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, 2017
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

CAPSTONE COMPANIES, INC.
(Exact name of small business issuer as specified in its charter)

Florida
84-1047159
(State or Other Jurisdiction of Incorporation)
(I.R.S. Employer No.)

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

(954) 252-3440
(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:
COMMON STOCK, $0.0001 PAR VALUE

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 _



1



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, emerging growth company or a smaller reporting Company.  See definitions of "large accelerated filer", "accelerated filer", "emerging growth company" 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]   Emerging Growth Company ___

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

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes _ 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, 2018, was approximately $23,523,182.

Number of shares outstanding of the Registrant's Common Stock as of March 21, 2018, is 47,046,364.

DOCUMENTS INCORPORATED BY REFERENCE

None




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TABLE OF CONTENTS

Item Number
Description
Page
     
Part I
 
Item 1.
Business
 5
Item 1A.
Risk Factors
 17
Item 1B.
Unresolved Staff Comments
 25
Item 2.
Properties
 26
Item 3.
Legal Proceedings
 26
Item 4.
Mine Safety Disclosures (Not Applicable)
 26
     
Part II
 
Item 5.
Market for Common Equity and Related Stockholder Matters
 27
Item 6.
Selected Financial Data (Not Applicable)
 28
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operation
 28
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk (Not Applicable)
 41
Item 8.
Financial Statements and Supplementary Data
 41
Item 9.
Change in and Disagreements with Accountants on Accounting and Financial Disclosure
 42
Item 9A.
Controls and Procedures
 42
Item 9B.
Other Information
 43
     
Part III
 
Item 10.
Directors, Executive Officers and Corporate Governance
 43
Item 11.
Executive Compensation
 50
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 54
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 55
Item 14.
Principal Accounting Fees and Services
 57
     
Part IV
     
Item 15.
Exhibits, Financial Statement Schedules
 58
Item 16.
Form 10-K Summary
60




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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 31 st .
(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".  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" and "Risk Factors" 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.



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PART I
Item 1.  Business

General

Capstone Companies, Inc. is a public holding company organized under the laws of the State of Florida.  The Company is engaged in the business of developing, marketing and selling consumer home LED lighting products through national and regional retailers in North America and in certain overseas 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 the Company's product development, engineering and factory resource capabilities in Hong Kong. Capstone's products are targeted for applications such as home indoor and outdoor lighting. The lighting portfolio consists of stylish, innovative and easy to use consumer LED lighting products. 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. LEDs are now mainstream in consumer lighting products, and, as such, the Company believes that the component and production costs of LED lighting products will continue to lower due to technological and production developments, which should allow a smaller innovative company like ourselves to capitalize on products utilizing LED.  The Company's focus is the integration of LED into most commonly used lighting products in today's home. We continue to make key investments to ensure that we provide quality LED lighting products. The Company understands and strives to couple well made products with superior customer service.  Customer service is a vital part of consumer loyalty.  Capstone believes that it is positioned well to participate in these expanded product categories designed to fuel the Company's future 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 revenue growth 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 OEM contract manufacturers which terms support the Company's growth.  The Company's direct import business model requires that 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 typically not warehoused for domestic replenishment programming.  CIHK continually evaluates its contract manufacturers' ability to meet the Company's growing needs.  Additionally, all manufacturers must meet rigorous compliance, security and equipment evaluation audits to ensure competitive pricing for the highest quality products.  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.

History of Our Business

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.

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



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On April 13, 2012, the Company established a wholly owned subsidiary in Hong Kong, named Capstone International Hong Kong Ltd ("CIHK") which provides support services such as engineering, new product development, product sourcing, factory certification and compliance, product price negotiating, product testing and quality control and ocean freight logistics for the Company's other subsidiaries. CIHK is also engaged in selling the Company's products internationally.

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 products that have distinctive aspects to create greater appeal to consumers.  The Company's product lines consisted 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. 
 
Commencing in 2014, Capstone explored and researched branding opportunities that would allow the Company to differentiate from its own Capstone Lighting ® 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 ® 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 ® name is a 100-year-old household iconic brand name. Hoover ® is a registered trademark of Techtronic Floor Care Technology Limited. The overall licensed brand revenue has increased significantly in 2017 with the launch of 4 new products under the Hoover ® Home LED brand and 1 new product under the Duracell ® brand.

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 light bulbs, that were deemed early technologies and were seen by the Company as too expensive and no longer appropriate for the market.  The early LED 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 positioned itself in the warehouse club channel and posted successive revenue growth while delivering strong gross margins. As discussed below under "Products and Customers,".  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 to consumer choice.

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



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LED Lighting Industry Trends

High Energy Costs Drive LED Adoption:

As a result of rising electricity prices and environmental concerns (as shown by U.S. Energy Information Administration studies), particularly within dense urban areas already impacted by high energy costs, consumers seek new technologies to reduce energy consumption. LEDs are 60% more efficient than fluorescent lighting and represent significant savings for consumers.  U.S. Environmental Protection Agency predicts widespread consumer use of LED lighting by 2020, especially if public utility programs encouraging consumer use of LED lighting continues.

Technological Maturity:

The technological advancement of LED lighting has surpassed traditional lighting performance in terms of brightness, efficiency, lamp life, safety, maintenance reduction and color -rendering. This maturity continues to drive growing market adoption. According to the U.S. Department of Energy study, LED market share is expected to account for $72 billion of the $105 billion general in the global lighting market by 2020.

Cost Comparison:

Market forces, including competitive pressure, greater manufacturing efficiencies and increased technology adoption among consumers, continues to significantly drive down LED prices. U.S. Environmental Protection Agency 2017 report shows that LED lighting uses 70-90% less energy than traditional incandescent lighting, lasts 15 times longer and has significant savings in energy costs.   The increasing efficiencies and savings of LED lighting as well as public utility programs to encourage use of LED lighting   has led to the global market experiencing increased LED adoption.

Superior Efficiency:

Since the introduction of the first visible LED in the 1960s, the technology has offered an increasingly wide variety of colored lighting, beginning with red and expanding to green, yellow and orange. In the mid-1990's, LEDs became capable of emitting blue light. With the advent of the blue LEDs combined with phosphor technology, LEDs made another technological advancement by emitting white LEDs. This breakthrough enabled LEDs, through its full color spectrum output capabilities, to compete with preferred color temperatures achieved by traditional lighting solutions.

In an effort to lower energy consumption, lighting developers are focused on increasing the "lumens per watt". The more lumens per watt, the more energy efficient the product is. Today's LEDs are significantly more efficient than the typical fluorescent light sources.

Social   Responsibility :

LED lighting solutions provide a significant opportunity for consumers to meet environmental goals. LEDs do not contain mercury, unlike fluorescent lighting, which can be harmful to the environment, do not emit ultraviolet radiation, typically do not contain glass, and are 100% recyclable.

Our Growth Strategy

The global lighting market has undergone a transition driven by rapid advancements in the performance, efficiency and cost 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). As the cost of LEDs decreases while performance improves combined with increased consumer education, we expect the LED lighting technology to continue to expand its share of the general illumination market. These advantages in addition to increased regulatory requirements banning inefficient lights   are expected to continue to accelerate the adoption of energy efficient LED technologies and lighting products.



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Target Markets:  Our objective is to become recognized as a leading-edge LED lighting company, "Rapidly Imbedding Technologies into Consumer Products. "

·
As the LED lighting market continues to build momentum, becoming a major provider of LED lighting in the market place requires expanding relationships with the buying teams for national retailers. We plan to continue to strengthen those relationships and expand into other departments or indeed other channels of distribution through those relationships.

·
We plan to continue to refine and improve our lighting products portfolio and expand into another product segments through the efforts our research and development team.
 
·
By introducing new products and expanding sales of existing products and continuing to increase our sales volumes, we believe that we can continue to improve operational efficiency by further reducing cost of materials, components and manufacturing costs, allowing us to maintain very competitive price points in the market place.

Perceived or Essential Strengths

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

In North America, the Company is highly recognized in several LED product niches.  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®, Hoover ® Home LED and Duracell ® have 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.

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) and Duracell ® has contributed to expanding the Company's retail position.  All brands are currently available in the marketplace.

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

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.


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Authoritative Knowledge : We invest in employees and manufacturers with extensive knowledge, understanding and experience of lighting technology, and regulatory environments that enables us to continue to provide superior quality products and service for our customers.  Our management team has demonstrated its ability to drive organic growth.

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 products 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 OEM 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 that the overseas factory performance meets our stringent operational tolerances to maintain our competitiveness and operational excellence.

Perceived Weaknesses

The Company does not have its own established, extensive e-commerce operation for marketing and selling products.  We rely on e-commerce or Internet marketing and sales by retailers or online companies like Amazon.com.  As consumers move increasingly to buying consumer goods online or through e-commerce, as witnessed by the growth of online companies like Amazon.com, the Company may have to devote capital and resources to developing its own e-commerce operation for its products to maintain or grow sales of products.   If an extensive, Company operated e-commerce operation is developed, it may fail to maintain or grow product sales.  The cost of any Company operated e-commerce operation may also divert capital from the brick-and-mortar retail products sales operations.

The Company does not have the financial, marketing and technological depth of some of its larger competitors in the LED consumer lighting industry.  The greater resources of competitors pose an ongoing threat of predatory pricing and marketing designed to undermine our competitiveness or to preclude entry into new geographical markets.  We believe the strength of our OEM contract manufacturing, the quality of our products and the power of online and social media in consumer decisions compensate to some extent for any inability to match larger competitors' advantages in resources.

Unexpected changes in lighting technology pose a threat to every company in the LED consumer industry.



9



Products and Customers

The Company has expanded its product positioning through the introduction of more indoor and outdoor lighting programs under the "Capstone Lighting®", Hoover ® Home LED and Duracell ® brands and  include the following products that are reported under one segment : Lighting Products:

·
Wireless Remote-Controlled LED Accent Lights
·
LED Under Cabinet Lights
·
LED Gooseneck Lantern
·
LED Solar Patio Lights
·
LED Motion Sensor Lights
·
LED Wall Utility Lights
·
CPC Power Failure Bulbs
·
Wireless Remote-Control Outlets

These product offerings encompass solutions for various residential lighting applications for interior and outdoor use.

Such product 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, 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 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, 2017, of $1.8 million or 5% of net revenue compared to $2.4 million or 8% of net revenue for the same period in 2016. 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.



10



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 the selection of products offered, Capstone seeks to service the needs of a wide range of consumers by providing products to satisfy their different interests, preferences and budgets.  The Company believes in its ability to 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

We continue to make investments to expand our sales, marketing, technical applications support and distribution capabilities to sell our lighting products. We market and sell our LED products through our internal sales team and agency networks. Generally, our agencies are recruited, trained and monitored by us directly. We maintain a firm policy on the use of our name for branding our LED lighting products. 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 Amazon.com and other retail e-commerce sites as they are the most cost efficient and effective approach for the Company.  We maintain a Facebook 1 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.

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 Energizer, Feit Electric and Jasco (GE).  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 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.





1   Facebook is a registered trademark of Facebook, Inc.


11



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.  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

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.  We outsource the manufacture and assembly of our products to a number of contract manufacturers overseas. 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.
 
These contract manufacturers purchase components that we specify and provide the necessary facilities and labor to manufacture our products. We leverage the strength of the contract manufacturers and allocate the manufacturing of specific products to the contract manufacturer best suited to the task. Quality control and lot testing is conducted at the contract manufacturers facility and also at 3 rd party testing laboratories overseas.

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.

To successfully implement Capstone's business strategy, the Company must continually improve its current products and develop new product segments with innovative imbedded technologies to meet consumer's growing expectations.

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.



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·
Raw Materials – Components and supplies are subject to sample inspections upon arrival at the contract manufacturer, to ensure the correct specified components are being used in production.
·
Work in Process – Our quality control team conducts quality control tests at different points during the product stages of our manufacturing process to ensure that quality integrity is maintained.
·
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 operator 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 operator 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 the Company needed to establish an east coast distribution point.  This relationship, if required, will allow us to fully expand our U.S. distribution capabilities and services.

Royalties

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

Royalty expenses related to such agreements for the fiscal years 2017 and 2016 were $1,282,210 and $496,166 respectively.  This expense increase resulted from increased sales of the Hoover ® Home LED branded products and increased sales resulting from the addition in 2017 of the Duracell ® brand to a specific product.

Seasonality

Sales for household products and electronics are seasonally influenced. Certain gift products cause consumers to increase purchases during key holiday winter season of the fourth quarter, which requires increases in retailer inventories during the third quarter. In addition, natural disasters such as hurricanes and tornadoes can create conditions that drive increased needs for portable power and power failure light sales. Historically, the LED products had seasonally lower sales during the first quarter due to the Chinese New Year holiday as factories are closed and shipments are halted during this period.



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Intellectual Property

CAPC subsidiary, CAPI, owns a number of U.S. trademarks and patents which CAPC considers of substantial importance and which are used individually or in conjunction with other CAPC trademarks and patents.  These include the following trademarks: Exclusive license and sub-license to Power Failure Technology; Capstone Power Control, Timely Reader, Pathway Lights, 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; Puck Light (cookie), Puck Light Base, Multi-Color Puck Lights, LED Dual Mode Solar Light, Integrated Light Bulb (Coach Light), LED Gooseneck Lantern, Spot Lights, Security Motion Activated Lights, Under Cabinet Lighting and Bathroom Vanity Light.  CAPC periodically prepares patent and trademark applications for filing in the United States and China.  CAPC will also pursue foreign patent protection in foreign countries if deemed necessary.  CAPC's ability to compete effectively in the power failure, portable lighting, and LED Home Lighting categories depends in part, on its ability to maintain the proprietary nature of its technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements, licensing, and cross-licensing agreements.  CAPC owns a number of patents, trademarks, trademark and patent applications and other technology which CAPC believes are significant to its business. These intellectual property rights relate primarily to lighting device improvements and manufacturing processes.

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

Value of Patents. 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 w e 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.



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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. 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.

Environmental Regulations

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

Employees

As of December 31, 2017, 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:

Employee Function
Number of Employees
Executive
3
Sales/Customer Service/Distribution
4
Research & Development/Technology/Product Development
4
Administrative
3
TOTAL
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Corporate Information

Our principal executive offices are located at 350 Jim Moran Blvd., Suite #120, Deerfield Beach, Florida, USA 33442. Our telephone number is (954) 570-8889 and our website is located at www.capstonecompaniesinc.com . Our U.S. subsidiaries operate out of our principal executive offices.

We file our financial information and other materials required under the Exchange Act 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 corporate website.



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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.

CIHK is subject to the laws of Hong Kong SAR.  In light of the specific operational role of CHK in our company, we do not believe that such regulation poses a significant risk factor in terms of the business and financial condition of the Company.

Working Capital Requirements and Financing

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 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 2017 and 2016, has increased working capital, provided the Company with liquidity and has allowed for the repayment of all outstanding bank notes and old related party loans.

Continued product expansion are critical requirements to ensure the Company's continued revenue 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.

On September 8,   2010, in order to 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 the time of closing was 5%.



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As of December 31, 2017, the base management fee is now equal to .30% and the interest rate on the loan was 6.50 % . 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.

The Sterling National Bank credit facility over the years has been a major contributing factor that has allowed the Company to increase its revenue and expand its account receivables.

As of both December 31, 2017 and 2016, the balance due to Sterling National Bank was $0.

As of December 31, 2017, the maximum amount that can be borrowed and available on this credit line is $7,000,000.

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.

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.

These risk factors are not the only risks that we or our subsidiaries may face. Additional risks and uncertainties not presently known to us or not currently believed to be important also may adversely affect our business.

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

Our future success may depend on our ability to deliver new, higher performing and lower cost solutions for existing and new markets and for customers to accept those solutions. We must introduce new products in a timely and cost-effective manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex process, and we have in some instances experienced delays in completing the development and introduction of new products. Our research and development efforts are aimed at solving increasingly complex problems, and we do not expect that all of our projects will be successful. The successful development, introduction and acceptance of new products depend on a number of factors, including the following:



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·
achievement of technology breakthroughs required to make commercially viable products;
·
the accuracy of our predictions for market requirements;
·
our ability to predict, influence and / or reach to evolving standards;
·
acceptance of our new product and systems designs;
·
our timely completion of product designs and development; and
·
our ability to effectively transfer increasingly complex products and technology from development to manufacturing.
If any of these or other similar factors becomes problematic, we may not be able to deliver and introduce new products in a timely or cost-effective manner.

We face significant challenges managing our growth strategy.

Our potential for growth depends significantly on the adoption of our products within the markets we serve and our ability to affect this rate of adoption. In order to manage our growth and business strategy effectively relative to the uncertain pace of adoption, we must continue to:

·
expand the capability of information systems to support a more complex business;
·
to secure and expand sufficient third-party manufacturing resources, to meet customer demand;
·
manage an increasingly complex supply chain that has the ability to supply an increasing number of raw materials and components with the required specifications and quality, and deliver on time to our third-party manufacturing facilities, or our logistics operations;
·
expand research and development, sales and marketing, technical support, distribution capabilities and administrative functions;
·
manage organization complexity and communication;
·
expand the skills and capabilities of our current management team;
·
add experienced senior level managers and executives;
·
attract and retain qualified employees; and
·
adequately maintain and adjust the operational and financial controls that support our business.
We are also increasingly dependent on information technology to enable us to improve the effectiveness of our operations and to maintain financial accuracy and efficiency. While we intend to focus on managing our costs and expenses, over the long term we expect to invest to support our growth and may have additional unexpected costs. Such investments take time to become fully operational, and we may not be able to expand quickly enough to exploit targeted market opportunities. In connection with our efforts to cost-effectively manage our growth, we rely on contract manufacturers for production capacity. If our contract OEM manufacturers, original design manufacturers (ODMs) or other service providers do not perform effectively, we may not be able to achieve the expected cost and may incur additional costs to fulfill customer demand. Our operations may also be negatively impacted if any of these contract manufacturers, ODMs or other service providers do not have the financial capability to meet our growing needs. There are also inherent execution risks in starting up a new contract manufacturer factory or expanding production capacity of our existing contract OEM manufacturers or ODMs, or moving production to different contract manufacturers or ODMs, that could increase costs and reduce our operating results.

We operate the executive operations with a relatively small number of personnel.  We may have to increase the number of our personnel in the future to handle any growth or expansion of product lines.  Our ability to find and retain qualified personnel when needed by our growth or existing operations will be an important factor in determining our success in coping with growth or efficiently handling existing operational burdens.  The Company also intends to develop a plan to develop future operational executives as part of prudent business planning.



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If we are unable to effectively develop, manage and expand our sales channels for our products, our operating results may suffer.

As we grow our business and expand into business channels that are different from those in which we have historically operated, those retailers may alter their promotional pricing or inventory strategies, which could impact our targeted sales of these products. If we are unable to effectively penetrate these channels or develop alternate channels to ensure our products are reaching the intended customer base, our financial results may be adversely impacted. In addition, if we successfully penetrate or develop these channels, we cannot guarantee that customers will accept our products.

The markets in which we operate are highly competitive and have evolving technical or consumer requirements.

The markets for our products are highly competitive. In the consumer LED lighting market, we compete with companies that manufacture and sell traditional LED lighting products, we compete with companies that have greater market share, name recognition and technical resources than we do. Competitors continue to offer new products with aggressive pricing. Aggressive pricing actions by our competitors in our businesses could reduce margins if we are not able to reduce costs at an equal or greater rate than the sales price decline.

With the growth potential for consumer LED lighting products, we will continue to face increased competition in the future across our businesses. If the investment in capacity exceeds the growth in demand the LED lighting market is likely to become more competitive with additional pricing pressures.

As competition increases, we need to continue to develop new products that meet or exceed the needs of our customers. Therefore, our ability to continually produce more efficient and lower cost LED lighting products that meet the evolving needs of our customers will be critical to our success. Competitors may also try to align with some of our strategic customers. This could lead to lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our business, results of operations or financial condition.

As is true in any consumer product industry, the ability of a company to respond to changing consumer tastes and purchasing habits is key to success in consumer products.

If we are not able to compete effectively against companies with greater resources, our prospects for future success will be jeopardized.

The lighting industry is highly competitive. In the consumer LED lighting markets in which we sell, our products compete with lighting products utilizing similar LED lighting technology provided by larger and longer-established consumer lighting companies. Management expects competition to intensify in the future. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical and other resources. Our competitors may acquire or be acquired by, receive investments from or enter into other business relationships with, larger, well established and well-financed competitors. Therefore, some of our competitors with other revenue sources may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies, and devote substantially more resources to product development. It is difficult to effectively compete with companies that have these resources, so we cannot assure that we will ever become a significant company in the industry.



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If our products fail to perform or fail to meet customer requirements or expectations, we could incur significant additional costs, including costs associated with the recall of those items.

The manufacture of our products involves complex processes.  Our customers specify quality, performance and reliability standards that we must meet.  If our products do not meet these standards, we may be required to replace or rework the products.  In some cases, our products may contain undetected defects that only become evident after shipment and used by consumers.  Even if our products meet standard specifications, our customers may attempt to use our products in applications for which they were not designed resulting in product failures and creating customer satisfaction issues.

If failures or defects occur, they could result in significant losses or product recalls due to:

·
costs associated with the removal, collection and destruction of the product;
·
payments made to replace product;
·
costs associated with repairing the product;
·
the write-down or destruction of existing inventory;
·
insurance recoveries that fail to cover the full costs associated with product recalls;
·
lost sales due to the unavailability of product for a period of time;
·
delays, cancellations or rescheduling of order for our products; or
·
increased product returns.

A significant product recall could also result in adverse publicity, damage to our reputation and a loss of customer or consumer confidence in our products. While we believe that product liability for consumer LED products is not significant or widespread, we could face product liability lawsuits or regulatory proceedings by the Consumer Product Safety Commission (CPSC) and could suffer losses from a significant product liability judgment or adverse CPSC finding against us if the use of our products at issue is determined to have caused injury or contained a substantial product hazard to the public.

We provide warranty periods of 1 year on our products. Although we believe our warranty reserves are appropriate, we are making projections about the future reliability of new products and technologies, and we may experience increased variability in warranty claims. Increased warranty claims could result in significant losses due to a rise in warranty expense and costs associated with customer support.

We rely on a number of key manufacturers to supply our products .

We depend on a number of key suppliers who manufacture our products.  Although alternative manufacturers with similar manufacturing capabilities are available, qualification and certification of many of these alternative manufacturers could take up to six months or longer to finalize.

Additionally, the inability of our suppliers to access capital efficiently could cause disruptions in their businesses, thereby negatively impacting ours. This risk may increase if an economic downturn negatively affects key suppliers or a significant number of our other suppliers. Any delay in product delivery or other interruption or variation in supply from these suppliers could prevent us from meeting customer order requirements. If we were to lose a key supplier, if our key suppliers were unable to support our demand for any reason or if we were unable to identify and qualify alternative suppliers, our manufacturing operations could be interrupted or hampered significantly.

We rely on arrangements with independent shipping companies for the delivery of our products from vendors and to customers both in the United States and abroad. The failure or inability of these shipping companies to deliver products or the unavailability of shipping or port services, even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs and added security.



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We depend on a limited number of retail customers for a substantial portion of our revenue, and the loss of, or a significant reduction in purchases by, one or more of these customers could adversely affect our operating results.

We receive a significant amount of our revenue from a limited number of customers. Most of our customer orders are made on a purchase order basis, which does not generally require any long-term customer commitments. Therefore, these customers may alter their purchasing behavior with little or no notice to us for various reasons, including developing their own product solutions; choosing to purchase from our competitors or incorrectly forecasting end market demand for their products. Retail customers may alter their promotional pricing; increase promotion of competitors' products over our products; or reduce their inventory levels; all of which could negatively impact our financial condition and results of operations. If our customers alter their purchasing behavior, if our customers' purchasing behavior does not match our expectations or if we encounter any problems collecting amounts due from them, our financial condition and results of operations could be negatively impacted.

Our results may be negatively impacted if customers do not maintain their favorable perception of our brand or licensed brands and products.

Maintaining and continually enhancing the value of the Company's brand or licensed brands is critical to the success of our business. Brand value is based in large part on customer perceptions. Success in promoting and enhancing brand value depends in large part on our ability to provide high-quality products. Brand value could diminish significantly due to a number of factors, including adverse publicity about our products (whether valid or not), a failure to maintain the quality of our products (whether perceived or real), the failure of our products or Capstone to deliver consistently positive consumer experiences. Damage to our brand or licensed brands, reputation or loss of customer confidence in our brands or products could result in decreased demand for our products and have a negative impact on our business, results of operations or financial condition.

Global economic conditions could materially adversely impact demand for our products and services.

Our operations and performance depend significantly on economic conditions. Uncertainty about global economic conditions could result in customers postponing purchases of our products and services in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values and other macroeconomic factors, which could have a material negative effect on demand for our products and services and, accordingly, on our business, results of operations or financial condition.

Additionally, our international sales are subject to variability as our selling prices become less competitive in countries with currencies that are declining in value against the U.S. Dollar and more competitive in countries with currencies that are increasing in value against the U.S. Dollar. In addition, our international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies.

U.S. President Donald J. Trump announced steel and aluminum tariffs in March 2018.  These tariffs may provoke a trade war between China and the U.S. and such trade conflict could affect our business – as we produce our products in China. The possibility and extent of any trade conflicts and such a conflict's impact, if any, on our business or growth is uncertain as of the date of the filing of this Report.



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Our operations in foreign countries expose us to certain risks inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.

We have revenue, operations and contract manufacturing arrangement in overseas that expose us to certain risks.  Fluctuations in exchange rates may affect our revenue, expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements.  We are also subject to other types of risks, including the following:

·
protection of intellectual property and trade secrets;
·
tariffs, customs, trade sanctions, trade embargoes and other barriers to importing/exporting materials and products in a cost effective and timely manner, or changes in applicable tariffs or custom rules;
·
rising labor costs or labor unrest;
·
difficulties in staffing and managing international operations;
·
the burden of complying with foreign and international laws; and
·
adverse tax consequences;
·
the risk that because our brand names may not be locally recognized, we must spend significant amounts of time and money to build brand recognition without certainty that we will be successful; and
·
political conflict or trade wars affecting our efforts to conduct business abroad.
Changes in regulatory, geopolitical, social, economic, or monetary policies and other factors may have a material adverse effect on our business in the future or may require us to significantly modify our current business practices. Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could also result in an adverse effect on our business and results of operations.

Our results of operations and financial condition could be seriously impacted by security breaches, including cybersecurity incidents.

Failure to effectively prevent, detect and recover from security breaches, including attacks on information technology and infrastructure by hackers; viruses; breaches due to employee error or actions; or other disruptions could result in misuse of our assets, business disruptions, loss of property, and confidential business information. Such attacks could result in unauthorized parties gaining access to at least certain confidential business information. However, to date, we have not experienced any financial impact, changes in the competitive environment or business operations that we attribute to such attacks. Although management does not believe that we have experienced any security breaches or cybersecurity incidents, there can be no assurance that we will not suffer such attacks in the future. We actively manage the risks within our control that could lead to business disruptions and security breaches. As these threats continue to evolve, particularly around cybersecurity, we may be required to expend significant resources to enhance our control environment, processes, practices and other protective measures. Despite these efforts, such events could adversely affect our business, financial condition or results of operations.

Acts of God or catastrophic events may disrupt our business.

A disruption or failure of our systems or operations in the event of a natural disaster, health pandemic, or man-made catastrophic event could cause delays in completing sales, continuing production or performing other critical functions of our business, particularly if a catastrophic event occurred at our subcontractors' locations. Any of these events could severely affect our ability to conduct normal business operations and, as a result, our operating results could be adversely affected. There may also be secondary impacts that are unforeseeable as well, such as impacts to our customers, which could cause delays in new orders, delays in completing sales or even order cancellations.



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CAPC's inadequate or expensive funding and financing alternatives.

CAPC's current short-term debt level as of December 31, 2017, was $0 as compared to $1,321,721 as of December 31, 2016.  Our current funding availability consists of private placement note agreements from insiders and the Sterling National Bank financing agreement to fund investment, operations, and debt service as required. 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

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 2017 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. 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.

Litigation could adversely affect our operating results and financial condition.

While the Company is not subject to any significant litigation actions, defending against potential litigation will likely require significant attention and resources and, regardless of the outcome, result in significant legal expenses, which could adversely affect our results unless covered by insurance or recovered from third parties. If our defenses are ultimately unsuccessful or if we are unable to achieve a favorable resolution, we could be liable for damage awards that could materially affect our results of operations and financial condition.

Our business may be impaired by claims that we, or our customers, infringe the intellectual property rights of others.

Litigation between competitors over intellectual property rights can be a common business practice in an industry as a means to protect or gain market share. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in such litigation, we could be required to:



23



·
pay substantial damages;
·
indemnify our customers;
·
stop the manufacture, use and sale of products found to be infringing;
·
discontinue the use of processes found to be infringing;
·
expend significant resources to develop non-infringing products or processes; or
·
obtain a license to use third party technology.

There can be no assurance that third parties will not attempt to assert infringement claims against us, or our customers, with respect to our products. We have also promised certain customers that we will indemnify them in the event they are sued by our competitors for infringement claims directed to the products we supply. Under these indemnification obligations, we may be responsible for future payments to resolve infringement claims against them. We do not maintain a reserve for intellectual property rights litigation liabilities.

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 2017, 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.

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.

If we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed.

To a significant extent, our success will depend on our senior management team, including the Chairman and Chief Executive Officer Mr. Stewart Wallach and other members of the executive team. The loss of any of these individuals could severely harm the business. Our success also depends on our ability to identify, attract, hire, train and retain highly skilled technical, managerial, and sales and marketing personnel. Competition for these individuals is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. The inability to attract and retain such highly skilled personnel could harm our ability to obtain new customers and develop new products and could adversely affect our business and operating results.



24



Our results of operations and financial condition could be materially affected by the enactment of legislation implementing changes in the U.S. or foreign taxation of international business activities or the adoption of other tax reform policies.

On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Reform Act, was enacted, which contains significant changes to U.S. tax law, including, but not limited to, a reduction in the corporate tax rate and a transition to a new territorial system of taxation. The primary impact of the new legislation on our provision for income taxes was a reduction of the future tax benefits of our deferred tax assets as a result of the reduction in the corporate tax rate.  The impact of the Tax Reform Act will likely be subject to ongoing technical guidance and accounting interpretation, which we will continue to monitor and assess. Provisional accounting impacts may change in future reporting periods until the accounting analysis is finalized, which will occur no later than one year from the date the Tax Reform Act was enacted. If we expand the scale of our international business activities, any changes in the U.S. or foreign taxation of such activities may increase our worldwide effective tax rate and harm our business, results of operations, and financial condition.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. We expect that the requirements may increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems, and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We review and, if necessary, refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, resources, including accounting-related costs and management oversight.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Any weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports that are filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Common Stock.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting.

Item 1B.  Unresolved SEC Staff Letters.

None for the fiscal year ended December 31, 2017.



25



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. The Company located its principal executive offices and sole operations facility at 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.

Capstone entered into a lease agreement for the same office space. 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 had the one-time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term.

Effective February 1, 2017, the Company renewed the lease for 3 years ending January 31, 2020 with a base annual rent of $92,256 and with a total rent expense of $281,711 through the term of the agreement. Under the lease agreement, Capstone is 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 had 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 and was further extended for another (12) months ending May 16, 2018 with a base annual rate of $54,193 paid in equal monthly installments. The Company entered into a six (6) month rental agreement from December 1, 2016 until May 31, 2017 and was further extended until December 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. This agreement has been further extended until December 31, 2018.

The future lease obligation under these agreements are as follows and are reported in U.S. Dollars:

Year Ended December 31,
 
US
   
HK
   
Total
 
     2018
 
$
93,855
   
$
38,060
   
$
131,915
 
     2019
   
95,570
     
-
     
95,570
 
     2020
   
7,964
     
-
     
7,964
 
     2021
   
-
     
-
     
-
 
         Total future lease obligations
 
$
197,389
   
$
38,060
   
$
235,449
 

Rent expense amounted to $163,060 and $144,181 for the years ended December 31, 2017 and 2016, 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 may be 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).



26



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, $0.0001 par value, ("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.  The Company considered but has not acted and may not act on seeking quotation of the Common Stock on The OTC Markets Group, Inc. QX Tier.  The Company will not seek quotation of its Common Stock on the QX Tier unless and until the Company's business and financial condition warrant such an application to quote the Common Stock on the QX Tier or another stock quotation system.

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, 2017, there were approximately 291 holders of record (excluding OBO/Street Name accounts) of our Common Stock and 47,046,364   outstanding shares of the Common Stock.  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, 2017 and 2016.  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.

 
2017
2016
 
High
Low
High
Low
1 st Quarter
.5000
.2500
.3495
.2325
2 nd Quarter
.7350
.4525
.4350
.2550
3 rd Quarter
.6500
.4500
.4500
.2500
4 th Quarter
.5800
.4000
.4950
.3200

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 filed December 19, 2017, we have no recent sales of unregistered securities that have not been previously reported in filings with the SEC.



27



Adoption of Stock Repurchase Plan

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

On December 21, 2016, 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.

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

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

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

On December 15, 2017, the Company's Board of Directors approved an extension of the Company's stock repurchase plan for up to $750,000 through June 30, 2018.

The following summarizes any purchases of the Common Stock under the stock purchase program:

Fiscal Period
 
Number of Shares Repurchased
   
Aggregate Purchase Price
 
FY 2017
   
1,666,667
   
$
250,000
 
Total
   
1,666,667
   
$
250,000
 

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 , 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 2017 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.



28



Executive Summary

The following discussion is designed to provide a better understanding of our audited consolidated financial statements and notes thereto, including a brief discussion of our business products, key factors that impacted our performance and a summary of operating results. The following discussion should be read in conjunction with our consolidated financial statements included in Item 8 of this Annual Report. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.

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 designs, markets and sells diverse LED lighting products for indoor and outdoor applications with the primary market in the United States and also distributed in leading (big box) retailers and home centers internationally including Australia, France, Iceland, Japan, Mexico, New Zealand, South Korea, Spain, Taiwan, Thailand, United Kingdom.

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 nine 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 products that have distinctive aspects to create greater appeal to consumers.  The Company's has expanded its lighting product lines which 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.

Commencing in 2014, Capstone explored and researched branding opportunities that would allow the Company to differentiate from its own Capstone Lighting ® 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 ® 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 ® name is a 100-year-old household icon and one of the most trusted brands in America.

Over the course of the next three years, Capstone positioned itself in retail channels and posted successive revenue growth while delivering strong gross margins.

In 2017 the Company negotiated a License agreement with Duracell ® and successfully launched a new lighting product.

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 Duracell ® products and the Company will offer private label programming to international accounts where the Company's brands are less relevant.



29



To date the Company maintains and supplies eight core lighting products The Company follows a closely defined business strategy to develop and increase market leadership positions in these key product offerings.  These product offerings 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.  The global marketplace in which Capstone operates in remains highly competitive and in certain markets competition consists of large multi-national companies, some of which may have greater resources than the Company does. 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.



30



Principal Factors Affecting Our Financial Performance

There are a number of industry factors that affect our financial performance which include, among others:

·
Overall Demand for Products and Applications using LED Lighting.   Our potential for growth depends significantly on the continued adoption of LEDs in the consumer product market place, and our ability to develop new applications for this market.   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. These uncertainties make demand difficult to forecast for us and our customers.

·
Intense and Constantly Evolving Competitive Environment . Competition in the market place we serve is intense. Many companies have made significant investments in product development, production equipment and product marketing. Product pricing pressures exist as market participants often initiate pricing strategies to gain or protect market share. To remain competitive, market participants must continuously increase product performance or functionality, reduce costs and develop improved ways to support their customers. To address these competitive measures, we invest in research and development activities to support new product development, lower product costs and deliver higher levels of performance and product functionality to differentiate our products in the market.

·
Profit Margins .  The Company needs to release products with profit margins that produce profitability on a sustained basis and concurrently control the marketing costs required to sustain or grow market share.

·
Technological Innovation and Advancement .  Innovation and advancements in LEDs and lighting technologies continue to expand the potential applications for our products. However, new technologies could emerge, or improvements could be made in existing technologies that could reduce or limit the demand for our existing products.  Through research and development, the Company needs to identify these emerging technologies or identify new functionality using these technologies to differentiate its products from competitors' products, increase consumer demand for our products and foster consumer willingness to pay a higher product purchase price.

·
Affordable Funding .  The Company needs access to affordable funding to support new product development and new market penetration.

·
Intellectual Property Issues .   Market participants rely on patented and non-panted proprietary information relating to product development and other core competencies of their business. Protection of intellectual property is critical. Therefore, steps such as patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. To enforce or protect intellectual property rights, litigation or threatened litigation is common.

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



31



Results of operations

Net Revenues

Revenue is derived from sales of our residential LED lighting products. These products are directed towards consumer home LED lighting for both indoor and outdoor applications. Revenue is subject to both quarterly and annual fluctuations and is impacted by the timing of individually large orders as well as delays or sometimes advancements to the timing of shipments or deliveries. We recognize revenue upon shipment of the order to the customer, when all performance obligations have been completed and title has transferred to the customer and in accordance with the respective sales contractual arrangements. Each contract on acceptance will have a fixed unit price. The majority of our sales are to the U.S. market which in 2017 represented 95.1% of revenue and we expect that region to continue to be the major source of revenue for the Company. However, we also derive a portion of our revenue from overseas which we also expect to grow.  All of our revenue is denominated in U.S. dollars.

Cost of Goods Sold

Our cost of goods sold consists primarily of purchased products from contract manufacturers, associated duties and inbound freight. In addition, our cost of goods sold also include inventory adjustments, warranty claims/reserves and freight allowances. We source our manufactured products based on customer orders.

Gross Profit

Our gross profit has and will continue to be affected by a variety of factors, including average sales price for our products, product mix, our ability to reduce product costs and fluctuations in the cost of our purchased components.

Operating Expenses

Operating expenses include sales and marketing expenses, consisting of licensed brands royalties, sales representatives commissions, advertising and trade show expense and costs related to employee's compensation. In addition, operating expense include charges relating to accounting, legal, insurance and stock-based compensation.



32



CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
       
(In Thousands)
                       
   
December 31, 2017
   
December 31, 2016
 
                         
   
Dollars
   
% of Revenue
   
Dollars
   
% of Revenue
 
Revenue
 
$
36,753
     
100.00
%
 
$
30,630
     
100.00
%
Cost of sales
   
27,911
     
75.94
%
 
$
23,232
     
75.85
%
Gross Profit
   
8,842
     
24.06
%
   
7,398
     
24.15
%
Operating Expenses:
                               
Sales and marketing
   
2,267
     
6.17
%
   
1,224
     
4.00
%
Compensation
   
1,612
     
4.39
%
   
1,434
     
4.68
%
Professional fees
   
550
     
1.50
%
   
365
     
1.19
%
Product development
   
377
     
1.03
%
   
327
     
1.07
%
Other general and administrative
   
805
     
2.19
%
   
705
     
2.30
%
Total Operating Expenses
   
5,611
     
15.27
%
   
4,055
     
13.24
%
Operating Income
   
3,231
     
8.79
%
   
3,343
     
10.91
%
Other Income (Expense)
                               
Interest income
   
-
     
-
     
27
     
0.09
%
Interest expense
   
(122
)
   
(0.33
)%
   
(282
)
   
(0.92
)%
Total Other Income (Expense)
   
(122
)
   
(0.33
)%
   
(255
)
   
(0.83
)%
                                 
Income Before Tax Provision
   
3,109
     
8.46
%
   
3,088
     
10.08
%
Provision for Income Tax
   
(1,030
)
   
(2.80
)%
   
(267
)
   
(0.87
)%
Net income
 
$
2,079
     
5.66
%
 
$
2,821
     
9.21
%

Net Revenues

For the year ended December 31, 2017, net revenues were $36.8 million, an increase of $6.1 million or 20.0% from $30.6 million in fiscal 2016. The Company continued to have strong revenue growth in the lighting products category. Revenue under the Hoover Ò   Home and Duracell Ò licensed brands increased from $10.1 million in 2016 up to $31.6 million in 2017, an increase of $21.5 million, which reflects consumer acceptance of our license brand strategy.

In the same period revenue for the Capstone brand dropped from $20.5 million to $5.2 million, a reduction of $15.3 million, as the Company transitioned Capstone branded products into both the newly acquired Duracell brand and the Hoover Ò   Home brand. In 2017 increased revenue also resulted from the launch of 5 new products, 4 of which were released under the Hoover Ò   Home brand.

For the years ended December 31, 2017 and 2016, international sales were approximately $1.8 million or 5% of revenue as compared to $2.4 million or 8 % of revenue, respectively.



33



The Company provided retailers with, $1.9 million for consumer rebate promotional allowances in 2017 compared to $2.5 million in 2016.

The following table disaggregates revenue by major source:
 
                                     
   
For the Year Ended December 31, 2017
   
For the Year Ended December 31, 2016
 
   
Capstone Brand
   
Licensed Brands
   
Total Consolidated
   
Capstone Brand
   
Licensed Brands
   
Total Consolidated
 
         
(In Thousands)
         
(In Thousands)
 
                                     
LED Consumer Products- US
 
$
3,816
   
$
31,125
   
$
34,941
   
$
18,356
   
$
9,863
   
$
28,219
 
LED Consumer Products-International
 
 
1,361
   
 
451
   
 
1,812
   
 
2,149
   
 
262
   
 
2,411
 
     Total Revenue
 
$
5,177
   
$
31,576
   
$
36,753
   
$
20,505
   
$
10,125
   
$
30,630
 

Gross Profit and Cost of Sales

Gross profit for the year ended December 31, 2017, was approximately $8.8 million, or 24.1% of net revenues, as compared to gross profit of $7.4 million or 24.2% of net revenues, for fiscal 2016. The $1.4 million or 19.5% gross profit increase mainly resulted from  the increase of  licensed product revenue with the continued expansion of  the licensed product line. Lighting products gross margin percentage of 24.1 % in 2017 compared to 24.2% remained steady as a result of the continued effort of our Hong Kong sourcing team to leverage increased buying volume to reduce unit cost. This is particularly important when we launch new products.

For the years ended December 31, 2017 and 2016, cost of sales were approximately $27.9 million and $23.2 million, respectively, an increase of $4.7 million or 20.1% from the previous year. This cost represents 75.9% of net revenues for both 2017 and 2016.

Operating Expenses

Sales and Marketing Expenses

In fiscal 2017 and 2016, sales and marketing expenses were $2.3 million and $1.2 million respectively, an increase of $1.1 million or 85.2%. As a percent to revenue 2017 expenses were 6.17% as compared to 4.0% in 2016.  During 2017, with the continued success   of the Hoover ® License and the expansion of the Hoover ® product offerings, royalty payments to TTI Floor Care for the Hoover ® License were $778 thousand, an increase of $282 thousand from 2016 royalty payments.   In 2017 with the introduction of the Duracell ® license product, royalties for the year were $505 thousand which did not occur in 2016. Sales agent commission was $457 thousand an increase of $144 thousand from 2016 and we incurred $181 thousand in advertising and trade show expense, an increase of $31 thousand compared to $150 thousand in 2016.

Compensation Expenses

For fiscal 2017, compensation expenses were approximately $1.6 million an increase of $178 thousand or 12.4% from $1.4 million expensed in 2016. As a percent to revenue 2017 expenses were 4.39% as compared to 4.68% in 2016. Expenses in 2017 increased as a result of salary increases in our Hong Kong operation and some yearend bonus payments in the U.S. office.



34




Professional Fees

For fiscal 2017, professional fees were approximately $550 thousand compared to $365 thousand in 2016, an increase of $185 thousand or 50.6%.   In 2017, consulting fees were approximately $32 thousand higher than 2016 as we engaged a consultant to support sales administration. As a percent to revenue 2017 expenses were 1.50% as compared to 1.19% in 2016. Legal and other expenses were $209 thousand, up $143 thousand from fiscal 2016 as we engaged the investment banking services of Wilmington Capital Securities, LLC which increased expenses by $120 thousand in the period.

Product Development Expenses

For fiscal 2017, product development expenses were approximately $377 thousand as compared to $327 thousand, an increase of $50 thousand or 15.3% from 2016.  Expenses in 2017 increased as we expanded the number of new products being developed. As a percent to revenue 2017 expenses were 1.03% as compared to 1.07% in 2016. We continued to invest in product design, electrical engineering, product prototyping, testing and regulatory certifications by outside third-party testing laboratories.

Other General and Administrative Expenses

For fiscal 2017 and 2016, other general and administration expenses were approximately $805 thousand and $705 thousand, respectively, an increase of $100 thousand or 14.2%.  As a percent to revenue 2017 expenses were 2.19% as compared to 2.30% in 2016.  With the higher sales volume certain variable expenses increased such as insurance liability premiums and courier services, we also incurred additional $22 thousand in travel related expenses.

Total Operating Expenses

In summary, in fiscal 2017, total operating expenses were $5.6 million or 15.27% of revenue as compared to $4.1 million or 13.24% of revenue in 2016. This represents a $1.5 million or 2.03% of revenue increase over fiscal 2016.

Operating Income

For the year ended December 31, 2017 the operating income was $3.2 million or 8.79% of revenue compared to $3.3 million or 10.91% of revenue in 2016.  The fiscal 2017operating income performance was flat due to the $1.5 million increase in total operating expenses as compared to fiscal 2016. As we have done in previous years, this added strategic expense is required to support continued future revenue growth. We have continued to incur strategic and planned expenses particularly in sales marketing and product development.

Other Income (Expense)

For fiscal 2017 other expense was approximately $122 thousand a reduction of $132 thousand compared to $255 thousand expensed in 2016. In 2017 despite having substantial revenue growth, the Company through a combination of efficient cash flow management, favorable payment terms with our overseas suppliers and increased operational cash flow, has been able to pay off old outstanding loans and substantially curtailed the need for increased borrowing and purchase order funding which has resulted in a significant reduction of interest expense for the year.

Provision for Income Tax

The effective tax rate was 33% in 2017 and 9% in 2016.

In fiscal 2017 with the utilization of all previous net operating loss carryforwards, the Company has provided for a substantial increase in our income tax provision.  For the year ended December 31, 2017, the provision for income tax was approximately $1.0 million. This represents a tax provision increase of $763 thousand as compared to a $267 thousand provision required for fiscal 2016.



35




Net Income

For fiscal 2017 and 2016 net income was approximately $2.1 million and $ 2.8 million, respectively a reduction of approximately $742 thousand or 26.3%.

RESULTS OF OPERATIONS AND BUSINESS OUTLOOK

Gross margin, as presented below, is sales less cost of sales.
 
Years Ended December 31 ,
 
 
2017
 
2016
 
Sales
       
(In thousands, except percentages)
       
Net Revenue
 
$
36,753
   
$
30,630
 
Gross Profit
 
 
8,842
   
 
7,398
 
Gross Profit %
   
24.1
%
   
24.2
%
                 
Assets
   
2017
     
2016
 
(In thousands)
               
Total Assets
 
$
10,433
   
$
9,367
 

In 2017  net revenues continued its growth and increased by $6.1 million or 20% from fiscal 2016.  The gross profit percentage also remained steady at 24.1% and that is after launching 5 new products.

In 2017 and 2016 we also incurred approximately $1.282 million and $496 thousand of royalty fee expense related  to the license agreements with Hoover ® and Duracell ® brands.

While we believe that the markets for our LED home products will remain highly competitive during fiscal 2018, we believe we are positioned as a market leading innovator in our business segment and have targeted continued growth in this segment in 2018.

We are focused on the following priorities to support our goals of delivering higher revenue and profits over time:

·
We will continue to invest in capabilities and technologies that allow the Company to execute its strategy to increase sales and production volume in all existing markets that we serve.
·
Increase lighting products revenue and improve margins by investing in our retailer relationships, continuing to deliver innovative consumer lighting solutions. and by should the opportunities arise acquire complimentary businesses that are accretive to our earnings.
·
Increase the lighting products business by expanding our product offerings with new products that leverage our innovative leadership to serve a larger share of existing customers' LED lighting products demand.
·
Maintain the high customer experience and service levels in our business.
·
We have also identified a new product segment and plan to invest in new technologies, products and licenses if necessary to support the development of this segment, which may also bring the Company into different markets and channels of distribution. The level of spending on these activities, however, will continue to be driven by market opportunities

With the continued retail interest in our product offerings, the expansion of the LED Home category products under the Hoover ® brand, and with the continued introduction of new products, the Company anticipates its sales volumes to continue to grow in fiscal years 2018-2019.



36




Contractual Obligations

The following table represents contractual obligations as of December 31, 2017

 
Payments Due by Period
 
 
Total
 
2018
 
2019
 
2020
 
After 2020
 
(In thousands)
                   
Purchase Obligations
 
$
2,733,516
   
$
2,733,516
   
$
-
   
$
-
   
$
-
 
Short-Term Debt
   
624,782
     
624,782
     
-
     
-
     
-
 
Long-Term Debt
   
251,000
     
-
     
251,000
     
-
     
-
 
Operating Leases
   
235,449
     
131,915
     
95,570
     
7,964
     
-
 
Total Contractual Obligations
 
$
3,844,747
   
$
3,490,213
   
$
346,570
   
$
7,964
   
$
-
 

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 — Income tax payable.
Long Term Debt— Deferred tax liability.
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

Our cash balances as of December 31, 2017 and 2016 was $3.7 million and $1.6 million, respectively. The Company also had additional borrowing capacity under the Sterling National Bank financing agreement of approximately $3.7 million and $3.8 million, respectively.

The Sterling National Bank credit facility allows the Company to borrow up to $7.0 million based upon specified percentages of eligible accounts receivables and inventory. As of December 31, 2017, and 2016 the loan balance for both years was $0.

Historically, our Directors have been a significant source of financing and they continue to support our operations as necessary. During 2017 the Company was able to pay off all Director debt and accumulated interest. As of December 31, 2017, and 2016, the Company had notes payable to related parties of $0 and $1,321,721, respectively.

Revenues of $36.8 million during 2017 which represents a $6.1million or 20% increase continued to provide positive operational cash flow. Cash flow 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.  As of December 31, 2017, and 2016, cash and cash equivalents increased by $2.0 million and $1.3 million, respectively.

Revenue is significantly influenced by the timing and launch of new products into the marketplace. With our Hong Kong operation, we have built an operational structure that, through relationships with factory-suppliers combined with our expertise, can develop and release quality, innovative products to the market substantially quicker than in previous years.


37





 
Years ended December 31,
 
Summary of Cash Flows
2017
 
2016
 
(In thousands)
       
Net cash provided by (used in):
       
Operating Activities
 
$
3,452
   
$
4,204
 
Investing Activities
 
 
(48
)
 
 
(54
)
Financing Activities
 
 
(1,382
)
 
 
   (2,869)
 
Net increase in cash and cash equivalents
 
$
2,022
   
$
1,281
 

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.

Cash Flows provided by Operating Activities

Cash provided by operating activities was approximately $3.5 million in 2017 compared with approximately $4.2 million in 2016.   Net income of approximately $2.1 million, combined with a $1.1 million decrease in accounts receivables, and a $226 thousand reduction to inventory,  were the predominant reasons for the Company's cash improved  position, from $1.6 million at December 31, 2016 to $3.7 million at December 31, 2017.   The Company continued to negotiate beneficial payment terms with our main overseas manufacturers that resulted in significantly reduced funding requirements to produce newly launched products.

Cash Flows used in Investing Activities

The use of cash in 2017 was approximately $48 thousand compared to $54 thousand in 2016.  The Company has continued to invest in new product molds and tooling.  With the product expansion into smart home lighting categories, the Company's future capital requirements may increase.  We believe that CIHK will be able to negotiate favorable payment terms with our manufacturers that may reduce the amounts of upfront cash required when initiating a new project.  Management believes that our cash flow from operations and additional borrowing as required will provide for these necessary capital expenditures.

Cash Flows used in Financing Activities

Cash used in financing activities for the year ended December 31, 2017 and 2016, was approximately $1.4 million compared to $2.9 million, respectively. As of December 31, 2017.  the Company had fully paid off all remaining related party notes of $1.1 million and paid $250 thousand in the repurchase of Company shares from Involve, LLC.

At December 31, 2017, 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 as needed will provide sufficient financial resources for the Company in 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.



38




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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make certain estimates and assumptions regarding matters that are inherently uncertain and that ultimately affect the reported amounts of assets, liabilities, revenues and expense, and the disclosure of contingent assets and liabilities. The estimates and assumptions are based on management's experience and understanding of current facts and circumstances. These estimates may differ from actual results. Certain of our accounting policies are considered critical as they are both important to reflect our financial position and results of operations and require significant or complex judgement on the part of management. The following is a summary of certain accounting policies considered critical by management.

Revenue Recognition

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

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

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

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



39




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

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

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

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

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

The Company selectively supports retailer's initiatives to maximize sales of the Company's products on the retail floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to the customer.  The Company recognizes these incentives at the time they are offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to cost of sales, or marketing expenses depending on the type of sales incentives.

Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period the related revenue is recorded.

Allowance for Doubtful Accounts

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

As of both December 31, 2017 and 2016, management has determined that the accounts receivable is fully collectible. As such, management has not recorded an allowance for doubtful accounts.

Goodwill

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.



40




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

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

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

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 warranties and accruals for various compensation, benefits and commission expenses.

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.

As of December 31, 2017, the Company had utilized all net operating loss carry forwards for income tax reporting purposes that were previously available to be offset against future taxable income through 2034. As of December 31, 2016, the Company had net operating loss carry forwards available of approximately $357,000. The net deferred tax liability as of December 31, 2017 and 2016 was $251,000 and $216,000, respectively, and is reflected in long-term liabilities in the accompanying balance sheets.

On December 22, 2017, President Trump signed into law the legislation generally known as Tax Cut and Jobs Act of 2017. The tax law includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward and a deemed repatriation transition tax. In accordance with ASC 740, "Income Taxes", the impact of a change in tax law is recorded in the period of enactment. Refer to Note 8 for additional information on income taxes.

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.



41




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

None.

Item 9A.  Controls and Procedures.

Evaluation of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017. 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.

The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on management's evaluation of our disclosure controls and procedures as of December 31, 2017, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company.

·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

·
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness 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.


42




The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013 Internal Control-Integrated Framework. Based on their assessment, management concluded that, as of December 31, 2017, the Company's internal control over financial reporting is effective based on those criteria. Based on that evaluation, our management concluded that our internal control over financial reporting, as of December 31, 2017 was effective.

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

Changes in internal controls over financial reporting.

There are no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected or are reasonable likely to materially affect, our internal control over financial reporting.

The Chairman of our Audit Committee has 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. The Chairman has had detailed discussions with the auditors about these matters, prior to, during, and on completion of the audit.

Item 9B.  Other Information.

 None

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.



43




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 2017, all Directors attended at least 75% of all (6) six 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 2017 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.



44




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 2017 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 2017 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, 2017, as filed with the Commission on March 28, 2018.
The foregoing report is provided by the undersigned members of the Audit Committee.

/s/Jeffrey Guzy
Jeffrey Guzy, Chairman of Audit Committee

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.

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 philosophies:

1.
Align Shareholder and Officer Interests: Besides a base salary sufficient to attract qualified personnel, we provide non-qualified, long-term stock options to tie the interest to our officers with the interests of the Shareholders in a long-term profitability of the Company.

2.
Performance Bases Compensation: Our grant of options and stock are designed to reward and encourage officers to achieve Company goals in financial and business performance.

3.
Competitive Market: We include determinations of compensation ranges and practices of employers in our areas of operation.



45




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.

The Company intends to perform a benchmark compensation analysis in March or April of 2018.

We use peer group and available survey data to analyze our executive compensation (overall, base salary, annual bonus and long-term incentives) relative to the 50 th percentile, or median, of the benchmark data.  While we use the data to ensure competitiveness and reasonableness, we do not rely solely or primarily on benchmarking in establishing executive compensation levels.  Variations in the actual compensation we set may be based on achievement of short-term and long-term goals, the competitive environment, talent and level or responsibility of each senior officer.

Role of the Compensation and Nominating Committee

The Compensation and Nominating Committee or "CNC" 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 CNC receives recommendations from our Chief Executive Officer regarding the compensation of the senior officers (other than the Chief Executive Officer).

Neither Mr. Guzy nor Mr. Postal are deemed to be "employees" of the Company or its subsidiaries.

The CNC meets as often as it deems necessary, without the presence of any executive officer when approving compensation, except that the Company's Chief Financial Officer, at the discretion of the Compensation Committee, may be present during the approval of, or deliberations with respect to, other executive officer compensation.  The CNC may delegate any authority granted to it to one or more subcommittees of the CNC, in its sole discretion.

The CNC 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


46




·
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.

By: /s/ Jeffrey Guzy
_____________________________________________
Jeffrey Guzy, Chairman of Compensation Committee

March 28, 2018

CODE OF ETHICS

The Company has a code of ethics that applies to all of the Company's employees, including its principal executive officer, and principal financial 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 2017

The Board of Directors had (6) six official meetings in year 2017.  During 2017, 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.



47




Board of Director – 2017 Compensation Table

Name (1)
 
Audit Committee
   
Nomination and Compensation Committees
   
Total Awards
 
Stewart Wallach (2)
   
-
     
-
     
-
 
Gerry McClinton (2)
   
-
     
-
     
-
 
Jeff Guzy (3), (4)
 
$
22,752
   
$
22,753
   
$
45,505
 
Jeff Postal (3), (4)
 
$
22,752
   
$
22,753
   
$
45,505
 
Larry Sloven (2)
   
-
     
-
     
-
 

(1)
The individuals listed were appointed to the Board of Directors for 2017;
(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 July 20, 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 2017 was $23,250 for each grant.
(4)
On August 6, 2017, 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 2017-2018.  The market value using the Binomial Lattice pricing model for each grant was $55,000.  As the grant period covered 2017-2018, the cost impact in 2017 was $22,212 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 past losses and  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.

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:



48




·
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.


49




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 66, 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 62, 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 39, 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 2017 by the Company's directors and officers.

Item 11.  Executive Compensation.

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 2017, 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.


50




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

Name & Principal Position
Year
 
Salary $
   
Bonus $
   
Stock Awards $
   
Non-Equity Incentives $
   
All Others $
   
TOTAL
 
Stewart Wallach,
2017
 
$
301,521
   
$
100,000
   
$
-
   
$
-
   
$
-
   
$
401,521
 
Chief Executive Officer (1,2,5,6)
2016
 
$
327,396
   
$
100,000
   
$
-
   
$
-
   
$
-
   
$
427,396
 
 
2015
 
$
287,163
   
$
-
   
$
-
   
$
-
   
$
-
   
$
287,163
 
                                                   
 James G. McClinton,
2017
 
$
191,442
   
$
20,000
   
$
-
   
$
-
   
$
-
   
$
211,442
 
 Chief Financial Officer
2016
 
$
192,013
   
$
20,000
   
$
-
   
$
-
   
$
-
   
$
212,013
 
& COO (3,4,5,6)
2015
 
$
191,442
   
$
-
   
$
-
   
$
-
   
$
-
   
$
191,442
 

Footnotes:
(1)
On February 5, 2018, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum.
(2)
On February 5, 2016, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $287,163 per annum.  As part of the agreement, the base salary would 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. 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, 2018, the Company entered into a new Employment Agreement with James McClinton, whereby Mr. McClinton   will be paid $191,442 per annum.
(4)
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.
(5)
The Company has no non-equity incentive plans.
(6)
The Company has no established bonus plan.  Any bonus payments are made ad hoc upon recommendation of Compensation Committee. Bonuses are only paid on a performance basis.

EMPLOYMENT AGREEMENTS

Stewart Wallach, Chief Executive Officer and President.

On February 5, 2016, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach would be paid $287,163 per annum.  As part of the agreement, the base salary would 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 showed a net profit for the year. The initial term of this agreement began February 5 th , 2016 and ended 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.



51




On February 5, 2018, the Company renewed the Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed two years in length.

The February 5, 2018 Employment Agreement with Mr. Wallach is attached as an exhibit to this Report and the above summary is qualified in its entirety by reference to the Employment Agreement.

Gerry McClinton, Chief Operating Officer and Chief Financial Officer.

On February 5, 2016, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton would be paid $191,442 per annum.  As part of the agreement, the base salary would 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 showed a net profit for the year. The initial term of this agreement began February 5 th , 2016 and ended 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.

On February 5, 2018, the Company renewed the Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed one year in length.

The February 5, 2018 Employment Agreement with Mr. McClinton is attached as an exhibit to this Report and the above summary is qualified in its entirety by reference to the Employment Agreement.

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, 2017 (as filed by the Company with the Commission on March 28, 2018).



52




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, 2017
Name
No. of Shares
Underlying
% of Total Options
Granted Employees
in 2017
Expiration
Date
Restricted
Stock Grants
No. Shares
underlying Options
Options Granted
in 2017
Stewart Wallach
-
-
-
-
-
Gerry McClinton
-
-
-
-
-

OTHER COMPENSATION (1)

NAME/POSITION
YEAR
SEVERANCE
PACKAGE
CAR
ALLOWANCE
CO. PAID
SERVICES
TRAVEL
LODGING
TOTAL ($)
Stewart Wallach
2017
-
-
-
-
-
Chief Executive
2016
-
-
-
-
-
Officer
2015
-
-
-
-
-
             
Gerry McClinton
2017
-
-
-
-
-
Chief Operating
2016
-
-
-
-
-
Officer & Chief
2015
-
-
-
-
-
Financial Officer
           

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 2017 TABLE
OPTIONS (1)

NAME
Securities Underlying
Unexercised Options
Option Exercise
Price
Option
Expiration Date
Stewart Wallach
-
-
-
Gerry McClinton
-
-
-

Footnotes:

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

2017 OPTION EXERCISES AND VESTED OPTIONS

Name
Number of Shares
Acquired on Exercise
Value Realized on
Exercise
Stewart Wallach
-
-
Gerry McClinton
-
-



53




POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT

   
SALARY
SEVERANCE
   
BONUS
SEVERANCE
   
GROSS UP
TAXES
   
BENEFIT
COMPENSATION
   
GRAND TOTAL
TOTAL
 
Stewart Wallach
 
$
301,521
     
-
   
$
12,500
   
$
12,000
   
$
326,021
 
Gerry McClinton
 
$
191,442
     
-
   
$
9,000
   
$
12,000
   
$
212,442
 

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 9, 2018, 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 9, 2018, ("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 47,046,364 shares of Common Stock outstanding on the Record Date.



54




OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
as of December 31, 2017.
         
ALL OPTION WARRANT SHARES
NAME, ADDRESS & TITLE
STOCK OWNERSHIP
PERCENTAGE OF STOCK OWNERSHIP
STOCK OWNERSHIP AFTER CONVERSION OF ALL OPTIONS & WARRANTS  PLUS THOSE EXERCISEABLE WITHIN THE NEXT 60 DAYS
% OF STOCK OWNERSHIP AFTER CONVERSION OF ALL OPTIONS & WARRANTS PLUS THOSE EXERCISEABLE WITHIN THE NEXT 60 DAYS
VESTED
EXPIRED
NOT VESTED
               
Stewart Wallach, CEO, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442
9,841,255
20.9%
9,841,255
20.2%
-
1,633,204
-
               
Gerry McClinton, CFO, & Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442
33,663
0.1%
33,663
.1%
-
2,150,000
-
               
Jeff Postal, Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442
9,485,415
20.2%
9,585,415
19.7%
-
-
100,000
               
Aimee C. Gaudet, Secretary, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442
-
0.0%
50,000
0.1%
40,000
-
10,000
               
Jeff Guzy, Director, 3130 19th Street North, Arlington, VA  22201
55,467
0.1%
555,467
1.1%
400,000
100,000
100,000
               
Larry Sloven, Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442
52,800
0.1%
52,800
0.1%
-
66,667
-
               
ALL OFFICERS & DIRECTORS AS A GROUP
19,468,600
41.4%
20,118,600
41.3%
440,000
3,949,871
210,000

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.

I tem 13.  Certain Relationships and Related Transactions, and Director Independence.

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.



55




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.

A "related-person transaction" will be a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any "related person" are participants involving an amount that exceeds $120,000. Transactions involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person will not be covered by this policy. A related person will be any executive officer, director or a holder of more than five percent of our common stock, including any of their immediate family members and any entity owned or controlled by such persons.

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.  As of December 31, 2017, all related party loans were paid off and the outstanding balance is $0.

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.

On December 15, 2017, the disinterested directors of the Board of Directors of the Company approved the use of up to $1,400,000 dividend distribution from Capstone Industries, Inc., a Florida corporation and a wholly owned subsidiary of the Company, to pay down $700,000 of working capital loans made by Jeffrey Postal to the Company and $700,000 to be used for payment of estimated 2017 Federal income taxes.   The proposed use of the cash dividend was also approved by disinterested directors of the Company under the Company's related party transaction guidelines.  As of December 31, 2017, the balance on related party loans was $0.



56




Process for Identifying Related Person Transactions.

To identify related-person transactions in advance, we are expected to rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related-person transactions, our board of directors will take into account the relevant available facts and circumstances including, but not limited to:

 
the risks, costs and benefits to us;
 
the impact on a director's independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated;
 
the terms of the transaction;
 
the availability of other sources for comparable services or products; and
 
the terms available to or from, as the case may be, unrelated third parties or to or from our employees generally.

Promoters and Certain Control Persons

We did not have any promoters at any time during the past five fiscal years.

Director Independence

Our Board of Directors has determined that our director, Mr. Jeffery Guzy, is an independent director, as the term "independent" is defined by the rules of the Nasdaq Stock Market. The Company was not successful in recruiting additional, qualified and interested independent directors in fiscal year 2017.

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, 2017 and 2016:

   
2017
   
2016
 
Audit Fees
 
$
105,350
   
$
94,000
 
Tax Fees
 
$
11,340
   
$
4,500
 
Total
 
$
116,690
   
$
98,500
 

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, 2017 were attributed to work performed by persons other than MHM's fulltime, permanent employees.



57




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 2017 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 Financial Statement Schedules Reports

(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, 2017, and 2016
F-3 Consolidated Statements of Income for the Years ended December 31, 2017 and 2016
F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2017 and 2016
F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 2017 and 2016
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.



58



 
2.1
3.1
3.1.1
3.1.1.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
 


59



 
10.13
10.14
10.15
10.16
10.17
10.18
14
21.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
 
Note:  CHDT Corp. is a prior name of Capstone Companies, Inc.

^
Filed Herein.

The following Exchange Act reports were filed during the 2017 year: Schedule 13D, filed December 15, 2017.

Item 16.   Form 10-K Summary.   None.



60




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 28th day of March 2018.

CAPSTONE COMPANIES, INC.

Dated:   March 28, 2018


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.



/s/ Stewart Wallach
Stewart Wallach
Principal Executive Officer
Director and Chief Executive Officer
March 28, 2018



/s/ Gerry McClinton
Gerry McClinton
Chief Financial Officer
Chief Operating Officer and Director
March 28, 2018



/s/ Jeffrey Guzy
Jeffrey Guzy
Director
March 28, 2018



/s/ Jeffrey Postal
Jeffrey Postal
Director
March 28, 2018



/s/ Larry Sloven
Larry Sloven
Director
March 28, 2018
 
 
61



 

Report of Independent Registered Public Accounting Firm


To the Board of Directors and
Stockholders of Capstone Companies, Inc. and Subsidiaries:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Capstone Companies, Inc. and Subsidiaries ("Company") as of December 31, 2017 and 2016, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Mayer Hoffman McCann P.C.


We have served as the Company's auditor since 2014.
Boca Raton, Florida
March 28, 2018
 
 
F - 1



 
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
           
CONSOLIDATED BALANCE SHEETS
           
             
   
December 31,
   
December 31,
 
   
2017
   
2016
 
Assets:
           
Current Assets:
           
   Cash
 
$
3,668,196
   
$
1,646,128
 
   Accounts receivable, net
   
4,367,721
     
4,449,179
 
   Inventory
   
140,634
     
366,330
 
   Prepaid expenses
   
239,150
     
330,020
 
     Total Current Assets
   
8,415,701
     
6,791,657
 
                 
Property and Equipment:
               
   Computer equipment and software
   
9,895
     
19,767
 
   Machinery and equipment
   
318,801
     
325,750
 
   Furniture and fixtures
   
5,665
     
5,665
 
   Less: Accumulated depreciation
   
(266,997
)
   
(250,465
)
     Total Property & Equipment
   
67,364
     
100,717
 
                 
Other Non-current Assets:
               
   Deposit
   
13,616
     
12,193
 
   Note receivable
   
-
     
526,887
 
   Goodwill
   
1,936,020
     
1,936,020
 
      Total Other Non-current Assets
   
1,949,636
     
2,475,100
 
         Total Assets
 
$
10,432,701
   
$
9,367,474
 
                 
Liabilities and Stockholders' Equity:
               
Current Liabilities:
               
   Accounts payable and accrued liabilities
 
$
2,733,516
   
$
2,678,210
 
   Income tax payable
   
624,782
     
1,588
 
   Notes and loans payable to related parties
   
-
     
1,321,721
 
     Total Current Liabilities
   
3,358,298
     
4,001,519
 
                 
Long Term Liabilities:
               
   Deferred tax liabilities
   
251,000
     
216,000
 
     Total Long Term Liabilities
   
251,000
     
216,000
 
     Total Liabilities
   
3,609,298
     
4,217,519
 
                 
Commitments and Contingencies (Note 6)
               
                 
Stockholders' Equity:
               
   Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares
   
-
     
-
 
   Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued -0- shares
   
-
     
-
 
   Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued -0- shares
   
-
     
-
 
   Common Stock, par value $.0001 per share, authorized 56,666,667 shares, issued 47,046,364 and 48,132,664 shares
   
4,704
     
4,813
 
   Additional paid-in capital
   
7,005,553
     
7,411,172
 
   Accumulated deficit
   
(186,854
)
   
(2,266,030
)
     Total Stockholders' Equity
   
6,823,403
     
5,149,955
 
     Total Liabilities and Stockholders' Equity
 
$
10,432,701
   
$
9,367,474
 
                 
The accompanying notes are an integral part of these consolidated financial statements.
         
F - 2



 
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
 
             
   
For the Years Ended
 
   
December 31,   
 
   
2017
   
2016
 
             
Revenues, net
 
$
36,752,813
   
$
30,630,368
 
Cost of sales
   
27,910,869
     
23,232,605
 
        Gross Profit
   
8,841,944
     
7,397,763
 
                 
Operating Expenses:
               
  Sales and marketing
   
2,266,601
     
1,223,798
 
  Compensation
   
1,612,480
     
1,434,154
 
  Professional fees
   
549,844
     
365,396
 
  Product development
   
376,981
     
326,820
 
  Other general and administrative
   
805,077
     
704,957
 
       Total Operating Expenses
   
5,610,983
     
4,055,125
 
                 
Operating Income
   
3,230,961
     
3,342,638
 
                 
Other Income (Expense):
               
  Interest income
   
-
     
26,897
 
  Interest expense
   
(122,091
)
   
(281,447
)
     Total Other (Expense)
   
(122,091
)
   
(254,550
)
                 
Income Before Tax Provision
   
3,108,870
     
3,088,088
 
                 
    Provision for Income Tax
   
(1,029,694
)
   
(267,000
)
                 
Net Income
 
$
2,079,176
   
$
2,821,088
 
                 
Net Income per Common Share
               
Basic
 
$
0.044
   
$
0.059
 
Diluted
 
$
0.044
   
$
0.058
 
                 
Weighted Average Shares Outstanding
               
Basic
   
47,007,296
     
48,132,664
 
Diluted
   
47,188,450
     
48,342,030
 
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
F - 3



 
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
YEARS ENDED DECEMBER 31, 2017 AND 2016
 
                                                                   
   
Preferred Stock
   
Preferred Stock   
   
Preferred Stock   
               
Additional
             
   
Series A   
   
Series B   
   
Series C   
   
Common Stock   
   
Paid-In
   
Accumulated
   
Total
 
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Capital
   
Deficit
   
Equity
 
                                                                   
Balance at December 31, 2015
   
-
   
$
-
     
-
   
$
-
     
-
   
$
-
     
48,132,664
   
$
4,813
   
$
7,344,115
   
$
(5,087,118
)
 
$
2,261,810
 
                                                                                         
Stock options for compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
67,057
     
-
     
67,057
 
Net Income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
2,821,088
     
2,821,088
 
Balance at December 31, 2016
   
-
     
-
     
-
     
-
     
-
     
-
     
48,132,664
     
4,813
     
7,411,172
     
(2,266,030
)
   
5,149,955
 
                                                                                         
Stock options for compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
95,469
     
-
     
95,469
 
Repurchase of shares from Involve L.L.C.
   
-
     
-
     
-
     
-
     
-
     
-
     
(1,666,667
)
   
(167
)
   
(749,833
)
   
-
     
(750,000
)
Shares issued to payoff working capital loan and exercise of warrants
   
-
     
-
     
-
     
-
     
-
     
-
     
580,367
     
58
     
248,745
     
-
     
248,803
 
Net Income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
2,079,176
     
2,079,176
 
Balance at December 31, 2017
   
-
   
$
-
     
-
   
$
-
     
-
   
$
-
     
47,046,364
   
$
4,704
   
$
7,005,553
   
$
(186,854
)
 
$
6,823,403
 
                                                                                         
The accompanying notes are an integral part of these consolidated financial statements.                                
 
F - 4



 
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
           
CONSOLIDATED STATEMENTS OF CASH FLOWS
           
             
   
For the Years Ended   
 
   
December 31,   
 
   
2017
   
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
   Net income
 
$
2,079,176
   
$
2,821,088
 
Adjustments necessary to reconcile net income to net cash provided by (used in) operating activities:
               
      Depreciation and amortization
   
80,940
     
63,678
 
      Accrued interest on note receivable
   
26,887
     
(26,887
)
      Stock based compensation expense
   
95,469
     
67,057
 
      Provision for deferred income tax
   
35,000
     
216,000
 
      Increase (decrease) in accrued sales allowance
   
(1,006,731
)
   
527,502
 
      Decrease in accounts receivable
   
1,090,898
     
100,501
 
     (Increase) decrease in inventory
   
225,696
     
(160,623
)
      Decrease in prepaid expenses
   
90,869
     
236,441
 
     (Increase) in other assets
   
(1,423
)
   
-
 
      Increase in accounts payable and accrued liabilities
   
55,306
     
513,926
 
      Increase (decrease) in accrued income tax payable
   
623,194
     
(5,912
)
      Increase (decrease) in accrued interest on notes payable
   
56,554
     
(148,367
)
  Net cash provided by operating activities
   
3,451,835
     
4,204,404
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
   
(47,587
)
   
(53,510
)
Net cash (used in) investing activities
   
(47,587
)
   
(53,510
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from notes payable
   
30,559,312
     
27,856,207
 
Repayments of notes payable
   
(30,559,312
)
   
(30,131,741
)
Repurchase of shares from Involve, LLC
   
(250,000
)
   
-
 
Warrants issued
   
7,500
     
-
 
Proceeds from notes and loans payable to related parties
   
-
     
860,000
 
Repayments of notes and loans payable to related parties
   
(1,139,680
)
   
(1,453,946
)
Net cash (used in) financing activities
   
(1,382,180
)
   
(2,869,480
)
                 
Net increase in Cash and Cash Equivalents
   
2,022,068
     
1,281,414
 
Cash and Cash Equivalents at Beginning of Year
   
1,646,128
     
364,714
 
Cash and Cash Equivalents at End of Year
 
$
3,668,196
   
$
1,646,128
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the year for:
               
Interest
 
$
418,925
   
$
429,814
 
Income taxes
 
$
371,500
   
$
56,912
 
                 
Non-cash financing activities:
               
    Sale of Investment for Note receivable
 
$
-
   
$
500,000
 
                 
Shares issued in satisfaction of loan payable to related party
 
$
240,900
   
$
-
 
                 
Note receivable used to repurchase shares from Involve L.L.C.
 
$
500,000
   
$
-
 
                 
The accompanying notes are an integral part of these consolidated financial statements.
               
F - 5



 
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Organization and Basis of Presentation

CAPC was initially incorporated September 18, 1986, under the laws of the State of Delaware under the name Yorkshire Leveraged Group, Incorporated, and then changed its domicile to Colorado in 1989 by merging into a Colorado corporation, named Freedom Funding, Inc. Freedom Funding, Inc. then changed its name to CBQ, Inc. by amendment of its Articles of Incorporation on November 25, 1998. In May 2004, the Company changed its name from CBQ, Inc. to China Direct Trading Corporation as part of a reincorporation from the State of Colorado to the State of Florida.  On May 7, 2007, the Company amended its charter to change its name from "China Direct Trading Corporation" to CHDT Corporation.  This name change was effective as of July 16, 2007, for purposes of the change of its name on the OTC Bulletin Board.   With the name change, the trading symbol was changed to CHDO. On June 6, 2012, the Company amended its charter to change its name from CHDT Corporation to CAPSTONE COMPANIES, INC.  This name change was effective as of July 6, 2012, for purposes of the change of its name on the OTC Bulletin Board.  With the name change, the trading symbol was changed to CAPC.

In February 2004, the Company established a new subsidiary, initially named China Pathfinder Fund, L.L.C., a Florida limited liability company. During 2005, the name was changed to Overseas Building Supply, LLC ("OBS") to reflect its shift in business lines from business development consulting services in China for North American companies to trading Chinese-made building supplies in South Florida.  This business line was ended in fiscal year 2007 and the OBS name was changed to Black Box Innovations, L.L.C. ("BBI") on March 20, 2008. On January 31, 2012, the BBI name was changed to Capstone Lighting Technologies, L.L.C ("CLT").

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

On April 13, 2012, the Company established a wholly owned subsidiary in Hong Kong, named Capstone International Hong Kong Ltd ("CIHK") which provides support services such as engineering, new product development, product sourcing, factory certification and compliance, product price negotiating, product testing and quality control and ocean freight logistics for the Company's other subsidiaries. CIHK is also engaged in selling the Company's products internationally.

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

Reverse Stock Split

On May 24, 2016, the Company's Board of Directors 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 shares of common stock, options, warrants and per share amounts for 2016 have been retroactively adjusted to reflect this reverse stock split.


F - 6

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

Nature of Business

Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling home LED products through national and regional retailers in North America and in certain overseas markets. The Company's products are targeted for applications such as home indoor and outdoor lighting and will have different functionalities to meet consumer's needs.  These products may be offered either under the Capstone brand or licensed brands.

The Company's products are typically manufactured in China by contract manufacturing companies.

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

Accounts Receivable

For product revenue, the Company invoices its customers at the time of shipment for the sales value of the product shipped. Accounts receivable are recognized at the invoiced amount and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers. As of both December 31, 2017 and 2016, accounts receivable serves as collateral for the Company's note payable.

Allowance for Doubtful Accounts

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

As of both December 31, 2017 and 2016, management has determined that accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.

The following table summarizes the components of Accounts Receivable, net:
 
 
December 31,
   
December 31,
 
 
 
2017
   
2016
 
Trade Accounts Receivables at year end
 
$
4,561,782
   
$
5,649,971
 
Reserve for estimated marketing allowances, cash discounts and other incentives
   
(194,061
)
   
(1,200,792
)
Total Accounts Receivable, net
 
$
4,367,721
   
$
4,449,179
 


F - 7

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

The following table summarizes the changes in the Company's reserve for marketing allowances, cash discounts and other incentives which is included in net accounts receivable:
   
December 31,
   
December 31,
 
 
 
2017
   
2016
 
Balance at beginning of the year
 
$
(1,200,792
)
 
$
(673,290
)
     Accrued allowances
   
(921,833
)
   
(3,047,518
)
     Reversal of prior year accrued allowances
   
58,867
     
94,203
 
     Expenditures
   
1,869,697
     
2,425,813
 
Balance at year-end
 
$
(194,061
)
 
$
(1,200,792
)

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

Inventory

The Company's inventory, which consists of finished LED lighting products for resale by Capstone, are recorded at the lower of cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of a specific inventory item falls below its original cost. Management regularly reviews the Company's investment in inventories for such declines in value. The write-downs are recognized as a component of cost of sales. During the fiscal year 2017 and 2016, inventory written down was $84,576 and $44,784, respectively. As of December 31, 2017, and 2016, respectively, the inventory was valued at $140,634 and $366,330.

Prepaid Expenses

The Company's prepaid expenses consist primarily of deposits on inventory purchases for future orders as well as prepaid advertising.  As of December 31, 2016, the Company had $186,019, in prepaid advertising credits included in prepaid expenses on the consolidated balance sheet. Such amounts were written off during 2017.

Property and Equipment

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

Computer equipment
3 - 7 years
Computer software
3 - 7 years
Machinery and equipment
3 - 7 years
Furniture and fixtures
3 - 7 years

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable.  When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset.  Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell.  No impairment losses were recognized by the Company during 2017 or 2016.

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


F - 8

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

Depreciation and amortization expense was $80,940 and $63,678 for the years ended December 31, 2017 and 2016, respectively.

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.

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

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.  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, by considering qualitative factors to determine whether it is more likely than not that a that the Company's goodwill carrying value is greater than its fair value. Such factors may include the following:
a significant decline in expected revenues, significant decline in the Company's stock price, a significant downturn in the general economic business conditions, the loss of key personnel or when conditions occur that may indicate impairment. The Company's intangible assets, which consist of goodwill of $1,936,020 recorded in connection with the Capstone acquisition, were tested for impairment during the fourth quarter, 2017, and we determined that no adjustment for impairment was necessary.

Net Income Per Common Share

Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding as of December 31, 2017 and 2016. Diluted earnings per share reflects the potential dilution that could occur if securities or

other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.  At December 31,2016, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 5,182,226.


F - 9

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

Basic weighted average shares outstanding is reconciled to diluted weighted shares outstanding as follows:
 

 
           December 31, 2017
                December 31, 2016
Basic weighted average shares outstanding
                     47,007,296
48,132,664
Dilutive warrants
                                    -
     209,366
Dilutive options
                         181,154
                -
Diluted weighted average shares outstanding
                    47,188,450
48,342,030
 
Principles of Consolidation

The consolidated financial statements for the years ended December 31, 2017 and 2016 include the accounts of the parent entity and its wholly-owned subsidiaries CLT, Capstone and CIHK. All significant intra-entity transactions and balances have been eliminated in consolidation.

Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, including cash, accounts receivable and accounts payable at December 31, 2017 and 2016 approximates their fair values due to the short-term nature of these financial instruments. The carrying value of the Company's notes payable approximate their fair value based on market rates for similar loans. The fair value hierarchy under U.S. GAAP distinguishes between assumptions based on market data (observable inputs) and an entity's own assumptions (unobservable inputs). The hierarchy consists of three levels:

·
Level 1 - Quoted market prices in active markets for identical assets or liabilities;
·
Level 2 - Inputs other than level one inputs that are either directly or indirectly observable; and
·
Level 3 - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.

Revenue Recognition

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

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

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


F - 10

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

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

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

The following table disaggregates net revenue by major source:

   
For the Year Ended December 31, 2017
   
For the Year Ended December 31, 2016
 
   
Capstone Brand
   
License Brands
   
Total Consolidated
   
Capstone Brand
   
License Brands
   
Total Consolidated
 
                                     
Lighting Products- U.S.
 
$
3,815,342
   
$
31,125,297
   
$
34,940,639
   
$
18,355,820
   
$
9,863,387
   
$
28,219,207
 
Lighting Products-International
   
1,361,256
     
450,918
     
1,812,174
     
2,148,721
     
262,440
     
2,411,161
 
     Total Revenue
 
$
5,176,598
   
$
31,576,215
   
$
36,752,813
   
$
20,504,541
   
$
10,125,827
   
$
30,630,368
 

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

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

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

The Company selectively supports retailer's initiatives to maximize sales of the Company's products on the retail floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to the customer.  The Company recognizes these incentives at the time they are offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to cost of sales, or marketing expenses depending on the type of sales incentives.


F - 11

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period the related revenue is recorded.

During the year ended December 31, 2017 and 2016, Capstone determined that $58,867 and $94,203, respectively of previously accrued allowances were no longer required. The reduction of accrued allowances is included in net revenues for the years ended December 31, 2017 and 2016.

Warranties

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

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

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

The following table summarizes the changes in the Company's product warranty liabilities which are included in accounts payable and accrued liabilities in the accompanying December 31, 2017 and 2016 balance sheets:

 
 
December 31,
   
December 31,
 
 
 
2017
   
2016
 
Balance at the beginning of the year
 
$
294,122
   
$
30,067
 
     Amount accrued
   
940,291
     
854,754
 
     Amount expensed
   
(906,134
)
   
(590,699
)
Balance at year-end
 
$
328,279
   
$
294,122
 

Advertising and Promotion

Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing expenses.  Advertising and promotion expense was $181,436 and $149,938 for the years ended December 31, 2017 and 2016, respectively.

Research and Development
Our research and development team located in Hong Kong working with our designated factories, are responsible for the design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets

For the year ended December 31, 2017 and 2016, research and development expenses were $376,981 and $326,820, respectively.


F - 12

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

Shipping and Handling

The Company's shipping and handling costs are included in sales and marketing expenses and are recognized as an expense during the period in which they are incurred and amounted to $78,531 and $140,118 for the years ended December 31, 2017 and 2016, respectively.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities contained in the accompanying consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years for potential warranty claims and various other expenses which amounted to $600,622 and $428,511 as of December 31, 2017 and 2016.

The following table summarizes the components of accounts payable and accrued liabilities at December 31, 2017 and 2016, respectively:
 
 
December 31,
   
December 31,
 
 
 
2017
   
2016
 
Accounts payable
 
$
2,132,894
   
$
2,249,699
 
                 
Accrued warranty reserve
   
328,279
     
294,122
 
Accrued compensation, benefits, commissions and other expenses
   
272,343
     
134,389
 
                             Total accrued liabilities
   
600,622
     
428,511
 
   Total
 
$
2,733,516
   
$
2,678,210
 

Income Taxes

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

On December 22, 2017, President Trump signed into law the legislation generally known as Tax Cut and Jobs Act of 2017. The tax law includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward and a deemed repatriation transition tax. In accordance with ASC 740, "Income Taxes", the impact of a change in tax law is recorded in the period of enactment. Refer to Note 8 for additional information on income taxes.

Stock-Based Compensation

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

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


F - 13

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.

The Company accounts for forfeitures as they occur.

Stock-based compensation for the years ended December 31, 2017 and 2016 totaled $95,469 and $67,057, respectively.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

Recent Accounting Standards
 In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, which provides guidance for revenue recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today's guidance. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year. Accordingly, public business entities should apply the guidance in ASU 2014-09 to annual reporting periods (including interim periods within those periods) beginning after December 15, 2017.

The ASC 606 establishes a principles-based approach for accounting for revenue arising from contracts with customers and supersedes existing revenue recognition guidance. The ASC 606 provides that an entity should apply a five-step approach for recognizing revenue, including (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. Also, the entity must provide various disclosures concerning the nature, amount and timing of revenue and cash flows arising from contracts with customers.


F - 14

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

The Company has substantially completed its study on the impact that implementing this standard will have on its consolidated financial statements, related disclosures and our internal control over financial reporting as well as whether the effect will be material to our revenue. Based on the results of our study to date, the standard will not be material to our revenue at adoption. Changes will need to be made to our current internal control over financial reporting processes to ensure all contracts are reviewed for each of the five revenue recognition steps.  Additionally, the Company's revenue disclosures will change in fiscal 2018 and beyond.  The new disclosures will require more granularity into our sources of revenue, as well as the assumptions about recognition timing, and include our selection of certain practical expedients and policy elections. We will use the modified retrospective approach upon adoption of this guidance effective January 1, 2018. We have reviewed our current accounting policies and practices to identify potential differences resulting from the application of the new requirements to our sales contracts, including evaluation of performance obligations in the sales contract, the transaction price, allocating the transaction price to each separate performance obligation and accounting treatment of costs to obtain and fulfill contracts. In addition, we will update certain disclosures, as applicable, included in our consolidated financial statements to meet the requirements of the new guidance.

We do not expect the adoption of ASC 606 will have any impact on our operating cash flows.

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

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

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


F - 15

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

In November 2016, the FASB issued ASU 2016-18, Cash Flows: Statement of Cash Flows (Topic 230) - Restricted Cash.  The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard is effective at the beginning of our fiscal year and subsequent interim periods beginning after December 31, 2017. The adoption of ASU 2016-18 is not expected to have a material effect on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit's carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. ASU 2017-04 will be effective for the Company's fiscal year beginning after December 15, 2019, and subsequent interim periods. The Company is currently evaluating the impact of the adoption of ASU 2017-04 will have on the Company's consolidated financial statements.

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

Adoption of New Accounting Standards

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory which simplifies the subsequent measurement of inventory. The updated guidance requires that inventory measured using any method other than last-in, first-out (LIFO) or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) be measured at the lower of cost and net realizable value. This update became effective at the beginning of our 2017 fiscal year. The adoption of this ASU did not have a significant impact on our consolidated financial statements and disclosures.

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

The Company adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718) which simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures, effective January 1, 2017. The new standard requires excess tax benefits or deficiencies for share-based payments to be recognized as income tax benefit or expense, rather than within additional paid-in capital, when the awards vest or are settled. Furthermore, cashflows related to excess tax benefits are required to be classified as operating activities in the statement of cash flows rather than financing activities. Under ASU 2016-09 the Company can elect a policy to account for forfeitures as they occur rather than on an estimated basis. The adoption of ASU 2016-09 did not have a material effect on the Company's consolidated financial statements, related disclosures and ongoing financial reporting.

 

F - 16

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company's financials properly reflect the change.

Reclassifications

Certain reclassifications have been made to the 2016 consolidated financial statements to conform to the 2017 presentation. Total stockholders' equity and net income are unchanged due to these reclassifications.

NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE

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

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

Cash and Cash Equivalents

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

The Company at times has cash and cash equivalents with its financial institution in excess of Federal Deposit Insurance Corporation ("FIDC") insurance limits. The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks.

Accounts Receivable

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

Major Customers

The Company had two customers who comprised 57% and 42% of net revenue during the year ended December 31, 2017, and 64% and 35% of net revenue during the year ended December 31, 2016.  The loss of these customers would adversely impact the business of the Company.

For the years ended December 31, 2017 and 2016, approximately 5% and 8% respectively, of the Company's net revenue resulted from international sales.



F - 17

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)

Major Customers
 
Gross Revenue %
 
Gross Accounts Receivable
 
 
Year Ended
December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
 
2017
 
2016
 
2017
 
2016
 
Customer A
   
57
%
   
64
%
 
$
2,259,769
   
$
3,760,755
 
Customer B
   
42
%
   
35
%
   
2,268,426
     
1,823,785
 
 Total
   
99
%
   
99
%
 
$
4,528,195
   
$
5,584,540
 

Major Vendors

The Company had two vendors from which it purchased 87% and 11% of merchandise sold during the year ended December 31, 2017, and 88% and 7% of merchandise sold during the year ended December 31, 2016. The loss of this supplier could adversely impact the business of the Company.

As of December 31, 2017 and 2016, approximately 77% and 87%, respectively, of accounts payable were due to the two vendors.

 
Purchases %
 
Accounts Payable
 
 
Year Ended
December 31,
 
Year Ended December 31,
 
Year Ended December 31,
 
 
2017
 
2016
 
2017
 
2016
 
Vendor A
   
87
%
   
88
%
 
$
922,310
   
$
1,507,671
 
Vendor B
   
11
%
   
7
%
   
768,164
     
545,066
 
 Total
   
98
%
   
95
%
 
$
1,690,474
   
$
2,052,737
 

NOTE 3 - INVESTMENT AND NOTE RECEIVABLE

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

On June 8, 2016, the Board of Directors approved a Resolution to accept an offer from AC Kinetics to sell the Company 100 shares of AC Kinetics Series A Preferred Stock. For consideration, the Company received a note in the face amount of $1,500,000 that would be immediately paid to the Company on completion and funding of a Securities Purchase Agreement with a national company to purchase AC Kinetics.  The note was subject to a Subordination Agreement for loans made to AC Kinetics by the national company involved in the Securities Purchase Agreement.  As further consideration, the Company also received an option to repurchase 1,666,667 shares of Company common stock held by Involve L.L.C. at an exercise price of $.15. The Agreements were signed June 27, 2016.


F - 18

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - INVESTMENT AND NOTE RECEIVABLE (continued)

The options also had termination dates being the earlier of the 12-month anniversary of the first option exercise date or 36 months from the agreement effective date.  The agreement was signed June 27, 2016 and the options would have expired on June 27, 2019.

On June 27, 2016 in assessing the fair value of the note, management had to first consider the probability of the Securities Purchase Agreement between AC Kinetics and a national company being finalized. The completion of the Securities Purchase Agreement involved the development, testing and marketing of technologically advanced motor-control software which was still in its development stages. Payment of the note was also subject to a subordination agreement for loan advances made by the national company to AC Kinetics to fund the project which at the time of the transaction were several million dollars.

In evaluating the note management determined that other than the intrinsic fair value of the option agreement, any added value to the note was dependent on the completion of the Securities Purchase Agreement between AC Kinetics and a national company and if the Securities Purchase agreement did not close, then AC Kinetics would not have the financial ability to pay the note, particularly as the note was subordinated to substantial loan advances made to AC Kinetics to fund the product development.

In evaluating the note management also determined that the best estimate of fair value should be based on the value of the option to repurchase common stock from Involve L.L.C. which represented the spread between the market price and the exercised price of the 1,666,667 shares of common stock to be repurchased with an estimated value of $500,000.

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

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

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

As of September 30, 2017 management were advised by a principal of AC Kinetics that the national company had not exercised its securities  purchase rights per the agreement, that the national company had stopped advancing loans to fund the project, that the national company had not entered into a revised loan agreement and that the project leader for the national company coordinating the project had been laid off and there was no guarantee that the securities purchase option would be completed.

With the exercise of all available options under the repurchase agreement and as the collateral used to substantiate the value of the note receivable was no longer available and as the possibility of the securities purchase agreement coming to a completion was doubtful, management determined that the fair value of the note at December 31, 2017 was $0.


F - 19

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 – NOTES PAYABLE

Sterling National Bank

On September 8,   2010, in order to fund increasing accounts receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now 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 .30% 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 6.25%. As of December 31, 2017 and 2016, the interest rate on the loan was 6.50 % and 5.25%, respectively. The amounts borrowed under this agreement are due on demand and collateralized by substantially all the assets of Capstone.

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

As of December 31, 2017, the maximum amount that can be borrowed and available on this credit line is $7,000,000.

NOTE 5 – NOTES AND LOANS PAYABLE TO RELATED PARTIES

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

On May 30, 2007, the Company executed a $575,000 promissory note payable to a Director of the Company.  This note was amended on July 1, 2009 and again on January 2, 2010. As amended, the note carries an interest rate of 8% per annum.  All principal was payable in full, with accrued interest, on January 2, 2014.  On November 2, 2007, the Company issued 12,074 shares of its Series B Preferred stock valued at $28,975 as payment towards this loan.  The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid principal.  On July 12, 2011, Stewart Wallach, the Chief Executive Officer and Director of the Company and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman (former Chairman), whereby they would purchase equally all of Mr. Ullman's notes net of any offsets, monies due from Mr. Ullman to the Company. The original terms of all notes would remain the same. On July 12, 2011, this note payable was reassigned by Mr. Ullman, equally split between Stewart Wallach, Chief Executive Officer and Director, and JWTR Holdings LLC.

The note balance of $466,886 was reduced by $47,940 for offsets due by Mr. Ullman. The revised loan balance of $418,946 was reassigned equally, $209,473 to Stewart Wallach and $209,473 to JWTR Holdings LLC. As amended the note was due on or before April 3, 2017.  On September 19, 2016, this note was paid in full to both parties. Each party was paid $295,558 which included principal of $209,473 and interest of $86,085.

On March 11, 2010, the Company received a loan from a Director in the amount of $100,000. As amended, the note was due on or before April 3, 2017 and carried an interest rate of 8% per annum. On September 22, 2016, this note was paid in full including accrued interest of $52,296.

On May 11, 2010, the Company received a loan from Stewart Wallach in the amount of $75,000. As amended, the note was due on or before April 1, 2016 and carried an interest rate of 8% per annum. On March 2, 2016, this note was paid in full including accrued interest of $34,866.

On January 15, 2013, the Company received a loan in the amount of $250,000 from Stewart Wallach. The loan carried an interest rate of 8% per annum. This loan was amended, and the due date was extended until April 3, 2017 On April 1, 2016, Stewart Wallach transferred ownership of this note and all accrued interest to Director, Jeffrey Postal.  The amount transferred was $250,000 and accrued interest of $64,164. This loan was cancelled, and a new loan entered into with Jeffrey Postal on April 1, 2016. At December 18, 2017 this loan was paid in full including accrued interest of $98,520.

F - 20

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)

On January 15, 2013, the Company received a loan in the amount of $250,000 from a Director of Capstone. The loan carried an interest rate of 8% per annum. On December 18, 2017 this loan was paid in full including accrued interest of $98,521.

Purchase Order Assignment- Funding Agreements

On March 18, 2016, Capstone received $360,000 against a note from Group Nexus. The note was due on or before September 30, 2016 and carried an interest rate of 8.0% per year. The note with accumulated interest of $5,287 was paid off in full on May 24, 2016.

On April 19, 2016, Capstone received $500,000 against a note from George Wolf, a consultant. The note was due on or before December 31, 2016 and carried an interest rate of 8% per year.  On June 1, 2016, the note was paid off in full with accumulated interest of $4,712.

Working Capital Loan Agreements

On April 1, 2012, the Company signed a working capital loan agreement with Postal Capital Funding, LLC ("PCF"), a private capital funding company owned by Jeffrey Postal. Pursuant to the agreement, the Company may borrow up to a maximum of $1,000,000 of revolving credit from PCF.  Amounts borrowed carry an interest rate of 8%.  This loan was amended, and the due date has been extended until January 2, 2018.

On February 2, 2017, the Company paid down $137,129 against this loan including $37,129 of accumulated interest.

On June 16, 2017, the Company paid down $167,092 against this loan including $44,092 of accumulated interest.

During September 2017, Director, Jeffrey Postal entered into a Conversion and Option Agreement to satisfy the remaining balance of the working capital loans totaling $275,000 with accrued interest of $104,318. The Agreement resulted in $217,500 of outstanding notes payable being satisfied as payment for exercised stock options and a further $23,400 of notes payable being satisfied as payment for the purchase of 50,000 of the Company's common shares. On September 14, 2017, the remaining balance of that note payable, $138,418 was paid to this related party.

As of December 31, 2017, and December 31, 2016, the Company had notes payable to related parties of $0 and $1,321,721, respectively.

During the years ended December 31, 2017 and 2016, interest expense on the notes payable to related parties amounted to $58,859 and $120,963, respectively.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Operating Leases

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

Capstone entered into a 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 had the one-time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term.


F - 21

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)

Effective February 1, 2017, the Company renewed the lease for 3 years ending January 31, 2020, with a base annual rent of $92,256 and with a total rent expense of $281,711 through the term of the agreement.  Under the lease agreement, Capstone is responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.

CIHK entered into a lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong.  The original agreement was for the period from February 17, 2014, to February 16, 2016, with a base annual rent of $48,000 (HK$ 372,000) paid in equal monthly installments. The lease was extended for three (3) months until May 16, 2016. The lease was renewed for (12) months ending May 16, 2017 with a base annual rate of $48,775 and was further extended for (12) months ending May 16, 2018 with a base annual rate of $54,193 paid in equal monthly installments. The Company entered into a six (6) month rental agreement from December 1, 2016 until May 31, 2017 and was extended until December 31, 2017 for showroom space at 3F, Wing Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. This agreement has been further extended until December 31, 2018.

The Company's rent expense amounted to $163,060 and $144,181 for the years ended December 31, 2017 and 2016, respectively.

The future lease obligations under these agreements are as follows:
 

Year Ended December 31,
 
US
   
HK
   
Total
 
                   
     2018
 
$
93,855
   
$
38,060
   
$
131,915
 
     2019
   
95,570
     
-
     
95,570
 
     2020
   
7,964
     
-
     
7,964
 
     2021
   
-
     
-
     
-
 
         Total future lease obligation
 
$
197,389
   
$
38,060
   
$
235,449
 
 
Consulting Agreements and Subsequent Events

On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf was paid $10,500 per month through December 31, 2015 increasing to $12,500 per month from January 1, 2016 through December 31, 2017. A bonus compensation of $10,000 was paid in the month of January 2017 related to 2016 sales performance.

On January 1, 2017, the agreement was amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2017 through December 31, 2017. Bonus compensation of $15,000 was paid on December 22, 2017 related to 2017 sales performance.

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

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


F - 22

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)

Employment Agreements and Subsequent Events

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

On February 5, 2018, the Company renewed the Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed two years in length.

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

On February 5, 2018, the Company renewed the Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed one year in length.

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

Licensing Agreements

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


F - 23

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 – COMMITMENTS AND CONTINGENCIES (continued)

On December 29, 2016, the Company finalized the first amendment to the February 4, 2015 Licensing Agreement with the floorcare company in which the initial term was extended through February 3, 2020 and additional renewal terms and periods were also finalized. During this initial extended period through February 3, 2020, if the Company achieves net sales of $5,000,000, then the agreement would automatically be extended 2 years until February 3, 2022 and if during this second extended period the Company achieves net sales of $5,000,000, then the agreement would automatically be further extended 2 years until February 3, 2024. The license also added an additional product category.

Royalty expense related to this agreement for the years ended December 31, 2017 and 2016, was $777,626 and $496,166, respectively.

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

Royalty expense related to this agreement for the years ended December 31, 2017 and 2016, was $504,584 and $0, respectively.

Investment Banking Agreement and Subsequent Event

On March 1, 2017, the Company executed an Investment Banking Agreement with Wilmington Capital Securities, LLC, ("Wilmington"), a registered broker-dealer under the Securities Exchange Act of 1934. The Company entered into the Agreement in order to obtain outside assistance in finding and considering possible opportunities to enhance Company shareholder value through significant corporate transactions or through funding expansion and/or diversification of the Company's primary business lines. The scope of such possible strategic transactions included mergers and acquisitions, asset acquisition or sales and funding through the issuance of Company securities. The agreement had an initial six-month term and renewed for an additional, consecutive six-month term. Wilmington received a cash retainer fee of $80,000, paid in monthly installments, in the first six-month term, and a reduced retainer fee of $45,000, paid in monthly installments, in the first renewal of the initial six-month term. Wilmington will also receive a transaction fee for any consummated strategic transaction introduced by Wilmington under the Agreement. The transaction fees are based on the Lehman Scale starting at 8% fee reducing to 4% on transactions from $5,000,000 to in excess of $20,000,000.

The retainer fee paid for this agreement for the year ended December 31, 2017 was $120,000.  A further retainer fee of $5,000 that remained on the agreement was paid in January 2018.

NOTE 7 - STOCK TRANSACTIONS

Warrants

During September and October 2007, the Company issued 2,121,569 shares of common stock for cash at $0.255 per share, or $541,000 total as part of a Private Placement under Rule 506 of Regulation D. Along with the stock, each investor also received a warrant to purchase 30% of the shares purchased in the Private Placement. In September 2017, an investor exercised a warrant option for 29,412 shares at the exercise price of $.255 per share. During October 2017 the remaining 607,062 outstanding warrants expired.

Options

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

 

F - 24

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 7 - STOCK TRANSACTIONS (continued)

On July 20, 2016, the Company granted 200,000 stock options to two directors of the Company and 10,000 stock options to the Company Secretary. These options have an exercise price of $0.435 with an effective date of August 6, 2016 and vested on August 5, 2017.

On August 6, 2017, the Company granted 200,000 stock options to two directors of the Company and 10,000 stock options to the Company Secretary. These options have a strike price of $.435 with an effective date of August 6, 2017 and will vest on August 5, 2018.

During the quarter ended September 30, 2017, Jeffrey Postal entered into a Conversion and Option Agreement with the Company and exercised his option to purchase 500,000 of his vested stock options at the grant price of $.435 per share and with a total value of $217,500.  As part of the Agreement, the $217,500 payment for these stock options resulted in the satisfaction of $217,500 of notes payable due Mr. Postal since 2012.

As of December 31, 2017, there were 1,026,670 stock options outstanding and 816,670 stock options vested. The stock options have a weighted average expense price of $0.435.

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

In applying the Binomial Lattice (Suboptimal) option pricing model to stock option granted, the Company used the following weighted average assumptions: The following assumptions were used in the fair value calculations of options granted during the year ended December 31, 2016:

Risk free interest rate – 1.13 – 1.59%
Expected term – 5 to 10 years
Expected volatility of stock – 500%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 150

In applying the Binomial Lattice (Suboptimal) option pricing model to stock option granted, the Company used the following weighted average assumptions: The following assumptions were used in the fair value calculations of options granted during the year ended December 31, 2017:

Risk free interest rate – 1.82 – 2.27%
Expected term – 5 to 10 years
Expected volatility of stock – 500%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 150

The risk-free interest rate is based on rates of treasury securities with the same expected term as the options. The Company uses the expected term of employee and director stock-based options. The Company is utilizing an expected volatility based on a review of the Company's historical volatility, over a period of time, equivalent to the expected life of the instrument being valued.

The expected dividend yield is based upon the fact that the Company has not historically paid dividends and does not expect to pay dividends in the near future.


