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, 2013

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 _

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

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity as of March 10, 2014 was approximately $5,850,042.

Number of shares outstanding of the Registrant’s Common Stock, as of March 10, 2014, is 657,760,532.

DOCUMENTS INCORPORATED BY REFERENCE

None

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TABLE OF CONTENTS

Item Number	Description	Page
Part I
Item 1.	Business	4
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	14
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Mine Safety Disclosures (Not Applicable)	15
Part II
Item 5.	Market for Common Equity and Related Stockholder Matters	15
Item 6.	Selected Financial Data (Not Applicable)	15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 8.	Financial Statements and Supplementary Data	21
Item 9.	Change in and Disagreements with Accountants on Accounting and Financial Disclosure	21
Item 9A.	Controls and Procedures	21
Item 9B.	Other Information	21
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	22
Item 11.	Executive Compensation	32
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
Item 13.	Certain Relationships and Related Transactions, and Director Independence	37
Item 14.	Principal Accounting Fees and Services	38
Part IV
Item 15.	Exhibits, Financial Statement Schedules	39

DEFINITIONS:

As used in this 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.”

(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)   Any reference to fiscal year in this Report means our fiscal year, which is the same as a calendar year basis.

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Report”) contains statements that constitute "forward-looking statements” as defined under the Private Securities Litigation Reform Act 1995, as amended.  Those statements appear in a number of places in this Form 10-K 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” or similar words.  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 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 Form 10-K Report, including the "Management's Discussion and Analysis of Results of Operations and Financial Condition," identifies important factors that could cause such differences.  With respect to any such forward-looking statement that includes a statement of its underlying assumptions or bases, the Company cautions that, while it believes such assumptions or bases to be reasonable and has formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be significant or “material” depending on the circumstances.  When, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished.  Further, the Company is a "penny stock" and a micro-cap 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 on Form 10-K are made as of the date hereof, and 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

We are a public holding company organized under the laws of the State of Florida and we design and manufacture through our operating subsidiary a line of specialty power failure lighting solutions and other innovative specialty consumer products for the North American and Latin American retail markets Our product line consists of stylish, innovative and easy to use consumer products, including portable booklights, specialty booklights, multi-task lights, e reader lights, power failure multi-function handheld lights, power failure decorative accent lighting, power failure multi-function nightlight wall-plates  and  wireless motion sensor lights that are designed to make today’s lifestyles simpler and safer.  Our products are sold under our wholly-owned subsidiary Capstone Industries Inc. brand name as well as being private labeled for our retailer customers as programs require.  CAPC seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers on a global basis with unique products that make their lives simpler and safer.

We oversee the manufacturing of our products, which are currently all made in China by contract manufacturers, through our three wholly-owned operating subsidiaries; (a) Capstone Industries, Inc., a Florida corporation organized in 1997 and acquired on September 13, 2006 (“Capstone”), (b) Capstone International Hong Kong Ltd, a Hong Long limited liability Company “CIHK” and (c) Capstone Lighting Technologies, a Florida limited liability Company (“CLTL”).

Strategy

Our strategy is to increase the company’s profitability, cash flow and revenues through the ongoing development of innovative and technologically advanced ideas and concepts to the consumer product categories that have become synonymous with our brands, while maintaining low competitive prices.  We plan to leverage our product successes by expanding our channels as our product categories and brand recognition continue to gain traction at retail levels by merchandisers, buyers and consumers.  Based on expanding channels, the Company's expanded distribution footprint is expected to continue to yield annual sales growth throughout 2014. Planning for this result the company initiated a rebranding effort that was finalized in mid-year 2013 which enhanced its market image further and better reflected the company's unique product innovations and technology advancements within its categories.  Further to the point of technology advancements and our strategy to continue to nourish the company’s product development endeavors, the Company invested in a U.S. company, AC Kinetic Technologies, in 2013 to confidentially explore and develop certain inventive concepts the Company has conceived that are very complex and that would yield intellectual property which will further distance the companies’ products from off the shelf products commonly marketed at retail.  The Company plans to exploit the trade secret technologies within its own products and also make the technologies available for licensing to companies that have distributions not currently served by other Capstone related companies.  The first of these products will be introduced to the market in second fiscal quarter of 2014.  The Company also continues to seek out and selectively acquire or invest in businesses with perceived superior technical product development capabilities or that could benefit from our market position and strategic direction.  All forward planning product development roadmaps are also assessing possible benefits to be realized from US based production.