F - 25

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 - STOCK TRANSACTIONS (continued)

For the years ended December 31, 2017 and 2016, the Company recognized stock-based compensation expense of $95,469 and $67,057, respectively, related to these stock options. Such amounts are included in compensation expense in the accompanying consolidated statements of income. A further compensation expense expected to be $68,856 will be recognized for these options in 2018.

The following table sets forth the Company's stock options outstanding as of December 31, 2017, and December 31, 2016 and activity for the years then ended:
 
   
Shares
   
Weighted Average Exercise Price
   
Weighted Average Fair Value
   
Weighted Average Remaining Contractual Term (Years)
   
Intrinsic Value
 
                               
Outstanding, January 1, 2016
   
5,272,227
   
$
0.435
   
$
0.303
     
1.73
   
$
-
 
Granted
   
210,000
     
0.435
     
0.390
     
4.82
     
-
 
Exercised
   
-
     
-
     
-
     
-
     
-
 
Forfeited/expired
   
(300,001
)
   
0.435
     
0.105
     
-
     
-
 
Outstanding, December 31, 2016
   
5,182,226
   
$
0.435
   
$
0.318
     
.97
   
$
77,733
 
Granted
   
210,000
     
0.435
     
0.550
     
5.20
     
-
 
Exercised
   
(500,000
)
   
-
     
-
     
-
     
(15,000
Forfeited/expired
   
(3,865,556
)
   
0.435
     
0.323
     
-
     
-
 
Outstanding, December 31, 2017
   
1,026,670
   
$
0.435
   
$
0.345
     
2.45
   
$
87,267
 
                                         
Vested/exercisable at December 31, 2016
   
4,972,226
   
$
0.435
   
$
0.315
     
.80
   
$
74,583
 
Vested/exercisable at December 31, 2017
   
816,670
   
$
0.435
   
$
0.292
     
1.83
   
$
69,417
 
 
The following table summarizes the information with respect to options granted, outstanding and exercisable under the 2005 Plan:
 

Exercise Price
   
Options Outstanding
   
Remaining Contractual Life in Years
   
Average Exercise Price
   
Number of Options Currently Exercisable
 
$
.435
     
166,668
     
0.33
   
$
.435
     
166,668
 
$
.435
     
46,668
     
1.31
   
$
.435
     
46,668
 
$
.435
     
66,667
     
0.03
   
$
.435
     
66,667
 
$
.435
     
10,000
     
0.10
   
$
.435
     
10,000
 
$
.435
     
56,667
     
1.33
   
$
.435
     
56,667
 
$
.435
     
20,000
     
2.46
   
$
.435
     
20,000
 
$
.435
     
10,000
     
3.50
   
$
.435
     
10,000
 
$
.435
     
100,000
     
1.00
   
$
.435
     
100,000
 
$
.435
     
10,000
     
6.00
   
$
.435
     
10,000
 
$
.435
     
100,000
     
2.00
   
$
.435
     
100,000
 
$
.435
     
10,000
     
7.50
   
$
.435
     
10,000
 
$
.435
     
100,000
     
2.60
   
$
.435
     
100,000
 
$
.435
     
10,000
     
7.60
   
$
.435
     
10,000
 
$
.435
     
100,000
     
3.60
   
$
.435
     
100,000
 
$
.435
     
10,000
     
8.60
   
$
.435
     
10,000
 
$
.435
     
200,000
     
4.60
   
$
.435
     
-
 
$
.435
     
10,000
     
9.60
   
$
.435
     
-
 
 


F - 26

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 - STOCK TRANSACTIONS (continued)

Stock Purchase

During the quarter ended September 30, 2017, Jeffrey Postal entered into a Conversion and Option Agreement with the Company. As part of the Agreement, Jeffrey Postal purchased 50,000 shares of common stock for $23,400.   As part of the Agreement, the payment for these shares resulted in the satisfaction of $23,400 of notes payable due to Mr. Postal since 2012.

Adoption of Stock Repurchase Plan

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

On December 21, 2016, 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.

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

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

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

On December 15, 2017, the Company's Board of Directors approved an extension of the Company's stock repurchase plan for up to $750,000 through June 30, 2018.

NOTE 8 - INCOME TAXES

As of December 31, 2017, the Company had utilized all net operating loss carry forwards for income tax reporting purposes that were previously available to be offset against future taxable income through 2034. As of December 31, 2016, the Company had net operating loss carry forwards available of approximately $357,000. The net deferred tax liability as of December 31, 2017 and 2016 was $251,000 and $216,000, respectively, and is reflected in long-term liabilities in the accompanying balance sheets.

For the year ended December 31, 2016, the Company recorded a change in the valuation allowance of $756,000, on the basis of management's reassessment of the amount of its deferred tax assets that are more likely than not to be realized. As of each reporting date, management considers new evidence, both positive and negative, that could affect its determination of the future realization of deferred tax assets. As of December 31, 2016, in part because as of that date the Company had achieved two years of pretax income, management determined that there was sufficient positive evidence to conclude that it is more likely than not that the deferred taxes are realizable. Management therefore reduced the valuation allowance accordingly and the impact of the change is reflected in 2016 income.


F - 27

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - INCOME TAXES (continued)

The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant judgement to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities for the years 2014 and prior.

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

The provision for income taxes for the years ended December 31, 2017 and 2016 was calculated based on the estimated annual effective rate of 34% for both the full 2017 and 2016 calendar years, adjusted for an income tax benefit from the expected utilization of net operating loss carryforwards.

On December 22, 2017, President Trump signed into law the legislation generally known as Tax Cut and Jobs Act of 2017. The tax law includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, a change in the treatment of foreign earnings going forward and a deemed repatriation transition tax. In accordance with ASC 740, the impact of a change in tax law is recorded in the period of enactment. During the fourth quarter of 2017, the Company recorded a non-cash, change in its net deferred income tax balances of approximately $120,000 related to the tax rate change. The Company estimates that its deemed repatriation liability will not be material due to its limited international operations.

The income tax provision for the years ended December 31, 2017 and 2016 consists of:

 
 
2017
   
2016
 
  Current:
           
     Federal
 
$
870,000
   
$
51,000
 
     State
   
113,000
     
-
 
     Foreign
   
11,694
     
-
 
Deferred:
               
     Federal
   
34,000
     
216,000
 
     State
   
1,000
         
  Income Tax Provision
 
$
1,029,694
   
$
267,000
 

The provision for income taxes differ from the amount computed using the federal US statutory income tax rate as follows:
 

   
2017
   
2016
 
  Provision at U.S. statutory rate
 
$
981,000
   
$
1,050,000
 
  State taxes, net of Federal benefit
   
75,000
     
-
 
  Foreign taxes
   
11,694
     
-
 
  Alternative minimum tax
   
-
     
51,000
 
  Depreciation and amortization
   
(31,000
)
   
(37,000
)
  Accrued liabilities
   
31,000
     
38,000
 
  Non-deductible stock-based compensation
   
32,000
     
23,000
 
  Other differences
   
50,000
     
(102,000
)
  Impact of tax reform
   
(120,000
)
   
-
 
  Decrease in valuation allowance
   
-
     
(756,000
)
  Income tax provision
 
$
1,029,694
   
$
267,000
 
 

F - 28

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - INCOME TAXES (continued)

The tax effects of temporary differences and carry forwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:

   
2017
   
2016
 
Deferred tax assets:
           
    Net operating loss carryforward
 
$
-
   
$
121,000
 
    Liabilities and reserves
   
88,000
     
88,000
 
    Property and equipment and inventory
   
20,000
     
14,000
 
    Other
   
1,000
     
-
 
     
109,000
     
223,000
 
Deferred tax liabilities:
               
    Intangible assets
   
(360,000
)
   
(439,000
)
     
(360,000
)
   
(439,000
)
Net deferred tax assets and liabilities
 
$
(251,000
)
 
$
(216,000
)

 
 
 
 
 
 
F - 29



EXECUTIVE EMPLOYMENT AGREEMENT
STEWART WALLACH

This Executive Employment Agreement ("Agreement") is made and entered into as of February 5th, 2018 by and between Capstone Companies, Inc. ("Company") and Stewart Wallach, a natural person (the "Executive").  The Company and the Executive may also hereinafter be referred to individually as a "party" and collectively as the "parties."
RECITALS:
WHEREAS, the Company desires to employ Executive on a full-time basis and Executive wishes to be employed by the Company on the terms and conditions set forth in this Agreement; and
WHEREAS, the parties wish this Agreement to supersede all prior employment agreements between the parties.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive agree as follows:
1.
Term of Employment .
1.1.
Initial Employment Period .  The Company agrees to employ the Executive as the Chairman of the Board, Chief Executive Officer and President of Capstone Industries, Inc., (a subsidiary of the Company), and the Executive accepts employment with the Company, upon the terms set forth in this Agreement, for the period beginning on 12:01 a.m., local Miami, Florida time, on February 5, 2018, and ending on 11:59 p.m., local Miami, Florida time, on February 5, 2020 (the "Employment Period"), during which time Executive will devote his full business time to providing services hereunder.  During the Employment Period, this Agreement shall remain in force unless sooner terminated in accordance with the provisions of this Agreement pursuant to Section 5 below.  The Executive agrees that the consideration provided hereunder is fair and adequate consideration for all services provided in each of the aforesaid capacities.  Executive further agrees that this Agreement shall not constitute an employment agreement for services rendered to any company other than the Company.  Any employment agreement with any other company shall be and must be a separate written agreement with such other company or companies.

1.2.
Extension of the Employment Period .  The parties may extend the Employment Period of this Agreement by mutual agreement, provided that such agreement must be approved by the Company Board of Directors in writing and no extension may exceed two (2) year in length.

1.3.
Termination of all Prior Employment Agreement .  Executive hereby knowingly, intentionally and voluntarily terminates any and all prior employment agreements between the Company or any of its subsidiaries and the Executive.  Executive agrees and understands that this Agreement sets forth all of the terms and conditions of his employment by the Company and that all rights, benefits and claims under any prior employment agreement, whether written or oral, are expressly waived and terminated by this Agreement.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

1


2.
Employment .
2.1.
Position and Duties .  During the Employment Period, the Company hereby agrees to employ Executive as Chairman of the Board, Chief Executive Officer and President of Capstone Industries, Inc. (a subsidiary of the Company) on the terms set forth herein. In such capacity, Executive has responsibility for the executive oversight and strategic planning for the Company and its subsidiaries, especially in terms of producing and implementing the Company's and its subsidiaries' strategic marketing and sales plan and strategic business development plan.  The Company may also assign Executive to other duties commensurate with Executive's skills and experience. Executive reports to the Board of Directors of the Company. Executive agrees to devote his business time, ability, knowledge and attention solely to the Company's business affairs and interests and to faithfully and diligently perform such services and assume such duties and responsibilities as are assigned to the best of Executive's abilities, skills and efforts and to abide by applicable Company policies and directives as they exist from time to time.
2.2.
Location .  The Executive shall render his services under this Agreement in the principal executive offices of the Company which shall be in the greater Fort Lauderdale-Miami consolidated metropolitan area.  Under no circumstances shall the Executive be required to relocate from more than fifty (50) miles from said metropolitan area or provide services under this Agreement in any other location other than in connection with reasonable and customary business travel.  The Company reserves the right to make a temporary reassignment of the location for the performance of Executive's services hereunder for a period not to exceed forty five (45) days, which relocation shall not constitute a breach of this Agreement.
2.3    Limitations on Outside Activities.   Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to (i) serving, with the approval of the Company's Board of Directors, which shall not be unreasonably withheld, as a director, trustee or member of any committee of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs; provided   that such activities do not involve any material conflict of interest with the interests of the Company or, individually or collectively, interfere materially with the performance by the Executive of his duties and responsibilities under this Agreement.  Notwithstanding the foregoing and except as expressly provided herein, during the Employment Period, the Executive may not accept employment with any other individual or entity, or engage in any other venture which is directly or indirectly in conflict or competition with the business of the Company.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

2



3.
Compensation .
3.1.
Base Salary .  In consideration of Executive's services to the Company, the Company will pay Executive a gross base salary of TWO HUNDRED EIGHTY SEVEN THOUSAND ONE HUNDRED SIXTY THREE DOLLARS AND FIFTY FIVE CENTS ($287,163.55) per annum.  The Executive's base salary will be paid in equal installments in accordance with the Company's standard payroll schedule, and the Company will withhold from such salary all applicable federal, state and local taxes as required by applicable laws.  The Executive may elect to accept additional cash compensation awards in Company "restricted" (as defined in Rule 144 under the Securities Act of 1933, as amended) shares of Company Common Stock, $0.0001 par value, ("Shares"), which payments shall be made in semi-annual installments.  The Company hereby grants "piggy-back" registration rights to the Executive for all such Shares that are issued hereunder (expressly excepting any registration on Form S-8 or Form S-4, or any successor form to those two forms).  The value of the Shares in respect of the cash compensation being replaced by such Shares shall be determined by the average closing BID price for the Shares (as quoted on www.bloomberg.com ) for the first twenty (20) consecutive trading days for each month in which Shares will be substituted for cash compensation hereunder.
3.2.
Bonus .  In addition, any bonus program adopted by the Company for senior office(s), shall be deemed to be "merit based" and will be determined solely at the discretion of the compensation committee, and in accordance with its terms as they exist from time to time.
4.
Benefits and Reimbursements .
4.1.
Insurance .  Executive shall be entitled to participate in the following benefit programs which would include; health insurance, dental insurance and vision insurance, as well as any similar insurance programs offered by the Company to individuals employed by the Company as executives or in otherwise similar positions.
4.2.
Leave .  Executive shall be entitled to thirty (30) days of paid vacation and seven (7) days of paid personal leave each year (during which time his compensation shall continue to be paid in full).  Executive shall also be entitled to five (5) days of sick leave, during which time his compensation shall continue to be paid in full.  Executive may carry over up to five (5) days of unused vacation/personal leave from contract year to contract year provided the company requests the Executive not take vacation due to required work.  For purposes of this Agreement, "contract year" means from January 1st to December 31 st each year.
4.3.
Stock Option, Savings or Retirement Plans .  Executive shall be entitled to participate in any pension, profit-sharing, deferred compensation plans, "merit" bonuses, stock option or other incentive compensation plans as are offered by the Company to individuals employed by the Company as full-time executive and subject to the same qualifications as other full-time executive employees.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

3



4.4.
Expenses .  The Company shall reimburse Executive for the reasonable amount of hotel, travel, entertainment and other expenses necessarily incurred by Executive in the discharge of his duties to the Company, subject to the Company's expense policy.
4.5.
Technology .   The Company shall provide Executive with a laptop computer and a cellular phone for his use during the Employment Period.  These shall remain the property of the Company, and shall be returned to the Company upon the termination of the Executive's employment.
5.
Termination.
The employment of Executive by Company and the Employment Period shall terminate upon the occurrence of any of the following conditions:
5.1.
Expiration .  Immediately upon the expiration of the Employment Period set forth in Section 1 above, including any extension of the Employment Period as agreed upon in writing pursuant to Section 1.
5.2.
Death .  Immediately upon the death of Executive.
5.3.
Disability .  Immediately upon the Disability of Executive.  Immediately upon the death or disability of the Executive.  As used herein, the term "Disability" shall mean either (i) the Executive's inability, by reason of physical or mental incapacity or impairment, to perform his duties and responsibilities under this Agreement for a period of more than sixty (60) consecutive days, or for more than ninety (90) days, whether or not consecutive, within the preceding 365-day period, or (ii) the receipt by the Executive of disability benefits for permanent and total disability under any long-term disability income policy held by or on behalf of the Executive.
5.4.
By the Company for Cause .  Immediately upon provision of written notice to the Executive by the Company that his employment is being terminated for Cause, as defined below.  "Cause" for termination means:
(i)   Executive's willful and intentional refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided , however , that the Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 5.4 (i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice;
(ii)   Any willful and intentional act of the Executive involving fraud, theft, misappropriation of funds, or embezzlement affecting the Company or its subsidiaries;
(iii)   Executive's conviction of, or a plea of guilty or nolo contendere to, an offense which is a felony or a misdemeanor evincing moral turpitude;
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

4



(iv)   Executive's material breach of this Agreement which is not remedied within fifteen (15) days after receipt of a written demand to remedy from the Company; or
(v)   Gross misconduct by Executive that is of such a serious or substantial nature that a substantial likelihood exists that such misconduct would injure the public business reputation of the Company if the Executive were to remain employed by the Company; or
(vi)   Issuance of any prohibition by the U.S. Securities and Exchange  Commission or "SEC" against the Executive serving as an officer or director of a public company and the period for appeal of such prohibition has expired without the Executive filing an appeal; or
(vii)   the Company files for Chapter 7 protection from creditors and the bankruptcy petition is not withdrawn or dismissed within sixty days after the filing date; or
(viii)   Executive intentionally refuses to follow a lawful, commercially reasonable directive of the Company Board of Directors, such directive concerns an action or matter within the purview of the Executive's customary and usual duties and the refusal of the Executive results in the Company or any of its subsidiaries suffering a material liability or loss (for purposes of this Agreement, "material" shall mean an amount equal to or exceeding One Hundred Thousand Dollars and No Cents ($100,000.00).
5.5   Termination of the Executive for Cause shall be communicated by a Notice of Termination.   For purposes of this Agreement, a "Notice of Termination" shall mean delivery to the Executive of written notice from duly authorized officers of the Company stating that in the good faith determination of the Company the Executive was guilty of conduct constituting Cause and failed to cure such conduct within the applicable time period. For purposes of this Agreement, no such purported termination of the Executive's employment shall be effective without such Notice of Termination.
5.6   By Company Without Cause .  At the election of the Company after serving the Executive with at least three (3) months notice of the Company's intent to termination his employment Without Cause. The Company shall have the right to pay the Executive the notice period in lieu of notice.
5.7   By Executive for Good Reason .  As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive:
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

5



(i)   assignment to the Executive of duties materially inconsistent with the Executive's positions as described in Section 2.1 hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause, Disability or as a result of the Executive's death or by the Executive other than for Good Reason;
(ii)   the change in the location of the Company's principal executive offices or of the Executive's principal place of employment to a location outside the greater Fort Lauderdale-Miami, Florida metropolitan area/more than fifty (50) fifty miles from the current location. The Executive will have the option to transfer to the new location, in the same or equivalent position at a reasonable expense to the Company.
(iii)   any material breach of this Agreement by the Company which is continuing;
(iv)   a Change in Control, provided that a Change of Control shall only constitute Good Reason if the Executive terminates his employment within six (6) months following a Change of Control;
provided , however , that the Executive shall not be deemed to have Good Reason pursuant to clauses (i) or (iii) above unless the Executive gives the Company written notice that the specified conduct or event has occurred and the Company fails to cure such conduct or event within thirty (30) days of the receipt of such notice. A "Change of Control" shall be deemed to have occurred when any person, other than Executive or his respective affiliates, associates, or estate, becomes, after the date of grant, the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then-outstanding securities;
6.
Effect of Termination and Severance .
6.1.
If the Employment Period is terminated by the Company for Cause, the Company will pay to the Executive his accrued and unpaid base salary as well as all accrued but unused vacation through the date of such termination;
6.2.
If the Employment Period is terminated by the Executive other than because of death, Disability or for Good Reason, the Company will pay to the Executive his accrued and unpaid base salary as well as all accrued but unused vacation through the date of such termination;
6.3.
If the Employment Period is terminated upon the Executive's death or Disability,
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

6



(i)
the Company will pay to the Executive's estate or the Executive, as the case may be, an ongoing salary from the Company's normal payroll account, equivalent to the sum of (12) months base salary based on the annual base salary the Executive was earning as of the date of termination; a pro-rated "merit" bonus, if earned during the previous calendar year, if  applicable to the Executive during the calendar year of Termination;
6.4.
If the Employment Period is terminated by the Company without Cause or if the Executive terminates for Good Reason,
(i)
the Company shall pay the Executive sum payments equal to the greater of: (A) the sum of twelve (12) months base salary rate Executive was earning as of the date of termination; (B) the sum of any "merit" based bonuses earned by the Executive during the prior calendar year of his/her Termination.  Any payments owed by the Company to the Executive, as a result of Death, Disability, or Termination, shall be paid from a normal payroll account on a weekly or bi-weekly basis in accordance with the normal payroll policies of the Company.  The amount owed by the Company to the Executive will be divided by the remaining number of weeks in the calendar year of the Termination, and will continue until company obligation is fully paid but at no time will be no more than twelve (12) installments.
(ii)
the Company shall also continue in effect the Executive's health and dental benefits (or similar health and dental benefits paid to senior executives noted in Section 3(c)) for a period of twelve (12) months commensurate with the Company's "approved" Health Plan & Benefits Package at the time of termination.  If Executive, participated in family health insurance coverage at the time of termination, that obligation would remain theirs and the Company would continue to pay installments to keep insurance active for a twelve (12) month period and reduce the family's monthly premium against the Executive's severance package.  If Executive is eligible for continued health insurance benefits under the federal law known as COBRA and Executive timely elects COBRA coverage and makes timely payment of required premiums, the Company will reimburse Executive the cost of such COBRA coverage, not to exceed amount being paid at the time of termination, for twelve (12) months (commensurate with Executives' severance package) from the termination date or the date on which the Executive obtains health coverage from a subsequent employer.  If Executive is not eligible for COBRA benefits, the Company will reimburse Executive the cost of similar coverage Executive obtains for twelve (12) months from the termination date or the date on which the Executive obtains health insurance coverage from subsequent employer.  If contract is terminated due to death, Company would not be required to keep any coverage in effect.
7.
Confidential Information .
Executive acknowledges that he will occupy a position of trust and confidence with respect to the Company's affairs and business and that, in connection with the performance of his services on behalf of the Company, Executive will be provided access to the Company's confidential and proprietary information and trade secrets ("Company Confidential Information") and confidential and proprietary information of third parties ("Third Party Information").
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

7



7.1.
Confidential Information Defined.   The term "Company Confidential Information" shall mean any and all confidential and/or proprietary information of the Company.  By way of illustration but not limitation, Company Confidential Information includes: information and materials related to proprietary computer software, hardware, including hard drives, electronic files and websites, research, business procedures and strategies, marketing plans and strategies, member lists and business histories, analyses of member information, employee or prospective employee information, financial data of the Company or its customers or employees, and any other information that is not generally known to the public or within the industry in which the Company competes.  Executive further acknowledges that the Company has and in the future will receive from third parties confidential and proprietary information ("Third Party Information"), including but not limited to confidential and proprietary information of the Company's customers, subject to a duty on the Company's part to maintain the confidentiality of such information and to use it for certain limited purposes for a period of two (2) years thereafter.
7.2.
Executive's Obligations.
(i)   Non-Disclosure .  Executive agrees that during Executive's employment with the Company and thereafter, Executive will not use, disclose, lecture upon, publish or transfer directly or indirectly any Company Confidential Information or Third Party Information other than as authorized by the Company, nor will Executive accept any employment or other professional engagement that likely will result in the use or disclosure, even if inadvertent, of Company Confidential Information or Third Party Information.  Executive agrees that he will not use in any way other than in furtherance of the Company's business any Company Confidential Information or Third Party Information.  Executive will obtain the Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to Executive's work at the Company and/or incorporates any Confidential Information.  Executive hereby assigns to the Company any rights Executive may have or acquire in such Confidential Information and recognizes that all Confidential Information shall be the sole property of the Company and its/their assigns.
(ii)   Disclosure Prevention .  Executive agrees to take all reasonable steps to preserve the confidential and proprietary nature of Company Confidential Information and Third Party Information and to prevent the inadvertent or accidental disclosure of Company Confidential Information and Third Party Information.
(iii)   Removal of Materials .  Executive agrees that Executive will not remove any Company Confidential Information or Third Party information from the Company's premises or make copies of such materials except for use in the Company's business.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

8



(iv)   Return of Materials .  Executive agrees not to retain and further agrees to return to the Company any tangible or intangible originals or copies of any Company Confidential Information or Third Party Information after termination of Executive's employment, or earlier at the Company's request for any reason.  Executive further agrees to provide the Company with access to any personal computer equipment and/or devices that Executive has used during the term of this Agreement, so that the Company may verify that all of its Company Confidential Information or Third Party Information has been deleted from this equipment.
(v)   Copying.   Executive agrees that copying of Company Confidential Information or Third Party Information shall be done only as needed in furtherance of and for use in the Company's business.  Executive further agrees that copies of Company Confidential Information and Third Party Information shall be treated with the same degree of confidentiality as the original information and shall be subject to the same restrictions herein.
(vi)   Continuation of Obligations .  Executive agrees that the obligations of this Section shall continue after termination or Executive's employment.
(vii)   Computer Security .  Executive agrees that, during his employment with the Company, he will use computer resources (both on and off of the Company's premises) for which Executive has been granted access and then only to the extent authorized. Executive agrees to comply with the Company's policies and procedures concerning computer security. Executive further acknowledges that Executive will not alter, remove or destroy any Company Confidential Information or Third Party Information stored on any electronic storage devices, including, but not limited to, electronic media stored on servers, local hard drives, lap-tops, "PDAs" or any other similar devices except in accordance with the Company's record retention and destruction policy.
(viii)   Email and Internet .  Executive understands that the Company maintains an electronic mail and Internet/World Wide Web ("Internet") system, and related facilities, for the purpose of business communications.  Executive acknowledges that the Company owns such a system and facilities, and that the Company retains the right to review any and all electronic mail and Internet communications, and to review his use of the Internet, with or without notice, at any time. Executive further acknowledges that he has no right to privacy to any e-mail or Internet communications, or to his use of the Internet.  Executive further agrees to comply with the Company's procedures concerning the use of e-mail and the Internet, including compliance with any destruction and/or retention policies for e-mail communications.
7.3.
Known Knowledge .  Subject to the foregoing obligations, it is understood that Executive is free at all times to use information which is generally known in the trade or industry (except such information which becomes so because of a breach of this Agreement by Executive) and further that Executive's general knowledge, skill and experience shall not be deemed to be Confidential Information.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

9



8.
Assignment of Inventions .
8.1.
Definitions .  The term "Proprietary Rights" shall mean all trade secret, patent, copyright, mask work and other intellectual property rights or "moral rights" throughout the world. "Moral rights" refers to any rights to claim authorship of an Invention or to object to or prevent the modification of any Invention, or to withdraw from circulation or control the publication or distribution of any Invention, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a "moral right."
8.2.
Assignment of Inventions .  Executive hereby assigns and agrees to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all his or her right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by the Executive, either alone or jointly with others, during the period of his or her employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company, are hereinafter referred to as "Company Inventions."
8.3.
Unassigned Inventions .  This Agreement will not be deemed to require assignment of any invention that was (1) developed entirely on the Executive's own time without using the Company's equipment, supplies, facilities, or Proprietary Information and (2) is not related to the Company's actual or anticipated business, research or development and (3) has not resulted from work performed by Executive for the Company.  Attached as Exhibit One hereto is a complete list of all Inventions   that the Executive has conceived, developed or reduced to practice prior to the Effective Date of this Agreement, alone or jointly with others, that are the Executive's sole property or the property of third parties and which are excluded from the scope of this Agreement.
8.4.
Works for Hire .  Executive acknowledges that all original works of authorship which are made by the Executive (solely or jointly with others) within the scope of Executive's employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101).
8.5.
Enforcement of Proprietary Rights .  Executive agrees to assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries.  To that end Executive agrees to execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof.  In addition, Executive will execute, verify and deliver assignments of such Proprietary Rights to the Company or its designee.  Executive's obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of his or her employment, but the Company shall compensate Executive at a reasonable rate after Executive's termination for the time actually spent by Executive at the Company's request on such assistance.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

10


9.
Restrictive Covenants .
9.1.
Acknowledgements .  Executive acknowledges that (i) his services to the Company will be special and unique and that he will occupy a position of trust and confidence with respect to the business affairs of the Company; (ii) that his engagement for the Company will allow him access to the Company's Confidential Information; (iii) that he will have access to the customers and clients of the Company and will be working to develop business relationships for the Company; (iv)   that the Company would not have entered into this Agreement with Executive, or engaged Executive, but for the covenants and agreements contained in this Section; and (v) that the agreements and covenants contained in this Section are essential to protect the business, good will, and confidential information of the Company.
9.2.
Non-Competition .   During the Employment Period and for eighteen (18) months thereafter, Executive shall not, directly or indirectly, in any geographic area in which the Company operates compete with the Company in the development, marketing, or sale of products that compete with those developed, marketed, or sold by the Company.
9.3.
Non-Solicitation of Employees .   During the Employment Period and for eighteen (18) months thereafter, Executive shall not, directly or indirectly, on his own behalf or on behalf of any other person or entity, solicit for employment, hire, or engage, whether on a full-time, part-time, consulting, advising, or any other basis, any persons who were employees or Executives of the Company during the Employment Period.
9.4.
Non-Solicitation of Customers .   During the Employment Period and for [twelve (12) months] thereafter, Executive shall not, in competition with the Company, directly or indirectly, on his own behalf or on behalf of any other person or entity, solicit, accept business from, or conduct business with, (i) any customer or client served by the Company prior to or during the Employment Period with which Executive had contact or about which Executive received information or knowledge during the Employment Period, or (ii) any prospective customer or client of the Company with which Executive had contact or about which Executive received information or knowledge during the Employment Period.
9.5     Independent Covenants . The Restrictive Covenants set forth herein are each to be construed as a separate agreement, independent of any other provisions of this Agreement.  Therefore, the Executive agrees that the existence of any claim or cause of action that Executive may have against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any provision of this Section 9 against the Executive.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

11



10.
Enforcement .
10.1.
Equitable Relief Authorized .  Executive acknowledges that in the event of a violation of the provisions of Sections 7, 8 or 9 of this Agreement, Company's business interests will be irreparably injured, the full extent of Company's damages will be impossible to ascertain, monetary damages will not be an adequate remedy for Company, and Company will be entitled to enforce this Agreement to prevent a breach or threatened breach of the Agreement by temporary, preliminary or permanent injunction or other equitable relief without the necessity of proving actual damage and without the necessity of posting bond or security, which Executive expressly waives. Executive also agrees that Company may, in addition to injunctive relief, seek monetary damages for any breach of the provisions contained in this Agreement in addition to equitable relief and that the granting of equitable relief shall not preclude Company from recovering monetary damages.
10.2.
Modification .  Company and Executive represent that in entering into this Agreement it is their intent to enter into an agreement that contains reasonable employment and post-employment restrictions and that such restrictions be enforceable under law.  In the event that any court or other enforcement authority determines that any provision of this Agreement is overbroad or unenforceable by reason of the geographic scope, scope of prohibited activities, time frame, or any other reason, the parties authorize such court or other enforcement authority to modify the scope of the restriction so that it is enforceable to the greatest extent permissible.
10.3.
Severability .  If any provision of the Agreement is held to be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions will not in any way be affected or impaired thereby.
10.4.
Notification of New Employer .  In the event that Executive leaves the employ of the Company for any reason, Executive agrees to inform any subsequent employer of his rights and obligations under this Agreement.  Executive further hereby authorizes the Company to notify his new employer about Executive's rights and obligations under this Agreement, including by delivering a copy of this Agreement, and any written modifications thereto, to any subsequent employer.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

12



11.
General Terms .
11.1.
No Prior Agreements .  Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive and his/her employment by the Company and the performance of his/her duties hereunder will not violate or be a breach of any agreement with or obligation to a former employer, client or any other person or entity, and Executive agrees to indemnify the Company for any costs and expenses arising out of a claim by any such third party has against the Company based upon or arising out of any non-competition agreement or other restrictive covenant, invention or confidentiality agreement between Executive and such third party which was in existence as of the date of this Agreement and which Executive is alleged to be in violation of.
11.2.
Indemnification; Insurance Against Liability .  Executive will be entitled to such prevailing rights and entitlements to indemnification, defense of claims and insurance against liability as are generally provided to executives of the Company, consistent with Company bylaws, insurance policies and contracts, and applicable law.
11.3.
Governing Law; Interpretation .  This Agreement will be governed by the substantive laws of the State of  Florida, without regard to the principles of conflicts of laws.  This Agreement will be construed as a whole, according to its fair meaning, and not in favor of or against any party, regardless of which party may have initially drafted certain provisions set forth herein.
11.4.
Choice of Law and Forum :  This Agreement shall be construed according to the laws of the United States of America and the State of Florida, without regard to its conflict of laws provisions.  Executive hereby expressly consent to the personal jurisdiction of the state and federal courts for Broward County, Florida in any lawsuit filed there against the Executive by the Company arising from or related to this Agreement, including any claims for infringement of the Company's Confidential Information, Inventions or Works for Hire or any update thereto.  Executive agrees that if Executive is not a resident of the State of Florida, USA, at the time of such action, then Executive hereby irrevocably appoints the Secretary of the State of Florida,  as agent for the purpose of accepting service of process in Florida and the United States. Executive waives trial by jury in any action, proceeding, claim, or counterclaim brought by any party in connection with any matter arising out of or in any way connected with this Agreement, the relationship of Executive to the Company and /or any claim of injury or damage arising in any way between and among the Company and Executive.  Provided, however, that Executive agrees that nothing in this Section shall prohibit the Company from initiating legal action in any court which has personal and subject matter jurisdiction over me in the event that it is necessary for the Company to pursue equitable relief against me for a breach of this Agreement.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

13



11.5.
Assignment .  This Agreement is personal to Executive and he may not assign it without prior written consent of the Company.  The Company may, without Executive's consent, assign the Agreement to any successor entity, including the Restrictive Covenants of Section 9.
11.6.
Notices .  Any notice required or permitted hereunder will be in writing and will be deemed to have been duly given if delivered by hand or if sent by certified mail, postage and certification prepaid, to Executive at his residence (as noted in the Company's records), or to the Company address, or to such other address or addresses as either party may have furnished to the other in writing.
11.7.
Entire Agreement; Amendments .  This Agreement and any other exhibits and attachments hereto constitutes the final and complete expression of all of the terms of the understanding and agreement between the parties hereto with respect to the subject matter hereof, and this Agreement replaces and supersedes any and all prior or contemporaneous negotiations, communications, understandings, obligations, commitments, agreements or contracts, whether written or oral, between the parties respecting the subject matter hereof.  This Agreement may not be modified, amended, altered or supplemented except by means of the execution and delivery of a written instrument mutually executed by both parties.  No action or omission by the Company shall be deemed to be a waiver of any of its rights under this Agreement unless such waiver is set forth in writing and identified as a waiver.  Any waiver by the Company of any rights under this Agreement shall not be deemed to be a waiver of any other right.
11.8.
Counterparts .  This Agreement may be executed simultaneously in two (2) counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument.
11.9.
Survival .  The provisions of the various sections of this Agreement which by their terms call for performance subsequent to the expiration or termination of this Agreement or the Employment Period shall survive such expiration or termination.
11.10.
Withholdings .  The parties agree that all payments to be made to the Executive by the Company pursuant to this Agreement shall be subject to all applicable withholdings.
11.11.
Headings .  The Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.
11.12.
No Contra Proferentum .   The parties agree that they have been represented by counsel during the negotiation and execution of this Agreement, and, therefore, waive the application of any law, regulation or holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

14



11.13.
Capacity .  Each of the parties hereto warrants that they are legally competent to execute this Agreement and accepts full responsibility therefor.
12.
Resolution of Disputes .
Except as provided, herein, and in the event of any claim, cause of action, dispute or controversy arising under this Agreement or otherwise related to the parties' employment relationship, the parties shall negotiate in good faith for the purpose of resolving such dispute. In the event that the parties cannot resolve the claim, cause of action, dispute or controversy informally within fifteen (15) days, then such claim, cause of action, dispute or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by a mandatory arbitration in Miami, Florida before one (1) arbitrator.  The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures (Streamlined Arbitration Rules and Procedures). Judgment on the Award may be entered in any court having jurisdiction.  This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction. Each party shall bear its own costs in the arbitration and shall share equally the costs of the arbitration itself.  Notwithstanding the foregoing, and without undermining the agreement to arbitrate on any other claim, cause of action, dispute or controversy, the Company shall at all times have and retain the exclusive and unilateral right to seek immediate temporary and preliminary injunctive relief in a court of law in the event of a violation or alleged violation by the Executive of Sections 7, 8, or 9 of this Agreement. In the event such judicial relief is granted, such relief shall remain binding on the parties pending the outcome of arbitration.  THE COMPANY AND EXECUTIVE ACKNOWLEDGE THAT EACH HAD THE OPPORTUNITY TO CONSULT WITH LEGAL AND FINANCIAL COUNSEL CONCERNING THE RIGHTS AND OBLIGATIONS ARISING UNDER THIS AGREEMENT, THAT EACH HAS READ AND UNDERSTANDS THIS AGREEMENT, AND THAT EACH ENTERS INTO IT WILLINGLY.
This Agreement is duly executed as of the day and year of the last signature below.
Capstone Companies, Inc.   Stewart Wallach
By:     Sign:  

Title:     Title:  

Date:     Date:  
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

15




EXECUTIVE EMPLOYMENT AGREEMENT
JAMES G. MCCLINTON

This Executive Employment Agreement ("Agreement") is made and entered into as of February 5th, 2018 by and between Capstone Companies, Inc. ("Company") and James Gerald McClinton, a natural person (the "Executive").  The Company and the Executive may also hereinafter be referred to individually as a "party" and collectively as the "parties."
RECITALS:
WHEREAS, the Company desires to employ Executive on a full-time basis and Executive wishes to be employed by the Company on the terms and conditions set forth in this Agreement; and
WHEREAS, the parties wish this Agreement to supersede all prior employment agreements between the parties.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Executive agree as follows:
1.
Term of Employment .
  1.1 Initial Employment Period .  The Company agrees to employ the Executive as the Chief Financial Officer and the Chief Operating Officer of the Company, and the Executive accepts employment with the Company, upon the terms set forth in this Agreement, for the period beginning on 12:01 a.m., local Miami, Florida time, on February 5, 2018, and ending on 11:59 p.m., local Miami, Florida time, on February 5, 2020 (the "Employment Period"), during which time Executive will devote his full business time to providing services hereunder.  During the Employment Period, this Agreement shall remain in force unless sooner terminated in accordance with the provisions of this Agreement pursuant to Section 5 below.  The Executive agrees that the consideration provided hereunder is fair and adequate consideration for all services provided in each of the aforesaid capacities.  Executive further agrees that this Agreement shall not constitute an employment agreement for services rendered to any company other than the Company.  Any employment agreement with any other company shall be and must be a separate written agreement with such other company or companies.

  1.2 Extension of the Employment Period .  The parties may extend the Employment Period of this Agreement by mutual agreement, provided that such agreement must be approved by the Company Board of Directors in writing and no extension may exceed one (1) year in length .   In the event of a non-renewal of the agreement, the Company will provide written notification, no less than 3 months prior to the expiration of the Employment Period of the Company's intent not to renew.

  1.3 Termination of all Prior Employment Agreement .  Executive hereby knowingly, intentionally and voluntarily terminates any and all prior employment agreements between the Company or any of its subsidiaries and the Executive.  Executive agrees and understands that this Agreement sets forth all of the terms and conditions of his employment by the Company and that all rights, benefits and claims under any prior employment agreement, whether written or oral, are expressly waived and terminated by this Agreement.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

1



2.
Employment .
  2.1 Position and Duties .  During the Employment Period, the Company hereby agrees to employ Executive as Chief Financial Officer (CFO) and the Chief Operating Officer (COO) on the terms set forth herein.  In CFO capacity, Executive is accountable for the administrative, financial and risk management operations of the Company, to include the development of a financial and operational strategy, metrics tied to that strategy and the ongoing development and monitoring of control systems designed to preserve Company assets and report accurate financial results.  In COO capacity, Executive has responsibility for manufacturing and logistical support for the Company and its subsidiaries, especially in terms of supporting the Company's and its subsidiaries' strategic marketing and sales plan and strategic business development plan.  The Company may also assign Executive to other duties commensurate with Executive's skills and experience. Executive reports to the CEO, and the Board of Directors of the Company.  Executive agrees to devote his business time, ability, knowledge and attention solely to the Company's business affairs and interests and to faithfully and diligently perform such services and assume such duties and responsibilities as are assigned to the best of Executive's abilities, skills and efforts and to abide by applicable Company policies and directives as they exist from time to time.
  2.2 Location .  The Executive shall render his services under this Agreement in the principal executive offices of the Company which shall be in the greater Fort Lauderdale-Miami consolidated metropolitan area.  Under no circumstances shall the Executive be required to relocate from more than fifty (50) miles from said metropolitan area or provide services under this Agreement in any other location other than in connection with reasonable and customary business travel.  The Company reserves the right to make a temporary reassignment of the location for the performance of Executive's services hereunder for a period not to exceed forty five (45) days, which relocation shall not constitute a breach of this Agreement.
                 2.3 Limitations on Outside Activities.   Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to (i) serving, with the approval of the Company's Board of Directors, which shall not be unreasonably withheld, as a director, trustee or member of any committee of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs; provided   that such activities do not involve any material conflict of interest with the interests of the Company or, individually or collectively, interfere materially with the performance by the Executive of his duties and responsibilities under this Agreement.  Notwithstanding the foregoing and except as expressly provided herein, during the Employment Period, the Executive may not accept employment with any other individual or entity, or engage in any other venture which is directly or indirectly in conflict or competition with the business of the Company.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

2



3.
Compensation .
  Base Salary .  In consideration of Executive's services to the Company, the Company will pay Executive a gross base salary of ONE HUNDRED NINETY ONE THOUSAND, FOUR HUNDRED AND FORTY FOUR DOLLARS AND NINETY SIX CENTS ($191,441.96) per annum.  The Executive's base salary will be paid in equal installments in accordance with the Company's standard payroll schedule, and the Company will withhold from such salary all applicable federal, state and local taxes as required by applicable laws.  The Executive may elect to accept additional cash compensation awards in Company "restricted" (as defined in Rule 144 under the Securities Act of 1933, as amended) shares of Company Common Stock, $0.0001 par value, ("Shares"), which payments shall be made in semi-annual installments.  The Company hereby grants "piggy-back" registration rights to the Executive for all such Shares that are issued hereunder (expressly excepting any registration on Form S-8 or Form S-4, or any successor form to those two forms).  The value of the Shares in respect of the cash compensation being replaced by such Shares shall be determined by the average closing BID price for the Shares (as quoted on www.bloomberg.com ) for the first twenty (20) consecutive trading days for each month in which Shares will be substituted for cash compensation hereunder.
  Bonus .  In addition, any bonus program adopted by the Company for senior office(s), shall  be determined solely at the discretion of the compensation committee, and in accordance with its terms as they exist from time to time.
4.
Benefits and Reimbursements .
  4.1 Insurance .  Executive shall be entitled to participate in the following benefit programs which would include; health insurance, dental insurance and vision insurance, as well as any similar insurance programs offered by the Company to individuals employed by the Company as executives or in otherwise similar positions.
  4.2 Leave .  Executive shall be entitled to twenty (20) days of paid vacation and seven (7) days of paid personal leave each year (during which time his compensation shall continue to be paid in full).  Executive shall also be entitled to five (5) days of sick leave, during which time his compensation shall continue to be paid in full.  Executive may carry over up to ten (10) days of unused vacation/personal leave from contract year to contract year provided the company requests the Executive not take vacation due to required work.  For purposes of this Agreement, "contract year" means from January 1st to December 31 st each year.
  4.3 Stock Option, Savings or Retirement Plans .  Executive shall be entitled to participate in any pension, profit-sharing, deferred compensation plans, "merit" bonuses, stock option or other incentive compensation plans as are offered by the Company to individuals employed by the Company as full-time executive and subject to the same qualifications as other full-time executive employees.
  4.4 Expenses .  The Company shall reimburse Executive for the reasonable amount of hotel, travel, entertainment and other expenses necessarily incurred by Executive in the discharge of his duties to the Company, subject to the Company's expense policy.
  4.5 Technology .   The Company shall provide Executive with a laptop computer and a cellular phone for his use during the Employment Period.  These shall remain the property of the Company, and shall be returned to the Company upon the termination of the Executive's employment.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

3



5.
Termination.
The employment of Executive by Company and the Employment Period shall terminate upon the occurrence of any of the following conditions:
  5.1 Expiration .  Immediately upon the expiration of the Employment Period set forth in Section 1 above, including any extension of the Employment Period as agreed upon in writing pursuant to Section 1.
  5.2 Death .  Immediately upon the death of Executive.
  5.3 Disability .  Immediately upon the Disability of Executive.  Immediately upon the death or disability of the Executive.  As used herein, the term "Disability" shall mean either (i) the Executive's inability, by reason of physical or mental incapacity or impairment, to perform his duties and responsibilities under this Agreement for a period of more than sixty (60) consecutive days, or for more than ninety (90) days, whether or not consecutive, within the preceding 365-day period, or (ii) the receipt by the Executive of disability benefits for permanent and total disability under any long-term disability income policy held by or on behalf of the Executive.
  5.4 By the Company for Cause .  Immediately upon provision of written notice to the Executive by the Company that his employment is being terminated for Cause, as defined below.  "Cause" for termination means:
(i)   Executive's willful and intentional refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided , however , that the Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 5.4 (i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice;
(ii)   Any willful and intentional act of the Executive involving fraud, theft, misappropriation of funds, or embezzlement affecting the Company or its subsidiaries;
(iii)   Executive's conviction of, or a plea of guilty or nolo contendere to, an offense which is a felony or a misdemeanor evincing moral turpitude;
(iv)   Executive's material breach of this Agreement which is not remedied within fifteen (15) days after receipt of a written demand to remedy from the Company; or
(v)   Gross misconduct by Executive that is of such a serious or substantial nature that a substantial likelihood exists that such misconduct would injure the public business reputation of the Company if the Executive were to remain employed by the Company; or
(vi)   Issuance of any prohibition by the U.S. Securities and Exchange  Commission or "SEC" against the Executive serving as an officer or director of a public company and the period for appeal of such prohibition has expired without the Executive filing an appeal; or
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

4



(vii)   the Company files for Chapter 7 protection from creditors and the bankruptcy petition is not withdrawn or dismissed within sixty days after the filing date; or
(viii)   Executive intentionally refuses to follow a lawful, commercially reasonable directive of the Company Board of Directors, such directive concerns an action or matter within the purview of the Executive's customary and usual duties and the refusal of the Executive results in the Company or any of its subsidiaries suffering a material liability or loss (for purposes of this Agreement, "material" shall mean an amount equal to or exceeding One Hundred Thousand Dollars and No Cents ($100,000.00).
5.5 Termination of the Executive for Cause shall be communicated by a Notice of Termination.   For purposes of this Agreement , a "Notice of Termination" shall mean delivery to the Executive of written notice from duly authorized officers of the Company stating that in the good faith determination of the Company the Executive was guilty of conduct constituting Cause and failed to cure such conduct within the applicable time period. For purposes of this Agreement, no such purported termination of the Executive's employment shall be effective without such Notice of Termination.
5.6 By Company Without Cause .  At the election of the Company after serving the Executive with at least three (3) months notice of the Company's intent to termination his employment Without Cause. The Company shall have the right to pay the Executive the notice period in lieu of notice.
5.7 By Executive for Good Reason .  As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive:
(i)   assignment to the Executive of duties materially inconsistent with the Executive's positions as described in Section 2.1 hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause, Disability or as a result of the Executive's death or by the Executive other than for Good Reason;
(ii)   the change in the location of the Company's principal executive offices or of the Executive's principal place of employment to a location outside the greater Fort Lauderdale-Miami, Florida metropolitan area/more than fifty (50) fifty miles from the current location. The Executive will have the option to transfer to the new location, in the same or equivalent position at a reasonable expense to the Company.
(iii)   any material breach of this Agreement by the Company which is continuing;
(iv)   a Change in Control, provided that a Change of Control shall only constitute Good Reason if the Executive terminates his employment within six (6) months following a Change of Control;   provided , however , that the Executive shall not be deemed to have Good Reason pursuant to clauses (i) or (iii) above unless the Executive gives the Company written notice that the specified conduct or event has occurred and the Company fails to cure such conduct or event within thirty (30) days of the receipt of such notice. A "Change of Control" shall be deemed to have occurred when any person, other than Executive or his respective affiliates, associates, or estate, becomes, after the date of grant, the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then-outstanding securities;
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

5



6.
 Effect of Termination and Severance .
  6.1 If the Employment Period is terminated by the Company for Cause , the Company will pay to the Executive his accrued and unpaid base salary as well as all accrued but unused vacation through the date of such termination;
  6.2 If the Employment Period is terminated by the Executive other than because of   death, Disability or for Good Reason , the Company will pay to the Executive his accrued and unpaid base salary as well as all accrued but unused vacation through the date of such termination;
   6.3 If the Employment Period is terminated upon the Executive's death or Disability ,
(i)   the Company will pay to the Executive's designated beneficiary, or, in the absence of such designation, to the estate or legal representative of the Executive, as the case may be, his accrued and unpaid base salary as well as all accrued but unused vacation through the date of such   termination.
(ii)   the Company will continue to pay to the Executive's designated beneficiary, or, in the absence of such designation, to the estate or legal representative of  the Executive, as the case may be,  the base salary as in effect at the time of termination for  a period of 1 year  on the first Eligible Payment Date  (the "Pay-out Period"), in accordance with the Company's customary payroll practices,; a pro-rated "merit" bonus, if earned during the previous calendar year, if  applicable to the Executive during the calendar year of Termination;
  6.4 If the Employment Period is terminated by the Company without Cause or is   caused by the Company  through Non-Renewal  of this Agreement or if the   Executive terminates for Good Reason,
(i)   the Company shall pay the Executive sum payments equal to: (A) the sum of twelve   (12) months base salary rate the Executive was earning as of the date of termination; and (B) the sum of any "merit" based bonuses earned by the Executive during the prior calendar year of his/her Termination.  Any payments owed by the Company to the Executive, as a result of Death, Disability, or Termination, shall be paid from a normal payroll account on a weekly or bi-weekly basis in accordance with the normal payroll policies of the Company.  The amount owed by the Company to the Executive, from the Termination effective date, will be divided by the remaining number of weeks in the calendar year of the Termination, and will continue until company obligation is fully paid but at no time will be no more than twenty six   (26) installments.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

6



(ii)   the Company shall also continue in effect the Executive's health and dental benefits (or similar health and dental benefits paid to senior executives noted in Section 4.1) for a period of twelve   (12)   months commensurate with the Company's "approved" Health Plan & Benefits Package at the time of termination.  If Executive, participated in family health insurance coverage at the time of termination, that obligation would remain theirs and the Company would continue to pay installments to keep insurance active for a   twelve (12) month period and reduce the family's monthly premium against the Executive's severance package.  If Executive is eligible for continued health insurance benefits under the federal law known as COBRA and Executive timely elects COBRA coverage and makes timely payment of required premiums, the Company will reimburse Executive the cost of such COBRA coverage, not to exceed amount being paid at the time of termination, for twelve (12) months (commensurate with Executives' severance package) from the termination date or the date on which the Executive obtains health coverage from a subsequent employer.  If Executive is not eligible for COBRA benefits, the Company will reimburse Executive the cost of similar coverage Executive obtains for twelve (12) months from the termination date or the date on which the Executive obtains health insurance coverage from subsequent employer.  If contract is terminated due to death, Company would not be required to keep any coverage in effect.
7. Confidential Information .
Executive acknowledges that he will occupy a position of trust and confidence with respect to the Company's affairs and business and that, in connection with the performance of his services on behalf of the Company, Executive will be provided access to the Company's confidential and proprietary information and trade secrets ("Company Confidential Information") and confidential and proprietary information of third parties ("Third Party Information").
  7.1 Confidential Information Defined.   The term "Company Confidential Information" shall mean any and all confidential and/or proprietary information of the Company.  By way of illustration but not limitation, Company Confidential Information includes: information and materials related to proprietary computer software, hardware, including hard drives, electronic files and websites, research, business procedures and strategies, marketing plans and strategies, member lists and business histories, analyses of member information, employee or prospective employee information, financial data of the Company or its customers or employees, and any other information that is not generally known to the public or within the industry in which the Company competes.  Executive further acknowledges that the Company has and in the future will receive from third parties confidential and proprietary information ("Third Party Information"), including but not limited to confidential and proprietary information of the Company's customers, subject to a duty on the Company's part to maintain the confidentiality of such information and to use it for certain limited purposes for a period of two (2) years thereafter.
  7.2 Executive's Obligations.
(i)   Non-Disclosure .  Executive agrees that during Executive's employment with the Company and thereafter, Executive will not use, disclose, lecture upon, publish or transfer directly or indirectly any Company Confidential Information or Third Party Information other than as authorized by the Company, nor will Executive accept any employment or other professional engagement that likely will result in the use or disclosure, even if inadvertent, of Company Confidential Information or Third Party Information.  Executive agrees that he will not use in any way other than in furtherance of the Company's business any Company Confidential Information or Third Party Information.  Executive will obtain the Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to Executive's work at the Company and/or incorporates any Confidential Information.  Executive hereby assigns to the Company any rights Executive may have or acquire in such Confidential Information and recognizes that all Confidential Information shall be the sole property of the Company and its/their assigns.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

7



(ii)   Disclosure Prevention .  Executive agrees to take all reasonable steps to preserve the confidential and proprietary nature of Company Confidential Information and Third Party Information and to prevent the inadvertent or accidental disclosure of Company Confidential Information and Third Party Information.
(iii)   Removal of Materials .  Executive agrees that Executive will not remove any Company Confidential Information or Third Party information from the Company's premises or make copies of such materials except for use in the Company's business.
(iv)   Return of Materials .  Executive agrees not to retain and further agrees to return to the Company any tangible or intangible originals or copies of any Company Confidential Information or Third Party Information after termination of Executive's employment, or earlier at the Company's request for any reason.  Executive further agrees to provide the Company with access to any personal computer equipment and/or devices that Executive has used during the term of this Agreement, so that the Company may verify that all of its Company Confidential Information or Third Party Information has been deleted from this equipment.
(v)   Copying.   Executive agrees that copying of Company Confidential Information or Third Party Information shall be done only as needed in furtherance of and for use in the Company's business.  Executive further agrees that copies of Company Confidential Information and Third Party Information shall be treated with the same degree of confidentiality as the original information and shall be subject to the same restrictions herein.
(vi)   Continuation of Obligations .  Executive agrees that the obligations of this Section shall continue after termination or Executive's employment.
(vii)   Computer Security .  Executive agrees that, during his employment with the Company, he will use computer resources (both on and off of the Company's premises) for which Executive has been granted access and then only to the extent authorized. Executive agrees to comply with the Company's policies and procedures concerning computer security. Executive further acknowledges that Executive will not alter, remove or destroy any Company Confidential Information or Third Party Information stored on any electronic storage devices, including, but not limited to, electronic media stored on servers, local hard drives, lap-tops, "PDAs" or any other similar devices except in accordance with the Company's record retention and destruction policy.
(viii)   Email and Internet .  Executive understands that the Company maintains an electronic mail and Internet/World Wide Web ("Internet") system, and related facilities, for the purpose of business communications.  Executive acknowledges that the Company owns such a system and facilities, and that the Company retains the right to review any and all electronic mail and Internet communications, and to review his use of the Internet, with or without notice, at any time. Executive further acknowledges that he has no right to privacy to any e-mail or Internet communications, or to his use of the Internet.  Executive further agrees to comply with the Company's procedures concerning the use of e-mail and the Internet, including compliance with any destruction and/or retention policies for e-mail communications.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

8



Known Knowledge .  Subject to the foregoing obligations, it is understood that Executive is free at all times to use information which is generally known in the trade or industry (except such information which becomes so because of a breach of this Agreement by Executive) and further that Executive's general knowledge, skill and experience shall not be deemed to be Confidential Information.
8.  Assignment of Inventions .
8.1 Definitions .  The term "Proprietary Rights" shall mean all trade secret, patent, copyright, mask work and other intellectual property rights or "moral rights" throughout the world. "Moral rights" refers to any rights to claim authorship of an Invention or to object to or prevent the modification of any Invention, or to withdraw from circulation or control the publication or distribution of any Invention, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a "moral right."
8.2 Assignment of Inventions .  Executive hereby assigns and agrees to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all his or her right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by the Executive, either alone or jointly with others, during the period of his or her employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company, are hereinafter referred to as "Company Inventions."
8.3 Unassigned Inventions .  This Agreement will not be deemed to require assignment of any invention that was (1) developed entirely on the Executive's own time without using the Company's equipment, supplies, facilities, or Proprietary Information and (2) is not related to the Company's actual or anticipated business, research or development and (3) has not resulted from work performed by Executive for the Company.  Attached as Exhibit One hereto is a complete list of all Inventions   that the Executive has conceived, developed or reduced to practice prior to the Effective Date of this Agreement, alone or jointly with others, that are the Executive's sole property or the property of third parties and which are excluded from the scope of this Agreement.
8.4 Works for Hire .  Executive acknowledges that all original works of authorship which are made by the Executive (solely or jointly with others) within the scope of Executive's employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101).
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

9



8.5 Enforcement of Proprietary Rights .  Executive agrees to assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries.  To that end Executive agrees to execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof.  In addition, Executive will execute, verify and deliver assignments of such Proprietary Rights to the Company or its designee.  Executive's obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of his or her employment, but the Company shall compensate Executive at a reasonable rate after Executive's termination for the time actually spent by Executive at the Company's request on such assistance.
9. Restrictive Covenants .
9.1 Acknowledgements .  Executive acknowledges that (i) his services to the Company will be special and unique and that he will occupy a position of trust and confidence with respect to the business affairs of the Company; (ii) that his engagement for the Company will allow him access to the Company's Confidential Information; (iii) that he will have access to the customers and clients of the Company and will be working to develop business relationships for the Company; (iv)   that the Company would not have entered into this Agreement with Executive, or engaged Executive, but for the covenants and agreements contained in this Section; and (v) that the agreements and covenants contained in this Section are essential to protect the business, good will, and confidential information of the Company.
9.2 Non-Competition .   During the Employment Period and for eighteen (18) months thereafter, Executive shall not, directly or indirectly, in any geographic area in which the Company operates compete with the Company in the development, marketing, or sale of products that compete with those developed, marketed, or sold by the Company.
9.3 Non-Solicitation of Employees .   During the Employment Period and for eighteen (18) months thereafter, Executive shall not, directly or indirectly, on his own behalf or on behalf of any other person or entity, solicit for employment, hire, or engage, whether on a full-time, part-time, consulting, advising, or any other basis, any persons who were employees or Executives of the Company during the Employment Period.
9.4 Non-Solicitation of Customers .   During the Employment Period and for [twelve (12) months] thereafter, Executive shall not, in competition with the Company, directly or indirectly, on his own behalf or on behalf of any other person or entity, solicit, accept business from, or conduct business with, (i) any customer or client served by the Company prior to or during the Employment Period with which Executive had contact or about which Executive received information or knowledge during the Employment Period, or (ii) any prospective customer or client of the Company with which Executive had contact or about which Executive received information or knowledge during the Employment Period.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

10



9.5 Independent Covenants .   The Restrictive Covenants set forth herein are each to be construed as a separate agreement, independent of any other provisions of this Agreement.  Therefore, the Executive agrees that the existence of any claim or cause of action that Executive may have against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any provision of this Section 9 against the Executive.
7.
10. Enforcement .
10.1 Equitable Relief Authorized .  Executive acknowledges that in the event of a violation of the provisions of Sections 7, 8 or 9 of this Agreement, Company's business interests will be irreparably injured, the full extent of Company's damages will be impossible to ascertain, monetary damages will not be an adequate remedy for Company, and Company will be entitled to enforce this Agreement to prevent a breach or threatened breach of the Agreement by temporary, preliminary or permanent injunction or other equitable relief without the necessity of proving actual damage and without the necessity of posting bond or security, which Executive expressly waives. Executive also agrees that Company may, in addition to injunctive relief, seek monetary damages for any breach of the provisions contained in this Agreement in addition to equitable relief and that the granting of equitable relief shall not preclude Company from recovering monetary damages.
10.2 Modification .  Company and Executive represent that in entering into this Agreement it is their intent to enter into an agreement that contains reasonable employment and post-employment restrictions and that such restrictions be enforceable under law.  In the event that any court or other enforcement authority determines that any provision of this Agreement is overbroad or unenforceable by reason of the geographic scope, scope of prohibited activities, time frame, or any other reason, the parties authorize such court or other enforcement authority to modify the scope of the restriction so that it is enforceable to the greatest extent permissible.
10.3 Severability .  If any provision of the Agreement is held to be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions will not in any way be affected or impaired thereby.
10.4 Notification of New Employer .  In the event that Executive leaves the employ of the Company for any reason, Executive agrees to inform any subsequent employer of his rights and obligations under this Agreement.  Executive further hereby authorizes the Company to notify his new employer about Executive's rights and obligations under this Agreement, including by delivering a copy of this Agreement, and any written modifications thereto, to any subsequent employer.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

11



8.
11. General Terms .
11.1 No Prior Agreements .  Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive and his/her employment by the Company and the performance of his/her duties hereunder will not violate or be a breach of any agreement with or obligation to a former employer, client or any other person or entity, and Executive agrees to indemnify the Company for any costs and expenses arising out of a claim by any such third party has against the Company based upon or arising out of any non-competition agreement or other restrictive covenant, invention or confidentiality agreement between Executive and such third party which was in existence as of the date of this Agreement and which Executive is alleged to be in violation of.
11.2 Indemnification; Insurance Against Liability .  Executive will be entitled to such prevailing rights and entitlements to indemnification, defense of claims and insurance against liability as are generally provided to executives of the Company, consistent with Company bylaws, insurance policies and contracts, and applicable law.
11.3 Governing Law; Interpretation .  This Agreement will be governed by the substantive laws of the State of Florida, without regard to the principles of conflicts of laws.  This Agreement will be construed as a whole, according to its fair meaning, and not in favor of or against any party, regardless of which party may have initially drafted certain provisions set forth herein.
11.4 Choice of Law and Forum :  This Agreement shall be construed according to the laws of the United States of America and the State of Florida, without regard to its conflict of law's provisions.  Executive hereby expressly consent to the personal jurisdiction of the state and federal courts for Broward County, Florida in any lawsuit filed there against the Executive by the Company arising from or related to this Agreement, including any claims for infringement of the Company's Confidential Information, Inventions or Works for Hire or any update thereto.  Executive agrees that if Executive is not a resident of the State of Florida, USA, at the time of such action, then Executive hereby irrevocably appoints the Secretary of the State of Florida, as agent for the purpose of accepting service of process in Florida and the United States. Executive waives trial by jury in any action, proceeding, claim, or counterclaim brought by any party in connection with any matter arising out of or in any way connected with this Agreement, the relationship of Executive to the Company and /or any claim of injury or damage arising in any way between and among the Company and Executive.  Provided, however, that Executive agrees that nothing in this Section shall prohibit the Company from initiating legal action in any court which has personal and subject matter jurisdiction over me in the event that it is necessary for the Company to pursue equitable relief against me for a breach of this Agreement.
11.5 Assignment .  This Agreement is personal to Executive and he may not assign it without prior written consent of the Company.  The Company may, without Executive's consent, assign the Agreement to any successor entity, including the Restrictive Covenants of Section 9.
11.6 Notices .  Any notice required or permitted hereunder will be in writing and will be deemed to have been duly given if delivered by hand or if sent by certified mail, postage and certification prepaid, to Executive at his residence (as noted in the Company's records), or to the Company address, or to such other address or addresses as either party may have furnished to the other in writing.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

12



11.7 Entire Agreement; Amendments .  This Agreement and any other exhibits and attachments hereto constitutes the final and complete expression of all of the terms of the understanding and agreement between the parties hereto with respect to the subject matter hereof, and this Agreement replaces and supersedes any and all prior or contemporaneous negotiations, communications, understandings, obligations, commitments, agreements or contracts, whether written or oral, between the parties respecting the subject matter hereof.  This Agreement may not be modified, amended, altered or supplemented except by means of the execution and delivery of a written instrument mutually executed by both parties.  No action or omission by the Company shall be deemed to be a waiver of any of its rights under this Agreement unless such waiver is set forth in writing and identified as a waiver.  Any waiver by the Company of any rights under this Agreement shall not be deemed to be a waiver of any other right.
11.8 Counterparts .  This Agreement may be executed simultaneously in two (2) counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument.
11. 9 Survival .  The provisions of the various sections of this Agreement which by their terms call for performance subsequent to the expiration or termination of this Agreement or the Employment Period shall survive such expiration or termination.
11.10 Withholdings.  The parties agree that all payments to be made to the Executive by the Company pursuant to this Agreement shall be subject to all applicable withholdings.
11.11 Headings.  The Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.
11.12 No Contra Proferentum.  The parties agree that they have been represented by counsel during the negotiation and execution of this Agreement, and, therefore, waive the application of any law, regulation or holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.
11.13 Capacity.  Each of the parties hereto warrants that they are legally competent to execute this Agreement and accepts full responsibility therefor.
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

13



12. Resolution of Disputes .
12.1 Except as provided, herein, and in the event of any claim, cause of action, dispute or controversy arising under this Agreement or otherwise related to the parties' employment relationship, the parties shall negotiate in good faith for the purpose of resolving such dispute. In the event that the parties cannot resolve the claim, cause of action, dispute or controversy informally within fifteen (15) days, then such claim, cause of action, dispute or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by a mandatory arbitration in Miami, Florida before one (1) arbitrator.  The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures (Streamlined Arbitration Rules and Procedures). Judgment on the Award may be entered in any court having jurisdiction.  This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction. Each party shall bear its own costs in the arbitration and shall share equally the costs of the arbitration itself.  Notwithstanding the foregoing, and without undermining the agreement to arbitrate on any other claim, cause of action, dispute or controversy, the Company shall at all times have and retain the exclusive and unilateral right to seek immediate temporary and preliminary injunctive relief in a court of law in the event of a violation or alleged violation by the Executive of Sections 7, 8, or 9 of this Agreement. In the event such judicial relief is granted, such relief shall remain binding on the parties pending the outcome of arbitration.  THE COMPANY AND EXECUTIVE ACKNOWLEDGE THAT EACH HAD THE OPPORTUNITY TO CONSULT WITH LEGAL AND FINANCIAL COUNSEL CONCERNING THE RIGHTS AND OBLIGATIONS ARISING UNDER THIS AGREEMENT, THAT EACH HAS READ AND UNDERSTANDS THIS AGREEMENT, AND THAT EACH ENTERS INTO IT WILLINGLY.
This Agreement is duly executed as of the day and year of the last signature below.
Capstone Companies, Inc.   James Gerald McClinton
By:     Sign:  

Title:     Title:  

Date:     Date:  
Capstone Companies, Inc.
350 Jim Moran Blvd. Suite 120 Deerfield Beach, FL 33442

Ph: (954)252-3440 | Fax: (954)252-3442 |   Email: info@capstonecompaniesinc.com
www.capstonecompaniesinc.com

14


PE(Product/Service)
Sterling Capital Funding TM
A Division of Sterling Factors Corporation
500 Seventh Avenue
New York, New York 10018 Financing Agreement
 
August 27, 2010
Capstone Industries, Inc.
350 Jim Moran Boulevard —Suite 120, Deerfield Beach, Florida 33442
Gentlemen:
We are pleased to confirm the terms on which we are to act as your receivable manager/ financier for your sales and/or rendition of services and which are to be invoiced in your name and assigned to us.

1.
During the term of this agreement you hereby sell and assign to us as absolute owner thereof each and every accounts receivable, contract rights and all other proceeds resulting from or which may result from the sale of all  merchandise owned by you or the sale of which you may control or the rendition of services by you, net of any returns, claims, allowances, and discounts granted to cust01ners on the shortest selling terms indicated on each invoice, Such discounts, credits 01' allowances may be claimed only by the customer.
2.
Accounts receivable resulting from such shipments and/or services are referred to in this Agreement as Accounts. We will purchase Accounts in accordance with the terms of this Agreement and remit to you as herein provided,
3.
All Accounts and other evidences of indebtedness and  the proceeds thereof (including but without limitation, notes, trade acceptances, etc.) resulting from your shipments or rendition of services made during the duration of this Agreement, and all contract rights relating thereto and all of your rights as vendor as well as all of your rights and remedies as an unpaid seller (including without limitation, the right of replevin, stoppage in transit and reclamation under Section 2002 of the Uniform C01nmercial Code or otherwise) and any merchandise reclaimed or returned or any merchandise represented by invoices assigned to us regardless of whether or not it has been shipped, shall be and hereby are assigned to us as absolute owner thereof, and we shall have the right to bring suit to enforce our rights with respect to the same in your name or ours.


As security for any and all Obligations (as hereinafter defined), we shall be entitled to hold and you hereby grant to us a continuing general lien upon, security interest in and to, and right of set-off on or against any of the following, whether now or hereafter existing or acquired, and wherever located (collectively the "Collateral"): all accounts including those at client 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 us, bank and other deposit accounts, whether or not reposed with your affiliates, general intangibles (including without all tax refunds, contract rights, trade names, trademarks, trade secrets, customer lists, software and all other licenses, rights, privileges and franchises), all balances, stuns and other property at any time to your credit or in out possession or in the possession of any of our Affiliates, together with all merchandise, the sale of which resulted in (he 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 noncash proceeds of all of the foregoing.
"Obligations" shall mean and include all loans, advances, indebtedness, liabilities, debit balances, letters of credit, acceptances, airway and steamship guaranties, covenants, duties and obligations of whatever kind and nature at any time owing by you to us or' any of our' Affiliates, whether fixed or contingent, due or to become due, matured or unmatured, no matter how or when arising and whether under this Agreement or otherwise and including all obligations for purchases made by you from  any other concern factored or financed by us or any of our Affiliates. For the purpose hereof, "Affiliate" shall mean any person, firm or corporation directly or indirectly controlling, controlled by or in common control with us or any corporation the stock of which is owned or controlled directly or indirectly by Sterling Bancorp.
4.
Remittances received by you shall be held in trust for us segregated from your other assets and shall be turned over to us forthwith in the identical form in which received and you hereby grant to us full power and authority to execute and deliver to ourselves such evidences of title as we may deem desirable and to endorse your name upon all checks, notes and other instruments for the payment of money representing Accounts, contract rights or the proceeds thereof, such power being hereby declared to be coupled with an interest and irrevocable.
5.
By execution of this Agreement and also by each execution by you of a confirmatory assignment and listing of invoices representing Accounts, and contract rights to us, you represent and warrant that each such item is and shall be based on an actual bona fide sale and delivery of merchandise or rendition of service in the ordinary course of business, unencumbered title to which was in you at the time of sale or rendition of services, that the customer is and shall be unconditionally liable for the payment of the amounts stated in the invoice according to its terms, whether or not sold, without offset, defense or counterclaim; that none of your merchandise is or shall be subject to any pledge or security interest except as we may have approved in writing; that no such Accounts, and contract rights have been or will be assigned, sold, pledged, or hypothecated or otherwise  encumbered, except to us; that no other person has or shall have any claim thereto as proceeds of merchandise or otherwise; and that you are not in default to the United States or any state or local subdivision thereof in the payment or deposit of any taxes; that the original invoices bear notice of assignment to us, reading substantially as follows:


MAKE CHECKS PAYABLE ONLY TO STERLING RECEIVABLE MANAGEMENT, 500 Seventh Avenue, P,O, Box 742 Midtown Station, New York, New York 10018.
As used in this Agreement, the term "invoice" includes any and all lists or compilations of merchandise or descriptions of services rendered, and price information delivered or sent to customers in any form or format and by any means, including, without limitation, electronic data transfer.
You agree to execute and deliver to us such other and further instruments of assignment, financing statements and other instruments of further assurance as we may reasonably require, but even though you may fail to execute and deliver the same, this Agreement shall nevertheless operate as a complete assignment to us of all Accounts during the life of this Agreement, You will also furnish us a detailed listing of all invoices on assignment forms acceptable to us, and a copy of each original invoice. You represent and warrant to us that any electronic data transfer we receive from you or anyone acting on your behalf will correctly and completely represent the transactions and information set forth therein, You authorize us unilaterally to execute and file financing statements in accordance with this and any other agreement between you and us in any state permitting such filing.
You represent and warrant to us that you are solvent and will continue to remain so, that you are an entity organized under the laws of Florida, and that your records concerning Accounts, are and will be kept at the address shown at the head of this letter until you notify us otherwise in writing. You shall not change your state of organization without giving us at least 30 days prior written notice of such change.
If applicable, you represent and warrant to us that all inventory has been and will at all times hereafter be manufactured and produced in accordance with the Fair Labor Standards Act of 1938 and all rules, regulations, and orders promulgated there under.
6.   We will, on your request and at our sole discretion, advance to you up to 85% of the net amount of undisputed Accounts after goods are shipped or services rendered, and the invoices and shipping documents are delivered to us, and after the merchandise or services have been finally accepted by the customer. The balance, as we may determine, is to be retained by us as a reserve. If in our judgment it should be necessary, we may retain an additional amount for customers' returns, allowances, deductions and/or disputes. We shall be entitled to hold all sums to your credit as security for outstanding claims and any and all obligations owing to us or our Affiliates by you, however arising. In our discreti011 we may at any time remit to you amounts standing to your credit, and subject to the provisions of this Agreement shall remit any amounts withheld after collection thereof by us. From time to time, at your request, we at our sole discretion.may make advances in excess of this contractual advance rate, which advances are deemed "Over advances." Any Over advances which we, in our sole discretion, make to you, shall bear interest at a rate equal to (2%) percent above the contractual rate of interest set forth in this Agreement, A calculation of the charges for such over advances will appear in your monthly statement.


You shall notify us. immediately in the event that any of your customers returns or desires. to return merchandise purchased from you or in any other way makes any alleged claim, defense or offset against merchandise, the services rendered, terms, prices, delivery, etc. even if you believe that the customer's allegations are without merit, The occurrence of any of the foregoing 01' any account that remains unpaid 90 days from invoice date, or of any dispute at any time or of any breach of warranty on your part in relation to such Accounts will render such Accounts and on any other Accounts owed by the Same customer as ineligible. The entire responsibility for collecting such Account or Accounts shall be assumed and borne by you and you shall account to us therefore. All disputes ate to be adjusted promptly by you at your expense and you are to advise us of adjustments. You shall indemnify and protect us against liability, loss or expense caused by or arising out of the rejection of goods or alleged claims, defenses or offsets of every kind and nature of customers, If you fail to do so we shall have the right at any time, if we so elect, to settle, compromise, adjust or litigate all such (disputes ox claims directly with your customer or any complainant on such terms and conditions as we deem advisable,
You shall hold returned merchandise subject to our order and at our request deliver possession of returned merchandise to us and pay to us any proceeds from the subsequent resale thereof, No return will be accepted by you and no discount, credit or allowance will be issued or granted by you to a customer without prior written notice to us, in each case.
8.   You agree to pay to us all unpaid Accounts on demand, but we shall have the right at any time to charge back to your account the face amount thereof if any amount has been credited to your account with respect thereto. The charge-back of such items shall not be deemed a reassignment thereof and title thereto shall remain in us, and our rights in the security represented thereby shall continue.
9.   For our services hereunder, we shall charge a base management fee equal to .45 % of the gross invoice amount of each of your accounts receivable, which commission shall be due and payable by you and chargeable to your account with us; as at the day of the assignment to us, The minimum base management commission payable hereunder for each Contract Year (each twelve month period commencing from the date this Agreement is accepted by you) shall be $20,000, which to the extent of any deficiency shall be chargeable to your account with us at the end of such Contract Year. At our sole discretion, we may elect to charge the difference between the actual commission earned by us and the minimum commission to your account on a monthly basis and if so, the monthly minimum charge shall not be less than $1,667. Said base management fee shall be increased by .25% for each additional 30 days or portion thereof of extended terms, beyond 90 days maximum selling terms. The minimum base management fee on each invoice shall be $5.00.
10.   If at any time you have obligations owing to us, such obligations shall be payable to us on demand and we shall not be required to have any recourse to any security or any other party liable thereon, and we may, in our discretion, charge your account with the amount thereof with the same force and effect as though it were a payment made to you hereunder. If we become liable to the United States on your account by virtue of the Internal Revenue Code (and or the Federal Tax Lien Act of 1966), we may charge the amount thereof to your account whether or not we have made payment, and you shall pay us the amount thereof on demand or present satisfactory proof that you have paid the amount involved to the United States.


l1.   We shall debit your account our charges set forth in Paragraph 9 and the interest as provided in this Paragraph 11 hereof and all other items properly chargeable   to you and any monies remitted or paid to you or otherwise advanced by us for your account. On or about the 15th day of each month we shall mail to you by ordinary mail an abstract of your account as of the last day of the preceding month. Such abstract shall be an account stated and shall be deemed correct unless written objection thereto is made within 30 days after our mailing thereof. Only that portion of the abstract specifically objected to by you in writing shall not be binding. Any charges pursuant to this Paragraph legally constituting interest shall not exceed the maximum contract rate permitted by law for an incorporated or for an unincorporated client, whichever is applicable. Interest as provided herein will be charged on the daily balances resulting from advances 01' other charges made pursuant hereto, less collections and other monies received hereunder, at the rate specified in this Paragraph. For purposes of calculating interest, collections shall be deemed credited to your account 10 banking days after receipt thereof by us.
All debits in your account shall bear interest daily at a rate equal to 1/4% above the Sterling National Bank Base Rate from time to time in effect (which shall not necessarily be the lowest rate charged to its customers) now or hereafter prevailing. Any change in the interest rate shall take effect on the first business day of the month following the month in which the Base Rate changes. In no event shall the interest rate charged be less than the Sterling Bank Base Rate in effect on the date of this agreement (5%).
12.
You will keep records of all transactions which may be pertinent to this Agreement and all such records shall be available to us. and our representatives for examination at any time. The expense of such examination shall be borne by you together with all reasonable out-of-pocket expenses and shall in no event be less than $800.00 per examination day. If at any time we shall be required to pay any State, City, Local or Federal sales, use, or excise tax on the purchase of any Accounts or contract rights hereunder, you will repay to us the amount of tax so paid.
13.
You agree to furnish us with balance sheets, statements of profit and loss, financial statements and such other information regarding your business affairs and financial conditions as we may from time to time require, and in any event, a statement of your financial position for each fiscal year prepared and reviewed by your regularly engaged certified public accountant.
14.
This Agreement expresses the entire understanding between the parties. Failure by us to insist upon strict performance shall not be deemed to be a waiver of our right to require strict performance, and any waiver by us must be in writing and shall then be for the particular instance only. A waiver by us of any right 01' remedy on any one occasion shall not be construed as a waiver of any such right or remedy which we would otherwise have on any future occasion, whether similar in kind or otherwise. The terms of this Agreement shall not be waived, modified or altered unless in writing by both parties hereto. Out' remedies hereunder shall be deemed to be cumulative and not exclusive. If any of the terms of this Agreement shall differ with the terms of any other agreement between you and us that which gives us greater rights shall prevail,
15.
All notices given under this Agreement shall be sent by certified mail to the business address of the party to whom notice shall be given,


16.
This Agreement together with all assignments of Accounts and Contract Rights hereunder shall be deemed made in New York and subject to the laws of the State of New York. At our option, should any controversy arise out of this Agreement 01' in relation to or in connection with it or any actual or alleged breach thereof, said controversy may be submitted to the Supreme Court of the State of New York, County of New York for determination pursuant to "New York Simplified Procedure for Court Determination of Disputes" as provided for by the New York Civil Practice Law and Rules. You agree that any claim or cause of action by you against us or any of our directors, officers or employees arising out of or relating in any way to this Agreement shall be barred unless asserted by you by the commencement of an action or proceeding by you within one year after the first act, occurrence omission upon which such claim or cause of action is based. YOU HEREBY AGREE TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK ON ALL DISPUTES OR CONTROVERSIES ARISING UNDER OR RELATING TO THIS AGREEMENT AND DESIGNATE THE SECRETARY OF STATE OF NEW YORK STATE AS YOUR AGENT FOR SERVICE OF PROCESS. YOU FURTHER AGREE TO WAIVE TRIAL BY JURY IN ANY SUIT OR PROCEEDING ARISING UNDER OR RELATING TO THIS AGREEMENT.
17.
This Agreement shall commence as of the day 8 th day of  September 2010 and shall continue in effect until one year(s) from the date hereof, and from year to year thereafter, unless either party hereto gives the other patty not less than sixty (60) days written notice of termination prior to the anniversary of this Agreement in any year. If terminated prior to the initial or any renewal term hereof, or if there is a default by you under the terms of this Agreement as set forth below, then and in such event all sums due from you, including but not limited to, the minimum base management commission for any Contract year, shall be immediately due and payable as set forth hereinafter in this Paragraph 17. Notice of termination by you or by us, as the case may be, shall be effected by hand delivery, courier service or the mailing of a certified letter by the terminating party. Notwithstanding the foregoing, should any of the following "Events of Default" occur: failure by you to pay or perform under the terms or conditions of this Agreement; you submit any information relating to Accounts, your operations or financial condition that is false in any material respect, or you Omit to provide material information relating to Accounts, your operations or financial condition; you become insolvent or are unable to meet your debts as they mature, fail, suspend business as a going concern, make an assignment for the benefit of creditors, apply for an extension from your creditors, or a receiver or trustee is appointed for you or your properly or a petition in bankruptcy or for reorganization under the Bankruptcy Code filed by or against you, or should you seek relief under any federal or state insolvency statute, then, we shall have the right to terminate this Agreement forthwith without prior notice. Notwithstanding any termination hereof, this Agreement shall nevertheless be in full force and effect and binding upon you until you have fully paid and performed all of the Obligations.


18.
Upon the occurrence of any Event of Default, we shall have all of the rights and remedies of a secured party under the Uniform Commercial Code and other applicable law with respect to all Collateral, such rights and remedies provided for herein. All proceeds of Collateral shall be first applied to all costs and expenses of liquidating the Collateral, including attorney's fees and disbursements and then to payment (in such order as we may elect) of all Obligations,
                                                                                                                              Very truly yours,
                                                                                                                              Sterling Capital Funding TM
 
                                                                                                                              A Division of Sterling Factors Corporation
                                                                                                                              By /s/
                                                                                                                              BY /s/
        ACCEPTED AND AGREED TO:
        Capstone Industries, Inc.
        /s/ Howard Ullman, COO
Rev. 7-29-08 ((WD)

 
CERTIFICATE CORPORATE RESOLUTIONS¯-
I, Howard Ullman, do hereby certify that I am Secretary Capstone Industries, Inc., a Corporation organized under the laws of the State of Florida, and that a special  meeting of the Board of Directors of said corporation duly held at its office on  at which a quorum was present and acting throughout, the following resolutions were duly moved, seconded, and unanimously adopted:
RESOLVED: That at it is in the best interest of this corporation to enter into the agreement with STERLING CAPITAL FUNDING f a division of STERLING FACTORS CORPORATION, having an office 500 Seventh Avenue, New York, NY 10018,  referred as "Sterling", to be dated this day providing for: the sale, pledge, assignment, negotiation and guarantee to Sterling of accounts, notes, documents s, instruments, chattel paper and other forms of obligations; the pledge and assignment  of Inventory, goods and chattels now or hereafter owned by this corporation; the pledge of stock now or hereafter owned by this corporation; and such other and further  documentation as may be necessary to effectuate the financing arrangements contemplated between Sterling and this corporation; and it was further.
RESOLVED: That the President, Vice-President, Treasurer, Secretary or other officer of this corporation, or any one or more of them, be and the same are hereby authorized and empowered, on its behalf, to execute and deliver said agreements and any modifications thereof; and it was further.
RESOLVED: That any officer or  officers of this corporation and/or their nominees are hereby authorized and empowered, on Its behalf, to execute and deliver any and all schedules of assignments of accounts, transfer of instruments, sates, pledges, notes, financial, financing and other statements, and any and all further agreements, papers, documents and certificates, as may from time to time be required by said Sterling, upon any matters or transactions arising under said agreements or in connection with any further financial arrangements with this corporation; and it was further
RESOLVED: That all acts of the of this corporation and/ or their nominees and all agreements, modifications, transfers, assignments, certificates and statements, which they or any of them may do, execute or deliver in pursuance of said agreements and to facilitate transaction thereunder, and are hereby ratified and approved; and it was further
RESOLVED: That any officer, agent or nominee of Sterling is hereby authorized and empowered to endorse the name of this corporation to any and all checks, drafts and other Instruments or orders for the payment of money, payable to this corporation or its order, to deposit the same In any account or accounts of Sterling, with any BANK, BANKER OR TRUST COMPANY, and to deal with any and all such checks, drafts, and other instruments or orders for the payment of money and the proceeds thereof as the property of Sterling ; and it was further
RESOLVED: That any BANK. BANKER OR TRUST COMPANY be, and they hereby are, authorized and requested to receive for deposit to the credit of Sterling without further inquiry, all such checks, drafts and other orders or instruments for the payment or money, payable to this corporation or its order, and that said banks shall be under no liability to this corporation, with respect to the disposition which Sterling may or shall make of the same instruments or the proceeds thereof."
I further certify that the foregoing resolutions remain in force and have not been rescinded or modified.
I further certify that I am the custodian of and an) familiar with the books and records of said corporation and nothing contained in the Certificate of Incorporation, By-Laws or any other records prohibits the execution of the aforementioned  agreements by said corporation.



I further certify that the following are duty elected officers of this corporation:
President: Reid Goldstein

Treasurer: James G. McClinton

IN WITNESS WHEREOF, I haye hereunto set my hand as
Secretary of corporation, and affixed its corporate seal, by order
of its Board of Directors,
 
This 8th day of September 2010
                                                                                                                                    /s/ Howard Ullman, Secretary (Seal)
Rev 52604







STERLING
NAIIONAL BANK


                                                                                          500 Seventh Avenue
                                                                                          New York, NY 10018-45
                                                                                          Phone; 212-5754444
                                                                                          Fax: 212-382-3439
                                                                                          Plamonka@snb.com

                                                                                          Peter La Monica
                                                                                          Vice President



November 5, 2015



Mr. Gerry McClinton Capstone Industries, Inc.
350 Jim Moran Boulevard-Suite 120
Deerfield Beach, Florida 33442 Dear Mr. McClinton
Re: Amendment to Factoring Agreement

This letter will modify and  amend  the  Financing  Agreement  between  us dated  August  27,  20 I 0, as follows:

Paragraph 11

For purpose of calculating interest, collections shall be deemed credited to your account
(4) four banking days after receipt thereof by us.

Nothing herein contained shall vary, alter or amend any provisions of said Financing Agreement between us, except as specifically provided herein.

    Gerry   McClinton
                                                      COO










VALIDITY GUARANTY



In order to induce Sterling National Bank ("Bank " ) to make loans ,   advances or other extensions of credit (the " F i nancing Agreements " ) Capstone Industries, Inc. ( " Client " ) , upon the collateral  security  of the accounts  receivable  ( " Accounts " ) of   Client , and in consideration of Bank ' s so doing , the undersigned hereby guaranty and warrant to Bank that each and every Account assigned, pledged ,   transferred or sold to Bank by Client will represent goods and services delivered and is a valid obligation of a customer of Client ; that all remittances received by Client on Accounts will be held by Client in accordance with the provisions of the Financing Agreement between Bank and Client and that Client will immediately deliver to Bank the checks ,   wires or other forms of payment received when and as required by the Financing Agreement.

In the event Client knowingly misrepresents to Bank or withholds from Bank material information regarding the Accounts,   the undersigned agrees to pay to Bank , after liquidation of the Client assets and upon Bank ' s demand , the full amount of such unpaid Accounts to the extent of the obligations under the Financing Agreement.

The undersigned and each of them hereby waive notices of acceptance hereof and further waive notice of and hereby consent to any agreement or arrangements whatever with Client including , without limitation , agreements and arrangements for payment , extension, subordination , composition , arrangement, compromise , discharge or release of the whole or any party of any indebtedness and same shall in no way impair the undersigned ' s liability hereunder. The undersigned waives the benefits of any provision of the Bankruptcy Code and of any similar or other legislation as now or hereafter enacted ,   amended or added to ,   which may extend the time for payment of ,   or impair any of the obligations of the undersigned hereunder . This agreement shall continue in full force and effect until actual receipt by Bank from the undersigned of written notice of cancellation ,   but such cancellation shall be applicable only to transactions that have their inception thereafter .

This guaranty and waiver shall be 9inding upon the heirs , personal representatives , successors , and assigns of each of the undersigned and the benefits thereof shall extend to and include the successors and assigns of Bank . The death of any of the undersigned shall not release his or her estate from any liability accruing prior to death .

This Guaranty shall be deemed made i n New York and subject to the laws of the State of New York and undersigned consents to the jurisdiction of any local, State or Federal Court located within the State of New York ,   which jur i sdiction shall be exclusive in any action between the parties . Undersigned hereby waives personal service of any and all process and consents that all such service of process shall be made by certified mail ,   return receipt requested ,   directed to undersigned at its address appearing on the records of Bank and service so made shall be complete ten (10) days after the same has been posted as aforesaid , provided , however , that if such certified mail is rejected , unclaimed or undeliverable , service may be made by ordinary mail. UNDERSIGNED AND BANK EACH HEREBY UNCONDITIONALLY WAIVES HIS OR ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF , DIRECTLY OR INDIRECTLY,   THIS GUARANTY , ANY RELATED DOCUMENTS , ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECTMATTER OF THIS AGREEMENT , AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BY THEM.


Date: 06-10-2016,

 
/s/ Stewart Wallach
Chief    Executive  Officer

C

Witness
 
/s/ Aimee Gaudet

 















 
TRADEMARK LICENSE AGREEMENT

This Agreement is made and entered into as of this ____ day of _____________, 2015 (the " Effective Date ") by and between
Techtronic Floor Care Technology Limited , a BVI corporation, with its principal place of business at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands (" TFCTL "), and Hoover Inc. , a US corporation, with its principal place of business at 7005 Cochran Road, Glenwillow, Ohio 44139 (" Hoover "), (TFCTL and Hoover, collectively, " TTI Floor Care "),
and
Capstone Industries Inc. , a US corporation with its principal place of business at 350 Jim Moran Boulevard, Suite 120, Deerfield Beach, FL, United States of America 33442 (" Licensee ").
WHEREAS
A.
TTI Floor Care is the owner of the Licensed Marks (as defined below).
B.
Licensee wishes to obtain a license to use the Licensed Marks on and in connection with specified goods and/or services within the Territories (as defined below) and TTI Floor Care is willing to grant a license to Licensee to use the Licensed Marks on the terms and conditions set out in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1.
DEFINITIONS
As used in this Agreement:
" Affiliate " means any corporation, partnership, or other entity which directly or indirectly controls, is controlled by, or is under common control with a party. " Control " of an entity shall mean possession, directly or indirectly, of the power to direct or cause the direction of management or policies of such entity through ownership of voting securities, contract, or otherwise.
" Channels of Trade " means the approved wholesale and/or retail accounts in the Territories as listed in Exhibit 3 or such others as TTI Floor Care may approve from time to time in writing during the Term.
" Default Rate " means three (3) percentage points above the United States federal discount rate prevailing on the date a payment is due, or the maximum amount allowable by law if less than such rate.
" Derivative Materials " means all logos, designs, symbols, marks, graphics, text, trade dress, drawings, collective works, sculptures, pictures, photographs, artwork, and material objects consisting of or incorporating or derived from any one or more of the Licensed Marks and all derivations, adaptations, and variations thereof.
" Effective Date " shall have the meaning set forth in the preamble of this Agreement
" Event of Default " shall have the meaning set forth in Sections 11.1.1 and 11.1.2 of this Agreement.
" Gross Sales " means the total amount paid or owing to Licensee and Licensee's Affiliates from the sale of Licensed Products, excluding finance charges, taxes on sales and reasonable invoiced charges for shipping and handling which are separately identified on an invoice for a sale.  Any amounts paid or owing to Licensee or any Affiliate of Licensee for artwork, set-up, or personalization or customization of any Licensed Products shall be included in Gross Sales.
" Initial Term " shall have the meaning set forth in Section 2.5 .
1

Trademark license agreement TFCTL – Capstone Industries Inc.

" Licensed Marks " means the trademarks and service marks identified in Exhibit 1 and such other marks as TTI Floor Care may authorize Licensee to use from time to time during the Term.
" Licensed Products " means the approved products listed in Exhibit 2 or such other products as TTI Floor Care approve from time to time in writing during the Term.
" Manufacturer " has the meaning set forth in Section 4.5 of this Agreement.
" Minimum Royalties " shall have the meaning set forth in Section 3.2 of this Agreement.
" Net Sales " means Gross Sales less credits for returns actually made or allowed.  In computing Net Sales, no deductions shall be taken from Gross Sales for any of the following:  cash discounts granted as terms of payment; early payment discounts; allowances or discounts related to advertising; mark-down allowances; costs incurred in manufacturing, selling, advertising, promoting, importing or distributing the Licensed Products; freight costs incorporated in the selling price; or uncollectible accounts.
" Packaging " means any materials used in the packaging or labeling of the Licensed Products, including but not limited to cartons, boxes, containers, labels, and hang tags.
" Policy Limit " means combined single limits of no less than one million dollars ($1,000,000) for bodily injury and property damage arising out of each occurrence; two million dollars ($2,000,000) general aggregate and two million dollars ($2,000,000) products and completed operations; and a five million dollar ($5,000,000) umbrella policy.
" Premium " means any merchandise used or intended to be used for promoting, publicizing, or increasing the sale of any goods or services, including but not limited to incentives for sales forces, the trade, or consumers.
" Promotional Materials " means any materials used to advertise or promote the Licensed Products, including but not limited to television and print advertising, internet and website content, press releases, brochures, fliers, photographs, point-of-purchase displays and other display materials, banners, advertisements, announcements, public relations kits and press releases.
" Royalties " shall have the meaning set forth in Section 3.1 of this Agreement.
" Term " shall have the meaning set forth in Section 2.5 of this Agreement.
" Territories " means in the United States of America, Canada and Mexico.
" Triggering Event " shall have the meaning set forth in Section 11.1.3 of this Agreement.
2.
LICENSE GRANT
2.1.   Grant of Trademark License . Subject to the terms and conditions of this Agreement, TTI Floor Care hereby grants to Licensee the exclusive right to use the Licensed Marks, during the Term, on and in connection with the Licensed Products manufactured, advertised, marketed, and sold to the Channels of Trade in the Territories. Licensee shall have no right to use the Licensed Marks in any other manner for any other purpose. All rights, whether express or implied, not expressly granted to Licensee hereunder are reserved exclusively to TTI Floor Care.
2.2.   No Trade Name Usage . Licensee shall not use any of the Licensed Marks as part of Licensee's corporate, trade, doing-business-as name or domain name, and Licensee shall not use the Licensed Marks in any manner which would create the impression that Licensee is a division, subsidiary, or Affiliate of TTI Floor Care or that Licensee's employees or agents are employees or agents of TTI Floor Care. In addition, Licensee shall not use any Licensed Marks or any mark incorporating all or any part of any Licensed Mark on any business sign, business cards, stationery, envelopes, invoices, forms, or similar documents, in any media, except as approved in advance in writing by TTI Floor Care.
2

Trademark license agreement TFCTL – Capstone Industries Inc.

2.3.   Territories .  Licensee's rights under this Agreement extend only to the Territories.  Licensee shall not:  (a) use nor authorize any third party to use the Licensed Marks outside the Territories, either directly or indirectly; (b) advertise, promote, distribute or sell or authorize any third party to advertise, promote, distribute or sell Licensed Products outside the Territories, either directly or indirectly; or (c) sell Licensed Products to anyone whom Licensee knows or has reason to know intends to resell or distribute the Licensed Products outside the Territories.
2.4.   Scope of Grant .
2.4.1.
Nothing in this Agreement shall be construed as preventing or restricting, in any manner, TTI Floor Care's right to (i) use or to license any third party to use in any manner whatsoever the Licensed Marks within the Territories for products different from the Licensed Products, and to (ii) use or to license any third party to use in any manner whatsoever the Licensed Marks outside of the Territories.
2.4.2.
All other rights not specifically granted to Licensee hereunder are reserved for the sole and exclusive benefit of TTI Floor Care both within and outside the Territories, including but not limited to special events and promotions (whether charitable or not); duty-free retail outlets; in-flight services; any catalogue offerings; television marketing; interactive television; direct mail marketing; retail outlet stores for the benefit of the employees of TTI Floor Care and its Affiliates; and the right to exploit, directly and indirectly; any and all other methods of promotion, marketing and distribution and sale of Licensed Products both within and outside the Territories.
2.5.   Term .  This Agreement shall be effective as of the Effective Date and shall continue for a term of three (3) years unless sooner terminated or modified in accordance with its terms (" Initial Term "). Thereafter, provided that Licensee is in compliance with all the conditions set forth in this Agreement, this Agreement may be renewed upon written agreement of the parties. This Agreement may be terminated by either party by giving the other party not less than three months prior written notice, or in accordance with Section 11 .
3.
ROYALTY STATEMENTS AND PAYMENTS, RECORDKEEPING, AND AUDITS
3.1.   Royalties .
3.1.1.
During the Term, Licensee shall pay to TTI Floor Care royalties in the amount of five percent (5%) of Net Sales of Licensed Products on a quarterly basis (" Royalties "). For purposes of computing Gross Sales, Net Sales and Royalties due, a sale shall be deemed to take place at the point at which Licensed Products are sold by Licensee or any authorized Affiliate of Licensee to: (i) wholesale or retail outlets; (ii) sales people or sales representatives; (iii) employees; (iv) ultimate consumers; or (v) any other person or entity to whom sales of Licensed Products are authorized under this Agreement.
3.1.2.
Licensee shall also account for and pay to TTI Floor Care Royalties at the full rate and amount on the sale of all close-outs, end-of-season stocks and excess inventory (collectively " Closeouts ") approved by TTI Floor Care in Section 12.2.1 . The sale of Closeouts by Licensee shall not exceed five percent (5%) of total Net Sales of Licensed Products in any year of the Term.
3.2.   Minimum Royalties . During any renewal period after the Initial Term, Licensee shall pay the minimum level of royalties to be mutually agreed between the parties before the end of Initial Term or specified in Exhibit 6 (" Minimum Royalties "). The Minimum Royalties paid for any contract year may only be credited against Royalties due during the same Contract Year and may not be carried over to offset Royalties due during any other contract year. If Licensee pays, but does not earn the amounts specified above, TTI Floor Care may terminate this Agreement in accordance with Section 11.2 .
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Trademark license agreement TFCTL – Capstone Industries Inc.

3.3.   Statements and Payments .
3.3.1.
Within thirty (30) days of the end of each calendar quarter, Licensee shall submit to TTI Floor Care a full and accurate statement showing the quantity, description, Gross Sales and Net Sales of all Licensed Products distributed and/or sold during the preceding calendar quarter and the total amount of Royalties due thereon. At the same time, Licensee shall pay to TTI Floor Care all such Royalties and all other payments due to TTI Floor Care as of that date. No amounts shall be withheld by Licensee by reason of an offset against amounts due from TTI Floor Care to Licensee or any of its Affiliates for any products or services or for any other reason. To the extent any Royalties are not timely paid, then in addition to all other remedies TTI Floor Care may have, TTI Floor Care shall be entitled to offset the Royalties due against any sums which TTI Floor Care or any of its Affiliates owes to Licensee. Any applicable taxes on the manufacture, distribution, and sale of Licensed Products shall be borne by Licensee.  Licensee shall render such statements to TTI Floor Care whether or not any sales of Licensed Products have been made during the preceding calendar quarter. Unless TTI Floor Care agrees to an alternative form, Licensee shall use the form of statement attached hereto as Exhibit 5 . In its sole and exclusive discretion, TTI Floor Care may change the form of statement required to be used by Licensee upon written notice to Licensee.
3.3.2.
Minimum Royalties for each contract year after the Initial Term shall be paid by Licensee in accordance with Section 3.2 . No more than thirty (30) days after the end of each such calendar quarter, Licensee shall account for and remit to TTI Floor Care the amount by which earned Royalties on Net Sales of Licensed Products for that period exceeds the Minimum Royalties for such calendar quarter. In no event shall any difference between earned Royalties and Minimum Royalties in any calendar year affect Licensee's obligations to pay earned Royalties or Minimum Royalties in any other calendar year.
3.4.   Maintenance of Records and Inspections .
3.4.1.
Licensee shall keep accurate books of account and records covering all transactions relating to the Licensed Products, which shall conform to generally accepted accounting principles. During the Term and for a period of two (2) years thereafter, upon advance notice, TTI Floor Care, or an auditor, accountant or other representative of TTI Floor Care, shall have the right to examine and to make copies or extracts of such books of account and records.  TTI Floor Care shall be entitled to exercise this right of examination at all reasonable times during normal business hours.  Licensee shall maintain all such books of account and records for a period of at least two (2) years following the expiration or termination of this Agreement.  To assist TTI Floor Care's examination, Licensee shall clearly differentiate in its books of account and records transactions and other information relating to the Licensed Products through a symbol used exclusively for that purpose or some other comparable method.  If Licensee's books of account and records do not comply with the requirements of this Section 3.4.1 , then all findings of any auditor, accountant, or other representative of TTI Floor Care shall be deemed final.
3.4.2.
Licensee shall also ensure that TTI Floor Care and its designees shall be afforded full, complete, and regular access at regular intervals during normal business hours and at TTI Floor Care's request, to all facilities (including facilities owned, operated, controlled or managed by a third party) engaged in the manufacture, packaging, labeling, shipment, storage and distribution of the Licensed Products and all components thereof, for purposes of review, inspection, assessment as to compliance with this Agreement, and review of all relevant books and records (including the right to make copies and extracts therefrom) relating to the Licensed Products.
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Trademark license agreement TFCTL – Capstone Industries Inc.

3.5.   Discrepancies . Should TTI Floor Care or its representative determine in the course of any examination under Section 3.4 that Licensee has underpaid Royalties, within ten (10) days after receipt of notice of the underpayment, Licensee shall remit to TTI Floor Care the amount of the underpayment, together with interest thereon computed at the Default Rate from the date payment of the unpaid Royalties was originally due to the date of payment.  Should the amount of the underpayment equal five percent (5%) or more, within ten (10) days after receipt of an invoice from TTI Floor Care, Licensee shall pay to TTI Floor Care the total out-of-pocket cost of the examination which revealed the underpayment, including the cost of employee auditors calculated at the industry standard rate (no less than US$125.00 per hour per person including travel time during normal working hours and actual working time).
3.6.   Interest .  Any sum required to be paid by Licensee to TTI Floor Care under this Agreement which is not paid on the due date shall bear interest at the Default Rate calculated daily from the due date until the date of payment.
3.7.   Currency of Payment . Except as otherwise specified by TTI Floor Care, all Royalties and other payments due TTI Floor Care shall be stated and paid in United States dollars.  All currency conversions shall be made at the exchange rate in effect on the date payment is due as reported in The Wall Street Journal.  All costs of conversion shall be the sole expense of Licensee.  Any cost of conversion built into a bank's exchange rate must be accounted for with a corresponding increase in the amount being converted so that all costs of conversion shall be the sole expense of Licensee. Licensee shall withhold as taxes, duties, or other governmental charges on payments to be made to TTI Floor Care only such amounts as are absolutely required to be withheld by law in the country from which payment is made.  In the event of any such withholding, Licensee shall remit to TTI Floor Care Royalty payment net the withholding amount to TTI Floor Care, in United States dollars.  Licensee shall submit to TTI Floor Care originals of the remittance voucher and the official receipt evidencing payment of the corresponding taxes.  Licensee shall fully cooperate with TTI Floor Care and provide such information and records as TTI Floor Care may require in connection with any application by TTI Floor Care to the tax authorities in the United States or any country of the Territories, including but not limited to application for a credit for any withholding tax paid in the Territories or any country from which Royalties and any other payments are being made by Licensee to TTI Floor Care pursuant to this Agreement.
4.
QUALITY AND APPROVALS
4.1.   Quality Standards Generally . All Licensed Products and all Packaging and Promotional Materials shall be of such quality as approved by TTI Floor Care which quality shall be consistently maintained. Licensee may not use the Licensed Marks in any manner which would disparage or tarnish or dilute the distinctive quality of the Licensed Marks or the reputation and goodwill embodied in the Licensed Marks or which would reflect adversely on the Licensed Marks, TTI Floor Care or any of its products or services.  Whether this standard is met shall be in TTI Floor Care's sole and exclusive discretion.
4.2.   Branding Guidelines . Without prejudice for Section 4.1 , all Licensed Products and all Packaging and Promotional Materials shall comply with TTI Floor Care's Branding Guidelines, attached hereto as Exhibit 4 , which may be modified from time to time by TTI Floor Care in its sole discretion. Should TTI Floor Care notify Licensee of any such revisions, Licensee shall thereafter comply with the revised policies; however, Licensee may continue to use, distribute and sell any Licensed Products, Packaging or Promotional Materials manufactured or prepared and approved prior to notification of the revisions.
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Trademark license agreement TFCTL – Capstone Industries Inc.