We have extensive experience in introducing new products to retail market channels and believe that provides us a competitive edge. In our early development, we sought to find niche product opportunities that may have been overlooked or underexploited by competitors, in order to win a profitable niche of the market share with minimal cost of entry.   In 2014, the Company plans its largest launch of new products that is expected to expand the company’s distribution beyond its current product placements.  The new products will not only introduce additional  functionality to existing categories of products  that are meaningful to consumers but will also  revitalize categories that have grown stale due to minimal investment and creativity by competitors. The Company’s product(s) characteristics are as follows:

·   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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Due to the extensive, modern manufacturing, design and engineering capabilities in China, and the lower labor costs in China, we believe 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, we believe this Chinese manufacturing resource gives us the level of production cost and quality that allows us 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.  In these cases, the Company will evaluate production opportunities in the United States.

The Company has begun to utilize US based industrial design support to augment the Capstone International HK Ltd. Hong Kong based team, and to isolate and protect some of the Company's latest intellectual property or “IP” which will find its way into specific products planned for Q2-4.

The Company has expanded Capstone International HK operations in Hong Kong, with additional personnel experienced in Engineering and Design, Product Development, International Logistics and Quality Control. These associates work with our OEM Chinese 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.  The Company initiated its expansion in Hong Kong in 2012 as product line extensions and increased number of factories utilized became factors. In anticipation of the company’s expected growth, we have continued our investment to insure overseas factory performance meets stringent tolerances which maintain our competitiveness and operational excellence.  Although the Hong Kong operation will be offering these same services to companies that do not have existing operations in China or are seeking a more hands on approach with minimal overhead impacts, this business model is purely incremental to our core and is not required to maintain our operations.  These services would be offered by contract, more commonly known as a buying agency agreement. These are fee based services and typically average 5-6% of purchases made through this agreement.

Products and Customers

The Company has earned the recognition associated with being an innovative company as evidenced by the Company being invited to more retail buying reviews than earlier years when we were more focused on proving our ability to perform in the big box environment while supplying a short line of products. Our 2013 top line results are indicative of this increased interest and our strategy for market positioning which was forged in 2008-9 has been proven sound. We are now determined to expand our product positioning through the introduction of several more indoor and all new outdoor lighting programs.  Additionally, we will be adding hardwired products to our programs in addition to the existing battery and induction powered product lines.

In the Company's earlier development years the largest selling product group was the Eco-i-Lite power failure light program and represented a majority of the sales.  In 2013 this program accounted for 24.4% of revenues as compared to 84.8% of revenues in 2012, 57.7% in 2011, 63.8%, in 2010. In 2013 we launched new products that were well received by retailers.  A new wireless motion sensor light program and a new multi-function power failure light in a wallplate configuration.  These new introductions accounted for approximately 60% of the 2013 net revenue. Our other products include Pathway Lights® book and multi-task lights, and Door Security Monitor which was planned as our entry into the security products sector.  The security lighting category is a prime target for the Company in 2014.  Since 2009 our branded products have been consistently focused on security and safety.

Since inception, we have focused on establishing and growing relationships with numerous leading international, national and regional retailers including but not limited to: Costco, Home Depot, Lowes, Office Depot, Sam’s Club, Target, The Container Store, True Value, and Wal-Mart.  These distribution channels may sell our products through the Internet as well as through retail storefronts and catalogs/mail order.

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Our experience in management, operations, and the export business has enabled us to develop the scale, manufacturing efficiencies and design expertise that serves as the foundation for us to aggressively pursue niche product opportunities in the largest consumer markets and growing international market opportunities.  While we have traditionally generated the majority of our sales in the domestic market, urbanization, rising family incomes and increased living standards have spurred demand for small consumer appliances internationally.  In order to capture this market opportunity, we introduced the Capstone Industries brands to markets outside the U.S. including Central and South America, Mexico, Taiwan and we anticipate further expansion into Canada as well as other markets where our US customers have strong global initiatives.   Due to the rate of natural and man-made occurrences resulting in loss of electricity worldwide, we are optimistic about the potential growth rate in fiscal years 2014 and 2015 for our power failure lighting programs (assuming sufficient marketing support and response of competition and key markets).  In fact, a key component in the rebranding effort was to create a powerful umbrella identity on the retail package that would serve to rationalize a retail destination within lighting more focused on power failure solutions.

We believe CAPC is well positioned to become a leading manufacturer in the rapidly growing home emergency lighting and security lighting sectors and will continue to be a leader of power-failure lighting solutions for consumers in our channels.  We believe we will maintain our revenue growth because of our ability to deliver products on time, the quality reputation of our products, our business relationships with our retailers and our 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.