4.3.   Approval of Licensed Products and Promotional Materials . Licensee shall not use the Licensed Marks on any Licensed Product or Promotional Materials without first providing Hoover with a written proposal for such use and obtaining Hoover's approval of the manner of use of the Licensed Marks on such Licensed Product or Promotional Materials. Hoover retains the right to approve or disapprove such uses at its own discretion.  Hoover shall, within fifteen (15) business days following receipt a request for approval (" Approval Period "), provide either (i) a written approval or (i) written specific reasons for withholding approval to Licensee and indication of the changes to be made to which Licensee shall abide.  If Hoover fails to provide any written answer within the Approval Period, approval shall be deemed denied.  Once Hoover has granted approval for use of the Licensed Mark on a given Licensed Product or Promotional Material, if Licensee desires to materially modify the manner of use of the Licensed Mark on such Licensed Product or Promotional Material, Licensee shall submit to Hoover any such proposed changes, and the same process outlined above in this Section 4.3 applies.
4.4.   Samples .  Licensee shall provide, at no cost to Hoover, three samples of each Licensed Product model consisting of a master pack from the first production run of each such model. Furthermore, it shall provide to Hoover, at no cost to Hoover, such additional samples of each Licensed Product as Hoover may reasonably request in writing from time to time during the Term to confirm the consistent quality of the Licensed Products and compliance with approved samples and other requirements of this Agreement.
4.5.   Manufacturers .
4.5.1.
TTI Floor Care acknowledges that Licensee may wish to retain one or more third parties to manufacture the Licensed Products solely for the account of Licensee.  Licensee shall notify TTI Floor Care in advance of the name and address of all such proposed third-party manufacturers and shall obtain TTI Floor Care's written approval before retaining any such manufacturer to produce any Licensed Products.  Any such third-party manufacturer so approved by TTI Floor Care and retained by Licensee shall be referred to as a " Manufacturer " for purposes of this Agreement. Licensee represents and warrants that it shall inform all Manufacturers of the obligations of this Agreement applicable to them.  Licensee's retention of a Manufacturer shall not relieve it of any obligations under this Agreement or constitute an excuse for any breach or nonperformance under this Agreement, nor shall it be deemed a sublicense of this Agreement.  Licensee shall be responsible and primarily liable for all activities and obligations of all Manufacturers with respect to the Licensed Products, including but not limited to the unauthorized disposition by any Manufacturer of any Licensed Products, Packaging, or Promotional Materials or other items bearing the Licensed Marks.  If TTI Floor Care so requests, Licensee shall require each Manufacturer to sign an agreement in form and substance acceptable to TTI Floor Care governing the manufacture, in whole or in part, of Licensed Products.  Should any Manufacturer utilize any Licensed Marks or Derivative Materials for any unauthorized purpose, Licensee shall cooperate fully in halting such conduct and shall be fully accountable to TTI Floor Care.  Should Licensee violate any provision of this Section 4.5 which violation causes TTI Floor Care to be subjected to any cost or expense, Licensee shall fully reimburse TTI Floor Care for such cost or expense.
4.5.2.
Licensee shall take all steps to ensure that all Manufacturers and all other persons and entities used in connection with the manufacture, assembling, storage, shipment and distribution of the Licensed Products hereunder shall: comply with all legal requirements relevant to the conduct of their business and conduct their business in a manner in line with TTI Group's Business Partners Code of Conduct which can be found at the website www.ttigroup.com ,   which may be modified from time to time in TTI Group's sole discretion . All approved Manufacturers and others engaged pursuant to this provision shall provide regular reports and certification to TTI Floor Care that they are in compliance with all of the foregoing.
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Trademark license agreement TFCTL – Capstone Industries Inc.

4.6.   Inspections .  Upon request and reasonable notice, Licensee shall permit TTI Floor Care or TTI Floor Care's duly authorized representatives to inspect Licensee's manufacturing facilities and testing records and those of Licensee's Manufacturers to confirm compliance with this Agreement and to ensure the consistent quality of the Licensed Products.  Any agreement entered into with any Manufacturer regarding the manufacture of the Licensed Products shall provide for like rights of inspection of the Manufacturer's facilities and records by TTI Floor Care.
4.7.   Suspension of Approval Procedures .  TTI Floor Care reserves the right to suspend the approval process outlined in this Section 4 and action on any pending request or submission by Licensee for approval once TTI Floor Care has given notice to Licensee of any breach of this Agreement until Licensee cures the breach or the matter is otherwise resolved to TTI Floor Care's satisfaction.
4.8.   Failure of Approval .  All approvals under this Section 4 are within TTI Floor Care's sole and exclusive discretion and, therefore, Licensee shall have no rights against TTI Floor Care for damages or any other remedy as a result of TTI Floor Care's failure or refusal to grant any approval.  All approvals hereunder are subject to revocation in TTI Floor Care's commercially reasonable judgment.
4.9.   Seconds and Nonconforming Merchandise .  Licensee shall not sell or otherwise distribute any seconds, irregulars, or other merchandise bearing any Licensed Marks which do not conform to TTI Floor Care standard or any relevant local and international standards for the Licensed Products; nor may any Manufacturer sell or distribute for its own account any seconds, irregulars or other merchandise bearing the Licensed Marks. All such nonconforming merchandise shall be destroyed, unless TTI Floor Care approves in writing of an alternative disposition of such merchandise, such approval to be within TTI Floor Care's sole and exclusive discretion.  If TTI Floor Care approves the disposition of the nonconforming merchandise, TTI Floor Care reserves the right to require Licensee to remove labels on all Licensed Products distributed as seconds, irregulars, or otherwise, notwithstanding that such labels were previously approved by TTI Floor Care.  Any sale of any merchandise bearing any Licensed Marks shall be subject to the payment of Royalties hereunder, whether or not authorized, in addition to all other remedies TTI Floor Care may have on account of such sales.
4.10.   Competing Brands .  During the Term, except for use of the Licensed Marks in connection with the Licensed Products in the manner authorized in this Agreement, Licensee shall not use any images of floor care machines or any floor care-related themes, names, images, symbols, trade dress, trademarks, or service marks on or in connection with the manufacture, advertisement, promotion, distribution, or sale of any goods or services without TTI Floor Care's prior written approval, which shall be within TTI Floor Care's sole and exclusive discretion.
4.11.   Service to the End User .  Licensee will have the sole obligation and responsibility to promptly manage and resolve all customer service issues, product complaints, product service claims and warranty claims from end users with respect to the Products. During the Term, Licensee shall maintain a toll free customer service telephone number and a customer service call center with agents trained to promptly and professionally respond to all customer questions, comments and complaints regarding the Licensed Products. Upon TTI Floor Care's request, Licensee shall provide reports to TTI Floor Care of calls and correspondence received from end users with respect to the Licensed Products in a mutually acceptable format.
4.12.   Digital and Social Media Marketing . Licensee shall not establish, host or maintain any domain name, website, social media site or other online content using the Licensed Marks without TTI Floor Care's prior written approval, such approval to be within TTI Floor Care's sole and exclusive discretion.  TTI Floor Care may condition its approval of any such website, social media or online content on compliance with TTI Floor Care's criteria.
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Trademark license agreement TFCTL – Capstone Industries Inc.

4.13.   Licensee's Product Warranty .  Licensee represents and warrants that the Licensed Products (i) will be free from encumbrances, of good and merchantable quality, free from defects in workmanship and materials, and in conformance with applicable specifications; (ii) will comply with all applicable local, state, federal or provincial laws, rules, regulations, voluntary industry standards, codes or other obligations; and (iii) will not infringe the patents, designs, copyrights, trademark or any other intellectual property rights of any third party.  Licensee further represents and warrants that the quality of the Licensed Products shall equal or exceed the quality of comparable products sold by Licensee under other marks.  The rate of return for defective products in excess of industry norms for comparable products shall be evidence of failure to meet Licensor's quality standards.
4.14.   Limitation on Approvals .  Licensee acknowledges that the approval rights contained in this Section 4 are intended to preserve and maintain the quality of the Licensed Products and do not in any way limit or extinguish Licensee's obligations of indemnification under Section 9.1 , any other obligations of Licensee, or any rights of TTI Floor Care.
5.
MARKING OF LICENSED PRODUCTS, PACKAGING AND PROMOTIONAL MATERIALS
5.1.   Trademark Notices .  Licensee shall comply with the following requirements for marking the Licensed Products, Packaging and Promotional Materials:
5.1.1.
Licensee shall use the trademark demarcations "®" or "TM" or such other designation as TTI Floor Care may from time to time dictate or approve in connection with the Licensed Marks on all Licensed Products, Packaging and Promotional Materials.
5.1.2.
TTI Floor Care makes no representation or warranty that Licensee's compliance with the marking requirements of Section 5.1 shall ensure compliance with all laws, regulations, codes, and standards of all jurisdictions in the Territories, and Licensee remains responsible for ensuring such compliance.
5.1.3.
Licensee shall place a notice on all Licensed Products, Packaging and Promotional Materials indicating that the Licensed Marks are the trademarks of the TTI Group and are being used under license.
5.2.   Trademark Usage .  Licensee shall inform TTI Floor Care in writing in advance of all trade names, service marks, and trademarks which Licensee wishes to use on the Licensed Products in addition to the Licensed Marks. Licensee shall not use any trade names, service marks or trademarks on or in connection with the Licensed Products or on Packaging or Promotional Materials which have not been approved in writing in advance by TTI Floor Care.
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Trademark license agreement TFCTL – Capstone Industries Inc.

6.
DISTRIBUTION LIMITATIONS AND REQUIREMENTS
6.1.   Distribution Limitations .  Licensee shall sell or distribute the Licensed Products only to the Channels of Trade in the Territories and shall not sell any Licensed Products through or to any channels, outlets, or customers outside the Channels of Trade. A list of approved Channels of Trade as of the Effective Date is identified in Exhibit 3 . TTI Floor Care reserves the right, at any point in time, on written notice, to revoke the approval of any particular Channel of Trade. Licensee must seek and obtain TTI Floor Care's written advance approval to sell or distribute the Licensed Products in any additional channels of trade not identified on Exhibit 3 , which approval may be withheld or denied in TTI Floor Care's sole discretion. The approval of the Channels of Trade identified on Exhibit 3 includes approval for the sale of Licensed Products through websites maintained by, on-line services, catalogues, and direct mail offerings made by or on behalf of any approved retailers in such Channels of Trade. For the avoidance of doubt, Licensee may not sell Licensed Products to retailers in the On-line Retail Channel of Trade except as identified on Exhibit 3 or on any internet marketplace without the prior written approval of TTI Floor Care. Any sale of Licensed Products to any such Channel of Trade does not constitute approval or consent to sales of the Licensed Products by anyone other than Licensee to, through and by the specific retail stores operated in the Territories. Licensee shall not authorize any third party to use the Licensed Marks outside the Territories either directly or indirectly.  Any question as to whether a particular channel, outlet, or customer falls within the Channels of Trade shall be resolved by TTI Floor Care in its sole and exclusive discretion.  Furthermore, except for TTI Floor Care and its Affiliates' authorized dealers and distributors, if within the Channels of Trade, Licensee shall not sell or otherwise distribute any Licensed Products through or to floor-care dealers or any retailers, wholesalers, or mail-order or catalogue companies whose principal business is the sale of floor-care products or their parts or accessories.  Upon TTI Floor Care's request, Licensee shall submit to TTI Floor Care a written list of all customers of Licensee, together with information regarding sales of Licensed Products to each customer, including unit sales and volume by currency.
6.2.   Best Efforts .  Licensee shall use its best efforts to advertise, promote, sell and distribute Licensed Products to the Channels of Trade throughout the entire Territories in compliance with the terms of this Agreement. It is a material condition of this Agreement that Licensee maintains the bona fide use, distribution and sale of all Licensed Products to the Channels of Trade throughout all the Territories.  Unless otherwise specified herein, should Licensee fail to maintain the availability of any Licensed Products for sale to the Channels of Trade in any of the Territory, Licensee shall immediately notify TTI Floor Care. In the event of discontinuance of the availability of any Licensed Product in any of the Territories, regardless of the notice by Licensee, TTI Floor Care may either invoke its remedies under Section 11.1 of this Agreement or withdraw the license with respect to those Licensed Products or those Territories without obligation to Licensee other than to give written notice of such withdrawal.
6.3.   Combination and Premium Sales; Giveaways; Employee Sales; and Trade Samples .  Licensee shall not use any Licensed Products and shall not sell or otherwise provide any Licensed Products to anyone else for use as or in combination sales, giveaways, fund-raisers, promotions, prizes or entries in sweepstakes or other contests, or Premiums, including those in purchase-with-purchase promotions, without TTI Floor Care's prior written approval, which shall be within TTI Floor Care's sole and exclusive discretion.  Unless TTI Floor Care consents in advance in writing, Licensee shall not give away or donate Licensed Products. Licensee may sell reasonable quantities of Licensed Products to employees and to salespeople and sales representatives for their personal use and not for resale, provided that all royalties are paid on such sales in accordance with Section 3 of this Agreement.  Licensee expressly agrees, without limiting the foregoing, that it will not purchase or provide for promotion any floor care machines in connection with the sale of Licensed Products.
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Trademark license agreement TFCTL – Capstone Industries Inc.

6.4.   Business Plans . Should TTI Floor Care so request, Licensee shall provide, once within sixty (60) days of the Effective Date and annually thereafter, or on a more frequent basis as TTI Floor Care may desire, detailed written plans for the marketing, advertising, and promotion of the Licensed Products, with appropriate budgets and financial information.  All such plans shall contain such information and be in such form as TTI Floor Care may reasonably request.
6.5.   Inventory Reports .  Licensee shall provide to TTI Floor Care, as frequently as it conducts its own inventory count, but in no event less than annually, written reports detailing Licensee's inventory of Licensed Products on hand, identified by SKU, work-in process, and such other information as TTI Floor Care may reasonably request.
7.
COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS
It shall be Licensee's responsibility to ensure that all of its activities under this Agreement are in full compliance with all laws, regulations, codes, and standards applicable in all areas of the Territories, and in addition, Licensee shall comply with TTI Group's Business Partners Code of Conduct which can be found at the website www.ttigroup.com , which may be modified from time to time in TTI Group's sole discretion . Licensee shall be solely responsible for all costs and expenses associated with such compliance, including but not limited to payment of all applicable taxes, tariffs, and other governmental or regulatory fees and costs associated with the manufacture, advertising, promotion, distribution, importation and sale of Licensed Products.  All Licensed Products shall be free of defects in design, materials, and workmanship and shall comply with all applicable laws, regulations, and industry standards with respect thereto.  Because Licensee is the party most knowledgeable about its industry and the laws, regulations, and standards applicable thereto, TTI Floor Care is relying on Licensee to ensure compliance with the foregoing terms and conditions.  Should TTI Floor Care learn, through Licensee or any other means, that a particular Licensed Product(s) is not in compliance with any of the requirements of this Section 7, such non-complying Licensed Product(s) shall be immediately deemed disapproved, even if previously approved, and Licensee shall be required to take all necessary steps to bring such Licensed Product(s) into compliance.  In such event, Licensee shall not distribute, ship or sell any non-complying Licensed Products until they are brought into compliance.  Should Licensee learn of any claim that any Licensed Product(s) are not in compliance with the requirements of this Section 7, Licensee shall immediately notify TTI Floor Care and shall take all necessary steps to bring them into compliance.
8.
OWNERSHIP AND PROTECTION OF INTELLECTUAL PROPERTY
8.1.   Ownership of Licensed Marks . Licensee recognizes and acknowledges the validity and enforceability of the Licensed Marks. Licensee further acknowledges TTI Floor Care's ownership of all right, title and interest in and to the Licensed Marks and the goodwill associated therewith.  Licensee shall not acquire nor claim any right, title or interest in or to the Licensed Marks or any other intellectual property of TTI Floor Care as a result of the rights granted herein or the use of the Licensed Marks in accordance with the terms of this Agreement.  Licensee shall not file any copyright, trademark, domain name or other application anywhere in the world to register, in whole or in part, any of the Licensed Marks or Derivative Materials or any marks confusingly similar thereto.  Any and all benefits arising from Licensee's use of the Licensed Marks shall inure exclusively to the benefit of TTI Floor Care.  Licensee shall not, during the Term or thereafter, attack or dispute TTI Floor Care's ownership or the validity of the Licensed Marks or the validity of this Agreement.
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Trademark license agreement TFCTL – Capstone Industries Inc.

8.2.   Ownership of Derivative Materials .  All Derivative Materials, whether created by or on behalf of Licensee, shall be owned exclusively by TTI Floor Care. Licensee hereby assigns to TTI Floor Care all copyrights and all other right, title and interest in and to all Derivative Materials created, in whole or in part, by or for Licensee which Licensee now has or hereafter acquires.  Licensee shall disclose to TTI Floor Care all sources of Derivative Materials if not created solely by Licensee or supplied by TTI Floor Care.  If any Derivative Materials are designed, developed or created, in whole or in part, by any third party for Licensee, Licensee shall obtain, at Licensee's sole cost and expense, an assignment from such third party of all copyrights and all other right, title and interest in and to such materials so that the foregoing assignment by Licensee to TTI Floor Care is sufficient to vest full and complete title to all Derivative Materials in TTI Floor Care.  Licensee shall execute and shall cause any third party involved in the creation, design, or development of any Derivative Materials to execute whatever further documents TTI Floor Care deem necessary to vest all right, title and interest in and to all Derivative Materials in TTI Floor Care.  Licensee shall not permit any of its employees or independent contractors to obtain or reserve, by written or oral agreement or otherwise, any rights as authors, inventors, or otherwise in any Derivative Materials.  This Section 8.2 does not grant any rights to TTI Floor Care to any trademarks or trade names owned by Licensee which were not derived or adapted from or do not incorporate, in whole or in part, any of the Licensed Marks.  In addition, this Section 8.2 does not grant any rights to TTI Floor Care to any of Licensee's internal business documents.
8.3.   Protection of Licensed Marks .  Licensee acknowledges the importance to TTI Floor Care of protecting the Licensed Marks.  To prevent the dilution of the Licensed Marks, Licensee shall not adopt or use any mark which is confusingly similar to the Licensed Marks, either during the Term or thereafter.
8.4.   Licensee Assistance in Maintaining Licensed Marks .  Licensee shall cooperate fully and in good faith with TTI Floor Care to preserve and protect the Licensed Marks throughout the world.  Such cooperation shall include, but shall not be limited to, providing information relating to Licensee's use of the Licensed Marks which TTI Floor Care require for the preparation or prosecution of any trademark registration applications and executing or causing to be executed registered user agreements or other documents required by TTI Floor Care to apply for, prosecute, maintain or renew any trademark registration applications or to comply with the laws, regulations, codes or standards of any country with respect to the recordation of licenses.  Upon the expiration or termination of this Agreement, Licensee shall cooperate with TTI Floor Care to cancel any registered user agreement or any similar recordal of Licensee as an authorized user of the Licensed Marks in the Territories or any country and shall execute any documents necessary for that purpose.  TTI Floor Care shall reimburse Licensee for all reasonable out-of-pocket expenses actually incurred in complying with this Section 8.4 .
8.5.   Licensee Assistance in Prosecuting Infringements .  Licensee shall cooperate with all efforts with TTI Floor Care to prevent or stop the infringement or other unauthorized use of the Licensed Marks and/or Derivative Materials and to otherwise protect the same and TTI Floor Care's rights therein.  What action, if any, shall be taken with respect to any infringement or other unauthorized use of the Licensed Marks and/or the Derivative Materials shall be within TTI Floor Care's sole and exclusive discretion.  TTI Floor Care  may institute or prosecute any claim or suit which they deem appropriate in their own name or in the name of Licensee to prevent the infringement or unauthorized use of the Licensed Marks and Derivative Materials and may join Licensee as a party thereto where they determine that it is necessary or advantageous to do so.  TTI Floor Care shall be solely entitled to, and Licensee shall pay over to TTI Floor Care, all proceeds from any such claim or suit by reason of a judgment or settlement or other disposition.  Licensee shall not file any claim or suit or take any other action with respect to such infringement or unauthorized use without TTI Floor Care's prior written consent.  Licensee shall promptly notify TTI Floor Care of any infringements or perceived infringements of any rights in the Licensed Marks and/or the Derivative Materials which come to Licensee's attention.  Licensee shall not have any rights against TTI Floor Care because of TTI Floor Care's failure to take any action with respect to any alleged infringement or other unauthorized use of the Licensed Marks or Derivative Materials.
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Trademark license agreement TFCTL – Capstone Industries Inc.

9.
INDEMNIFICATION AND INSURANCE
9.1.   Indemnification by Licensee .  Licensee shall defend, indemnify and hold harmless and hereby does indemnify and hold harmless TTI Floor Care and  its respective Affiliates, officers, directors, employees, agents, successors, and assigns (" Indemnitees ") from and against any and all claims, demands, suits, causes of action, damages (including compensatory, punitive, and special damages to the extent allowed by applicable law), losses, costs and expenses, including reasonable attorneys' fees and fines, penalties, and product warranty and recall expenses, arising directly or indirectly from or out of the design, manufacture, advertising, promotion, distribution, sale, use, or misuse of any Licensed Products; the design, development, or creation of any Derivative Materials; the misuse of the Licensed Marks; or any alleged action or omission of Licensee or its officers, directors, employees, agents, successors, assigns or customers (collectively " Claims "), brought or asserted by customers, suppliers, contractors, subcontractors, manufacturers, sales representatives (independent and otherwise),  employees, or any other person or entity.  Licensee shall not settle or otherwise compromise any Claims without TTI Floor Care's prior written consent, which shall not be unreasonably withheld.  TTI Floor Care shall have the option to assume the defense of any Claims and to hire counsel of its choice, at Licensee's expense.  Licensee shall give immediate notice to TTI Floor Care of any occurrence which might reasonably be expected to result in any Claim against any one or more of the Indemnitees.  All of Licensee's indemnification obligations hereunder shall survive the expiration or termination of this Agreement.
9.2.   Insurance .  During the Term and for a period of three (3) years thereafter, Licensee shall maintain, at its expense, commercial general liability insurance, including broad form coverage for contractual liability, products liability and personal injury (including bodily injury and death), advertising injury, waiving subrogation, with limits of liability not less than Five Million Dollars (US$5,000,000) per occurrence with an annual aggregate of not less than Ten Million Dollar (US$10,000,000) issued by an insurer with a Best's Key Rating of A or better.  Beginning with the second year of this Agreement, TTI Floor Care shall have the right to require Licensee to increase by a reasonable amount the limits of such insurance policy, and Licensee shall take all necessary action to obtain such increased coverage, whether by increasing policy limits on an existing policy or purchasing additional policies.  Such insurance shall be in form and substance acceptable to TTI Floor Care and shall include coverage for any and all claims, demands, suits, causes of action, damages, losses, defenses, costs and expenses, including reasonable attorneys' fees, arising from or out of any alleged defects in or the use or misuse of the Licensed Products.  Licensee shall promptly upon its receipt send a copy of said policy, together with the name, address, and telephone number of the insurance underwriter and broker, to TTI Floor Care.  Said policy shall name Indemnitees as additional insureds and shall provide that it may not be canceled or materially altered without at least thirty (30) days prior written notice to TTI Floor Care.  Within thirty (30) days of the Effective Date, Licensee shall provide TTI Floor Care with a certificate of insurance evidencing Licensee's compliance with this Section 9.2 .  Licensee acknowledges that the insuranced required by this Section 9.2 is primary to any other applicable policy.
10.
REPRESENTATION AND WARRANTIES
10.1.   Licensee represents and warrants that: (i) it has the right and authority to enter into this Agreement; (ii) entering into this Agreement does not constitute a breach of any other agreement to which Licensee is a party.
12

Trademark license agreement TFCTL – Capstone Industries Inc.

10.2.   TTI Floor Care represents and warrants that:  (i) it has the right and authority to enter into this Agreement; (ii) the grant of the license hereunder does not constitute a breach of any other agreement to which TTI Floor Care is a party; (iii) to the best of its knowledge, TTI Floor Care owns the Licensed Marks and has the right to grant this license for their use; and (iv) to the best of its knowledge, the Licensed Marks, as licensed to be used in this Agreement, do not infringe any intellectual property rights of any third parties.  TTI Floor Care shall defend, indemnify and hold harmless Licensee from and against any and all claims, demands, suits, causes of action, damages, losses, costs and expenses, including reasonable attorneys' fees, arising from or out of any material breach or inaccuracy of any of the foregoing representations and warranties and in connection with the proper use by Licensee of the Licensed Marks.  TTI Floor Care shall give prompt written notice to Licensor of any event TTI Floor Care believes gives rise to a right of indemnification under this Section 10.2 .
11.
TERMINATION
11.1.   Voluntary Termination .  The following circumstances shall give TTI Floor Care the right to terminate this Agreement prior to the end of the Term.
11.1.1.
If Licensee commits any of the following Events of Default, TTI Floor Care shall have the right to terminate this Agreement immediately upon written notice to Licensee, which termination shall be deemed effective immediately without the need of any other ratifying act:
(a)
Licensee advertises, promotes, distributes or sells any Licensed Products not approved by TTI Floor Care;
(b)
Licensee distributes, displays or otherwise uses any Packaging or Promotional Materials not approved by TTI Floor Care;
(c)
Licensee distributes or sells any Licensed Products outside the Territories or sells or distributes any Licensed Products to any third party whom Licensee knows or has reason to know intends to resell or redistribute them outside the Territories;
(d)
Licensee sells any Licensed Products outside the Channels of trade without TTI Floor Care's prior written consent;
(e)
Licensee assigns or attempts to assign, sublicense, encumber, or otherwise transfer, in whole or in part, any right, title or interest in and to this Agreement or any rights or obligations hereunder without the prior written consent of TTI Floor Care;
(f)
Licensee violates the confidentiality agreement in Section 16 or the non-disparagement agreement in Section 18.6 ; or
(g)
A breach of this Agreement is committed by Licensee which is of the same nature, or which violates the same provision, as a breach of which TTI Floor Care has previously given Licensee notice.
11.1.2.
If Licensee commits any of the following Events of Default and does not cure the Event of Default within thirty (30) days after receiving notice of it from TTI Floor Care, TTI Floor Care shall have the right to terminate this Agreement upon written notice to Licensee, such notice to be effective as of the thirtieth day without the need for any other ratifying act:
(a)
Licensee fails to make any payment or deliver any statement required by this Agreement; or
(b)
Licensee breaches any other term or condition of this Agreement.
13

Trademark license agreement TFCTL – Capstone Industries Inc.

11.1.3.
If any of the following Triggering Events occur, TTI Floor Care shall have the option, in its sole and exclusive discretion, to immediately terminate this Agreement by sending written notice of termination to Licensee such notice to be effective immediately without need for any other ratifying act:
(a)
Any merger, consolidation, acquisition, or change of ownership, control or management involving Licensee occurs; or
(b)
Any of the principal assets of Licensee that are required for the conduct of its business are transferred, by operation of law, merger, consolidation, issuance or re-issuance of shares, or otherwise; or
(c)
Any transaction or series of related transactions occurs resulting in the transfer of thirty-three and one-third percent (33 1/3%) or more of the voting stock of Licensee, or if a partnership, thirty-three and one-third percent (33 1/3%) or more of the profit and loss participation in the partnership or the occurrence of any of the foregoing with respect to any general partner; or
(d)
The direct or indirect ownership or operating management or control of Licensee is otherwise changed, however accomplished.
11.2.   Permitted Termination by TTI Floor Care .  If the Minimum Royalties are not earned for any two quarters in any one contract year after the Initial Term, TTI Floor Care may terminate this Agreement upon sixty (60) days written notice.
11.3.   No Waiver .  TTI Floor Care shall be under no obligation to terminate this Agreement upon the happening of any Event of Default or Triggering Event, and its failure to do so shall not be deemed a waiver of its right to do so.  TTI Floor Care's rights under Section 11.1 are in addition to all other rights which TTI Floor Care may have against Licensee.
11.4.   Acceleration of Minimum Royalties .  Should TTI Floor Care terminate this Agreement due to an Event of Default pursuant to Sections 11.1.1 , 11.1.2 or 11.2 , the entire unpaid balance, if any, of the Minimum Royalties shall become due and payable immediately. In addition, in the event of termination hereof by TTI Floor Care due to an Event of Default or other breach, violation, or wrong doing of Licensee, all monies due hereunder (including but not limited to earned Royalties and any other payments due hereunder shall be automatically and immediately due and paid to TTI Floor Care).
11.5.   Termination in the Event of Insolvency or Bankruptcy of Licensee .
11.5.1.
To the full extent allowed by applicable law, this Agreement shall terminate automatically if Licensee files a petition in bankruptcy; is adjudicated a bankrupt; or files a petition or otherwise seeks relief under or pursuant to any bankruptcy, insolvency or reorganization statute or proceeding.  In addition, unless cured within thirty (30) days, this Agreement shall terminate automatically if a petition in bankruptcy is filed against Licensee; a custodian, receiver, or trustee is appointed for all or a substantial portion of Licensee's business or assets; or Licensee becomes insolvent (using either the equitable insolvency or balance sheet  test) or makes an assignment for the benefit of its creditors.  No assignee for the benefit of creditors, custodian, receiver, trustee in bankruptcy, sheriff, or any other officer of the court or official charged with taking over custody of Licensee's assets or business shall have any right to continue this Agreement or to exploit or use in any way the Licensed Marks or Derivative Materials if this Agreement terminates pursuant to this Section 11.5 .  Nothing contained in this Section 11.5 shall be deemed to preclude or limit any rights which TTI Floor Care may have as a creditor in any proceeding referenced above.
14

Trademark license agreement TFCTL – Capstone Industries Inc.

11.5.2.
In addition, TTI Floor Care shall have the same rights of termination specified in Section 11.5.1 , whether or not deemed enforceable by virtue of Sec 365 of the U.S. Bankruptcy Code, if an order for relief under the Bankruptcy Code is entered against Licensee and becomes a final order at any time when such rights of termination may be enforceable.  All Royalties (including Minimum Royalties and any other payments due under this Agreement) on sales made prior to such act shall become immediately due and payable.  In the event this Agreement and the license granted herein are so terminated, Licensee, its receivers, representatives, trustees, agents, administrators, successors and/or assigns, shall have no right to sell, exploit or in any way deal with any of the Licensed Products or use any Packaging, Promotional Materials or Derivative Materials except with and under the special consent and instruction of TTI Floor Care in writing, which they shall be obligated to follow.
11.5.3.
The rejection or failure to assume this Agreement by Licensee as debtor in possession or by the trustee in any bankruptcy or reorganization or similar proceeding shall constitute an automatic termination of this Agreement, and the license hereby granted, following notice to Licensee, effective as of the date of the commencement of such proceedings.
12.
POST-TERMINATION OR EXPIRATION
12.1.   Obligations Upon Expiration or Termination .  Upon the expiration or termination of this Agreement, Licensee shall cease using the Licensed Marks and Derivative Materials and shall not advertise, market, promote, distribute or sell any Licensed Products or use any Packaging or Promotional Materials, except as authorized in Section 12.2 .  In addition, Licensee shall not manufacture or have manufactured any Licensed Products except to fill orders taken prior to the date of expiration or termination. Upon such termination or expiration, Licensee shall immediately ship to TTI Floor Care, without charge, all artwork, transparencies, negatives, dies, tooling, molds, screens, disks and other materials used to reproduce the Licensed Marks or Derivative Materials.
15

Trademark license agreement TFCTL – Capstone Industries Inc.

12.2.   Rights of Sell-Off .
12.2.1.
Within ten (10) days of the expiration or termination of this Agreement, Licensee shall provide TTI Floor Care with a written statement of the quantity and description of Licensed Products in inventory.  TTI Floor Care shall be entitled, but not obliged, to purchase any part or all of the Licensed Products remaining in inventory at Licensee's lowest published or invoiced wholesale price and on the most favorable terms as Licensee offers to its other customers.  Not later than ten (10) days after receipt of Licensee's inventory statement, TTI Floor Care shall designate in writing those Licensed Products it wishes to purchase, and Licensee shall not then sell those Licensed Products to any third party.  Any Licensed Products which TTI Floor Care elects not to purchase may be distributed and sold by Licensee only in the ordinary course of business to the Class of Trade in the Territories for a period of ninety (90) days following the expiration or termination of this Agreement, but only if Licensee has timely delivered to TTI Floor Care its inventory statement. Licensee's rights during the sell-off period shall be nonexclusive. Licensee shall pay Royalties on all sales during the sell-off period at the rate set forth in Section 3 and shall deliver all statements to TTI Floor Care required by that Section .  Royalties during the sell-off period shall not be applied against Minimum Royalties, where applicable. To maintain the integrity of the Licensed Marks and the reputation and goodwill associated therewith, Licensee shall not sell or distribute any Licensed Products through "going out of business", close-out, consignment, liquidation or auction sales or similar methods, except with the prior written consent of TTI Floor Care. Furthermore, in recognition of TTI Floor Care's need to maintain a stable and viable market for the Licensed Products during the Term and any subsequent sell-off period, Licensee shall refrain from "dumping" the Licensed Products on the market during the sell-off period.  "Dumping" shall mean the distribution of product at volumes significantly in excess of Licensee's prior sales practices with respect to the Licensed Products and at price levels so far below Licensee's prior sales practices with respect to the Licensed Products as to disparage the Licensed Marks.  Nothing contained in this Section shall be deemed to restrict Licensee's right to set product prices in its discretion.  Licensee shall exercise its rights of sell-off in good faith and shall not, for example, increase its inventory during the three-month period prior to expiration to excessive levels in relation to all prior periods of time, or increase its inventory upon receipt of a notice of termination or nonrenewal.  In addition, during the Term, Licensee shall manufacture Licensed Products only in quantities consistent with anticipated demand therefor so as not to result in an excessive inventory build-up immediately prior to the end of the Term. Upon the expiration of the sell-off period, Licensee shall provide to TTI Floor Care a written statement of the quantity and description on Licensed Products remaining in inventory and shall deliver to TTI Floor Care, without cost, such remaining inventory and all Packaging and Promotional Materials and other materials bearing the Licensed Marks or incorporating any Derivative Materials, together with copies of all inventory records relating thereto.  Nothing in this Section 12.2 shall be deemed to give Licensee the right to sell any merchandise prohibited under Section 4.9 of this Agreement.
12.2.2.
Nothing in this Agreement shall prevent or interfere in any way with TTI Floor Care's right and ability at any time (during the Term or thereafter) to negotiate with, secure and finalize a contractual arrangement with one or more third parties covering the same subject matter as this Agreement.
12.3.   No Waiver .  TTI Floor Care's receipt and acceptance of inventory, records, and other materials under Sections 12.1 and 12.2 above shall not constitute a waiver of TTI Floor Care's right to recover any amounts due under Section 3 of this Agreement or of TTI Floor Care's right to exercise any other remedies provided by this Agreement or otherwise under law.
16

Trademark license agreement TFCTL – Capstone Industries Inc.

13.
REMEDIES
Licensee acknowledges that any continued use of the Licensed Marks and/or the Derivative Materials or the continued manufacture, advertisement, promotion, distribution, or sale of Licensed Products after the expiration or termination of this Agreement other than as authorized in Sections 12.1 and 12.2 will result in immediate and irreparable harm to TTI Floor Care for which there is no adequate remedy at law.  In such case, any Licensed Products, Derivative Materials, Packaging and Promotional Materials manufactured, advertised, promoted, used, distributed or sold after the expiration or termination of this Agreement other than as authorized in Sections 12.1 and 12.2 shall be deemed counterfeit, and TTI Floor Care shall be entitled to equitable relief, including but not limited to a temporary restraining order, preliminary and permanent injunction, and specific performance, at nominal bond, with respect to any further violations of TTI Floor Care's rights.
14.
NOTICES
All payments, statements, notices, and other communications required by this Agreement (including service of process) shall be sent via messenger, facsimile, e-mail, mailgram, or registered or certified mail to the parties at the addresses given below, unless another address is designated in writing, and shall be deemed to have been given on the date they are sent.  Any purported notice which does not comply with these requirements shall be ineffective.
If to TTI Floor Care:
Hoover Inc.
7005 Cochran Road
Glenwillow, Ohio 4419
Attention:  General Counsel

With copy to:
Techtronic Floor Care Technology Limited
c/o Techtronic Industries Co. Ltd.
24/F, CDW Building, 388 Castle Peak Road
Tsuen Wan, New Territories, Hong Kong
Attention of Legal Department
If to Licensee:
Capstone Industries Inc
[350 Jim Moran Boulevard, Suite 120
Deerfield Beach, FL 33442
Attention of Mr. Stewart Wallach
Email: Swallach@capstoneindustries.com]
15.
ASSIGNMENT
This Agreement and all rights and obligations hereunder are personal to Licensee and may not be assigned, sublicensed, encumbered, or otherwise transferred, in whole or in part, by Licensee without the prior written consent of TTI Floor Care, which consent shall be in TTI Floor Care's sole and exclusive discretion.  Licensee shall have no right to give permission to any person to alter, deface, add to, remove, erase, or obliterate, in whole or in part, any of the Licensed Marks or to use any of the Licensed Marks in connection with any goods or services whatsoever, regardless of what registrations for the Licensed Marks exist in any country for any particular goods or services.  Any attempt by Licensee to do any of the foregoing shall be void ab initio and shall constitute a material breach of this Agreement.  This Agreement and any or all rights and duties hereunder may be assigned by TTI Floor Care without Licensee's consent and without any restriction whatsoever.
17

Trademark license agreement TFCTL – Capstone Industries Inc.

16.
CONFIDENTIALITY
16.1.   As a result of this Agreement, Licensee may be given access to confidential information of TTI Floor Care, including but not limited to financial information, brand positioning and marketing strategies, new product information, intellectual property, designs, trade secrets, drawings and models (" Information ").  Licensee shall not, without TTI Floor Care's prior written consent, disclose to any third party any Information or the business terms of this Agreement and shall not use any Information for any purpose other than Licensee's performance under this Agreement.  Furthermore, Licensee shall limit its disclosure of Information to those employees having a need to know of it.  This duty of confidentiality shall not apply to Information which Licensee can demonstrate through written documentation:
16.1.1.
is or becomes part of the public domain through no wrongdoing of Licensee;
16.1.2.
Licensee can document was known to it prior to the disclosure thereof by TTI Floor Care; or
16.1.3.
lawfully becomes known to Licensee through a third party having no duty of confidentiality to TTI Floor Care.
Licensee's obligations under this Section 16 shall continue with respect to Information until one of the exceptions set forth in Sections 16.1.1 , 16.1.2 and 16.1.3 apply to such Information.  Nothing in this Section shall preclude Licensee from complying with any validly issued subpoena, document request, deposition notice, court order, or other legal document seeking the disclosure of Information; provided, however, that upon receipt of any such document or request, Licensee shall promptly notify TTI Floor Care to enable TTI Floor Care to seek a protective order or to move to quash the subpoena or to otherwise take such action as TTI Floor Care deems appropriate to protect the Information.  Licensee shall require all employees, agents, Manufacturers, and independent contractors employed or retained by it to comply with the provisions of this Section 16 and shall require all persons not employed by it who are to be given access to Information, with TTI Floor Care's consent, to sign an agreement of confidentiality in a form acceptable to TTI Floor Care.
16.2.   Licensee shall not use TTI Floor Care's name or any of the Licensed Marks nor refer to this Agreement or Licensee's relationship with TTI Floor Care in Licensee's own promotional materials, annual reports, offering circulars, SEC filings, or other materials without TTI Floor Care's prior written approval.
17.
CHOICE OF LAW, VENUE, AND JURISDICTION
This Agreement shall be governed and interpreted in all respects by and according to the laws of Hong Kong without reference to its conflicts of laws principles. Any dispute, controversy or claim arising out of or relating to this Agreement, including the validity, invalidity, breach or termination thereof, shall be settled by arbitration. The seat, or legal place, of arbitration shall be Hong Kong and the arbitration shall take place at the Hong Kong International Arbitration Centre in Hong Kong in accordance with its latest arbitration rules (the " HKIAC Rules ").  There shall be a sole arbitrator appointed in accordance with the HKIAC Rules.  The arbitration proceedings shall be conducted in English. The arbitral award shall be final and binding upon both parties.
18

Trademark license agreement TFCTL – Capstone Industries Inc.

18.
MISCELLANEOUS
18.1.   Agency . Nothing herein shall be construed to place the parties in the relationship of principal and agent, partners or joint venturers, and Licensee shall have no power to obligate TTI Floor Care or its Affiliates in any manner whatsoever.
18.2.   Severability and Binding on Permitted Successors and Assigns .
18.2.1.
The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable, in whole or in part, the remaining provisions shall remain in full force and effect and shall be interpreted so as to give effect to the intentions of the parties.
18.2.2.
This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective permitted successors and assigns.
18.3.   Merger and Integration .  This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements or understandings, whether written or oral, relating to the subject matter hereof.  No representations, warranties, covenants, promises, or undertakings have been made by or to any party other than those expressly contained in this Agreement.
18.4.   Amendment .  None of the provisions of this Agreement may be waived or modified except in a written agreement signed by both parties.  The failure of either party to require performance at any time under this Agreement shall not be deemed a waiver of any rights and shall not deprive that party of its right to require performance thereafter.
18.5.   Headings .  Headings are for convenience only and shall not be used to construe or affect the meaning or interpretation of this Agreement.
18.6.   Non-Disparagement .  During the Term and at all times thereafter, Licensee shall not, directly or indirectly, make any statement or do any act that adversely affects, disparages or creates any negative inference as to the reputation, prestige, value, image or impression of the Licensed Marks, TTI Floor Care (including its officers, directors, Affiliates, parents, and subsidiaries, and other licensees), TTI Floor Care's other products, or the performance of TTI Floor Care under this Agreement.
18.7.   Survivorship .  Notwithstanding the expiration or termination of this Agreement, all rights, obligations, and remedies which accrued prior to the termination or expiration hereof shall survive such termination or expiration.  Specifically, Sections 1 , 3 , 4 , 7 , 8 , 9 , 12 , 13 , 15 , 16 , 17 , 18.1 , 18.2 , 18.3 , 18.4 and 18.6 shall survive the termination or expiration hereof.
18.8.   Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one in the same instrument. An electronic, photographic or facsimile version of such counterpart shall constitute an original document for the purposes of establishing the provisions of this Agreement and shall be legally admissible under the best evidence rule.

IN WITNESS WHEREOF, the parties have executed this Agreement through duly authorized representatives as of the dates set forth below.

For and on behalf of
Techtronic Floor Care Technology Limited
 
 
______________________________________
Name:
Title:
For and on behalf of
Capstone Industries Inc.
 
 
______________________________________
Name:
Title:

For and on behalf of
Hoover, Inc.


______________________________________
Name:
Title:
19

Trademark license agreement TFCTL – Capstone Industries Inc.

Exhibit 1
Licensed Trademarks

Trademark
Type
Country
Application date
Application No.
Registration date
Registration No.
Class(es) and goods/services
[●]
             



20

Trademark license agreement TFCTL – Capstone Industries Inc.

Exhibit 2
Licensed Products

1.
Accent Lighting
a.
Pucks
b.
Rope Lighting
c.
Specialty Lighting
d.
Undercabinet Lighting
2.
Ceiling Fan, excluding bathroom exhaust fans (for installation as a fixture)
a.
Light Kits
3.
Interior Lighting
a.
Ceiling Mount Fixtures
b.
Hang/Pendant/Chand.
c.
Specialty Lighting
d.
Vanity Wall and Sconce
e.
Nightlights/Power Failure/Motion
4.
Lamps
a.
Accent
b.
Floor
c.
Table
d.
Torchieres
5.
Recessed Lighting
6.
Track Lighting
21

Trademark license agreement TFCTL – Capstone Industries Inc.

Exhibit 3
Channels of Trade


1.
Discounters such as Bed Bath & Beyond, Target, Walmart
2.
Home Center such as The Home Depot and Menard's but not Lowe's
3.
Specialty such as Best Buy, Hardware Stores
4.
Furniture Stores such as Ashley Furniture, Ethan Allen
5.
Office Supply such Office Depot, Staples
6.
Warehouse Clubs such as BJ's, Costco, Sam's Club
7.
Drug & Grocery such as CVS, Walgreens
8.
Online Retail: Amazon and websites for brick-and-mortar stores referenced in 1-7 above.  Any other online sales require prior approval of Licensor.

22

Trademark license agreement TFCTL – Capstone Industries Inc.

Exhibit 4
TTI Floor Care's Branding Guidelines
23

Trademark license agreement TFCTL – Capstone Industries Inc.

Exhibit 5
Form of Statement of Royalties


Royalty/Sales Report
Report should be sorted by country and by product category
 
 
Country:
 
Reporting  period : _____________________
                      
SKU #
Description
Wholesale
Price/Unit
Units
Sold
Total
Sales
Less
Returns
Net
Sales
Discontinued
as of
 
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
 
Total for Product Category:
0
$0.00
$0.00
$0.00
 
                      
          
Exchange Rate:
1
 
          
Total Net Sales (US$):
$0.00
 
          
x Royalty Rate:
0%
 
          
Total Royalties Due:
$0.00
 


24

Trademark license agreement TFCTL – Capstone Industries Inc.

Exhibit 6
Minimum Royalties

25

Trademark license agreement TFCTL – Capstone Industries Inc.

Exhibit 6
TTi Group's Business Partners Code of Conducts



 
26



FIRST AMENDMENT TO TRADEMARK LICENSE AGREEMENT

This First Amendment to the Trademark License Agreement dated February 4, 2015 ("TLA") is entered as of this 29 day of December 2016 (the "Effective Date") by and between:
Techtronic Floor Care Technology Limited , a BVI corporation, with its principle place of business at P. O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands (TFCTL"), and Hoover, Inc., a U.S. corporation, with its principal place of business at 8405 IBM Drive, Charlotte, North Carolina  28262 ("Hoover"), (TFCTL and Hoover, collectively known as "TTI Floor Care"),

AND

Capstone Industries, Inc. , a U.S. corporation with its principal place of business at 350 Jim Moran Boulevard, Suite 120, Deerfield Beach, Florida  33442 ("Licensee")
In consideration of the mutual terms and conditions set forth below and in the TLA, the sufficiency of which is hereby acknowledged, the Parties agree the TLA is hereby amended as follows:
a.
Paragraph 2 shall remain intact excepting the following provisions which shall be amended or added, as applicable, to read:

2.1 Grant of Trademark License.   Subject to the terms and conditions of this Agreement, TTI Floor Care hereby grants to Licensee the exclusive right to use the Licensed Marks, during the Term or an Extended Term, on and in connection with the Licensed Products manufactured, advertised, marketed, and sold to the Channels of Trade in the Territories.  Licensee shall have no right to use the Licensed Marks in any other manner for any other purpose.  All rights, whether express or implied, not expressly granted to Licensee hereunder are reserved exclusively to TTI Floor Care.  However, in the event that the Licensor grants that certain cordless or battery-powered lights or lighting may be included as a Licensed Product then that grant to the Licensee shall be non-exclusive.
2.5 Term. This Agreement shall be effective as of the Effective Date and shall continue for a term of three (3) years unless sooner terminated or modified in accordance with its terms ("Initial Term").  Following the conclusion of the Initial Term or an Extended Term, if applicable, this Agreement may be renewed upon written agreement of the Parties provided that the Licensee is in compliance with all conditions set forth in the Agreement.  This Agreement may be terminated by either party at any time by giving the other party not less than three months prior written notice, or in accordance with Section 11 .


2.6 Extended Term. If Capstone reaches $10 million dollars ($10,000,000) of Net Sales in the Initial Term of the Agreement, then the Agreement shall automatically extend from the end of the Initial Term through February 3, 2010 ("Extended Term").

i.
During the Extended Term, should Capstone attain a minimum of $5 million dollars ($5,000,000) of Net Sales or 50% of the Net Sales of the Initial Term, whichever is greater, then the Extended Term will extend through February 3, 2022 ("Second Extended Term").

ii.
During the Second Extended Term, should Capstone attain a minimum of $5 million dollars ($5,000,000) of Net Sales or 50% of the Net Sales of the Initial Term, whichever is greater, then the Second Extended Term will extend through February 3, 2024 ("Third Extended Term").

b.
Exhibit 2 – Licensed Products shall be deleted and replaced as follows:

Licensed Products
1.
Accent Lighting
a.
Pucks
b.
Rope Lighting
c.
Specialty Lighting
d.
Undercabinet Lighting
2.
Ceiling Fan, excluding bathroom exhaust fans (for installation as a fixture)
a.
Light Kits
3.
Interior Lighting
a.
Ceiling Mount Fixtures
b.
Hang/Pendant/Chand.
c.
Specialty Lighting
d.
Vanity Wall And Sconce
e.
Nightlights/Power Failure/Motion
4.
Lamps
a.
Accent
b.
Floor
c.
Tables
d.
Torchieres
5.
Recessed Lighting
6.
Track Lighting
7.
Power Failure Bulbs



8.
Outdoor Lighting
a.
Coach Lights
b.
Gooseneck Lights

All other portions of the TLA will remain in full force and effect.  The only portions of the TLA that are affected are those modified by this First Amendment.
IN WITNESS WHEREOF, the parties hereto execute this agreement by the respective, authorized officers as of the Effective Date.

Techtronic Floor Care Technology Limited   Capstone Industries, Inc.

By: ___/s/_________________________   By: __/s/__________________________
Name:   Gabe Johnson                                                                               Name: James G McClinton
Title:   Treasurer                                                                                     Title: Chief Financial Officer



Hoover, Inc.
By: __/s/__________________________
Name: Gary Scott
Title:   President
 
 





  Trademark License Agreement
Between
 CAPSTONE INDUSTRIES, INC.
and
THE DURACELL COMPANY



 

1


Table of Contents

Articles
1.   Definitions
2.   License Grant
3.   Payments & Reports 4
4.   Ownership of NEW TM-RELATED IP 6
5.   Term 7
6.   Termination 7
7.   LICENSED MARKS – Additional Covenants
8.   Additional Licensee Covenants & Obligations
9.   Audit & Inspection
10.   Assignment & Delegation 27
11.   Confidentiality 28
12.   Other Representations & Warranties 29
13.   Infringement 30
14.   Indemnification & Insurance
15.   Miscellaneous 22
Schedules
Schedule 1.1 – Definitions 37
Schedule 1.1.21 – LICENSED MARKS 41
Schedule 3.11 – Royalty Reporting Form 42
Schedule 7.6.2.1 – MARKED PRODUCT Proposal Process 44
Schedule 7.6.2.2 – MARKED PRODUCT Qualification Process 45
Schedule 7.6.3 – Licensing Guidelines 47
Schedule 7.12.1 – Corrective Action Plan Process for Defective Products
and Product Recall Process 48
Schedule 8.2 – Notification of THIRD PARTY Manufacturing 49
Schedule 8.2.1 – Guidelines for Creating a Factory Presentation 50
Schedule 8.4.1 – THIRD PARTY Manufacturers Quality and Standard
Requirements 52
Schedule 8.4.2 – Licensing Quality Checklist 53
Schedule 8.4.3 –Required Provisions in THIRD PARTY Contract
Manufacturer Agreements 54

 

2


Preamble
This AGREEMENT, effective and binding as of the last date of signing of this AGREEMENT   ("EFFECTIVE DATE"), is between CAPSTONE INDUSTRIES, INC. (hereinafter referred to as "CAPSTONE"); and THE DURACELL COMPANY, a Delaware corporation (individually and collectively hereinafter referred to along with their AFFILIATEs as "DURACELL").
DURACELL is the owner of certain trademarks used by DURACELL in association with its advertising and marketing of Duracell branded products.
CAPSTONE desires to obtain a license to use the trademarks in connection with the manufacture, sale, and distribution of MARKED PRODUCT in certain fields and territories.
DURACELL is willing to grant a license under the terms and conditions set forth below.
The PARTIES therefore agree as follows:
1.
Definitions
1.1.
General.  The capitalized terms defined in this AGREEMENT will have the meanings indicated for purposes of this AGREEMENT; non-capitalized terms have their ordinary meaning as determined by context, subject matter, and/or scope (Other Definitions & Interpretation).  A list of defined terms with definitions or a cross-reference to the location of its definition within the AGREEMENT is set forth in Schedule 1.1 .
2.
License Grant
2.1.
Trademark License.   DURACELL grants to CAPSTONE a non-exclusive, royalty-bearing, non-assignable and otherwise non-transferable, revocable, license to use the LICENSED MARKS in the FIELD through the DISTRIBUTION CHANNELS in the TERRITORY on and in connection with the manufacture, display, advertising, promotion, labeling, sale, marketing, and distribution of MARKED PRODUCT and PREMIUMS.  The license does not include the right to sublicense.
2.2.
No Other Licenses Granted to CAPSTONE.   The licenses granted CAPSTONE under this AGREEMENT are limited to those specifically set forth in Paragraph 2.1 (Trademark License).   Nothing in this AGREEMENT will be construed to grant CAPSTONE any rights or licenses to any other trademark, trade name, certification mark, service mark, domain name or other URL, product name, logo, patent, technical information, know-how, copyright, or other intellectual property of DURACELL.  All rights not specifically granted to CAPSTONE are reserved by DURACELL, including the right for DURACELL to practice the LICENSED MARK itself in all fields of use.  Nothing in this AGREEMENT will limit DURACELL's ability to use, license, and/or apply for any trademark or service mark as to any goods or services.


 

3



3.
Payments & Reports
3.1.
ANNUAL ROYALTY .  CAPSTONE will pay DURACELL an annual royalty of 3% of NET SALES of MARKED PRODUCT sold or OTHERWISE DISTRIBUTED by CAPSTONE to Costco Wholesale Corporation during the TERM. CAPSTONE will pay DURACELL an annual royalty of 6% of NET SALES of MARKED PRODUCT sold or OTHERWISE DISTRIBUTED by CAPSTONE to any other retailer except Costco Wholesale Corporation during the TERM. The ANNUAL ROYALTY will be re-set to zero at the beginning of each CONTRACT YEAR regardless of volumes sold or distributed the previous CONTRACT YEAR.
3.1.1.
Accrual of ANNUAL ROYALTY.   CAPSTONE's obligation to pay ANNUAL ROYALTIES accrues when CAPSTONE has SOLD the MARKED PRODUCT, regardless of the time of collection by CAPSTONE. .
3.1.1.1.
"SOLD" means the date on which CAPSTONE ships MARKED PRODUCT to a THIRD PARTY.
3.2.
GUARANTEED ROYALTY.   Regardless of the NET SALES and the royalties determined and due under Paragraph 3.1 (ANNUAL ROYALTY), CAPSTONE will pay DURACELL each CONTRACT YEAR the following non-refundable royalties in the amount appearing in Table 3.2.1 ("GUARANTEED ROYALTY").  If this AGREEMENT is terminated under Article 6 (Termination), then all GUARANTEED ROYALTY will become immediately accrued for years 1 thru 3, and immediately due and payable, even if not yet accrued at the date of termination.  If the ANNUAL ROYALTY for any CONTRACT YEAR will not be at least the amounts indicated in Table 3.2.1, CAPSTONE will make a payment of:  a) the difference between the GUARANTEED ROYALTIES set forth in Table 3.2.1 and the ANNUAL ROYALTY accrued for the year, simultaneously with b) the payment of the ANNUAL ROYALTY accrued during the last QUARTER of that CONTRACT YEAR.
Table 3.2.1
Contract Year
 
ANNUAL ROYALTY
 
CONTRACT YEAR 1
 
$
0.00
 
CONTRACT YEAR 2
 
$
0.00
 
3.3.
Payment Due Dates.   All royalty obligations under this AGREEMENT will be paid by CAPSTONE within 30 calendar days following the end of each QUARTER of the CONTRACT YEAR in which the royalties have accrued, with the exception of the balance of the GUARANTEED ROYALTIES for a subject CONTRACT YEAR, which will be due within 30 calendar days of the close of the 4 th QUARTER of the subject CONTRACT YEAR.  All other payments and fees accruing to DURACELL under the terms of this AGREEMENT will be paid by CAPSTONE to DURACELL on or before their respective due dates.  The first Quarterly Payment will be due on January 30, 2017 for any sales of MARKED PRODUCT that occurred prior to December 31, 2016. The royalties generated from these sales will be applied to CONTRACT YEAR 1 GUARANTEED ROYALTIES.
 

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3.4.
Minimum Quarterly Payments.   The royalty obligations under this AGREEMENT will be paid in following quarterly minimum distribution ratios:
3.4.1.
Quarter end March 31st = 25% of royalty obligations
3.4.2.
Quarter end June 30th = 25% of royalty obligations
3.4.3.
Quarter end September 30th = 25% of royalty obligations
3.4.4.
Quarter end December 31st = 25% of royalty obligations
3.5.
Late Payments.  Payments provided for in this AGREEMENT, when overdue, will at DURACELL's discretion bear interest at a rate of 12% per annum for the time period from the payment due date until payment is received by DURACELL.
3.6.
Wire Transfer.   All payments, fees and royalties are to be transferred by wire to JPMorgan Chase Bank, NA: Duracell US Operations, Inc.; Acct: 700622843; Fed Wire ABA: 021000021; Ach Wire ABA: 021000021; Swift Bic: CHASUS33; Remarks: Funds for Duracell – Bethel, CT; Branch: One Chase Manhattan Plaza, New York, NY 10005-1402, or as DURACELL may otherwise direct. Payment by CAPSTONE's company checks shall also be acceptable in the event wire transfer services are unavailable.
3.7.
Payment Reference.  In the detail section of the transmission for royalty payments, CAPSTONE will provide the following statement:  CAPSTONE Royalty Payment for Duracell Marked Products Contract # [____]: For Royalty Period (_____)", providing within the parentheses the period the royalties relate to, e.g., "(Third Quarter, 2016)".  DURACELL will provide the contract number to CAPSTONE.
3.8.
Payment Notice.   Upon DURACELL's request, when money is transferred, CAPSTONE  will send a notice to the following address, or such other address as DURACELL designates by written notice:
Duracell
Berkshire Corporate Park
Bethel, Connecticut, USA 06801
Attn: Lynn Schmitt
Email: schmitt.lm@duracell.com
3.9.
Currency.   All royalties and other payment obligations of CAPSTONE will be paid in USD.
3.10.
Statements & Reports.   CAPSTONE will submit monthly reports to DURACELL on product sales, specifying the product, customer (retailer and individual consumer), Country, number of units sold, returns, dollar amount and detailed royalty calculations for each product.  These reports are due 15 calendar days after the end of each month.  Within 15 calendar days after the end of each MONTH, CAPSTONE  will prepare and issue to DURACELL verified reports for each MONTH in the English language on the Royalty Reporting Form set forth in Schedule 3.10 (or such other form as DURACELL designates by written notice) that will include:
 

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3.10.1.
(Label.) a label identifying the AGREEMENT title, reference number, and MONTH;
3.10.2.
(Totals.) total number or amount of MARKED PRODUCT by items sold or OTHERWISE DISTRIBUTED by CAPSTONE ;
3.10.3.
(Sales.) GROSS SALES and NET SALES;
3.10.4.
(Deductions & Returns.) itemized deductions and returns by MARKED PRODUCT, used to calculate NET SALES; and
3.10.5.
(Royalties.) The royalties accrued during the MONTH and payable to DURACELL by CAPSTONE, including supporting summary calculations.
3.11.
Report if No Product Sold.   If no MARKED PRODUCT is sold or OTHERWISE DISTRIBUTED by CAPSTONE during the reporting period, CAPSTONE will prepare and issue a report to DURACELL to that effect, within 15 calendar days after the end of each MONTH.
3.12.
Transmitting Reports.   CAPSTONE  will transmit, via a method and form as directed by DURACELL, the reports of Paragraphs 3.10 (Statements & Reports) and 3.11 (Report if No Product Sold) to the following addresses, or such other address as DURACELL designates by written notice:
Duracell
Berkshire Corporate Park
Bethel, Connecticut, USA 06801
Attn: Lynn Schmitt
Email: schmitt.lm@duracell.com
3.13.
Taxes.   CAPSTONE will timely pay all taxes on the sales of MARKED PRODUCT.
3.13.1.
Withholding.  If any taxes on sales of MARKED PRODUCT are owed by DURACELL and required by law or regulation to be withheld on any royalty or other payments under this AGREEMENT, then:
3.13.1.1.
Payment.  CAPSTONE will timely pay the taxes on behalf of DURACELL.
3.13.1.2.
Deduction.  CAPSTONE will deduct the amount of the taxes from the subject royalty before paying the royalty to DURACELL.
3.13.1.3.
Certificate.  CAPSTONE will provide to DURACELL a certified copy of the withholding tax certificate for the taxes.
3.13.1.4.
Assistance.  CAPSTONE will assist DURACELL with obtaining other necessary documentation for the taxes, including documentation required by revenue authorities to enable DURACELL to claim exemption or repayment of the taxes.
 

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4.
Ownership of NEW TM-RELATED IP
4.1.
Copyrights from THIRD PARTIES .  CAPSTONE will secure from each THIRD PARTY contributor to a copyrightable work that is related to the MARKED PRODUCTS or the LICENSED MARKS and created for CAPSTONE, a written acknowledgement that, in exchange for consideration given, the contributor assigns to CAPSTONE all right, title, and interest, in and to the work and all derivative works from that work, and the contributor waives any claims with respect to moral rights for the work and all derivative works from that work.
4.2.
Assignment of NEW TM-RELATED IP to DURACELL.   If CAPSTONE  comes to own, through registration or common law and/or per Paragraph 4.1 (Copyrights from THIRD PARTIES), and despite the PARTIES' compliance with Article 7 (LICENSED MARK – Additional Covenants), any NEW TM-RELATED IP arising from CAPSTONE's use of the LICENSED MARKS, then CAPSTONE  hereby at CAPSTONE's expense, assigns to DURACELL to the extent legally permissible all of these rights without further compensation.
4.2.1.
"NEW TM-RELATED IP" means any trademarks, trade dress, copyright-protectable elements and derivative works thereof created by or for CAPSTONE for use with or in connection with one or more LICENSED MARKS.
4.3.
PRE-EXISTING IP.   Each PARTY's PRE-EXISTING IP will remain the absolute unencumbered property of the respective owner of the rights at the EFFECTIVE DATE.  Except for the limited rights explicitly set forth in Article 2 (License Grant), this AGREEMENT does not confer any rights under the PRE-EXISTING IP of either PARTY.
5.
Term
5.1.
Term.   This AGREEMENT is effective from the date of the EFFECTIVE DATE until December 31, 2018, unless terminated earlier under Article 6 (Termination); (any such period, the "TERM").
6.
Termination
6.1.
Breach.   Either PARTY may terminate this AGREEMENT, and the licenses granted herein, if the other PARTY is in material breach of any representation, warranty, covenant, or agreement contained herein, after providing written notice to the other PARTY of such intent and reason for termination.  This termination will be: (a) effective immediately upon notice with respect to breaches that are not curable; and (b) effective 60 calendar days after the date of the notice for curable breaches, unless before the end of that period the other PARTY cured the breach identified in the notice. If the breach is cured in the specified period and the breaching PARTY receives written acknowledgement from the non-breaching PARTY that the breach has been cured, then the notice of termination will be void and of no effect.
6.2.
Failure to Commence LAUNCH SALES.  Despite Paragraph 6.1 (Breach), DURACELL may terminate this AGREEMENT at any time, in its entirety if CAPSTONE has not achieved LAUNCH SALES by May  1, 2017.
 

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6.3.
Failure to Commence Sales in a Country. Despite Paragraph 6.1 (Breach), DURACELL may terminate this AGREEMENT at any time on a country-by-country basis for any MARKED PRODUCT for which CAPSTONE has not achieved shipments of initial stocking volume to at least one account in the subject country by December 31, 2017.
6.4.
Cause.  Despite Paragraph 6.1 (Breach), DURACELL may terminate this AGREEMENT immediately upon written notice to CAPSTONE  at any time selected by DURACELL following the occurrence of any one or more of the following events:
6.4.1.
False Report.  if CAPSTONE  at any time makes a knowingly false report,
6.4.2.
False Claim.  if DURACELL determines or becomes aware that CAPSTONE  has knowingly made any materially false claim about MARKED PRODUCT, including claims of product performance and/or efficacy;
6.4.3.
Ceases Business.  if CAPSTONE  ceases to do business;
6.4.4.
Minimum NET SALES.  if CAPSTONE  fails to meet the minimum NET SALES required for any CONTRACT YEAR as set forth in Table 6.5.4 .   Any sales of MARKED PRODUCT sales that occur prior to December 31, 2016 will be applied to the minimum NET SALES for CONTRACT YEAR 1.
Table 6.5.4
Contract Year
 
Minimum NET SALES
 
CONTRACT YEAR 1
 
$
5,000,000
 
CONTRACT YEAR 2
 
$
7,000,000
 

6.4.5.
Failure to Pay.  if CAPSTONE  fails to make a timely payment to DURACELL of any royalties or other payments due under this AGREEMENT and fails to cure such failure within 30 days upon written notice from DURACELL of such failure;
6.4.6.
Manufactured Priced Below Wholesale Price.  if wholesale price falls below the manufacture priced from manufacturer to CAPSTONE ;
6.4.7.
Disrepute.  if in DURACELL's sole opinion, CAPSTONE  brings DURACELL or the LICENSED MARKS into disrepute, including erosion of the brand equity of the LICENSED MARKS;
6.4.8.
Regulatory/Government Action.  if CAPSTONE  receives notice from any governmental agency or authority that any of the MARKED PRODUCT are subject to a recall, regulatory, government, or legal action;
 

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6.4.8.1.
Recall.   DURACELL shall have the right to require CAPSTONE to institute a product recall with respect to any MARKED PRODUCT upon the occurrence of one or more of the following events:  For purposes of this Section, a defective MARKED PRODUCT shall mean any MARKED PRODUCT that fails to work as specified or intended.
6.4.8.1.1.
The defect rate, as evidenced by consumer returns and/or complaint defects, exceeds 0.5% (5,000ppm).    CAPSTONE shall monitor consumer returns and complaint defects so as to alert DURACELL of high-level defect rates on MARKED PRODUCT.  CAPSTONE shall develop, execute and submit a corrective action plan to DURACELL within 5 business days if the defect rate reaches or exceeds 0.75% (7,500ppm) and CAPSTONE shall cease shipping the defective MARKED PRODUCT until the defect is fixed. Where customer complaints and or returns data is not available CAPSTONE will make efforts to collect and separate customer MARKED PRODUCT return data into 1.) returns as a result of product defect(s), and 2.) returns for all other reasons as a basis for determining an actual defective rate.
6.4.8.1.2.
Licensor determines that the MARKED PRODUCT presents an "unreasonable risk of serious injury or death" within the meaning of the rules and regulations of the U.S. Consumer Product Safety Commission ("CPSC"); or
6.4.8.1.3.
The CPSC, or any administrative or judicial entity having similar recall authority outside the United States, requests a recall
6.4.8.1.4.
Corrective Action Plan and Product Recall will follow the process as detailed in Schedule 7.12.1.
6.4.9.
Force Majeure.   if a force majeure prevents CAPSTONE  from performing its obligations under this AGREEMENT for a 120 day period;
6.4.10.
Improper Use.  if at any time, CAPSTONE  is not properly using the LICENSED MARKS on the MARKED PRODUCT, or on the labels or tags, or in advertising, or if the standard of quality of the MARKED PRODUCT does not conform to the standards set by DURACELL, and DURACELL has given written notice to the effect, identifying in the notice the situation to which it objects, and CAPSTONE  has not notified DURACELL within 5 calendar days after receipt of the notice of the means by which CAPSTONE  intends to correct the situation to which DURACELL has objected and if CAPSTONE  fails to complete such corrective action within 30 calendar days after receipt of the notice;
 

9



6.4.10.1.
All batteries included in Duracell branded portable lighting must be purchased from Duracell
6.4.10.2.
CAPSTONE will not sell any Duracell branded bulk batteries to a 3 rd party
6.4.11.
Liability for DURACELL.  if DURACELL reasonably believes that the activities of CAPSTONE, whether in connection with this AGREEMENT or otherwise, may expose DURACELL to administrative, civil or criminal liability;
6.4.12.
Change in Ownership. If CAPSTONE undergoes a substantial change in management or control.  The term "control" as used in the preceding sentence means the right to exercise, directly or indirectly, more than 50% of the voting rights attributable to the shares of CAPSTONE;
6.4.13.
Failure to provide DURACELL with ANNUAL FINANCIAL STATEMENTS;
6.4.14.
Failure to   provide DURACELL summaries of all consumer comments and complaints, and/or damage/return rates each QUARTER or If DURACELL concludes that the summaries of consumer comments/complaints, and/or damage/return rates are unacceptable, or if DURACELL's audit of CAPSTONE's toll free number/consumer relations response capabilities are deemed inadequate;
6.4.15.
Failure to receive written approval from DURACELL to utilize a THIRD PARTY Contract Manufacturer or failure to receive written approval from DURACELL of all MARKED PRODUCT and/or packaging before distribution.
6.5.
Solvency.   Despite Paragraph 6.1 (Breach), this AGREEMENT and all rights of CAPSTONE  under this AGREEMENT immediately terminate if:
6.5.1.
Bankruptcy. a bankruptcy petition is filed against CAPSTONE ,
6.5.2.
Insolvency. CAPSTONE  becomes subject to any voluntary or involuntary insolvency, cession, bankruptcy, or similar proceedings,
6.5.3.
Receivership. CAPSTONE  goes into receivership,
6.5.4.
Reorganization. CAPSTONE  files a petition for a reorganization or rearrangement under the US Bankruptcy Act,
6.5.5.
Credit Assignment. an assignment for the benefit of creditors is made by CAPSTONE ,
6.5.6.
Credit Agreement. an agreement between CAPSTONE  and its creditors generally is entered into providing for extension or composition of debt,
6.5.7.
Receiver Appointed. a receiver is appointed to administer the assets of CAPSTONE,
6.5.8.
Liquidation. the assets of CAPSTONE  are liquidated, and/or
 

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6.5.9.
Equipment Attachment. Any distress, execution, or attachment is levied on any of CAPSTONE's manufacturing or other equipment in excess of the amount of $100,000.00 as is used in the production and distribution of MARKED PRODUCT and remains un-discharged for a period of 30 calendar days.
6.6.
Assumption or Rejection Under US Bankruptcy Code.   Despite Paragraph 6.1 (Breach), and their subparagraphs, after any order for relief under the US Bankruptcy Act is entered against CAPSTONE, CAPSTONE must assume or reject this AGREEMENT within 60 calendar days after the order for relief is entered.  If CAPSTONE does not assume this AGREEMENT within such 60 day period, DURACELL may, at is sole option, terminate this AGREEMENT immediately by giving written notice to CAPSTONE, without further liability on the part of DURACELL.  Any payments due DURACELL under this AGREEMENT after any order for relief under the US Bankruptcy Act is entered against CAPSTONE will be entitled to treatment as administrative expenses under §503 of the US Bankruptcy Act, and will be immediately paid when due to DURACELL, without the need for DURACELL to file an application or motion in CAPSTONE's bankruptcy case for payment of such administrative expenses.
6.7.
Sale of LICENSED MARKS . If DURACELL sells LICENSED MARKS to a THIRD PARTY, then DURACELL will use its commercially reasonable efforts to assign this AGREEMENT to the purchaser of the LICENSED MARKS.  But, if such purchaser refuses the assignment, then DURACELL has the right to immediately terminate this AGREEMENT.  In such case, and despite Paragraph 6.8 (Effect of Termination or Expiration) future GUARANTEED ROYALTIES due will be waived.
6.8.
Effect of Termination or Expiration .
6.8.1.
Surviving Rights & Obligations.  Termination or expiration of this AGREEMENT will not relieve either PARTY of any obligations accruing prior to such termination or expiration, including those set forth in:  Articles 3 (Payments & Reports), 11 (Confidentiality), 12 (Other Representations & Warranties), and 14 (Indemnification & Insurance).
6.8.2.
Reversion.   Upon the termination or expiration of this AGREEMENT, all rights granted to CAPSTONE by DURACELL will revert to DURACELL, and CAPSTONE will have no claim against DURACELL for compensation of loss of business or goodwill, or for any other damages that may result from the expiration or termination of this AGREEMENT.  Other than those remedies provided by this AGREEMENT, DURACELL shall have no claim against CAPSTONE for compensation of loss of business or good or any other consequential damages which may result from the expiration or termination of this AGREEMENT.
 

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6.8.3.
Payment.  DURACELL is entitled to retain all royalties and other things of value paid or delivered to DURACELL prior to termination or expiration.  Additionally, the entire unpaid balance of all royalties or other payments owing and due under this AGREEMENT as well as the entire unpaid balance of all GUARANTEED ROYALTIES committed to by CAPSTONE  under this AGREEMENT, will immediately become due and payable upon termination with Cause as set forth at Sections 6.4.1., 6.4.2., 6.4.3., 6.4.6., 6.4.7., 6.4.10., 6.4.11., or 6.4.12.. If the termination is with Cause in accordance with Sections 6.4.4., 6.4.5., 6.4.8., 6.4.9., 6.4.13., 6.4.14., or 6.4.15   then CAPSTONE shall have the right to pay off the entire unpaid balance of all royalties or other payments owing and due under this AGREEMENT as well as the entire unpaid balance of all GUARANTEED ROYALTIES committed to by CAPSTONE under this Agreement, quarterly over a period of twenty-four (24) months.
6.8.4.
Execute Documents .  CAPSTONE will sign all documents necessary to terminate of record any of CAPSTONE's rights hereunder, which documents will be prepared by DURACELL at its expense.
6.9.
Inventory.   MARKED PRODUCT will be manufactured during the TERM in quantities consistent with anticipated demand so as not to result in an excessive inventory build-up immediately prior to termination or expiration of this AGREEMENT.  Subject to Paragraph 6.10.1 (Authorized Sell-Off), upon the termination or expiration of this AGREEMENT:
6.9.1.
No Further Manufacture / Distribution. CAPSTONE  will neither manufacture, nor have manufactured for CAPSTONE , nor use the LICENSED MARKS, nor manufacture, import, sell, distribute or otherwise transfer, nor permit to be manufactured or imported, nor sold distributed or otherwise transferred, any MARKED PRODUCT, PREMIUMS, or other materials using the LICENSED MARKS;
6.9.2.
Molds / Plates. CAPSTONE  will, at DURACELL's option, either sell to DURACELL at a price negotiated by the PARTIES in good faith or destroy or efface any molds, plates, screens, computer files and other items used to reproduce MARKED PRODUCT and labels, packaging, advertising materials, and other materials bearing the LICENSED MARKS; and
6.9.3.
No Further Sale. CAPSTONE will cease selling MARKED PRODUCT.
6.10.
Sell-Off.   Any unauthorized sale or distribution of MARKED PRODUCT after the termination or expiration of this AGREEMENT will constitute an infringement of DURACELL's rights.  Upon termination or expiration of this AGREEMENT, subject to the terms of this Paragraph 6.10 , CAPSTONE will not use any of the written, printed, or graphic material on the package carton or inserts for any purpose without first obtaining the written consent of DURACELL, which consent may be withheld at DURACELL's sole discretion.  Upon termination or expiration of this AGREEMENT, CAPSTONE will deliver to DURACELL no later than 30 calendar days following the termination or expiration, a statement indicating the number and description of MARKED PRODUCT on hand together with a description of all advertising and promotional materials relating thereto.
 

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6.10.1.
Authorized Sell-Off.   If CAPSTONE  has complied with all the terms of this AGREEMENT, including complete and timely payment of minimum royalty obligations, and termination is not for cause, then CAPSTONE may request in writing, permission to continue to distribute and sell its remaining inventory, on a non-exclusive basis only, for a period not to exceed 6 months following the termination or expiration of the AGREEMENT (the period, "SELL-OFF PERIOD"); provided CAPSTONE continues to pay applicable royalties to DURACELL on all NET SALES of MARKED PRODUCT sold, delivered, provided, disposed, or transferred for other consideration by CAPSTONE during the SELL-OFF PERIOD.  CAPSTONE may request an extension of up to 6 months to sell its existing inventory, which DURACELL may or may not accept in its discretion.  All sales of remaining inventory will be subject to a 6% royalty if sold to any other distributor, retailer or customer other than Costco. If this AGREEMENT is terminated either by (a) by DURACELL for cause, or (b) CAPSTONE without cause, then CAPSTONE will be deemed to have forfeited the SELL-OFF PERIOD..
6.11.
Termination of Other Licenses .  If DURACELL terminates this AGREEMENT for any cause under this AGREEMENT, including any basis set forth in Paragraphs 6.1 (Breach) through 6.7 (Sales of LICENSED MARKS), DURACELL will also have the right to terminate any other license agreement then in effect between the PARTIES, upon written notice to CAPSTONE .  Additionally, if DURACELL terminates for cause any other license agreement between the PARTIES during the TERM, then DURACELL may terminate this AGREEMENT at DURACELL's sole discretion upon written notice to CAPSTONE.
7.
LICENSED MARKS – Additional Covenants
7.1.
Acknowledgements.
7.1.1.
Validity.  CAPSTONE acknowledges the validity of the LICENSED MARKS.
7.1.2.
Secondary Meaning.   CAPSTONE acknowledges that the LICENSED MARKS are inherently distinctive and/or have acquired secondary meaning.
7.1.3.
Value.   CAPSTONE acknowledges that the reputation and goodwill associated with the LICENSED MARKS are commercially valuable.
7.1.4.
Ownership.   CAPSTONE acknowledges that DURACELL owns all right, title and interest in and to the LICENSED MARKS including the goodwill associated with the use of the LICENSED MARKS.
7.1.4.1.
No Claims . CAPSTONE will have no claims or rights whatsoever against DURACELL for contributing to, establishing, or increasing the goodwill of the LICENSED MARKS or of the MARKED PRODUCT.
 

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7.2.
Maintenance.
7.2.1.
Cooperation.  CAPSTONE will cooperate with DURACELL in taking all appropriate measures for the protection of the LICENSED MARKS; including providing to DURACELL such testimony, documents, samples or other materials as may be required for the signing, filing, prosecution or enforcement of any trademark applications or registrations that DURACELL may file from time to time.
7.2.2.
Samples.  Upon written request by DURACELL, CAPSTONE will provide to DURACELL, two samples of the MARKED PRODUCTS and/or CAPSTONE's advertising materials for the MARKED PRODUCTS, for DURACELL's use in maintaining any part of the LICENSED MARKS.
7.2.3.
Trademark Maintenance.  DURACELL may or may not, at DURACELL's sole discretion, prosecute, maintain, or abandon any part or all of any application for registration or registration of the LICENSED MARKS, and/or modify or supplement the applications and registrations for LICENSED MARKS without any payment, notice, or obligation by DURACELL to CAPSTONE.  DURACELL's discretion in this section further includes DURACELL's modification of the form of a LICENSED MARK and/or the class or type of goods to which it applies or may apply as a result of challenge by any THIRD PARTY.
7.3.
Use of LICENSED MARKS.
7.3.1.
As Specified.  CAPSTONE will only use the LICENSED MARKS as DURACELL specifies, and DURACELL may specify all aspects of use of the LICENSED MARKS, including the manner, place, type, form, layout, design, channels of trade, channels of distribution, and media of or for such use, on or in connection with, all displays, advertising, labels, MARKED PRODUCT and PREMIUMS, Internet sites, sales promotion materials, and all other forms of use of the LICENSED MARKS.
7.3.2.
Per Guidelines.   CAPSTONE will comply with any specific brand identity guidelines and trademark use rules as may be referenced in any of the Schedules, or provided to CAPSTONE by DURACELL, which may be amended or revised by DURACELL from time to time, upon written notice.
7.3.3.
Featuring.   CAPSTONE will feature the LICENSED MARKS as the predominant brand name on the MARKED PRODUCT and PREMIUMS and the MARKED PRODUCT's and PREMIUMS' case, container or package, unless otherwise instructed and authorized by DURACELL in writing.
7.3.4.
Upon Objection.  Upon written objection by DURACELL based on reasonable grounds, CAPSTONE will immediately cease any use or action in relation to or in connection with the LICENSED MARKS.
7.3.5.
Identifiers.  Upon written request by DURACELL, CAPSTONE will employ identifying symbols and/or words in connection with its use of the LICENSED MARKS.
 

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7.3.6.
Benefit.   All of CAPSTONE's use of the LICENSED MARKS will inure to DURACELL's benefit.
7.4.
Prohibitions regarding LICENSED MARKS.
7.4.1.
Harm to Rights.  CAPSTONE will not do or permit to be done any act or thing which prejudices, infringes or impairs the rights of DURACELL with respect to the LICENSED MARKS.
7.4.2.
False Representation.  CAPSTONE will not knowingly represent to any THIRD PARTY that CAPSTONE has any right, title, interest, or registration for, in or to the LICENSED MARKS, except for the limited license granted in this AGREEMENT.
7.4.3.
Competing / Confusing Usage & Registration.  CAPSTONE  will not use, register or attempt to register any trademarks, trade names, logos, domain names, meta tags, meta descriptors, or electronic mail (e-mail) addresses, server names, or search-engine markers, that are identical to, confusingly similar to, and/or incorporate the LICENSED MARKS or any other of trademarks, trade names or domain names of DURACELL.
7.4.4.
Use in Other Name.  CAPSTONE will not use the LICENSED MARKS as all or part of any trade name, corporate name or other designation used by CAPSTONE to identify CAPSTONE's business.
7.4.5.
Harm to DURACELL.  CAPSTONE will not intentionally do anything or produce any goods in connection with the LICENSED MARKS that damages or reflects adversely upon DURACELL or any of its trademarks, trade names or domain names.
7.4.6.
Composite Marks.   Without limiting the generality of other provisions of this AGREEMENT, CAPSTONE will not use the LICENSED MARKS as a part of any composite trademark or co-branded trademark or copyrighted work of authorship; nor will CAPSTONE seek to register the same without the express written permission of DURACELL.
7.5.
Sale of Product .  MARKED PRODUCT will be sold by CAPSTONE, to the public only in the manner in which other similar articles are customarily merchandised.  In no event will MARKED PRODUCT be used or sold as PREMIUMS or giveaways or for advertising or joint merchandising purposes, unless specifically authorized by DURACELL in writing.  DURACELL or THIRD PARTIES on DURACELL's behalf can use the LICENSED MARKS on PREMIUMS or giveaways, or for other advertising, joint merchandising, and sales promotion purposes, even if the items bearing these LICENSED MARKS are identical to the MARKED PRODUCT.  Additionally, CAPSTONE  will not sell, ship or distribute any MARKED PRODUCT to any THIRD PARTY that CAPSTONE  either knows or has reason to know is shipping the MARKED PRODUCT outside the TERRITORY. If MARKED PRODUCT is found to be sold in a country which is outside the approved TERRITORY, CAPSTONE will ensure the MARKED PRODUCT is extracted from the country at CAPSTONE's sole expense.
 

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7.6.
Approval Process .
7.6.1.
Purpose.  MARKED PRODUCT has been designed and developed by CAPSTONE, independent of DURACELL.  CAPSTONE will be selling MARKED PRODUCT on its own behalf, and not on behalf of DURACELL.  The following approval process for MARKED PRODUCTS is solely for purposes of certain quality control as a means for protecting the integrity of the LICENSED MARKS.  The approval process is not intended for purposes of directing the design and development of the MARKED PRODUCT. CAPSTONE shall comply with all reasonable procedures that DURACELL may adopt from time to time regarding its review and approval of the MARKED PRODUCT, advertising materials and packaging materials that CAPSTONE proposes to develop, manufacture, distribute, publish, produce, sell or otherwise use.  DURACELL shall have the right to take all actions that it deems necessary to ensure that the MARKED PRODUCT, advertising materials and packaging materials manufactured, sold and/or used hereunder are consistent with the high quality reputation and prestige of the LICENSED MARKS.
7.6.2.
Approval Rights.   DURACELL will have approval rights as set forth below, of all MARKED PRODUCT and PREMIUMS, as well as materials related to MARKED PRODUCT and/or PREMIUMS, including:  advertising, consumer comments toll-free scripts, packaging, websites, and  related promotional / sales / public relations materials.  In no event will these approval rights reduce, mitigate or eliminate any of CAPSTONE's obligations under this AGREEMENT.  DURACELL approvals will be limited to ensuring fit with the brand positioning; adherence to brand equity and design guidelines; correct trademark legal line and brand logos; or any claims directly related to DURACELL's products bearing the LICENSED MARKS.
7.6.3.
Process.
7.6.3.1.
Product Quality.   The MARKED PRODUCT shall be at least equal in quality to the best products made by CAPSTONE or CAPSTONE's THIRD-PARTY contract manufacturer in each MARKED PRODUCT category (or as otherwise approved by DURACELL), and, in all events, the MARKED PRODUCT shall perform at levels equivalent to or better than the leading competing product in each MARKED PRODUCT's category and target market.  CAPSTONE shall be responsible for new MARKED PRODUCT development.  All MARKED PRODUCT shall also be developed in accordance with the MARKED PRODUCT Proposal Process set forth in Schedule 7.6.2.1 and subject to the MARKED PRODUCT Qualification Process described in Schedule 7.6.2.2 .  The product features, specifications and consumer warranty coverage for additional MARKED PRODUCT that are approved by DURACELL shall be incorporated by reference and made a part of this AGREEMENT upon acceptance by the PARTIES hereto.
 

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7.6.3.2.
Artwork and Design Quality.   All artwork developed or used by CAPSTONE in connection with MARKED PRODUCT, packaging materials or advertising materials that utilize the LICENSED MARKS shall conform to the Licensing Guidelines appended hereto as Schedule 7.6.3 , which guidelines may be revised by DURACELL from time to time but no more than once per CONTRACT YEAR.  DURACELL shall provide the artwork for the logos provided in the Licensing Guidelines.  All rights in any artwork that utilize the LICENSED MARKS, whether developed by CAPSTONE or supplied by DURACELL, shall belong exclusively to DURACELL, and CAPSTONE shall have no rights therein except for the limited license granted in this AGREEMENT.  The suitability, styles, designs, packaging, contents, workmanship and quality of all MARKED PRODUCT must be approved by DURACELL prior to the development, manufacture, distribution, publication, production, sale or use thereof.  CAPSTONE acknowledges and is familiar with the high standards, quality, style and image of the LICENSED MARKS, DURACELL's businesses and the DURACELL products, and CAPSTONE shall at all times develop, produce and market the MARKED PRODUCT and packaging materials in a manner that is consistent with said standards and that enhances the value and reputation of the LICENSED MARKS.
 

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7.6.3.3.
Approval Process.   CAPSTONE shall consult with DURACELL on the design of the MARKED PRODUCT and packaging materials and, upon DURACELL's request and at CAPSTONE's own expense, utilize the services of an outside packaging company to complete package designs until such time as CAPSTONE has developed the appropriate level of expertise as determined by DURACELL in its sole and absolute discretion.  DURACELL shall have approval over development of the MARKED PRODUCT and packaging materials, and specifically shall be consulted for its written approval at the developmental stages of (i) preliminary artwork and design and (ii) initial production samples, i.e., production samples prior to full production of the first shipment to customers for a MARKED PRODUCT, and CAPSTONE shall not proceed to any subsequent stage of development without receiving said written approval.  DURACELL shall have the sole discretion to approve or disapprove any MARKED PRODUCT or packaging design during these developmental stages.  As provided in Schedule 7.6.2.1 , CAPSTONE may submit proposed new MARKED PRODUCT for review after the marketing plan has been reviewed and product line has been approved by DURACELL. Proposed products must be accompanied by a sales forecast, with a minimum of $25,000 in annual sales required.  Ad hoc requests are at the discretion of DURACELL.  Any ad hoc proposed product additions beyond those already approved in the marketing plan must be submitted for approval in the form of an addendum to the existing, approved marketing plan. Approval of any ad hoc additions will be considered against CAPSTONE's Minimum NET SALES requirements (as outlined in Table 6.4.4), the per product $25,000 minimum annual sales requirement, and the demands of the marketplace. DURACELL, at its discretion, may require the elimination of an existing, under-performing, or similar product to maintain the size of the CAPSTONE's approved product assortment. Additionally, DURACELL reserves the right to conduct an annual SKU rationalization review based on sales dollar performance and may require de-listing of items that do not meet the annual sales threshold of $25,000. All MARKED PRODUCT is subject to the MARKED PRODUCT Qualification Process described in Schedule 7.6.2.2.   DURACELL has the right to disapprove any MARKED PRODUCT or packaging material submitted if DURACELL determines, in its sole and absolute discretion, that the MARKED PRODUCT or packaging material in question would or could impair the value and goodwill associated with the LICENSED MARKS or otherwise does not comport with the manner of use of the LICENSED MARKS approved by DURACELL, as may be modified from time to time in the discretion of DURACELL.  Following receipt by DURACELL of any artwork, design, prototype, MARKED PRODUCT sample or packaging material under this Section, DURACELL shall notify CAPSTONE within 20 business days as to whether such material is approved.
 

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It is agreed that there shall be no exercise of any of the rights herein granted unless and until express written approval of the MARKED PRODUCT and packaging material shall be given to CAPSTONE  by DURACELL.  Once approved, MARKED PRODUCT and packaging material shall not be changed in any material way without the prior written consent of DURACELL. CAPSTONE will appoint a Product Manager responsible to manage and execute the MARKED PRODUCT Qualification Process to ensure all requirements are met and to manage CAPSTONE's product portfolio as outlined above.
7.6.3.4.
Performance and Quality Standards Report.   In addition, prior to the initial shipment of any new MARKED PRODUCT to a customer or distributor, CAPSTONE  shall submit to DURACELL internal company reports, certified to be accurate by an officer of CAPSTONE, that each MARKED PRODUCT conforms in all respects to the agreed upon performance and quality standards for such MARKED PRODUCT.
7.6.3.5.
MARKED PRODUCT Samples.   CAPSTONE shall provide DURACELL with free samples of each MARKED PRODUCT taken at random from production runs from time to time at the discretion of DURACELL.  At a minimum, CAPSTONE shall provide three items of each SKU twice each CONTRACT YEAR at no cost to DURACELL.  DURACELL shall pay for any additional samples it requests.  MARKED PRODUCT being distributed and sold must conform in all respects to the approved samples of finished MARKED PRODUCT.  If, in DURACELL's reasonable judgment, the quality of a MARKED PRODUCT has deteriorated or becomes changed in later production runs from the approved sample, or if a MARKED PRODUCT has otherwise been altered, DURACELL may, in addition to other available remedies, require that any such MARKED PRODUCT be immediately withdrawn from the market.
7.6.3.6.
No Irregulars or Seconds.   No irregulars, seconds or other MARKED PRODUCT or packaging material that does not conform in all respects to the approved samples may be distributed or sold.
7.6.3.7.
Branding Guidelines.   All advertising materials must be in compliance with the Branding Guidelines set out in Schedule 7.6.3 and shall be submitted by CAPSTONE to DURACELL for DURACELL's written approval prior to its use.  If DURACELL has not approved in writing of any such advertising materials within 20 business days of receipt, such material shall be deemed disapproved.  CAPSTONE shall not have any rights against DURACELL for damages or other remedies by reason of DURACELL's refusal to grant any approval referred to in this Section 7.  CAPSTONE waives any and all such rights and claims and irrevocably releases DURACELL from any liability or obligation with respect to DURACELL's refusal to grant any approval required under this Section 7.
 

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7.6.3.8.
Additional Applicability.   The approval process detailed in Paragraph 7.6 (Approval Process) and its subparagraphs will also apply to:
7.6.3.8.1.
(Changes.) any change in the MARKED PRODUCT, PREMIUMS and/or related materials, including design, bill of materials, components, component suppliers and configuration;
7.6.3.8.2.
(Labels & Packaging.) labels and packaging for MARKED PRODUCT and/or PREMIUMS; and
7.6.3.8.3.
(Other.) All printed materials, advertising, press materials, promotional copy and materials and consumer toll-free number scripts relating to MARKED PRODUCT and/or PREMIUMS.
7.7.
Trademark Marking .  CAPSTONE will mark all MARKED PRODUCT and PREMIUMS in the same manner as the approved or deemed approved samples.  In addition to marking MARKED PRODUCT and PREMIUMS in accordance with DURACELL's approvals obtained under Paragraph 7.6 (Approval Process) and its subparagraphs, CAPSTONE  will affix permanently to the MARKED PRODUCT and PREMIUMS or their containers, and to all sales materials, advertising materials and any other materials using or displaying the LICENSED MARKS, the legend Duracell is a registered trademark of Duracell US Operations Inc., used under license. All rights reserved. (for North America, Latin America and Asia) or Duracell is a registered trademark of Duracell Batteries BVBA and Duracell US Operations Inc., used under license. All rights reserved. (for Europe).
7.8.
Modification or Changes to LICENSED MARKS by DURACELL .  DURACELL may periodically (but no more than once per every 12 months) revise its DURACELL marks and graphics; such change must be incorporated on the MARKED PRODUCTS, packaging and marketing material within 6 months of notice being given and submission by Duracell of new artwork (i.e., on newly manufactured products, not products in inventory) at CAPSTONE's cost.  This period can be extended by 6 months provided that CAPSTONE provides its request in writing within 30 days of being notified that the marks and graphics may be changed.
7.9.
Use of LICENSED MARKS on Related Materials.   Subject to CAPSTONE's prior written approval, DURACELL will have the right, without payment or obligation to CAPSTONE, to produce and distribute catalogs, promotional brochures or inserts, point of sale displays or other advertising or matter displaying the MARKED PRODUCT in conjunction with other products of DURACELL and/or others. The procedure for obtaining CAPSTONE's approval will be the same as DURACELL's approval process used for approval of MARKED PRODUCT, PREMIUMS and related materials, outlined in Paragraph 7.6. (Approval Process) and its subparagraphs.  CAPSTONE will provide DURACELL the name, email, phone number, and address of the person responsible for approvals.
 

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7.10.
Exclusive Efforts.  During the TERM, CAPSTONE  will not manufacture, market, distribute or sell, directly or indirectly (whether for its own account or as agent for any THIRD PARTY), within the TERRITORY any products substantially similar, in the opinion of DURACELL, to the MARKED PRODUCT that bear a competitive trademark to the LICENSED MARKS, and/or are produced by or on behalf of CAPSTONE  under license from another manufacturer and/or distributor of alkaline battery products or chargers, including, but not limited to the following brands: ENERGIZER, EVERREADY, VARTA, RAY-O-VAC, or SANYO products.  If MARKED PRODUCTS are shipped with alkaline batteries, CAPSTONE must ship with DURACELL brand alkaline batteries. If MARKED PRODUCTS are shipped without alkaline batteries, CAPSTONE cannot recommend or offer coupons or incentives for any other alkaline battery brand but Duracell brand alkaline batteries.
7.10.1.
Licensee's Private Label Products. If CAPSTONE develops private labeled products that are in competition with the MARKED PRODUCTS, and retailers discontinue MARKED PRODUCTS in favor of CAPSTONE's Private Label Products,  CAPSTONE must pay DURACELL a royalty of (a) three percent (3%) of NET SALES of all of CAPSTONE 's Private Label Products sold to, through or by OEMs and (b) three and one-half per cent (3.5%) of NET SALES of all CAPSTONE 's Private Label Products sold in all other channels of trade ("Private Label Royalty").  
7.11.
Quality & Standards.   CAPSTONE  will produce only safe and high quality MARKED PRODUCT and PREMIUMS in accordance with good manufacturing practices, CAPSTONE's quality control, quality assurance and safety procedures and policies, quality and safety processes criteria provided by DURACELL, and DURACELL-approved THIRD-PARTY testing laboratory quality and safety confirmation.  CAPSTONE warrants for the TERM that all MARKED PRODUCT and PREMIUMS will meet or exceed industry standards, be free from defects, be fit for their intended purposes under normal usage, and be produced, packaged and distributed in compliance with all applicable legislation and regulation including federal, state and local laws and regulations.  Accordingly, only top quality goods will be sold by CAPSTONE under the LICENSED MARKS.  No factory damaged, seconds, or goods not of first quality will be sold by CAPSTONE pursuant to this AGREEMENT without the written approval of DURACELL.  CAPSTONE guarantees that each shipment or other delivery of MARKED PRODUCT and PREMIUMS now or later made by CAPSTONE, as of the date of such shipment or other delivery, will conform to the above requirements.  DURACELL may assess CAPSTONE's safety and quality systems, request data and/or documentation, and conduct process audits with respect to the MARKED PRODUCT and PREMIUMS at mutually agreeable times to be arranged between the PARTIES.  At DURACELL's discretion, such assessments (including DURACELL-approved THIRD PARTY testing laboratory quality and safety confirmation) may include assessments conducted prior to launch of MARKED PRODUCT and/or PREMIUMS.
 

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7.12.
Defective Products .  If CAPSTONE learns that it has manufactured or has in its possession or control or has shipped MARKED PRODUCT or PREMIUMS that do not comply with any applicable law or regulation, or that do not meet the product specifications, then CAPSTONE will notify DURACELL of such fact in writing within 48 hours. Additionally, CAPSTONE will notify DURACELL within 48 hours of any communication with a safety/regulatory agency regarding a MARKED PRODUCT.   Further, CAPSTONE will develop and execute a Corrective Action Plan as show in Schedule 7.12.1 .  Upon notice to DURACELL from CAPSTONE, or upon notice given by DURACELL to CAPSTONE of the existence of substandard MARKED PRODUCT or PREMIUMS, CAPSTONE will promptly take whatever action is determined by DURACELL to be necessary to correct this situation.  If requested by DURACELL, CAPSTONE will, solely at CAPSTONE's expense, promptly retrieve from CAPSTONE's warehouse or plant and from all trade customers all substandard MARKED PRODUCT and PREMIUMS and comply with instructions from DURACELL as to the handling of such MARKED PRODUCT and PREMIUMS.
7.13.
Online Review .  CAPSTONE will conduct monthly reviews of all online customers which will include e-tailers like Amazon as well as brick + mortar retailers who sell MARKED PRODUCT on their websites. CAPSTONE will maintain a minimum 3.0 out of 5.0 rating of all Duracell branded, licensed products. Any reviews of 2.0 or lower may require CAPSTONE to contact that consumer to rectify the problem and then report findings and resolution to DURACELL. Any products that do not maintain a 3.0 out of 5.0 rating or higher, may be discontinued at the request of DURACELL.
7.14.
Toll-Free Consumer Number, Complaints, Comments, Returns, Sales.    CAPSTONE will place a toll-free consumer comments phone number on the outer package of all MARKED PRODUCT, on the actual MARKED PRODUCT, and instructional manuals for all MARKED PRODUCT, if any, and will provide and fund resources with staffing at least during normal business hours and a referral provision for handling emergency calls outside normal business hours.  All consumer contact information will be collected in such a way to make it legally permissible that it be shared with DURACELL.  If CAPSTONE receives or becomes aware of any information on any product regulatory notifications or retrievals ( e.g. , recall, inventory exchange, etc.), or any health or safety consumer complaints ( e.g., personal bodily harm or injury, electrical smoke/fire, etc.), then CAPSTONE will promptly, but in no event later than 24 hours after receiving any such information, notify DURACELL of receiving any such information together with all relevant data.  Additionally, CAPSTONE  will collect, keep on hand during the TERM, and provide DURACELL summaries of all consumer comments and complaints, and/or damage/return rates within 30 days after the end of each QUARTER to the following address, or such other addresses as DURACELL designates by written notice:
Duracell
Berkshire Corporate Park
Bethel, Connecticut, USA 06801
Attn: Michael Bielanos
Email: b ielanos.mj@duracell.com
 

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DURACELL will review the consumer comments and complaints, and/or damage/return rates and will conduct its own audits of the toll free consumer comments phone number to include assessment of response time, representative knowledge, helpfulness and courtesy. If DURACELL concludes that the summaries of consumer comments/complaints, and/or damage/return rates are unacceptable, or if DURACELL's audit of CAPSTONE's toll free number/consumer relations response capabilities are inadequate, then CAPSTONE will be required to provide a written corrective action plan within  30 days. Failure to execute on these requirements may result in termination of the licensing agreement as outlined in section 6.4.14. CAPSTONE must maintain customer service support for all MARKED PRODUCT for a period of 3 years after expiration/termination of this AGREEMENT.
7.15.
No Infringement of 3 rd Party Patent Rights.   CAPSTONE represents as of the EFFECTIVE DATE and warrants for the TERM that CAPSTONE has no knowledge that the MARKED PRODUCT infringes on any THIRD PARTY patent rights.  If CAPSTONE receives notice from a THIRD PARTY alleging infringement of the THIRD PARTY's patent rights, then CAPSTONE will immediately notify DURACELL of the relevant MARKED PRODUCT, the THIRD PARTY patent rights alleged to be infringed and the name of the THIRD PARTY.  Despite anything to the contrary in this AGREEMENT, at DURACELL's sole discretion, DURACELL may terminate any license to the LICENSED MARKS under this AGREEMENT at any time during the period following such allegation of infringement of THIRD PARTY patent rights and prior to settlement of such allegation between CAPSTONE and the THIRD PARTY.
8.
Additional Licensee Covenants & Obligations
8.1.
Product Costs.  CAPSTONE will be solely responsible for all costs of all of CAPSTONE's activities associated with MARKED PRODUCT and PREMIUMS, including all costs associated with manufacture, distribution, sale, advertising, promotion, packaging design, and artwork.
8.2.
Contract Manufacturing.
8.2.1.
Notification of Third Party Manufacturer.   If CAPSTONE desires to use a THIRD PARTY contract manufacturer to have MARKED PRODUCT, PREMIUMS, and/or packaging materials made and/or labels applied thereto, then CAPSTONE will ensure that the contract manufacturer provides to DURACELL a completed Notification of Third Party Manufacturer form, as listed in Schedule 8.2 in advance of the contract manufacturer commencing production of MARKED PRODUCT and PREMIUMS.  DURACELL shall have prior approval rights over all third-party manufacturers retained by CAPSTONE. DURACELL's manufacturer approval guidelines are listed in Schedule 8.2.1, but the approval of any third-party manufacturer is at the reasonable discretion of DURACELL. DURACELL's manufacturer approval guidelines may be revised by DURACELL at their discretion with changes being provided in writing to CAPSTONE. DURACELL requires that all Third Party Manufacturers are certified to ISO9001 standards. Further, CAPSTONE will submit for all proposed contract manufacturer's either proof of a social accountability certification (i.e SA8000) or the results of a recent social accountability audit conducted by a certified third party auditing agency. Updated social accountability audit results will be required every two years.
 

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CAPSTONE may submit requests for additional or replacement manufacturers for MARKED PRODUCT; however, the approval of any additional third-party manufacturer shall be subject to the approval of DURACELL, which approval shall not be unreasonably withheld . If CAPSTONE will no longer use an approved contract manufacturer to manufacture MARKED PRODUCT or packaging, CAPSTONE must notify DURACELL within five BUSINESS DAYs using a Contract Manufacturer Change Form. The Contract Manufacturer Change form will be furnished by DURACELL. CAPSTONE will ensure and certify that the contract manufacturer has destroyed all molds, plates, screens, computer files and other items used to produce MARKED PRODUCT.
8.2.2.
Third Party Manufacturing Agreement.   CAPSTONE shall enter into a written manufacturing agreement with each of its THIRD PARTY manufacturers incorporating all of the provisions for the protection of DURACELL and the LICENSED MARKS which are contained in this AGREEMENT and in the THIRD PARTY Manufacturers Quality and Standard Requirements in Schedule 8.4.1 , the Licensing Quality Checklist in Schedule 8.4.2 and Required Provisions in THIRD PARTY Manufacturer Agreements in Schedule 8.4.3 .  At DURACELL's discretion, each such agreement shall be submitted to DURACELL for its prior approval, except that CAPSTONE may provide DURACELL with a redacted version of such agreement that omits confidential price and cost information.  CAPSTONE will notify DURACELL of the names and physical street addresses of any proposed third-party manufacturers, and the name and physical street addresses of each manufacturing facility that would manufacture the MARKED PRODUCT or parts thereof.  CAPSTONE shall immediately notify DURACELL of any proposed change of any manufacturing facility.  No change of manufacturing facility shall be made without the prior written approval of DURACELL.  CAPSTONE shall not grant any right, title or interest in or to the LICENSED MARKS, nor to any copyrights, service marks, trademarks or other property rights associated therewith, to any manufacturer.
8.2.3.
Right to Inspect and Audit Third Party Contract Manufacturer. The labeling of the MARKED PRODUCTS with the LICENSED MARKS shall be done in CAPSTONE's facilities or facilities approved by CAPSTONE.  CAPSTONE shall comply with the program that it has developed and DURACELL has approved to reduce the risk of counterfeiting MARKED PRODUCTs.  CAPSTONE shall make commercially reasonable efforts to include in its agreements with third-party manufacturers a right held by DURACELL to inspect and to audit, at its own expense, with reasonable notice to CAPSTONE, directly or through a representative, the manufacturing, packaging and labeling facilities of such third-party manufacturers.  To the extent such facilities include areas that contain confidential information or processes, CAPSTONE may request that such areas be excluded from the audit; provided that CAPSTONE provides DURACELL with reasonable alternative means of satisfying the requirements of the audit.  If DURACELL is unable to audit a third-party manufacturer to DURACELL's reasonable satisfaction, DURACELL shall have the right to bar CAPSTONE from retaining or otherwise using such third-party manufacturer to manufacture any MARKED PRODUCT.
 

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In such instance, CAPSTONE shall be required to use a different approved third-party manufacturer and shall still be required to make the GUARANTEED ROYALTY payments.
8.2.4.
Compliance of Contract Manufacturer.   CAPSTONE is responsible for ensuring that the contract manufacturer complies with all the obligations of CAPSTONE under this AGREEMENT.  CAPSTONE will be responsible for any breach of CAPSTONE's obligations under this AGREEMENT, even if the breach is actually committed by the contract manufacturer.  CAPSTONE agrees to advise DURACELL of any violation thereof by its manufacturers and of corrective actions taken by CAPSTONE and the results thereof, and, at the request of DURACELL, to terminate such an agreement with any manufacturer that violates any such provision for the protection of DURACELL or the LICENSED MARKS.  Regardless of any delegation of responsibility by CAPSTONE permitted hereunder, CAPSTONE agrees that it will be liable to DURACELL for all activities, duties or responsibilities of CAPSTONE carried out by third-party manufacturers. At DURACELL's discretion CAPSTONE will hire an independent third party to audit Contract Manufacturers for quality, safety and environmental compliance. Non-redacted results from audit to be shared with DURACELL.
8.2.5.
Released Claims. CAPSTONE hereby fully, absolutely, unconditionally and completely releases and discharges DURACELL from and against any and all actions, causes of action, setoffs, claims, cross-claims, counterclaims, damages, losses or demands of whatever kind or character which CAPSTONE  may ever have against DURACELL relating to or arising in whole or in part from any agreement between CAPSTONE  and a THIRD PARTY manufacturer or from the termination of any such THIRD PARTY agreement by CAPSTONE  at the request of DURACELL pursuant to the preceding subsection (the "RELEASED CLAIMS").  CAPSTONE hereby covenants and agrees not to sue or maintain, or assign or otherwise transfer the right to sue or maintain, any action or proceeding against DURACELL arising from or in connection with the RELEASED CLAIMS.
8.3.
Compliance with Laws. CAPSTONE represents as of the EFFECTIVE DATE, warrants for the TERM, and covenants that CAPSTONE is, and will at all times be, in full compliance with all applicable governmental, legal, regulatory and professional requirements associated with MARKED PRODUCT and PREMIUMS; including all applicable laws, codes, regulations, certifications, rules, ordinances, judgments, orders and decrees; including those related to: advertising and marketing, adulteration and contamination, antitrust, board of health, branding and labeling, consumer protection and safety, customs, employment, environmental matters (including NSF certification, state certification, extraction results, California Proposition 65, and applicable EPA regulations), fair trade, immigration, importation of materials, labor, product quality, working conditions, worker health and safety, and all applicable privacy laws (regulations, rules, opinions or other governmental and/or self-regulatory group requirements or statements of position), and the manufacture, marketing and distribution of the MARKED PRODUCT and PREMIUMS (collectively, " LAWS "). DURACELL accepts no responsibility or liability for the noncompliance of CAPSTONE or its contract manufacturers with any applicable laws and regulations.
 

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8.4.
Non-Infringement Analysis. CAPSTONE will use reasonable efforts to conduct a competent non-infringement analysis of MARKED PRODUCT in view of THIRD PARTY intellectual property rights prior to CAPSTONE 's first sale of MARKED PRODUCT.
8.5.
No Child Labor .  Neither CAPSTONE nor its contract manufacturers will engage in child labor practices or in unfair labor practices and CAPSTONE will be responsible to verify compliance by its contract manufacturers.  For purpose of this section, the term "child" means any person younger than the age of completion of compulsory schooling, but in any event no person younger than the age of 15 will be employed in the manufacturing, packaging, or distribution of the MARKED PRODUCT or PREMIUMS.
8.6.
Trade & Consumer Research .  CAPSTONE will provide DURACELL full access to any trade or consumer research conducted on the MARKED PRODUCT, even if funded entirely by CAPSTONE.  This research will be conducted in such a way as to assure the legality of this access.  CAPSTONE will ensure that DURACELL will have the unlimited and unrestricted right to use these research learnings and data for its own use in its future commercial endeavors.
8.7.
Right to Purchase .  DURACELL may purchase non-commercial quantities of MARKED PRODUCT and PREMIUMS from CAPSTONE at CAPSTONE's cost.
8.8.
Excess & Returned Product .  CAPSTONE may not sell excess and returned MARKED PRODUCT.
8.9.
Use of CAPSTONE's Name .   DURACELL will have the right, but not the obligation, to use the name of CAPSTONE  as set forth below, without any payment or obligation to CAPSTONE  whatsoever; and such publicity will be in good taste in accordance with industry standards:
8.9.1.
(internally) in DURACELL's internal programs, internal presentations, and other internal activities; and
8.9.2.
(externally)  in DURACELL's external programs, external presentations and other external activities to the extent such use is within the scope of the contents of any agreed upon press release between the parties under 11.6 (Press Release).
8.10.
Broad Commercialization.  Without expanding the definition of DISTRIBUTION CHANNELS and the rights granted to CAPSTONE in this AGREEMENT, CAPSTONE will broadly commercialize the MARKED PRODUCT, and will offer the MARKED PRODUCT for sale through the same distribution channels in the TERRITORY as is customary for the product category. DURACELL at its discretion may request photographic examples of all new retail channels of distribution.    


 

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8.11.
Product Listings, Forecasts & Marketing Plans .  By November 1 of each CONTRACT YEAR, CAPSTONE will provide DURACELL, either in writing or via a face-to-face presentation, a comprehensive business review for the current CONTRACT YEAR pursuant to this AGREEMENT.  This review must include CAPSTONE 's performance against marketing plans and financial commitments, a complete listing of all MARKED PRODUCT currently in market, unit sales of MARKED PRODUCT (by item or model) in total and by retail customer for CAPSTONE 's top 20 customers including gross sales, net sales, returns, retail sales data, also referred to as consumption or sell-through deemed necessary to monitor the business, and upon DURACELL's request 1 production sample of each of the MARKED PRODUCT and PREMIUMS and promotional materials produced, manufactured, sold, and distributed in the TERRITORY.  By November 1 of each CONTRACT YEAR, CAPSTONE will further provide DURACELL, either in writing or via a face-to-face presentation, a comprehensive marketing and business plan for the following CONTRACT YEAR, including a product development plan for all MARKED PRODUCT, sales and royalty forecasts, in-market launch plans, estimated retail distribution, advertising, marketing and promotional activity to support the business, pursuant to this AGREEMENT.  For CONTRACT YEAR 1, the comprehensive marketing and business review will be submitted within 60 days of the EFFECTIVE DATE of this AGREEMENT.  CAPSTONE will submit monthly reports to DURACELL on product sales, specifying the number of units sold, returns, dollar amount and detailed royalty calculations of each MARKED PRODUCT.  CAPSTONE and DURACELL shall meet at least 2 times each CONTRACT YEAR to review the comprehensive marketing and business plan.  Any so requested data will be remitted to the following address, or such other addresses as DURACELL designates by written notice:
  Duracell
Berkshire Corporate Park
Bethel, Connecticut, USA 06801
Attn: Lynn Schmitt
Email: schmitt.lm@duracell.com

8.12.
Notice of First Use.   CAPSTONE will provide DURACELL with the date of first shipment of each MARKED PRODUCT pursuant to this AGREEMENT in each country of the TERRITORY, together with documentation evidencing such first shipment of the MARKED PRODUCT.  CAPSTONE will provide DURACELL with such information within 1 month of the occurrence of such first shipment.
9.
Audit & Inspection
9.1.
Record Keeping .   CAPSTONE  will keep and maintain at its regular place of business complete and accurate books and records of all transactions carried out by CAPSTONE  in connection with the creation and sales of MARKED PRODUCT and PREMIUMS under this AGREEMENT, sufficient to comply with United States Generally Accepted Accounting Principles, applicable laws and provisions outlined in the AGREEMENT, including accounting books and records, regarding MARKED PRODUCT and PREMIUMS manufacturing, sales, shipment, returns, deduction and promotion ledgers, written policies and procedures, approval forms, THIRD PARTY manufacturer's agreements, if applicable, and general ledger entries, and any consumer comments and call logs and data (these books and records, collectively "RECORDS").  CAPSTONE will keep and maintain RECORDS for a period of 5 years subsequent to termination or expiration of this AGREEMENT.
 

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9.2.
Audits .  RECORDS will be subject to audit and reproduction by DURACELL during the TERM and for 5 years subsequent to termination or expiration of this AGREEMENT.  For the purpose of ensuring verification of compliance by CAPSTONE with all requirements of this AGREEMENT, DURACELL or its authorized representative will have the right to inspect and audit the RECORDS during regular business hours, provided that DURACELL will give CAPSTONE at least 10 calendar days advance notice of its intention to do so.
9.3.
Annual Financial Reporting . Prior to the start of each CONTRACT YEAR, CAPSTONE will provide DURACELL with their ANNUAL FINANCIAL STATEMENTS. Failure to provide their ANNUAL FINANCIAL STATEMENTS to DURACELL may result in termination of the AGREEMENT as referenced in section 6.4.13.

9.4.
Underpayment .  If, based on DURACELL's audit or inspection of CAPSTONE 's records related to this AGREEMENT, DURACELL determines that the amount of royalties properly due to DURACELL is 5% or more greater than the amount reported and/or actually paid by CAPSTONE  to DURACELL, and DURACELL provides CAPSTONE  a copy of a report describing the underpayment, and showing, in reasonable detail, the basis upon which such underpayment was determined; then, within  30 calendar days from the date the report was provided to CAPSTONE :
9.4.1.
(Payment.) CAPSTONE  will pay DURACELL a sum of money equal to the underpayment as determined by DURACELL, along with interest on the underpayment at a rate of 1.5% per month from the date the royalties were due until the date on which the underpayment is paid to DURACELL;
9.4.2.
(Contest.) CAPSTONE may contest the amount of the underpayment as determined by DURACELL, by providing written notice to DURACELL.
9.5.
Contesting Audit Findings .  If CAPSTONE contests DURACELL's determination of an amount of CAPSTONE's underpayment of royalties, then DURACELL may, at its sole discretion, request an independent auditor, reasonably acceptable to CAPSTONE, to review the RECORDS and/or the basis on which DURACELL determined the amount of underpayment.  If the auditor confirms DURACELL's claim, or concludes that the underpayment was larger than the amount estimated by DURACELL, then CAPSTONE  will, within 30 calendar days from the date of the auditor's conclusions, remit to DURACELL a sum equal to the deficiency determined by the auditor and all actual costs of the independent audit will be borne by CAPSTONE ; along with interest on the underpayment, at a rate of 1.5% per month, from the date on which the royalties were due from CAPSTONE  until the date on which the underpayment is paid to DURACELL.  
9.6.
Inspection of Manufacturing Facilities .  DURACELL or its representatives will be permitted to enter and inspect, at reasonable times during business hours and with at least 10 days prior notice, CAPSTONE's plants and warehouses, and those of its contract manufacturers where the MARKED PRODUCT or PREMIIUMS are being manufactured or stored.  Furthermore, DURACELL has the right to request copies of CAPSTONE's quality assurance and control processes, data and records at any time; and copies of such processes, data and records will be provided to DURACELL within 10 calendar days of the request.
 

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9.7.
Testing of Product .  DURACELL has the right to require that the MARKED PRODUCT and PREMIUMS be submitted to testing by a testing laboratory approved by DURACELL in accordance with generally accepted testing methods, protocols and standards.  The costs of such testing shall be borne by CAPSTONE to the extent that the costs are reasonable and consistent with industry standards.  DURACELL will seek to conduct any such inspection and/or testing in a manner calculated to reasonably minimize interference with normal business operations.  No such inspection or testing will reduce, mitigate or eliminate any of CAPSTONE's obligations under this AGREEMENT.
10.
Assignment & Delegation
10.1.
DURACELL Assignment of AGREEMENT.   This AGREEMENT may be assigned in whole or part by DURACELL to any THIRD PARTY and this AGREEMENT will inure to the benefit of and be binding on any assignees of DURACELL to the extent set forth in the applicable assignment document.
10.2.
DURACELL Assignment of IP.   Despite Paragraphs 12.1 (Ownership & Right to License) and 12.2 (Authority), DURACELL may assign to any THIRD PARTY any intellectual property rights licensed by DURACELL to CAPSTONE  under this AGREEMENT; provided a written agreement is entered into binding the THIRD PARTY to the licensor obligations of this AGREEMENT with respect to such assigned intellectual property rights.
10.3.
No Assignments or Delegations by CAPSTONE.   The rights and licenses granted by DURACELL in this AGREEMENT are personal to CAPSTONE and this AGREEMENT is entered into because of DURACELL's reliance upon the knowledge, experience, skill, and integrity of CAPSTONE.  This AGREEMENT, the license(s) and any other rights granted to CAPSTONE  under this AGREEMENT, and/or any duties to be performed by CAPSTONE  under this AGREEMENT may not be delegated, assigned, transferred, hypothecated, sublicensed, encumbered or otherwise disposed of without first obtaining the consent in writing of DURACELL, which may be withheld in DURACELL's sole discretion.  If DURACELL grants such consent, then all future delegations, assignments, transfers, hypothecations, sublicenses, encumbrances or other disposals of any new party's rights and/or duties under this AGREEMENT will not occur without written consent from DURACELL, which consent may be withheld in DURACELL's sole discretion.  Any attempted assignment without DURACELL's consent will be void and will automatically terminate all rights of CAPSTONE under this AGREEMENT.
 

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10.4.
Change of Control. If CAPSTONE (or its ultimate parent entity) is subject to a "Change of Control" event (as hereinafter defined) CAPSTONE shall notify DURACELL thereof no later than ten (10) days after the Change of Control takes place.  Thereafter, for a period of six (6) months from the date of notice, DURACELL shall have the right to terminate this Agreement upon thirty (30) days written notice but without liability to CAPSTONE, unless DURACELL received notice of the Change of Control at least ten (10) days prior to its consummation and consented in writing thereto.  In the event CAPSTONE provides such prior notice of a Change of Control to DURACELL, DURACELL shall reply to CAPSTONE within ten (10) days, and DURACELL's consent shall not be unreasonably withheld.  For purposes of this section, "Change of Control" means any merger, consolidation, share exchange, recapitalization or sale or transfer of equity securities of CAPSTONE  (or its ultimate parent entity), in each case in which any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934), other than CAPSTONE  or an Affiliate, acquires beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of fifty percent (50%) or more of the combined voting power of the then-outstanding or fully diluted voting securities of CAPSTONE  or its ultimate parent entity or the right to appoint the majority of the board of directors of either CAPSTONE or its ultimate parent.  In the event of termination under this Change of Control provision, CAPSTONE shall not be released from any of its obligations to make GUARANTEED ROYALTY payments or any other payments to DURACELL pursuant to the terms and conditions of this Agreement if the new controlling individual, entity or group is a competitor of THE DURACELL COMPANY or any subsidiary or Affiliate thereof.
11.
Confidentiality
11.1.
Disclosure of INFORMATION.   It is understood that confidential information may be disclosed by one PARTY ("DISCLOSER") to the other PARTY ("RECEIVER") for purposes of enabling the RECEIVER's performance under this AGREEMENT.  This confidential information may include new products, commercial plans, financial projections, data, know-how, formulae, processes, designs, sketches, photographs, plans, drawings, specifications, samples, reports, customer lists, pricing information, studies, findings, inventions, and ideas (collectively "INFORMATION").
11.2.
Obligation of Confidentiality.   The RECEIVER will maintain the INFORMATION in confidence using the same degree of care, but no less than a reasonable degree of care, as RECEIVER uses to protect its own confidential information of a like nature; will use INFORMATION solely in connection with RECEIVER's performance of this AGREEMENT; and will not be disclosed to any THIRD PARTIES other than employees or agents of the RECEIVER where such disclosure is necessary to enable RECEIVER's performance under this AGREEMENT.  But, the RECEIVER will have no obligation under this Article 11 with respect to any specific portion of INFORMATION that:
11.2.1.
Prior Possession. is already in the RECEIVER's possession at the time of disclosure by the DISCLOSER, as established by competent documentary evidence;
 

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11.2.2.
Publicly Available. is or later becomes available to the public, other than by the RECEIVER's default of this Article 11;
11.2.3.
Received From Others. is received from a THIRD PARTY having no obligation of confidentiality to the DISCLOSER;
11.2.4.
Independently Developed. is independently developed by the RECEIVER by personnel not aware of the INFORMATION of the DISCLOSER, as established by competent documentary evidence;
11.2.5.
Disclosed to Others. corresponds to that furnished by the DISCLOSER to any THIRD PARTY on a non-confidential basis other than in connection with limited consumer testing; or
11.2.6.
Law / Government Regulation. is required to be disclosed by law or government regulation, provided that the RECEIVER provides reasonable prior notice to DISCLOSER of such required disclosure.
11.3.
Required Disclosure by Law / Regulation. If RECEIVER is required by law or government regulation to disclose DISCLOSER INFORMATION (" COMPELLED DISCLOSURE "), then RECEIVER will: (a) provide prompt reasonable prior notice to the DISCLOSER of the COMPELLED DISCLOSURE so that DISCLOSER may take steps to protect DISCLOSER's confidential information, and (b) provide reasonable cooperation to DISCLOSER in DISCLOSER's protecting against the COMPELLED DISCLOSURE and/or obtaining a protective order narrowing the scope of the COMPELLED DISCLOSURE or use of the INFORMATION. If DISCLOSER is unable to obtain such protection against the COMPELLED DISCLOSURE, then despite the commitments set forth in Paragraph 11.2 (Obligation of Confidentiality) RECEIVER will be entitled to disclose the DISCLOSER's INFORMATION (aa) only as and to the extent necessary to legally comply with the COMPELLED DISCLOSURE and (bb) provided RECEIVER exercises reasonable commercial efforts to obtain reliable assurance that the DISCLOSER's INFORMATION is treated as confidential to the extent allowable by the law or government regulation requiring the COMPELLED DISCLOSURE. Such COMPELLED DISCLOSURE does not otherwise waive the non-use and confidentiality obligations set forth in Paragraph 11.2 (Obligation of Confidentiality) with respect to other uses and/or other disclosures of such INFORMATION.
11.4.
Term of Confidentiality.   Despite termination of this AGREEMENT, the obligations of confidentiality and non-use of the RECEIVER under this Article 11 with respect to specific portions of INFORMATION will survive for a period of 5 years from termination or expiration of this AGREEMENT, or upon written release of such obligations by the DISCLOSER; whichever is earlier.  Following termination of the obligations of confidentiality under this Article 11 (Confidentiality), the RECEIVER will be completely free of any express or implied obligations restricting disclosure and use of INFORMATION for which the termination of commitments applies, subject to the DISCLOSER's patent and other intellectual property rights.
 

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11.5.
Disclosure of this AGREEMENT .  CAPSTONE  will not divulge, permit, or cause CAPSTONE''s officers, directors, or agents to divulge the substance of this AGREEMENT, other than to (a) its representatives and attorneys in the course of any legal proceeding to which either of the PARTIES is a party for the purpose of securing compliance with this AGREEMENT, or (b) its contract manufacturers for the purpose of complying with this AGREEMENT; in either case, CAPSTONE will disclose only those portions of the AGREEMENT necessary for the respective purposes under (a) and (b) of this paragraph.
11.6.
Press Releases.  Each PARTY may issue a press release regarding the existence of a relationship between the PARTIES with the prior written consent of the other PARTY.  The issuing PARTY will provide the other PARTY with at least 10 BUSINESS DAYs prior written notice to approve of the disclosure.
12.
Other Representations & Warranties
12.1.
Ownership & Right to License.    Subject to Paragraph 10.2 (DURACELL Assignment of IP), DURACELL represents as of the EFFECTIVE DATE and warrants for the TERM that:
12.1.1.
(Ownership of LICENSED MARKS.) it owns or has applied for a trademark registration for the LICENSED MARKS as provided in Schedule 1.1.21 .
12.1.2.
(Right to License.)   it has the right to license the LICENSED MARKS to CAPSTONE  under this AGREEMENT.
12.2.
Authority.   Subject to Paragraph 10.2 (DURACELL Assignment of IP), each of the PARTIES represents as of the EFFECTIVE DATE and warrants for the TERM that it has authority to enter into this AGREEMENT and to perform its obligations under this AGREEMENT and that it has been duly authorized to sign and to deliver this AGREEMENT.
12.3.
Technical Information – No Liability.   Nothing in this AGREEMENT will be deemed to be a representation or warranty by DURACELL of the accuracy, safety, or usefulness for any purpose of any technical information, techniques, or practices at any time made available by DURACELL.  DURACELL will have no liability whatsoever to CAPSTONE  or any other PERSON for or on account of any injury, loss, or damage, of any kind or nature, sustained by, or any damage assessed or asserted against, or any other liability incurred by or imposed on CAPSTONE  or any other PERSON, related to or arising out of or in connection with or resulting from (a) the production, use, or sale of any apparatus or product; (b) the use of any technical information, techniques, or practices disclosed by DURACELL; or  (c) any advertising or other promotional activities with respect to any of the foregoing.
 

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12.4.
Express Disclaimer. DURACELL disclaims all implied representations and warranties, including but not limited to, warranties of merchantability and fitness for a particular purpose.  DURACELL does not represent or warrant the validity or enforceability of the LICENSED MARKS; or that the LICENSED MARKS will not be limited by the rights of THIRD PARTIES.  DURACELL will not have any liabilities or responsibilities whatsoever with respect to MARKED PRODUCT or PREMIUMS.  Without limiting the generality of the foregoing, DURACELL disclaims any representation or warranty that the LICENSED MARKS are a) available for use as to any or all of the goods proposed in the FIELD and b) available in the TERRITORY for any use.

13.
Infringement
13.1.
Notification of Infringements .  If CAPSTONE has actual knowledge of any infringement by a THIRD PARTY of the LICENSED MARKS, CAPSTONE will promptly notify DURACELL in writing and will provide DURACELL any information CAPSTONE has in support of such belief.
13.2.
Enforcement.   DURACELL has the right, but not the obligation, to institute any action as DURACELL deems appropriate to terminate the infringement or misappropriation of LICENSED MARKS through negotiation, litigation and/or alternative dispute resolution means, at its sole discretion and at its sole cost.  The right to institute the action will be exclusive to DURACELL.  DURACELL has the right to select and to control counsel in any action initiated by DURACELL.  CAPSTONE will lend its name to the action or join as a party in the action, and provide such assistance as may be reasonably necessary to conduct the action.  DURACELL will reimburse CAPSTONE for its reasonable out-of-pocket costs for rendering this assistance.  DURACELL has the right to settle the action at its sole discretion; any recovery of damages will be retained by DURACELL.
14.
Indemnification & Insurance
14.1.
Indemnification by CAPSTONE.   CAPSTONE assumes all responsibility as to the manufacture, use, marketing, distributing and sale of MARKED PRODUCT and for any LIABILITY however caused, related to or arising out of or from the manufacture, use, marketing, distributing or sale of MARKED PRODUCT, and/or related to or arising out of or from CAPSTONE's breach of any representation, warranty, covenant or agreement by CAPSTONE contained in this AGREEMENT.  CAPSTONE further indemnifies and holds harmless OWNER PARTIES from and against any THIRD PARTY LIABILITY incurred by any OWNER PARTIES related to or arising out of or from the manufacture, use, marketing, distributing and/or sale of MARKED PRODUCT by CAPSTONE and/or related to or arising out of or from CAPSTONE's breach of any representation, warranty, covenant or agreement by CAPSTONE contained in this AGREEMENT. Notwithstanding the foregoing, CAPSTONE's indemnification obligations under this paragraph shall not be extended to THIRD PARTY LIABILITY that arises from the gross negligence or intentional acts of OWNER PARTIES.
 

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14.1.1.
"OWNER PARTIES" means any of: OWNER; OWNER AFFILIATEs; any agents, officers, directors, and employees of OWNER; and any agents, officers, directors, and employees of OWNER's AFFILIATEs.
14.1.2.
"LIABILITY" means loss, liability, claim, cause of action, administrative action, suit, damages, and expenses (including reasonable attorney fees and costs) including any damages for personal injuries, including death and property damage and any other costs of whatsoever nature.
14.2.
Insurance. CAPSTONE will acquire and maintain at its sole cost and expense throughout the TERM Commercial General Liability insurance, including product liability and contractual liability coverage, underwritten by an insurance company which has been rated at least A-VI by the most recent edition of Best's Insurance Report.  CAPSTONE may, at its option, meet the insurance requirements via commercial insurance, self-insurance, risk financing techniques or a combination of these to enable CAPSTONE to meet its obligations outlined in this AGREEMENT and by law.  The financial status of an insurance company located outside of the United States must be acceptable to DURACELL.  This insurance coverage will provide protection against all claims, demands, causes of action, or damages, including attorneys' fees, arising out of any alleged defect in the MARKED PRODUCT, or any use thereof, of not less than $10,000,000 USD as a combined single limit for bodily injury, including death, personal injury and property damage, and with a deductible no greater than $100,000 USD.  The insurance policy will name DURACELL as an additional insured party. In addition, CAPSTONE will name DURACELL as an insured on all excess or umbrella policies carried by CAPSTONE. As it relates to CAPSTONE's indemnification obligations, all self-insurance, risk financing techniques and/or insurance policies maintained by CAPSTONE will be primary to and not excess or contributory with respect to any insurance or self-insurance maintained by DURACELL.  Approved Contract Manufacturers must show proof of Commercial General Liability insurance and maintain a minimum coverage of $2,500,000 USD as a combined single limit for bodily injury, including death, personal injury and property damage, and with a deductible no greater than $100,000 USD.
14.3.
Insurance Certificate & Maintenance of Coverage.   Within 30 calendar days after the EFFECTIVE DATE (and thereafter at the end of each CONTRACT YEAR and at least 30 calendar days prior to the expiration of coverage as evidenced by the Certificate of Insurance), CAPSTONE  will furnish DURACELL with a Certificate of Insurance evidencing the foregoing insurance coverage, and including a copy of the additional insured endorsement.  Upon expiration or termination of this AGREEMENT, including any post-termination or expiration of the SELL-OFF PERIOD, CAPSTONE  will continue to maintain the insurance coverage in full force and effect for an additional 3 years thereafter.
14.4.
CAPSTONE's Performance.   Nothing in this Article 14 will restrict, limit, waive or excuse CAPSTONE's performance of any other obligations set forth elsewhere in this AGREEMENT.
 

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15.
Miscellaneous
15.1.
Applicable Law.   This AGREEMENT is governed by the laws of the State of Delaware applicable to contracts made and performed entirely in such state, without regard to any principle of conflict or choice of laws that would cause the application of the laws of any other jurisdiction.
15.2.
Construction. The words "hereof," "herein" and "hereunder" and words of similar import when used in this AGREEMENT will refer to this AGREEMENT as a whole and not to any particular provision of this AGREEMENT. Whenever the words "include," "includes" or "including" are used in this AGREEMENT, they will be deemed to be followed by the words "without limitation", whether or not they are followed by those words or words of like import. The phrase "and/or" will be deemed to mean, e.g., X or Y or both. The meanings given to terms defined in this AGREEMENT will be equally applicable to both the singular and plural forms of these terms.
15.2.1.
Agreement Negotiated. The PARTIES have participated jointly in the negotiation and drafting of this AGREEMENT. If any ambiguity or question of intent or interpretation arises, this AGREEMENT will be construed as if drafted jointly by the PARTIES, and no presumption or burden of proof will arise favoring or disfavoring any PARTY by virtue of the authorship of any of the provisions of this AGREEMENT.
15.2.2.
Headings. Headings or titles to sections or attachments of this AGREEMENT are provided for convenience and are not to be used in the construction or interpretation of this AGREEMENT. All references to sections and attachments will be to the sections and attachments of this AGREEMENT, unless specifically noted otherwise. Reference to a section includes the referenced section, and all sub-sections included within the referenced section.
15.3.
Counterparts.   This AGREEMENT may be signed in one or more counterparts, each of which will be deemed to be an original, but all of which will constitute one and the same instrument. A facsimile or pdf copy of a signature of a PARTY will have the same effect and validity as an original signature.
15.4.
Dispute Resolution. It is the intention of both PARTIES to attempt to settle all issues between the PARTIES arising from this AGREEMENT by good faith negotiations. But, should such efforts not be successful, all such disputes will be brought exclusively before the appropriate courts in the state of Delaware.
15.5.
Effect of Supply Relationship. The terms contained in this AGREEMENT are independent of any contractual supply agreements between DURACELL and CAPSTONE for purchase of MARKED PRODUCT for use by DURACELL.
15.6.
Entire Agreement / Amendments.   This AGREEMENT, including any attached Schedules or Exhibits, constitutes the entire understanding between the PARTIES with respect to the subject matter contained herein and supersedes all prior agreements, understandings and arrangements whether oral or written between the PARTIES relating to the subject matter hereof, except as expressly set forth herein.  Nothing in this AGREEMENT may be changed or modified, nor may anything be added to this AGREEMENT, except as may be specifically agreed to in a subsequent writing signed with the same formalities as this AGREEMENT.
 

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15.6.1.
Cross-Termination Clause Exception. Despite Paragraph 15.6 (Entire Agreement / Amendments), this AGREEMENT does not supersede any rights set forth in any previous or future agreement (" PREV/FUT AGREEMENT ") between the PARTIES that may give the OWNER the right, following termination of the PREV/FUT AGREEMENT, to also terminate any other agreement OWNER may have with CAPSTONE, including termination of this AGREEMENT.
15.7.
Expenses . Except as specifically provided to the contrary in this AGREEMENT, all costs, fees and/or expenses incurred in connection with this AGREEMENT will be paid by the PARTY incurring such costs, fees and/or expenses.
15.8.
Force Majeure.   Neither DURACELL nor CAPSTONE  will be liable to the other for any failure to comply with any terms of this AGREEMENT to the extent the failure is caused directly or indirectly by acts of nature, fire, government restrictions or other government acts, strike, union disturbance, injunction or other labor problems, riots, insurrection, terrorism or threats of terrorism, war (whether or not declared), or other causes beyond the control of or without fault on the part of either DURACELL or CAPSTONE .  But, CAPSTONE will continue to be obligated to pay DURACELL when due amounts which it will have duly become obligated to pay in accordance with the terms of this AGREEMENT and DURACELL will continue to be bound by any exclusivity provisions under this AGREEMENT, provided that Parties shall negotiate in good faith to adjust and modify CAPSTONE's payment obligations to DURACELL to the extent that such obligations have been impacted by the force majeure events specified herein.  Upon the occurrence of any event of the type referred to in this Paragraph 15.8, the affected PARTY will give prompt notice to the other PARTY, together with a description of the event and the duration for which the affected PARTY expects its ability to comply with the provisions of this AGREEMENT to be affected.  The affected PARTY will devote its best efforts to remedy to the extent possible the condition giving rise to the failure event and to resume performance of its obligations under this AGREEMENT as promptly as possible.
15.9.
Further Assurances.   Each PARTY will sign and deliver those additional documents or take those additional actions as may be reasonably requested by the other PARTY if the requested document or action is reasonably necessary to affect the purposes of or obligations imposed under this AGREEMENT, including, but not limited to, recordation of this Agreement with the appropriate governmental agencies.
15.10.
Inquiries . All inquiries by THIRD PARTIES with respect to this AGREEMENT will be directed to DURACELL.
15.11.
Marketing .   CAPSTONE will use its commercially reasonable efforts, consistent with standards in the industry, in promoting, marketing, distributing and otherwise advancing the sale of MARKED PRODUCTS in the FIELD in the TERRITORY.
15.12.
No Implied or Other Rights . Despite anything contained in this AGREEMENT to the contrary, nothing in this AGREEMENT, expressed or implied, is intended to confer on any PERSON other than the PARTIES or their respective permitted successors and assigns any rights, remedies, obligations or liabilities under or by reason of this AGREEMENT.
 

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15.13.
No Special Payments .  DURACELL does not make any special payments whatsoever, in cash or in kind, either directly or indirectly, to any THIRD PARTY with a view to influencing unduly the decision of the THIRD PARTY in order to obtain any benefit or advantage whatsoever.  Nothing in this AGREEMENT authorizes CAPSTONE to make any such special payments, either directly or indirectly, in the performance of its obligations hereunder nor will DURACELL reimburse any such special payments.
15.14.
Non-reliance.   In evaluating and entering into this AGREEMENT neither PARTY relied and are not relying on any representations, covenants, warranties or other statements, whether oral or written, of the other, including with regard to any level of profitability, except those representations, covenants, and warranties specifically set forth in this AGREEMENT.
15.15.
Non-waiver.   If either PARTY at any time waives any of its rights under this AGREEMENT or the performance by the other PARTY of any of its obligations under this AGREEMENT, the waiver will not be construed as a continuing waiver of the same rights or obligations or a waiver of any other rights or obligations.
15.16.
Notices.  All notices provided for will be sent to the respective PARTIES at the following addresses by certified or registered mail or sent by a nationally recognized overnight courier service; or such other addresses as DURACELL designates by written notice:
If to CAPSTONE:
CAPSTONE INDUSTRIES, INC.
350 Jim Moran Blvd, STE # 120,
Deerfield Beach, Florida, 33442
Attention: Gerry McClinton
Email: gmcclinton@capstoneindustries.com

And copy to:
Attorney (if requested)
Company Name
Address Line 1
Address Line 2
Email:

If to DURACELL:
Duracell
14 Research Drive
Bethel, Connecticut, USA 06801
Attn:  Walter Gerrish
Email: gerrish.ws@duracell.com

And copy to:
Duracell
14 Research Drive
Bethel, Connecticut, USA 06801
Attn: Leo White
Email: white.lj@duracell.com

 

37



15.17.
Other Consents & Licenses .  CAPSTONE understands that that the terms of this AGREEMENT may not constitute all the consents or licenses required in order to manufacture, import, and/or sell the MARKED PRODUCT, and acknowledges that CAPSTONE is solely responsible for obtaining all other licenses or consents that may be so required.
15.18.
Relationship Between the PARTIES .  This AGREEMENT does not constitute CAPSTONE as the agent or legal representative of DURACELL, or DURACELL as the agent or legal representative of CAPSTONE for any purpose whatsoever.  Neither PARTY is granted any right or authority to assume or to create any obligation or responsibility, expressed or implied, on behalf of or in the name of the other PARTY or to bind the other PARTY in any manner or thing whatsoever.  No joint venture or partnership between CAPSTONE and DURACELL is intended nor will be inferred.  CAPSTONE's employees will not represent themselves as being representatives of or otherwise employed by DURACELL.
15.19.
Schedules & Exhibits.  Schedules and Exhibits to this AGREEMENT and conditions contained in the Schedules and Exhibits will have the same effect as if set out in the body of this AGREEMENT.
15.20.
Severability.   If and to the extent that any court or tribunal of competent jurisdiction holds any of the terms or provisions of this AGREEMENT, or the application thereof to any circumstances, to be invalid or unenforceable in a final non-appealable order, the PARTIES will use their best efforts to reform the portions of this AGREEMENT declared invalid to realize the intent of the PARTIES as fully as practicable, and the remainder of this AGREEMENT and the application of the invalid term or provision to circumstances other than those as to which it is held invalid or unenforceable will not be affected thereby, and each of the remaining terms and provisions of this AGREEMENT will remain valid and enforceable to the fullest extent of the law.
15.21.
Time of the Essence .  Subject to the next full sentence, time is of the essence in this AGREEMENT.  Whenever action must be taken (including the giving of notice or the delivery of documents) under this AGREEMENT during a certain period of time or by a particular date that ends or occurs on a non-BUSINESS DAY, then the period or date will be extended until the immediately following BUSINESS DAY.


 

38









[Signature Page as follows]





The PARTIES by their duly authorized representatives, sign this agreement in duplicate; with each PARTY receiving one of the signed originals hereof.
For:  CAPSTONE   For:  THE DURACELL COMPANY
By:     By:  

Name__/s/ James G McClinton___________   Name: /s/ Wallen S Gerrish
Title:__Chief Financial Officer____________   Title:     V.P. New Business Development  

Date:__12/3/16_______________________   Date:     1/9/17  




 

39



Schedule 1.1 - Definitions
1.1.1.
"AFFILIATE" means any corporation, association or other entity that directly or indirectly controls, is controlled by, or is under common control with the party in question; through stock ownership, or other equity interest, direct or indirect.  As used in the preceding sentence, "control", "controlled" and "control" mean with respect to a subject entity, direct or indirect beneficial ownership of more than 50% of the voting or equity interest in the entity.
1.1.2.
"AGREEMENT" means this license agreement between the PARTIES.
1.1.3.
"ANNUAL ROYALTY" is defined in Paragraph 3.1.
1.1.4.
"ANNUAL FINANCIAL STATEMENTS" means CAPSTONE's most recent U.S annual federal tax returns(which must be less than 365 days old), CAPSTONE's most recent annual income and loss statement along with related balance sheet certified by a C.P.A., a signed letter from CAPSTONE's current commercial bank certifying financial health and credit worthiness, and a signed letter from CAPSTONE's CEO and/or Chairman of the Board certifying that all of the documentation listed in ANNUAL FINANCIAL STATEMENTS is true and accurate .
1.1.5.
"BUSINESS DAY" means any day other than Saturday, Sunday or a US federal holiday. Any other reference to day or days will include Saturday, Sunday and US federal holidays.
1.1.6.
"CASH & QUANTITY DISCOUNTS" means (a) damaged merchandise discounts; (b) incentive discounts for (i) ordering in quantity to receive reduced price, and/or (ii) payment within a stipulated time period; and (c) any other discounts which reduce pricing for the customer or end consumer, including without limitation temporary price reductions, coupons and promotional spending with retail customers; where items (a)-(c) are discounts employed in the ordinary course of business consistent with CAPSTONE 's discount practices generally applicable, and consistently applied, to all of CAPSTONE 's products.
1.1.7.
" COMPELLED DISCLOSURE "   is defined in Paragraph 11.3.
1.1.8.
"CAPSTONE" is defined in the first paragraph.
1.1.9.
"CONTRACT YEAR" means any period commencing on January 1 and ending on December 31, unless otherwise noted; but the first CONTRACT YEAR for the purposes of this AGREEMENT will begin on the EFFECTIVE DATE and end on December 31, 2017.
1.1.10.
"DISCLOSER" is defined in Paragraph 11.1.
1.1.11.
"DISTRIBUTION CHANNELS" means sales of products to retail stores.
1.1.12.
"EFFECTIVE DATE" is defined in the first Paragraph.
1.1.13.
"FIELD" means portable lighting.
 

40



1.1.14.
"DURACELL" is defined in the first paragraph.
1.1.15.
"GROSS SALES" means the invoiced price of sales, prior to any adjustments resulting from offsets and/or deductions, of product ( i.e. , all merchandise items including finished products, and approved intermediates) sold to THIRD PARTIES (including distributors, customers and/or consumers by CAPSTONE).
1.1.16.
"GUARANTEED ROYALTY" is defined in Paragraph 3.2 and Table 3.2.1.
1.1.17.
"INFORMATION" is defined in Paragraph 11.1 .
1.1.18.
"LAUNCH SALES" means the shipment of initial stocking volume of MARKED PRODUCT to at least one account in either of each country making up the MAJOR MARKET.
1.1.19.
"LAWS"   is defined in Paragraph 8.3.
1.1.20.
" LIABILITY"   is defined in Paragraph 14.1.2.
1.1.21.
"LICENSED MARKS" means those trademarks and trade dress set forth in Schedule 1.1.21.
1.1.22.
  "MAJOR MARKET" means United States for MARKED PRODUCT.
1.1.23.
"MARKED PRODUCT" means portable lighting.
1.1.24.
"MONTH" means the period of time consisting of thirty days in April, June, September and November, and of thirty-one days in the remainder of the months, except February, which consists of twenty-eight days, except in leap-year, when the intercalary day is added, making twenty-nine days.
1.1.25.
"NET SALES" means CAPSTONE's GROSS SALES to a THIRD PARTY of MARKED PRODUCT less the total of the following: RETURNS and CASH & QUANTITY DISCOUNTS.
1.1.25.1.
Deductions.  Any of the deductions listed in Paragraph 1.1.25 (NET SALES) involving a payment by CAPSTONE will be taken as a deduction against aggregate sales for the calendar quarter in which the expense is accrued by CAPSTONE.  Despite the foregoing, the   total of all allowable deductions to arrive at NET SALES will not exceed 3.0% of total GROSS SALES in any CONTRACT YEAR.   For purposes of clarification, this limitation on total allowable deductions is relevant exclusively for the purpose of computing the amount of royalties owed to DURACELL, and is not intended to limit in any way CAPSTONE's unilateral right to grant whatever rebates and discounts to its customers that it deems most appropriate in its sole discretion.
1.1.25.2.
Sales.  Sales between or among CAPSTONE  will be excluded from the computation of NET SALES, but sales by CAPSTONE  to their THIRD PARTY customers will be included in the computation of NET SALES.
 

41



1.1.25.3.
US Dollars.  NET SALES will be translated into US dollars on a quarterly basis using the average of the exchange rates on the first and last working days of each quarter as published in the Wall Street Journal.
1.1.25.4.
Otherwise Distributed.  Where MARKED PRODUCT is not sold, but are OTHERWISE DISTRIBUTED, the NET SALES of the MARKED PRODUCT will be the average of the NET SALES of the MARKED PRODUCT that were sold to THIRD PARTIES during the most recent calendar quarter; and if there have been no previous sales of the MARKED PRODUCT, then the NET SALES of such MARKED PRODUCT will be the average selling price at which products of similar kind and quality, sold in similar quantities, are then currently being offered for sale by other manufacturers.
1.1.25.5.
Resale to AFFILIATE.  In order to assure to DURACELL the full royalty payments contemplated in this AGREEMENT, it is understood that if any MARKED PRODUCT are sold for purposes of resale to an AFFILIATE of CAPSTONE, then the royalties to be paid in respect to such MARKED PRODUCT will be computed on the NET SALES at which the AFFILIATE purchaser for resale sells such MARKED PRODUCT rather than upon the NET SALES of CAPSTONE.
1.1.26.
"NEW TM-RELATED IP" is defined in Paragraph 4.2.1.
1.1.27.
"OTHERWISE DISTRIBUTED" means the transfer of MARKED PRODUCT by CAPSTONE to a THIRD PARTY for less than fair market value, other than for purposes of scrapping or donations to charitable institutions.
1.1.28.
  " OWNER PARTIES " is defined in Paragraph 14.1.1.
1.1.29.
"PARTY" means either CAPSTONE or DURACELL, and "PARTIES" means the two collectively.
1.1.30.
"PERSON" means (as the context requires) an individual, a corporation, a partnership, an association, a trust, a limited liability company, or other entity or organization, including a governmental entity.
1.1.31.
"PRE-EXISTING IP" means intellectual property of a subject PARTY owned by that PARTY as of the EFFECTIVE DATE, including pre-existing intellectual property involved in the creation, production, and sale of the MARKED PRODUCT or PREMIUMS under this AGREEMENT.  In the case of DURACELL, such property includes intellectual property rights associated with (a) old advertisement graphics that are applied to the MARKED PRODUCT, and (b) old advertising slogans that are applied to the MARKED PRODUCT.
1.1.32.
"PREMIUMS" means any product bearing the LICENSED MARKS given away by CAPSTONE  for the purposes of increasing the sale, marketing, promotion or publicizing of the MARKED PRODUCT, including incentives for sales force, trade or consumer promotions.
1.1.33.
"PREV/FUT AGREEMENT" is defined in Paragraph 15.6.1.
 

42



1.1.34.
"QUARTER" means any 3 month period beginning on any January 1 and ending on the next March 31, beginning on any April 1 and ending on the next June 30, beginning on any July 1 and ending on the next September 30, beginning on any October 1 and ending on the next December 31, but the first QUARTER for the purposes of this AGREEMENT begins on the EFFECTIVE DATE and ends on the earliest of the next March 31, June 30, September 30 or December 31.
1.1.35.
"RECEIVER" is defined in Paragraph 11.1 .
1.1.36.
"RECORDS" is defined in Paragraph 9.1.
1.1.37.
"RETURNS" means MARKED PRODUCT returned in the ordinary course of business consistent with CAPSTONE's return practices generally applicable, and consistently applied, to all of CAPSTONE's products.
1.1.38.
"SELL-OFF PERIOD" is defined in Paragraph 6.10.1.
1.1.39.
"SOLD" is defined in Paragraph 3.1.1.1.
1.1.40.
"TERM" is defined in Paragraph 5.1.
1.1.41.
"TERRITORY" means the United States for MARKED PRODUCT.
1.1.42.
"THIRD PARTY" means any individual, corporation, association or other entity, which is not a PARTY.
1.1.43.
"USD" means United States Dollars.
[ Remainder of page intentionally left blank. ]
 

43


Schedule 1.1.21 - LICENSED MARKS
Duracell trademark

Copper & Black trade dress


[ Remainder of page intentionally left blank. ]

 

44


Schedule 3.11 - Royalty Reporting Form  SAMPLE (Page 1 of 2)
 

45



Schedule 3.11 - Royalty Reporting Form  SAMPLE (page 2 of 2)

 

46



 

47


Schedule 7.6.2.1 - MARKED PRODUCT Proposal Process

1.
CAPSTONE to provide DURACELL with new product proposal for consideration.
a.
New product to be proposed must either be included in annual marketing plan, or have been agreed to as an ad hoc case. DURACELL is not obligated to approve any ad hoc new product proposals. Upon its receipt of such plan(s), DURACELL will have twenty (20) business days to review (Y or N).  CAPSTONE shall have ten (10) days to address DURACELL's concerns.

2.
Proposal to include the following:
a.
CAPSTONE 's name, location and contact(s)
b.
Brief description of proposed new product and images
c.
Product specifications and anticipated agency certifications (UL, CE,…)
d.
Competitive landscape (competitors, prices, performance,…)
e.
Manufacturer, address and contact(s)
f.
Retail price and price to retailers
g.
Forecasted volumes and $ annually for a 2 year time horizon
h.
Countries and targeted retailers
i.
Planned ship date

3.
Proposal to be emailed to: schmitt.lm@duracell.com or as otherwise instructed by DURACELL








 

48


Schedule 7.6.2.2 - MARKED PRODUCT Qualification Process

1.
CAPSTONE to have received approval email from DURACELL on MARKED PRODUCT proposal as outlined in Schedule 7.6.2.1 or received approval from DURACELL on annual Marketing Plan to include new product proposal.

2.
CAPSTONE  to develop and submit to DURACELL a Technical MARKED PRODUCT Qualification Report, to include:

Section 1 - General
·
Cover page
·
Signature page – Approvals. Date
·
Table of Contents
·
Licensee and Manufacturer information (location, contacts, core products, other customers and history of product recalls
·
Product description with Intended customer use; Instructions for customer use
·
Forecasted annual volume and value chain from manufacturer to consumer
·
Listing of countries where product will be sold
·
Licensee's quality systems (including traceability of products and product recall plans)
·
Customer Service Information
·
Product's packaging and marketing claims

Section 2 - Product Information:
·
Product Specification
(Product drawing, pictures, dimensions, general specifications, etc)
·
Product Label
(Images of all labels on product)
·
Packaging
(Legible retail packing image and package specifications, carton image and specs)
·
Instruction Manual
·
BOM
(Detailed bill of material)

Section 3 - Reliability Test Report
·
Declaration of Conformity (Self Declaration of Conformity report; confirms that the product meets the required standard)
o
Summary page signed by OEM's QA, Engineering, and Plant Manager.
o
List of tests and test results (showing product meets stated criteria)
·
3 rd Party Certifications:
o
References and address of Manufacture
o
Product description
o
Product photograph
o
Critical components and Illustrations (drawings, photos of components,  schematics, etc)
o
Test summary, test methods
o
Results of tests
o
Testing Certification


3.
CAPSTONE  to provide the following:
·
Technical MARKED PRODUCT Qualification Report
·
Two (2) sample units of the proposed new product from the approved manufacturer from final sample production run.
·
Packaging artwork (images)
 

49



4.
DURACELL to email final approval to CAPSTONE indicating the permission to begin manufacturing and distributing the MARKED PRODUCT.

5.
CAPSTONE  to send (2) two - five (5) complete units in final packaging from first production run to:

Lynn Schmitt
THE DURACELL COMPANY
14 Research Drive
Berkshire Corporate Park
Bethel, CT 06801 USA

6.
Any proposed changes to the Technical MARKED PRODUCT Specification or to the MARKED PRODUCT's look, color or feel, must be submitted in writing to DURACELL and approved prior to implementing.

7.
CAPSTONE is responsible for identifying the applicable local regulations, product safety standards, certifications, warnings, and markings for all MARKED PRODUCTs and packaging in each TERRITORY of distribution. M ARKED PRODUCTs and packaging must comply with all local safety and environmental laws for the TERRITORY in which the product will be SOLD. MARKED PRODUCT that will be distributed in Europe must be RoHS and REACH compliant. MARKED PRODUCT that will be distributed in the United States must be tested and in compliance with California Proposition 65 (Prop 65).

8.
MARKED PRODUCTS will not contain the following chemicals:
• PVC, unless used for insulation purposes in electrical wiring. No PVC shall be used in product packaging or labeling.
• Bisphenol A (BPA)• Diester Phthalates, unless it is diethyl hexyl phthalate (DEHP) which is used in power cords of electrical appliances to provide flexibility to avoid cracking and electrical shock.

9.
Any MARKED PRODUCT that is an electrical device shall have a third party safety review and/or safety mark based upon the device construction and level of exposure to consumers.  Covered devices include the following: which mains (120V or 230V) enters the enclosure; which have rechargeable cells; which have a heating function;  which present a notable hazard to the user – if the standard to be applied addresses the hazard (typical hazards are electric shock, fire and casualty or other unique hazards which may be identified as a result of the third party safety review);  which are powered by an approved adapter that is measured to have hazardous voltage or power output as defined by the applicable product standard.

10.
 Any MARKED PRODUCT that is a battery, battery pack or includes batteries packaged with a device, shall comply with Directive 2006/66/EC. Nickel metal hydride (NiMH) batteries must have testing to meet the requirements of IEC 62133. Lithium primary and rechargeable cells must have Underwriters Laboratories (UL) Certification (North America requirement) or IEC62133 Testing and UN Transportation Testing (UN/DOT 38.3) Certification. Additionally, lithium battery packs or battery embedded in a device will also require UN Transportation Testing (UN/DOT 38.3) Certification and testing to meet the requirements of IEC 62133.






 

50




Schedule 7.6.3 – Licensing Guidelines

(Attached)








 

51



Schedule 7.12.1 - Corrective Action Plan Process for Defective Products and Product Recall Process













 

52



Schedule 8.2 - Notification of THIRD PARTY Manufacturer
Attn. Walter Gerrish
Duracell
Berkshire Corporate Park
Bethel, Connecticut, USA 06801

Dear Mr. Gerrish:

This letter serves as notice to you that pursuant to Paragraph 8.2 (Contract Manufacturing) of the license agreement ("License Agreement") dated [insert:  effective date of license agr't ] , by and between THE DURACELL COMPANY ("Licensor") and CAPSTONE ("Licensee"), we have been engaged as the manufacturer for Licensee in connection with the manufacture of the MARKED PRODUCTs and Premiums as defined in the License Agreement.  We acknowledge that we may not manufacture MARKED PRODUCTs or Premiums for, or sell or distribute MARKED PRODUCTs or Premiums to, anyone other than Licensee.  We further acknowledge that we are cognizant of the terms and conditions set forth in the License Agreement that are applicable to our function as manufacturer of the MARKED PRODUCTs and Premiums and will observe and comply with those provisions of the License Agreement.  It is expressly understood that we are obligated to comply with all local laws including without limitation, labor laws, wage and hour laws and anti-discrimination laws.  It is further expressly understood that you or your representatives may, at any time, have the right to inspect our facilities and review our records to ensure this compliance, but that the inspection will in no way reduce, mitigate or eliminate our obligation of this compliance, which will remain our sole responsibility.


Sincerely,

(Manufacturing Co's Name)

By  
(Signature)

(Print Name)


(Address)


(Date)


(Products Manufacturing)

 

53



Schedule 8.2 .1 - Guidelines for Creating a Factory Presentation
A factory presentation is a company's introduction to your company, its human capital, its manufacturing facility(ies) and its capabilities. It should communicate the core competency and the size and type of the operations in physical terms and in terms of manufacturing and Quality systems.  The information should be provided in PowerPoint format, ideally following the order defined below.

Overview
·
Org chart – how does QA link to top management?
·
Main Contacts (Factory manager, QA, QC, Manufacturing managers etc)
·
Address, telephone, fax, email, website
·
Directions – map if necessary to have our QA engineers visit the site
·
History of company and manufacturing operations
·
Core competencies, including product lines that the factory specializes in.
·
Main customers, if not confidential
·
Overview of the business, sales by region

Certifications:
·
ISO and manufacturing certifications
·
Social Accountability certifications or results of a recent Social Accountability audit
·
List of customer or industry awards

Products:
List main products, name product or supplier awards of any.
(Provide detailed pictures of key products, both packaged and unpacked)

Organization:
Number of workers:
·
Number and type of engineers (Identify degree level)
·
Approximate size of workforce
·
Experience of key managers and executives

R&D
Engineering and Design Capabilities:
·
CAD capabilities – software used
·
Engineering design software capabilities
·
Test Capabilities and equipment

Patents
List number and type of patents.  State whether they are global or local in scope.

Product Development
Overview of the product development and qualification process.
What is the process by which product gets developed and qualified?

Facilities
Office, engineering and manufacturing facilities
Facilities (pictures of engineering group area, manufacturing, storage, recreation rooms, videos and sq footage info etc)

 

54



Equipment
List of main manufacturing equipment and capabilities
Testing facilities, and testing capabilities:
·
Environmental chambers
·
Safety and Abuse testing
·
Burn in facilities
·
Rechargeable battery testers
·
Electronic equipment
·
Vibration
·
Shock
·
ESD
·
Salt spray
·
etc

Quality organization
Overview of Quality organization:
·
Number of individuals, including inspectors and QA people
·
Type of Quality tools(six sigma, 5S etc) and systems they have in place
·
Outgoing inspection
·
Measuring and testing and equipment used in QA, IQC, IPQC, OQC
·
Quality manual
·
Quality awards
·
Training
·
Process control systems
·
Outgoing and incoming inspection systems
·
Final inspection procedure (100% product checking at the end of the line?)
·
List of major Quality or safety issues
·
List of recalls in the past 5 years



 

55



Schedule 8.4.1 - THIRD PARTY Manufacturers Quality and Standard Requirements


1.
MARKED PRODUCT bearing the LICENSED MARKS are to be manufactured by CAPSTONE's agreed upon THIRD PARTY manufacturer and are to be sold by CAPSTONE in strict compliance with all applicable state and federal laws and regulations and industry standards, particularly toxic standards.  CAPSTONE may be required to show evidence of certification.

2.
MARKED PRODUCT shall be of high quality, in design, material and workmanship, and suitable for the purpose intended by the buyer.  MARKED PRODUCT must be of such style and appearance as to have a positive impact on DURACELL's reputation.  Words, shapes, symbols or devices that are obscene or scandalous are unacceptable.

3.
When affixed to MARKED PRODUCT and packaging materials, the LICENSED MARKS shall be clear, legible, without bleeding of line or color.

4.
MARKED PRODUCT must bear proper manufacturer identification and appropriate trademark and copyright notices.

5.
MARKED PRODUCT shall be constructed of durable material and shall resist breakage or shattering when dropped on a wooden surface from a distance of one yard.

6.
MARKED PRODUCT will not be injurious, deleterious or toxic and will not otherwise cause harm when used as instructed and with ordinary care for their intended purpose.

7.
CAPSTONE and the THIRD PARTY manufacturer will put in place a quality program.  The program will include the components set forth in the Licensing Quality Checklist attached hereto as Schedule 8.4.2.



 

56


Schedule 8.4.2 - Licensing Quality Checklist
Purpose: To define the roles / responsibilities for CAPSTONE to manufacture and distribute Duracell branded products.  The focus of this activity is to protect the Duracell brand against negative consumer perception and ensure the validity of the product's safety and intended use.

Scope: The scope of this checklist is defined as all products produced with the Duracell brand by an outside entity who has a contract to license the Duracell brand.  This checklist is defined in 3 areas: 1.) Qualification, 2.) Certification and 3.) Follow up.

Qualification: (CAPSTONE will be able to provide to licensor the following)
1.   Information profile of CAPSTONE and manufacturer (location, contacts, core products, other customers and history of product re-calls).
2.   Full product description with intended consumer use.
3.   Expected annual volume, value and the value chain from manufacturer to consumer.
4.   How will CAPSTONE manage consumer service (1-800, email,…)?
5.   How will CAPSTONE manage a product re-call, if needed?

Quality systems in place:
1.   Basic control systems / plans.
2.   Traceability of final product, if quality issues arise or possible product recall is necessary.
3.   Manufacturing approval process.
4.   CAPSTONE / manufacturer's qualification of product and choice of manufacturer (furnished on request).
5.   Instructions for consumer use (cautions, warnings, use).
6.   Product labeling / packaging.

Certification:
1.   Provide copies of agency certification of product (UL, CUL, CE, etc.). Duracell will be multiple listed by CAPSTONE.
2.   Provide visual standards of final product and packaging.
3.   Ensure that any product claims can be substantiated.
4.   Provide the certificate of quality (C of Q) criteria to be issued to customers. (Samples will be approved by Duracell and will be available ongoing by request.)
5.   CAPSTONE will provide a statement that the product conforms to all national and international standards regarding safety and environmental regulations.

Follow-up:
1.   CAPSTONE to provide monthly / quarterly information on Quality (returns, complaints, quantities shipped per customer in section 1.
2.   CAPSTONE will send 2- 5 pieces from first product produced to DURACELL. Additional samples will be available for purchase by DURACELL
3.   DURACELL may purchase samples from the field for periodic review.
4.   Periodic reviews with CAPSTONE and/or manufacturer will be performed as needed if returns / complaints become an issue.
5.   CAPSTONE must inform DURACELL of any changes to product criteria, specification, bill of materials, component suppliers or manufacturer.
Records / Documentation: (All records will be maintained by the CAPSTONE / manufacturer).
6.   Product certification
7.   Product / packaging approval documents (content / visual)
8.   Site visits, as needed.
9.   Monthly and quarterly reports

 

57



Schedule 8.4.3 - Required Provisions in THIRD-PARTY Manufacturer Agreements

1.   The Manufacturer agrees:
a.   to ensure that the LICENSED MARKS are applied to the MARKED PRODUCT and the packaging for the MARKED PRODUCT only in the manner prescribed by CAPSTONE (at the direction of DURACELL); to ensure that the LICENSED MARKS are applied to the MARKED PRODUCT and the packaging for the MARKED PRODUCT only in the approved form, and not to alter or make additions to the LICENSED MARKS, or combine them with other non-approved trademarks or other indicia whatsoever;
b.   to ensure that a notice approved by DURACELL appears on all packaging for the MARKED PRODUCT identifying that the LICENSED MARKS are used under license from THE DURACELL COMPANY; and
c.   not to use the LICENSED MARKS or any trademarks which are similar to the LICENSED MARKS on any goods other than those it manufactures for and/or supplies to the CAPSTONE .
d.   to advise CAPSTONE  at least (60) days prior to any proposed change of manufacturing facility.  No change of manufacturing facility shall be made without the written approval of CAPSTONE and DURACELL.
2.   The Manufacturer agrees to comply with the Quality and Standard Requirements, and the requirements of the Licensing Quality Checklist, and to allow DURACELL or its duly authorized representative to enter and inspect the Manufacturer's premises at all reasonable times to:
a.   assess the nature, standard, quality and characteristics of the MARKED PRODUCT, and the manner of use of the LICENSED MARKS on the MARKED PRODUCT and the packaging for the MARKED PRODUCT (including the license notice); and
b.   ensure that the Manufacturer is complying with its obligations under the contract.
3.   The Manufacturer agrees and warrants that it shall:
a.   jointly and severally, along with CAPSTONE, indemnify DURACELL against all product liability claims, infringement of intellectual property claims (other than infringement claims that arise as a result of CAPSTONE's authorized use of the LICENSED MARKS), environmental claims, product disposal/recycling claims and like matters to the same extent as provided in the Agreement with respect to indemnification of DURACELL by CAPSTONE;
b.   along with CAPSTONE , stand behind all consumer product warranties;
c.   not manufacture or cause to be manufactured more quantities of goods bearing the LICENSED MARKS than CAPSTONE  has ordered;
d.   only use the LICENSED MARKS on MARKED PRODUCT manufactured pursuant to CAPSTONE  approved purchase orders and only on MARKED PRODUCT shipped on behalf of CAPSTONE ; and
e.   account to CAPSTONE  for all goods manufactured and bearing the LICENSED MARKS but which are not supplied to  CAPSTONE .
4.   The Manufacturer shall at all times during the term of this Agreement maintain Commercial General Liability insurance for bodily injury, property damage, personal injury, products and completed operations, including but not limited to, the liability assumed under the indemnification provisions of this Agreement.  U.S. based manufacturers will utilize insurance carriers having a current A.M. Best rating of A: VIII or better; foreign based manufacturers may utilize insurance carriers having an equivalent rating or better.
5.   CAPSTONE  and Manufacturer agree that DURACELL is a third-party beneficiary of the Manufacturing Agreement with full power and right to enforce the terms thereof as they relate to or affect DURACELL, including obtaining injunctive relief.
6.   Manufacturer cannot assign the Manufacturing Agreement without the written consent of CAPSTONE and DURACELL.

58






CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT ( " Agreement " ), dated as of July 1 , 2015 (the "Effective Date") , by and between Capstone Industries, Inc. , a Florida Corporation (the "Company") , and George Wolf , (the " Consultant " ) , located at 7687 NW 127 111 Manor , Parkland, FL 33076.
WHEREAS , the Company desires to have the Consultant perform certain functions for the Company , and the Consultant desires to perform such functions for the Company , all as more fully set forth herein.
NOW , THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration,   the receipt and sufficiency of which are hereby acknowledged , the Consultant does hereby agree with the Company as follows:

1.
Scope of Work. During the term of this Agreement, the Consultant shall perform the consulting and advisory services as the Consultant and the Company may mutually agree (the   " Services " ) . The Service shall be performed in a professional manner reasonably satisfactory to the Company; provided, however , that the time , location and manner of performance of the Services shall be within the discretion of the Consultant.

(a)
Provide Support to Sales / Marketing

1.
As requested the Consultant will assist with developing and formulating sales strategies and participate in key account presentations.

11.
As requested the Consultant will assist with developing and formulating strategies for new product development.

(b)
Establish Protocol for a Global Sales Operation Function

The Consultant shall be responsible for defining and organizing a Global Sales Operation Protocol for review and approval by the Company

(c)
Manage Sales Operation Function

The Consultant shall be responsible for managing Sales Operation and assist in hiring and training of an indi v idual to manage Sales Operation for the Company in the future.

2.
Compensation .


(a)
Rate and Expenses. The Company shall pay the Consultant the rate for the Services provided hereunder (the "Compensation ") .
1


1.   July 1 , 2015 - December 31 , 2015 - $10 , 500.00 per month

11.   January 1 , 2016-December 21 , 2017 - $12 , 500.00 per month

111.   Compan y e x penses incurred reimbursed subject to approval

(b)
Taxes . The Consultant shall be responsible for the filing and payment of all federal , state,   provincial , and local taxes and contributions imposed or required under unemployment insurance , social security , income , capital gains and other tax laws relating to the Compensation (the   " Taxes and Contributions") . If the Consultant fails to file and pay all Taxes and Contributions that it is required to file and pay , and the Company is required to pay the Consultant ' s Ta x es and Contributions on its behalf , the Consultant shall reimburse the Company for the amount of such Taxes and Contributions .

3.
Covenant Not to Solicit . During the term of this Agreement and for a period of two (2) years immediately following the termination of this Agreement , the Consultant (i) shall neither directly nor indirectly induce , advise or encourage any employee , agent , consultant or independent contractor of the Company or any of the Company's subsidiary or affiliated companies to terminate his , her or its relationship with such person or entity; attempt to hire or retain or cause the hiring or retaining of , any such employee , agent , consultant or independent contractor , with another or third party , person or entity , except with the specific written consent of the Company in advance

4.
Confidential Information.

(a)
Covenant of Nondisclosure . Except as required by law , the Consultant shall not , at any time, directly or indirectly , use , publish , disseminate or otherwise disclose any Confidential Information (defined below) relating to or arising from the Services , any services provided to the Compan y prior to the date hereof, the financial terms of this Agreement, or the present , past or prospective business of the Company to any third party without the prior written consent of the Company.

(b)
Definition.   " Confidential Information" means secret or proprietary information which is disclosed to or learned by the Consultant or developed by the Consultant in performing the Services at any time during the term of this Agreement or during the Consultant's performance of services to the Company prior to the date hereof, including without limitation inventions , discoveries , trade secrets, and know-how; computer software code , designs , routines , algorithms, and structures; product information ; research and development information ; lists of clients and other information relating thereto; financial data and information; business plans and processes ; and any other information of the Company that the Company informs or informed the Consultant , or that the Consultant should know by virtue of its position , is non-public or is otherwise to be kept confidential; provided , however that " Confidential Information " shall not include information which (i) was generally available at the time of disclosure to the Consultant or becomes generally available to the public thereafter , other than as a result of disclosure by the Consultant , (ii) the Consultant can demonstrate was in the Consultant's possession or was available to the Consultant on a non-confidential basis , prior to its engagement by the Company,
or (iii) becomes available to the Consultant from a third party who is under no obligation t
2


maintain the confidentiality of such information. It is understood that many snippets of code within the product are by their nature generic a nd not considered proprietary under the terms of this agreement.

(c)
Additional R e quirements. The Consultant agrees that , before disclosing an y Confidential Information to any employee , agent , independent contractor or subcontractor (collectively , the   " Consultant Agents " ) , the Consultant shall ensure that such Consultant Agent has agreed in wr i ting to be bound by similar obligations of confidentialit y as this Section 4 with respect to the Confidential Information.

(d)
Return of Property. The Consultant agrees that all such Confidential Information , in whatever form , (including all copies thereof) that came or come into the Consultant's possession or control , whether prepared by the Consultant or others: (a) is the property of the Company , (b) will not be used by the Consultant in any wa y except in the performance of the Services , and (c) upon the request of the Company at the termination of this Agreement , will be left with, or forthwith returned by the Consultant to , the Company.

(e)
Nondisparagement . Each party hereto agrees that it will not (and , in the case of the Company , will cause its will cause management and employees not to) directly or indirectly make or ratify any statement , public or private , oral or written , to any person that disparages , either professionally or personally , the other party or its management , employees or its affiliated or subsidiary companies or that is derogatory or untruthful in any material respect about the other party or its management , employees or its affiliated or subsidiary companies.

5.
Covenant Not to Compete Through Disclosure of Trade Secrets to Competitors. Except as required b y law , the Consultant shall not , directly or indirectly , disclose any trade secrets to any person or entity connected with or interested in any business which performs services that are the same as or that are substantially similar to the services of the Compan y offered during the term hereof , or which designs , develops , manufactures , prepares , markets , sells , installs , services or distributes products or performs services in direct competition with the Company ' s products. Nothing in this Section limits the Consultant's obligation to protect the Company ' s Confidential Information set forth in Section 4.

6.
Work Product and Intellectual Property.


(a)
Developments. The Consultant agrees , for itself , and its Consultant Agents , that it and they will make prompt written disclosure to the Company , will hold in trust for the sole right and benefit of the Company , and will and hereby do assign to the Company all its and their right , title and interest in and to any ideas , inventions , original works of authorship, developments, improvements or trade secrets ("Developments " ) which (i) it or they have solely or jointly conceived or reduced to practice in the performance of services to the Company during the period prior to the date hereof , or (ii) it or they may solely or jointly conceive or reduce to practice or cause to be conceived or reduced to practice in the performance of the Services and which in any way relate to the Services or result from or are suggested by the Services or the objective for which the Services are being performed . All Developments devised , made , developed or perfected after termination of this Agreement with the Company are within the provisions of the preceding sentence if conceived in whole or material part during the period of


3


this Agreement , during the period in which the Consultant or its Consultant Agents performed services to the Company prior to the date hereof , or with the use of Company resources or facilities. The Consultant acknowledges that all original works of authorship which are or were made by it or any employee , agent , independent contractor or subcontractor (solely or jointly with others) within the scope of this Agreement and which are protectable by copyright are "works made for hire ," as that term is defined in the United States Copyright Act (17 U.S.C ., Section 101). If required by any applicable law in order to give effect to the intent of this paragraph , the Consultant shall be deemed to have sold all right, title and interest in, to and under the Developments to the Company for the Compensation , and the Consultant shall deliver to the Company a bill of sale for the Developments in form reasonably acceptable to the Company.

(b)
Obtaining Letters Patent, Copyright Registrations and Other Protections . The Consultant and its Consultant Agents will assist the Company in every proper way (at the Company ' s sole expense) to obtain and from time to time enforce United States and foreign proprietary rights relating to any and all inventions , mask-works , original works or authorship, developments , improvements or trade secrets of the Company , or which it or they have assigned to the Company , in any and all countries. To that end , the Consultant will execute , verify and deliver such documents and perform such other acts (including appearing as a witness), and shall cause any Consultant Agent to do the same, as the Company may reasonably request for use in applying for , obtaining, perfecting , evidencing, sustaining and enforcing such proprietary rights and its and their assignment thereof to the Company . In addition , the Consultant will execute , verify and deliver , and will cause to be executed , verified and delivered, all assignments of such proprietary rights to the Company or its designee . The Consultant ' s obligation to assist the Company with respect to proprietary rights in any and all countries shall continue beyond the termination of this Agreement. The Consultant hereb y irrevocably designates and appoints the Company and its duly authorized officers and agents as the Consultant's agent and attorney-in - fact for the Consultant and / or such Consultant Agent , to act for and on behalf of the Consultant and / or such Consultant Agent to execute , verify and file any such documents and to do all other lawfully permitted acts to further the purpose of this paragraph with the same legal force and effect as if executed by an authorized officer of the Consultant and/or by such Consultant Agent. The Consultant hereby waives and quitclaims to the Company any and all claims , of any nature whatsoever , which the Consultant now or may hereafter have for infringement of any proprietary rights assigned by the Consultant to the Company.

(c)
Shop Rights . The Consultant agrees that the Company shall be entitled to a shop right providing the Company a non-exclusive, royalty-free and irrevocable (although non- transferable and non-assignable) license to make , use and sell an y invention or other protectable development (whether patentable or not) conceived or made or authorized by or on behalf of the Consultant which is not within the scope of the above meaning of the term Developments , or within the scope of the term inventions , mask works, original works of authorship, developments , improvements or trade secrets of the Company, but which was conceived or made or authored on the time of the Company or with the use of the facilities or materials of the Company or with the use of Confidential Information of the Company .



4


(d)
Before assigning any Consultant Agent to work on the Services or sharing any Confidential Information with such Consultant Agent , the Consultant shall ensure that such Consultant Agent has agreed in writing to the provisions of this Section.

7.
Term and Termination.

(a)
Except as set forth in Paragraph (b) of this Section 7 , this Agreement shall commence on the date hereof and shall remain in full force and effect until December 31, 2017, unless sooner terminated (i) upon 30-days ' prior written notice by one party to the other party at any time, or (ii) if either party fails to cure a breach of this Agreement within ten (10) days after receiving written notice thereof , then the non-breaching party may immediately terminate this Agreement upon written notice to the other party. This Agreement may be renewed for successive additional one (1) year terms by mutual consent of the parties.

(b)
Notwithstanding the foregoing , in the event of a termination of this Agreement, (i) the Company shall remain obligated to pay the Consultant for all work performed through the date of termination, and (ii) the provisions of Sections 3, 4, 5 and 6 shall not terminate, but instead shall survive termination of the Agreement to the extent provided therein .

8.
Good Faith and Fair Dealing . Each party hereto agrees and covenants that such party shall at all times operate in good faith with a sense of fair dealing vis-a-vis the other party to this Agreement.

9.
Independent Contractor. The parties agree that no employment relationship is created by this Agreement. The parties hereby agree that the Consultant is an independent contractor, and that this Agreement does not constitute the Consultant an agent, employee , legal representative,   joint venture or partner of the Company for any reason whatsoever and neither party is authorized to act on behalf of the other party. The Consultant shall not be subject to the direction and control of the Company as to the means and methods employed by it in performing the Services within the parameters established by the Company .

10.
Waiver. Any waiver by the Company or by the Consultant of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision hereof.


11.
Severability; Reformation. In case any one or more of the provisions or parts of a provision contained in this Agreement shall , for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement ; and this Agreement shall , to the fullest extent lawful , be reformed and construed as if such invalid or illegal or unenforceable provision , or part of a provision, had never been contained herein, and such provision or part reformed so that it would be valid, legal and enforceable to the maximum extent possible . Without limiting the foregoing , if any provision (or part of provision) contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject , it shall be construed by limiting and reducing it , so as to be enforceable to the fullest extent compatible with then existing applicable law .
5


12.
Survival of Obligations. The Consultant ' s obligations under this Agreement shall survive the termination of this Agreement , regardless of the manner of such termination.

13.
Amendments; Assignments. This Agreement may be amended , modified or assigned in whole or in part , only by an instrument in writing signed by all parties hereto. This Agreement may not be assigned by either party without the prior written consent of the other party , except by the Company to a direct or indirect wholl y -owned subsidiary or to any entity that acquires the Company and / or substantially all the assets of the Company.

14.
Notices. Any notices or other communications required hereunder shall be in writing and shall be deemed given when delivered in person , or upon sending facsimile or e-mail transmission , or when mailed , by cert i fied or registered first-class mail , postage prepaid, return receipt requested , addressed , (a) if to the Company, to the Company ' s principal place of business at 350 Jim Moran Boulevard , Suite 120 , Deerfield Beach , FL 33442 , Attention: CFO , James G . McClinton or , (b) if to the Consultant, to the Consultant ' s address set forth on the signature page of this Agreement , or to such other addresses as either party shall have notified the others in accordance with the provisions of this Section 14.

15.
Counterparts. This Agreement may be executed in two or more counterparts , each of which shall constitute an original and all of which shall be deemed a single agreement.

16.
No Violation of Third Party Agreements. The Consultant hereby represents and warrants that the Consultant is not currently employed or retained on an independent contractor basis by any other person , which would conflict with the Services or the other terms of this Agreement , and the Consultant ' s execution and delivery of this Agreement and performance of its obligations hereunder do not , and will not , violate the terms of any other contract , agreement or arrangement , whether written or oral, to which the Consultant is a party or otherwise subject, including without limitation any agreement between the Consultant and a former employer or client.

17.
Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]












6


IN WITNESS WHEREOF, each of the parties hereto has caused this Consulting Agreement to be executed as of the date first above written.


Company:
Capstone Companies, Inc.
 
 
By: /s/ Stewart Wallach
Title: CEO
 
Consultant:
 
 
By: /s/ Geroge Wolf
Title: Consultant
 
Address:
7687 NW 127 th Manor
Parkland, FL 33076
























Signature Page to Consulting Agreement
7


Exhibit A

General Release of All Claims

As a material inducement to the Company to enter into this Agreement , and in consideration of the benefits and other good and valuable consideration , the receipt and sufficiency is hereby acknowledged, you , on behalf of yourself , your heirs , administrators , representatives , executors , successors, and assigns , hereby irrevocably and unconditionally release, acquit, and forever discharge Capstone Industries, Inc. and each of  its  predecessors parents subsidiarie s affiliates , divisions , related entities , successors and assigns , and all of their respective current and former agents , officers , directors , shareholders , employees , members , trustees , fiduciaries, representatives , attorne y s and all persons acting by , through , under or in concert with  any of them (the " Released Parties") from any and all charges , complaints claims liabilities, obligations, promises , agreements , damages , causes of action , suits , demands , losses , debts , and expenses of any nature whatsoever , known or unknown ( " Claims " ) which you have , had or claim to have against any Released Party up to and including the date you sign this Agreement. This General Release of Claims shall include , without limitation, Claims relating to your employment with the Company , Claims of discrimination under the common law or any federal  or state statute (including , without limitation , the Civil Rights Act of 1964 , the Americans with Disabilities Act and the Age Discrimination in Employment Act, all as amended), Claims for wrongful discharge , Claims for the payment of any salary , wages, bonuses, commissions, vacation pay , severance pay or benefits , Claims of detrimental reliance , and all other statutory , common law or other Claims of any nature whatsoever , to the extent permitted by law . This General Release of Claims does not apply to any Claims concerning a breach of this Agreement or any claims arising after the date you sign this Agreement. With respect to the Claims you are waiving herein , you acknowledge that you are waiving your right to receive money or any other relief in any action instituted by you or on your behalf by any other person , entity or government agency.



















8


ADDENDUM TO CONSULTING AGREEMENT


If Capstone Industries feels it is in their best interest to have George Wolf convert to full-time Executive status , anytime following the initial term (07/01/2015 - 12/31/2015) , the annual salary will be equal to the Consultant fee rate applicable at that time and the employment term would continue through December 31 , 2017 before an y further review would take place.













































9



capstone ·
Addendum to Consulting Agreement

This Addendum to Consulting Agreement (the "Agreement " ) is made and entered into on January 1 , 2017 by and between Capstone Industries ,   Inc . , a Florida Corporation (the " Company " ), and George Wolf, (the " Consultant " ) , located at 7687 NW 127 th Manor , Parkland , FL 33076 .

WHEREAS, on July 1 , 2015 , the Company and George Wolf entered into a Consulting Agreement (the "Consulting Agreement") whereby George Wolf would provide Support to Sales & Marketing , Establish Protocol for a Global Sales Operation Function and Manage the Sales Operation Function for the Company , and the Consultant desires to perform such functions for the Company .

This Agreement amends and modifies the Consulting Agreement as follows:

1.
Scope of Work   .

Rate and Expenses . The Company shall pay the Consultant the rate for the Services provided hereunder (the "Compensation " ) .

(a)
Provide Support to Sales/Marketing
i i i .   Will deal directly with specific retail accounts when requested by CEO

2.
Compensation n .

(a)
Rate and Expenses .   The Company shall pay the Consultant the rate for the Services provided hereunder (the " Compensation " ) .
ii.
January 1 , 2016 - December 31 , 2016 - $12,500 . 00, per month January 1 , 2017 - December 31 , 2017 - $13,750.00, per month

iii.
Bonus Compensation -Ten Thousand Dollars ($10,000 . 00) to be paid in the month of January 2017.


IN WITNESS WHERE OF ,   the parties have executed this Agreementt on the date first written above .

Company:
Capstone Companies, Inc.
 
 
By: /s/ Stewart Wallach
Title: CEO
 
Consultant:
 
 
By: /s/ Geroge Wolf
Title: Consultant
 
 
Witness:
Name: /s/ Aimee Gaudet

 







Capstone Industries, Inc.
350 Jim Moran Blvd.   Suite 120 Deerfield Beach, FL 33442

Ph: (954)570-8889 I Fax: (954)252 - 3442
www.capstoneindustries.com
10



capsto n e
Addendum #2 to Consulting Agreement

This Addendum to Consulting Agreement (the " Agreement " ) is made and entered into on January 1, 2018 by and between Capstone Industries, Inc., a Florida Corporation (the "Company " ), and George Wolf , (the "Consultant " ) , located at 7687 NW 127 t h Manor , Parkland, FL 33076 .

WHEREAS, on July 1 , 2015,   the Company and George Wolf entered into a Consulting Agreement (the
" Consulting Agreement " )   whereby George Wolf would provide Support to Sales & Marketing, Establish Protocol for a Global Sales Operation Function and Manage the Sales Operation Function fo r the Company, and the Consultant desires to perform such functions for the Company .

This Agreement amends and modifies the Consulting Agreement as follows:

1.
Scope of Work .

Rate and Expenses . The Company shall pay the Consultant the rate for the Services provided hereunder (the "Compensation").

(a)
Provide Support to Sales/Marketing
iii.   Will deal directly with specific retail accounts when requested by CEO


2.
Compensation.

(a)
Rate and Expenses . The Company shall pay the Consultant the rate for the Services provided hereunder (the "Compensation " ) .
January 1, 2018 - December 31, 2018 - $13,750.00 , per month


IN WITNESS WHEREOF, the parties have executed this Agreement on date first written above .

Company:
Capstone Companies, Inc.
 
 
By: /s/ Stewart Wallach
Title: CEO
 
Consultant:
 
 
By: /s/ Geroge Wolf
Title: Consultant
 
 
Witness:
Name: /s/ Aimee Gaudet





Capstone Industries, Inc.
350 Jim Moran Blvd.   Suite 120 Deerfield Beach, FL 33442

Ph: (954)570-8889 I Fax: (954)252 - 3442
www.capstoneindustries.com


11


Capstone Companies,
March 2017
Strictly Confidential
Mr. Stewart Wallach
Capstone Companies, Inc,
350 Jim Moran Blvd, Suite 120
 Deerfield Beach, FL 33442
Via email:
INVESTMENT BANKING AGREEMENT
Dear Mr. Wallach,
This letter agreement (this *'Agreement") confirms our mutual understanding regarding the retention Of Wilmington Capital Securities, LLC ("Wilmington") by Capstone Companies, Inc. together with its subsidiaries. successors and assigns (collectively€ the "Company"), subject to the terms and conditions of this Agreement.
1.
Purpose of Engagement . Wilmington will. assist the Company as its exclusive financial advisor to assist in Identifying and evaluating various strategic Transactions intended to maximize shareholder value. For purposes of this Agreement, a "Transaction" shall include, but not be limited to: (i) any transaction (or series of transactions) involving the issuance, offer, or private sale of, or investment or transaction in, the Company's capital stock (whether newly authorized shares or authorized but unissued shares), convertible securities, options, warrants, any other securities exchangeable or exercisable for or convertible into the Company's capital stocks any other rights to acquire the Company's capital stock or assets. or any other capital raise of any nature; (ii) any transaction (or series transactions) involving the sale, transfer, divestiture, or Other disposition of all or substantially all of the Company's assets •or business; (iii) any individual, entity, or '"group" of persons or entities within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 'becoming the beneficial owner, directly or indirectly, of 50% or more of the outstanding equity interests of the Company in any transaction or series of transactions; or (iv) any merger, consolidation, reorganization, recapitalization, restructuring, business combination, tender offer, exchange or other transaction involving the Company; regardless of whether the Company is the   surviving entity. For the avoidance of doubts the following events shall not constitute a Transaction for the purposes of this Agreement: (i) the exercise by the Company's officers or employees of options to purchase common stock of the Company granted prior to February 1, 2017; and (ii) the Company's exercise of its options to repurchase up to 25,000,000 shares of the Company's common stock from involve, LLC, a Delaware limited liability company, pursuant to that certain Option Agreement, dated June 27, 2016, between the Company and Involve, LLC, Wilmington and the Company agree and acknowledge that this Agreement should not be construed as a firm commitment or guarantee of any Transactions It is acknowledged and agreed that the decision to consummate a Transaction shall be in the Company ' s sole and absolute discretion.

2.
Term. The initial Term of this Agreement shall be for a period commencing on the date hereof and expiring on the earlier of six (6) months from the date hereof or the final closing of a Transaction. Unless terminated by either party by giving written notice to the other party, the Term of this this Agreement shall automatically renew for successive six (6) month periods. Notwithstanding any termination or expiration of this Agreement, the provisions of Paragraphs 5, 6, and Exhibit A, which is attached hereto and incorporated herein, shall survive such termination or expiration. The initial Six (6) month term of this Agreement and all successive six (6) month renewal periods are collectively referred to in Agreement as the " Term."

3.
Nature of Engagement. In order to facilitate Wilmington's efforts to effect a Transactions during the Term the Company shall not authorize any other party to act on the Company*s behalf with respect to any Transaction.
1

Capstone Companies,
March 2017


4.
Role of Wilmington. Wilmington will act as the Company's exclusive financial advisor with respect to:

a)
Assisting in the preparation of a memorandum describing the Company's industry, business strategy, business and management. and incorporating current financial and other appropriate information furnished by the Company (as amended and supplemented from time to time, the
"Information Memorandum");
b)
Assisting in the preparation of a presentation. based upon the Information Memorandum;

c)
Assisting in the preparation of a financial model;

d)
Using its reasonable efforts to identify and introduce the Company to prospective financial investors, strategic corporate investors, acquirers of assets: merger partners and/or other sources of capital ("Investors") and market the Transaction to such potential Investors.

e)
Evaluating Transaction proposals on behalf of the Company and providing guidance with respect to the Transaction structure and valuation;

f)
Assisting in. any discussions or negotiations of any Transaction, as requested by the Company;

g)
Coordinating due diligence, documentation and Transaction closing;

h)
Providing any services related to a •Transaction that may be appropriately requested by the Company.

5.
Compensation. In consideration for the services. Described above, Wilmington shall be entitled    to receive, and the Company agrees to pay Wilmington, the following compensation:

a)
Retainer. During the first six (6) months of the Term of this Agreement* the Company shall pay a non-refundable retainer fee of $80,000 (the "Initial Retainer") to Wilmington in accordance with the schedule below. The Initial Retainer shall be deemed to be fully earned by Wilmington and payable by the Company upon commencement of the Term. The Company shall pay the full amount of the Initial Retainer to Wilmington in accordance -with the schedule below of whether the Company terminates this Agreement during the initial six (6) months of the Term pursuant to Paragraph 2 of this Agreement.

Initial Retainer Payment Schedule
Payment Amount
 
Payment Due
$
20,000
 
Upon Execution of this Agreement
$
20,000
 
March 1, 2017
$
10,000
 
April 1, 2017
$
10,000
 
May 1, 2017
$
10,000
 
June 1, 2017
$
10,000
 
July 1, 2017


If the Term of this Agreement is extended for an additional six months as contemplated by Paragraph 2, then the Company shall pay an additional non-refundable retainer fee of $45,000 (the "Additional Retainer" and collectively with the Initial Retainer, the "Retainer") to Wilmington in accordance with the schedule below. Upon the renewal of this Agreement for an additional six (6) month period as contemplated by Paragraph 2, (i) the Additional Retainer shall be deemed to be fully earned by Wilmington and payable by the Company, and (ii) Company shall pay the full amount of the Additional Retainer to Wilmington regardless of Whether the Company terminates this Agreement during the additional six (6) month period pursuant to Paragraph 2 of this Agreement.
2

Capstone Companies,
March 2017


Additional Retainer Payment Schedule
Payment Amount
 
Payment Due
$
10,000
 
August 1, 2017
$
10,000
 
September 1, 2017
$
10,000
 
October 1, 2017
$
5,000
 
November 1, 2017
$
5,000
 
December 1, 2017
$
5,000
 
January 1, 2018

b)
Transaction Fee. It the Company consummates a Transaction, the Company shall pay to Wilmington a cash transaction fee (the "Transaction Fee") in accordance with the schedule below, payable by wire transfer at the closing of the Transaction:

Transaction Consideration
   
Wilmington Fee %
 
$
0 - $5,000,000
     
8
%
$
5,000,001 - $10,000,000
     
7
%
$
10,000,001 - $15,000,000
     
6
%
$
15,000,001 - $20,000,000
     
5
%
> $20,000,000
     
4
%

The Transaction Fee payable to Wilmington shall be reduced by the total Retainer amount paid by the Company to Wilmington as of the date on which the Transaction Fee is paid by the Company to Wilmington,
c)
Fee Obligation. Within  ten(10) days after the expiration of the Term, Wilmington shall provide -to the Company a final list (the 'Final List") of Investors that Wilmington has identified and introduced to the Company for the purposes defined in Paragraph I of this Agreement and, if any Transaction closes with any Investor(s) (or any of their respective affiliates) that are listed on the Final List within eighteen (18) months after the date of termination or expiration of this Agreement then Company shall pay to Wilmington the Transaction Fee set forth in Paragraph 5(b) payable within the time periods specified therein, If after 'the date of termination or expiration of this Agreement, the Company closes any transaction with an Investor that is. not on the Final List, then Company shall not be obligated to pay to Wilmington any fee or other compensation with respect to any such Transaction.

d)
Multiple Closings . In the event there are multiple partial closings prior to the final closing of the
Transaction, the Company shall pay -to or its designees, in cash the percentage of Consideration set forth in Section 5(b) payable with respect to the amount of each closing by wire transfer at the closing,
e)
Other. In the event that any portion of the Transaction(s) includes instruments or arrangements not contemplated by this Agreement, then the Company agrees to negotiate with Wilmington in good faith the amount of Transaction Fees that will be due to Wilmington under such circumstances, No fee payable to any other advisor by the Company or any other company in connection with the subject matter of this engagement shall reduce or otherwise affect any fee payable hereunder to Wilmington. All fees due "to Wilmington hereunder shall have no offsets (except as set forth in Paragraph 5(b)) and are non-refundable and non-cancelable,

3

Capstone Companies,
March 2017

6.
Reimbursement of Expenses. In addition to the fees described in Paragraph 5 above, the Company agrees to reimburse Wilmington, promptly, upon submission of an, invoice from time to time, for all reasonable, out of-pocket expenses incurred by Wilmington (including travel* databases, fees and disbursements of counsel, and of other consultants and advisors retained by Wilmington or its affiliates. fees and disbursements of accounting professional* priming and marketing expenses, etc.) in connection with a Transaction*
We look forward to formalizing our business relationship. If the foregoing and the attached Exhibit A correctly set forth our agreement, please execute the enclosed copy of this letter in the space provided and return it to use
Very truly yours,
                          WILMINGTON CAPITAL SECURITIES, LLC

    Name: /s/ Ronald Dorushkin
Title: Chief Executive Officer
Confirmed and agreed to this _____ day of ___________, 2017


Capstone Companies, Inc.


By: ________________________
Name: Stewart Wallach
Title: CEO


4

Capstone Companies,
March 2017

EXHIBIT A

(A)   Consideration . For purposes of this Agreement, "Consideration" shall mean the aggregate value of the Transaction shall include the aggregate amount paid or payable to the Company (including any subsidiary or *affiliate thereof), its shareholders, and any other third party in connection with the Transaction (including amounts paid or payable to holders of options, warranties, convertible securities, and all other securities issued by the Company) consisting of: (i) cash; (ii) equity and debt securities; (iii) the unpaid principal amount of any indebtedness of the Company or its affiliates for money borrowed that is assumed, repaid, forgiven, or satisfied in connection with the Transaction; (iv) the amount of any indemnity holdbacks or escrows in connection with the Transaction; (v) any extraordinary dividends. or distributions in connection with the Transaction; (vi) payments made pursuant to or in consideration of a non-compete agreement, non-solicitation agreement, or other restrictive covenants; (vii) rights to receive periodic payments, including seller financing; (Viii) the amount Of any deferred performance based payments, earnouts, or other contingent payments based on the future performance of the Company, its business, or its assets; (ix) any other forms of payment made, received, or to be received, directly or indirectly, by the Company (any subsidiary or affiliate thereof), its shareholders, or a third party; and (x) all other rights that may be at any time (A) transferred or contributed to the Company (or any of its subsidiaries or affiliates) or shareholders in connection with an acquisition Of equity Or assets Of the Company, (B) transferred or contributed by the Company (or any of its subsidiaries or affiliates) or shareholders in any transaction involving an investment in or acquisition of any third party, or acquisition of the equity or assets thereof, by Company (or any of its subsidiaries or affiliates), or (C) transferred or contributed to. the Company (or any of its subsidiaries or affiliates) or shareholders and any other parties entering into any joint venture or similar joint enterprise or undertaking with the Company (or any of its subsidiaries or affiliates). Any of the foregoing amounts held back or held pursuant to an escrow agreement established before or in connection with consummating the Transaction for indemnification or other purposes shall be deemed paid on the closing date and not contingent and the portion of the Consideration related such amounts shall be due and payable to Wilmington upon the closing of the Transaction. If any portion of the Consideration consists of securities, the. value of such securities shall be determined as follows: (i) if the securities are traded on a stock exchange, then the securities shall be valued at the average of the last sales price over the last ten trading days immediately preceding the consummation of the Transaction; (ii) if the securities are traded over-the-counter, then the securities shall be valued at the average: closing bid and asked quotes over the last ten trading days immediately preceding the consummation of the Transaction; and (iii )if the securities, interests, or rights are not publicly traded, then the value shall be the fair market value on the day immediately prior to the consummation of the Transaction as agreed to in good faith by the Company and Wilmington. Any assets other than cash and the other assets in this Section(A) will be valued as mutually agreed upon in good faith by the Company and Wilmington.

(B)
  Representation of the Company . The Company hereby represents and warrants that any and all information supplied hereunder to Wilmington in connection with any and all services to be performed hereunder by Wilmington for and on behalf of the Company shall be, to the best of the Company's knowledge, true, complete and correct as of the date of such dissemination and shall not fail to state a material fact necessary to make any of such information not misleading: The Company hereby acknowledges that the ability of Wilmington to adequately provide services as described herein is dependent upon the prompt dissemination of accurate correct and complete information to Wilmington. The Company further represents and warrants hereunder that this Agreement has been duly and validly authorized by all requisite corporate action; that the Company has the full right, power md capacity to executes deliver and perform its obligations hereunder; and that this Agreement, upon execution and delivery of the same by the Company and Wilmington will represent the valid and binding obligation of the Company enforceable in accordance with its terms. The representations and warranties set forth herein shall: survive termination or expiration of this Agreement.

5

Capstone Companies,
March 2017

(C)
Indemnification . The Company hereby agrees to indemnify and hold Wilmington, its affiliates their respective officers, director, shareholders, principals, employees, contractors, consultants, partners, managers, members: and their respective successors and assigns harmless from and against any and all loss, claim. damage, liability, deficiencies, actions, suits, proceedings, costs and legal expenses or expense whatsoever (including but not limited to, reasonable legal fees and other expenses and. Reasonable disbursements incurred in connection with investigating, preparing to defend or defending action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever, or in appearing or preparing for appearance as witness in any proceeding, including any pretrial proceeding such as a deposition) (collectively, "Losses") arising out of, based upon, or in any way related or attributed to (i) any breach of a representation, warranty or covenant by the Company contained in this Agreement or (ii) any activities or services performed hereunder by 'Wilmington, unless it is finally judicially determined in a court of competent jurisdiction that such Losses were the primary and direct result of the intentional misconduct or gross negligence of Wilmington in performing the services hereunder.
If Wilmington receives written notice of the commencement of any legal action, suit or proceeding with respect to which the Company is or may be obligated to provide indemnification pursuant to this Section Wilmington shall, within thirty (30) days of the receipt of such written notice* give the Company written notice thereof(a "Claim Failure to give such Claim Notice within such thirty (30) day period shall not constitute a waiver by Wilmington of its right to indemnity hereunder with respect to such action, suit or proceeding as long as no default has been entered. Upon receipt by the Company of a Claim Notice with respect to any claim for indemnification which is based upon a claim made by a third party ( 0 Third Party Claim"), the Company may assume the defense of the Third Party Claim with counsel of its own choosing, as described below" Wilmington shall cooperate in the defense of the Third Pany Claim and shall furnish such records, information. and testimony and attend all such conferences, discovery proceedings, hearings trial and appeals as may be reasonably required in connection therewith& Wilmington shall have the right to employ its own counsel in any such action. The Company shall not satisfy or settle any Third-Party Claim for which indemnification has been sought and is available hereunder without the prior written consent of Wilmington, which consent shall not be delayed which shall not be requited if Wilmington is granted a release in connection therewith. The indemnification provisions hereunder shall survive the termination or expiration of this Agreement.
The Company further agrees. upon demand by Wilmington, to promptly reimburse Wilmington for, or pay, any Loss as to which Wilmington has been indemnified herein with such reimbursement to be made currently as any Loss is incurred by Wilmington. Notwithstanding the provisions of the aforementioned indemnification, any such reimbursement or payment by the Company of fees, expenses, or disbursements incurred by Wilmington shall be repaid by Wilmington in the event of any proceeding 'in which a final judgment (after all appeals. or the expiration of time to appeal) is entered in a court of competent jurisdiction against Wilmington based solely upon its gross negligence intentional misconduct in the performance of its duties hereunder, and provided further, that the Company shall not be required to make. reimbursement or payment for any settlement effected without the Company's prior written consent (which consent shall not be unreasonably withheld or delayed.)
If for any reason the foregoing indemnification is unavailable or is insufficient to hold Wilmington harmless the Company agrees to contribute the amount paid or payable by Wilmington in such proportion as to reflect not only the relative benefits received by the Company, as the ease may be, on the one hand, and Wilmington on the other hand. but also, the relative fault of the Company and Wilmington as well as any relevant equitable considerations. In no event shall Wilmington contribute in excess of the fees actually received by it pursuant to the terms of this Agreement, IN NO EVENT SHALL EITHER PARTY OR ANY PARTY'S OFFICER, DIRECTORS, EMPLOYEES, SHAREHOLDERS, MEMBERS, MANAGERS, PARTNERS, AGENTS OR REPRESENTATIVES BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL. INDIRECT, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING 'WITHOUT LIMITATION LOSSOF GOODWILL, LOST PROFITS, LOST DATA OR LOST OPPORTUNITIES, IN ANY WAY RELATING TO THIS AGREEMENT* EVEN IF A PARTY HAS BEEN NOTIFIED OF THE POSSIBILITY OR LIKELIHOOD OF SUCH DAMAGES OCCURRING, AND WHETHER SUCH LIABILITY IS BASED ON CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY* PRODUCTS LIABILITY OR OTHERWISE* IN NO EVENT WILL EITHER PARTY'S LIABILITY IN THE AGGREGATE FOR ANY LOSSES FOR ANY MAITER ARISING BETWEEN THE PARTIES HEREIN, EXCEPT FOR THIRD PARTY CLAIMS ARISING UNDER THIS INDEMNIFICATION PROVISION UNDER THIS AGREEMENT, EVER EXCEED THE TOTAL FEES RECEIVED BY WILMINGTON, REGARDLESS OF THE FORM OF ACTION, WHETHER BASED ON CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY OR OTHERWISE.
6

Capstone Companies,
March 2017


For purposes of this Agreement, each officer, director, shareholder, member, and employee or affiliate of Wilmington and each person, if any, who controls Wilmington (or any affiliate) within the meaning of either Section 15 of the Securities Act of 1933s as amended, or Section 20 of the Securities Exchange Act of 1934, as amended, shall have the same rights as Wilmington with respect to matters of indemnification by the Company hereunder.
(D)
Confidentiality . Wilmington agrees that all non p ublic information pertaining to the prior, current or contemplated business of the Company is a valuable and confidential asset of the Company. Such information shall include, without limitation. information relating to customer •lists, bidding procedures, intellectual property, patents, •trademarks trade secrets, financing techniques and sources and such financial statements of the Company as are not available to the public. Wilmington and its officers, directors, employees, agents and members, shall hold all such information in trust and confidence for the Company and shall not use or disclose any such information for other than the Company's business. Such confidentiality does not apply (i) where such information is publicly available or later becomes publicly available other than through a breach of this Agreement, (ii) where such information is subsequently lawfully obtained by Wilmington from a third party or parties, (iii) if such information is known to Wilmington prior to the execution of this Agreement or (iv) as may be required by law.
(E)
Independent Contractor . It is expressly understood and agreed that Wilmington shall, at all times, act as an independent contractor with respect to the Company and not as an employee or agent of the Company, and nothing contained in this Agreement shall be construed to create venture, partnership, association or other affiliation, or like relationship, between the parties. It is specifically agreed that the relationship is and shall remain that of independent parties to a Contractual relationship and that Wilmington shall have no right to bind the Company in any manner. In no event shall either party be liable for the debts or obligations of the other except as otherwise specifically provided in this Agreement.
(F)
Amendment .  No modification, waiver, amendment, discharge or change of this Agreement shall be valid unless the same is evidenced by a written instrument, executed by the Company and Wilmington
(G)
Notices . All notices, demands or other communications given hereunder shall be in writing and shall be deemed to have been duly given when delivered in person or transmitted by-mail, facsimile transmission, or on the third calendar day after being mailed by United States registered or certified mails return .receipt requested, postage prepaid, to the addresses herein above first mentioned or to such other address as any party hereto shall designate to the other for such purpose
(H)
Entire Agreement . This Agreement (including Exhibit A) contains all the understandings and agreements of the parties with respect to the subject matter: discussed herein.  All prior agreements, whether written or oral, are merged herein and shall be of no force or effect.
(l)
Severability . The invalidity, illegality or unenforceability of any provision or provisions of this Agreement will not affect any other provision of this Agreement, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Agreement affect the balance of such provision. In the event that any one or more of the provisions contained in this Agreement or any portion thereof shall for any reason be held to be invalids illegal or unenforceable in any respect, this Agreement shall be reformed, construed and enforced as if such invalid, illegal or unenforceable provision had never been contained herein.
(J)
Construction: Venue . This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. The Company agrees that the sole and exclusive venue for any matters arising hereunder shall be the court of competent jurisdiction in Palm Beach County, Florida, and agrees to waive any objections to such venue. EACH OF WILMINGTON AND THE COMPANY HEREBY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING, SUIT OR CLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT.
7



(k)
Binding Nature . The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the patties, and their respective successors and assigns.
(L)
Counterparts . This Agreement may be executed in any number of counterparts, including facsimile signatures, which shall be deemed as original signatures. All executed counterparts shall constitute one Agreement, notwithstanding that all signatories are not signatories to the original or the same counterpart.
(M)
Attorneys' Fees and Court Costs. If any party to this Agreement brings an action, directly or indirectly based upon this Agreement or the matters contemplated hereby against the other party, the. prevailing patty shall be entitled to recovers in addition to any other appropriate amounts, its reasonable costs and expenses in connection with such proceeding, including, but not Limited to, reasonable attorneys' fees and expenses and court costs"
(N)
Computer Virus . During the course of this engagement, Wilmington may exchange electronic versions of documents and emails with you using commercially available software. Unfortunately, the technology community is occasionally victimized by the creation and dissemination of so called Viruses or similar destructive electronic programs. Wilmington takes issues raised by these viruses seriously and has invested in document and email scanning software that identifies and rejects files containing known viruses. Wilmington also updates its system with the software vendor's most current releases at regular intervals.
By utilizing this virus scanning software, Wilmington's system may occasionally reject a communication you send. Wilmington in turn may send you something that is rejected by your system. This infrequent occurrence is to be expected as part of the ordinary course of 'business.
Because the virus protection industry is generally one or two steps behind new viruses Wilmington cannot guarantee that its communications and documents will always be virus free. Occasionally. A virus will escape and go undetected as it is passed from system to system. Although Wilmington believes its virus protection measures are excellent, it can make no warranty that its documents will be virus free at all times.
Please inform Wilmington immediately in the event. a virus enters your company's system via any electronic means originating from Wilmington. 'Through cooperative efforts, disruption to communications can be minimized.
(0)
Information Disclosure . Wilmington may disclose any information when it is believed necessary for the conduct of its business, or where disclosure is required by law. For example, information may be disclosed for audit or research purposes, or to law and regulatory agencies to do such things as prevent fraud. Information may also be disclosed to affiliates as well as to others that are outside Wilmington. Wilmington may make other disclosures of Information as permitted by law,
(P)
Legal Services. Wilmington is not, in any manner, providing legal services or legal advice to the Company. Furthermore, the Company agrees and acknowledges that Wilmington is not an advisor as to tax, accounting or regulatory matters in any jurisdiction.
(Q)
Securities Trading and Other Activities . Wilmington is a full-service securities firm engaged, directly or indirectly, in various activities, including securities trading, investment management, financing and brokerage activities. The Company agrees and acknowledges that in the ordinary course of these activities, Wilmington and its affiliates may actively trade the debt or equity securities (or related derivative securities) of the Company and Other companies which may be the subject of the engagement contemplated by this Agreement for its own account and for accounts of its customers and may at any time hold long and short posi t ions in such securities. The Company further agrees and acknowledges that Wilmington and its affiliates also may from time to time perform various investment banking and financial advisory services for other clients and customers who may have conflicting interests with respect to the Company or the Transaction and nothing herein shall in any way limit Wilmington's, or its affiliates', ability to provide such services.

8



(R)
No Fiduciary Duties . The Company represents that it is a sophisticated business enterprise that has retained Wilmington for the limited purposes set forth in this Agreement, and the parties acknowledge and agree that their respective rights and obligations are contractual in nature. Each party disclaims any intention to impose fiduciary obligations on the other by virtue of the engagement contemplated by this Agreement.
(S)
USA Patriot Act. If necessary, the Company agrees to provide Wilmington with information and supporting documentation to enable Wilmington to comply with the requirements under Title Ill of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and. Obstruct Terrorism Act of2001 (Public Law 107-56).
(T)
Marketing. Wilmington shall have the ability to publicize (i.e., use of the Company logo in Wilmington's marketing materials) its role in providing the Company with the services noted herein.
9


Exhibit 21.1    Subsidiaries of Capstone Companies, Inc.

Subsidiaries of Registrant

United State of America

Capstone Industries, Inc., a Florida corporation

Capstone Lighting Technologies, L.L.C., a Florida limited liability company

Hong Kong SAR

Capstone International Hong Kong Ltd



Exhibit 31.1

Section 302 Certifications

I, Stewart Wallach, certify that:

1.            I have reviewed this annual report on Form 10-K of Capstone Companies, Inc. for the fiscal year end December 31, 2017;

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.            The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)            Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)            Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5.            The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: March 28, 2018


/s/ Stewart Wallach
Stewart Wallach
CEO, Director
(Principal Executive Officer)




Exhibit 31.2

Section 302 Certifications

I, Gerry McClinton, certify that:

1.            I have reviewed this annual report on Form 10-K of Capstone Companies, Inc. for the fiscal year ended December 31, 2017;

2.            Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.            Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.            The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)            Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)            Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5.            The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b)            Any fraud, whether or not material, that involves management or other employees who have a significant   role in the small business issuer's internal control over financial reporting.
Date: March 28, 2018


s/ Gerry McClinton
Gerry McClinton
Chief Financial Officer, Director
(Principal Financial Executive and Accounting Officer)



Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Capstone Companies, Inc. on Form 10-K for the fiscal year ended December 31, 2017 filed with the Securities and Exchange Commission (the "Report"), I, Stewart Wallach, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

(1)            the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)            the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.


/s/ Stewart Wallach
Stewart Wallach
Chief Executive Officer and Director
(Principal Executive Officer)

March 28, 2018

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Capstone Companies, Inc. on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the "Report"), I, Gerry McClinton, Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

(1)            the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)            the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.


/s/ Gerry McClinton
Gerry McClinton
Chief Financial Officer, Director
(Principal Financial Executive and Accounting Officer)
March 28, 2018

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.