Sales and Marketing

CAPC’s products are marketed primarily through a direct independent sales force, distributors and wholesalers.  The sales force markets our products through numerous retail locations worldwide, including mass merchandisers, warehouse clubs, food, drug and convenience stores, department stores and hardware centers.  We actively promote our products to retailers and distributors at North American trade shows, but rely on the retail sales channels to advertise our products directly to the end consumer.  Domestically and internationally, the sales teams market our full portfolio of product offerings.  All sales activities at major account levels involved direct company executive staff participation. The company will also be targeting direct to retail clients through its Capstone International staff for products that fall outside Capstone’s branded categories but are innovative and preferably exclusive to Capstone International.  This should allow for quicker revenue expansion as time consuming product and brand development efforts are the responsibility of the retailer.

Working Capital Requirements

During 2013 the Company reaffirmed its strategic decision to extend its business model to expand distribution, so that products could now be offered from our Los Angeles warehouse for U.S. domestic shipments, to such noted retailers as Home Depot, Target, Office Depot, True Value and Wal-Mart for non-seasonal periods.  This enables retailers to stock our products daily and replenish inventory based on rates of sale in their stores.  This has not only allowed Capstone to add these retailers to its distribution but has helped to normalize future business by minimizing the spikes in activity associated with the majority of the Company's business being promotional or seasonal. This program will require a larger amount of inventory particularly at key selling periods and therefore will require additional funding needs as we ship orders based on retailer weekly or on demand replenishment.  In 2013 to support the capital needs, Sterling National Bank has approved access of our available bank line for domestic inventory funding.  Our liquidity and cash requirements are discussed more fully in Part II, Item 6, Management’s Discussion and Analysis of Operations below.

Competitive Conditions

The consumer products and small electronics businesses are highly competitive, 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.   Our principal lighting competitors in the U.S. are Jasco, Energizer and Sylvania.  We believe private-label sales by large retailers has some impact on the market in some parts of the world as many national retailers such as Target, Wal-Mart, Home Depot, and Costco offer lighting as part of their  private branded product lines.

With trends and technology continually changing, CAPC will continue to endeavor 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.  We continue to invest in developing the technologies and design critical to competing in our markets as evidenced by our recent investment in AC Kinetic Technologies.

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Raw Materials

The principal raw materials used by us are sourced in China, as we manufacture our products exclusively through contract manufacturers in the region.  Although prices of materials have fluctuated over time, CAPC believes that adequate supplies of raw materials required for its operations are available at the present time. CAPC, of course, 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.

Seasonality

Sales and operating profit for household products and electronics are seasonally influenced, with increased purchases by consumers during the key holiday winter season of the fourth fiscal quarter which requires increases in retailer inventories during the third fiscal quarter. In addition, natural disasters such as hurricanes and tornadoes can create conditions that drive increased needs for portable power and spike power failure light sales. Many retailers now recognize a storm preparedness period and the Company believes that it is well positioned to gain market share in these sales periods. The Company’s "Power Failure Solutions” strategy supports this growing awareness.

Intellectual Property

CAPC subsidiary, Capstone owns a number of U.S. trademarks and patents, which CAPC considers of substantial importance and which are used individually or in conjunction with other CAPC trademarks and patents. These include the following trademarks: Timely Reader, Pathway Lights ,Timely Reader Booklights with Timer and Auto Shut Off and 10 LED - Eco-i-Lite Power Failure Light, 5 LED - Eco-i-Lite Power Failure Light, 3 LED - Eco-i-Lite Power Failure Light,3 LED Slim line Eco-i-Lite Power Failure Light, LED Induction Charged Headlight.  CAPC routinely prepares patent and trademark applications for filing in the United States. CAPC will also pursue foreign patent protection in foreign countries if deemed necessary.  CAPC’s ability to compete effectively in the power failure and portable 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 and trademark and patent applications and other technology which CAPC believes are significant to its business. These relate primarily to lighting device improvements and manufacturing processes.

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 from others intellectual property rights necessary to support new product introductions.  There can be no assurance that we will not need to 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. In particular, if we are unable to obtain issuance of a patent with broad claims with respect to our products or if we are unable to prevail in oppositions against our foreign patents with similar claim scope, a competitor may be able to design around our patent rights by employing technologies or innovations that are not covered by our subsisting patents.

Research, Product Development, and Manufacturing Activities

We are engaged in a variety of development and design activities as well as basic research activities directed to the substantial improvement or new application of our existing technologies. We will continue to invest heavily in this area. These costs are expensed when incurred and included in the operating expenses.  Research and product development costs amounted to approximately $225,754 in 2013, $227,087 in 2012, $197,290 in 2011, $140,917 in 2010.

Employees

We employed 9 employees as of December 31, 2013 in our U.S. office and 4 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.

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Prior History

We were incorporated on September 18, 1986 as a Delaware corporation.  From 1986 until the acquisition of CAPI, 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.

Acquisition of CAPI:  on September 15, 2006, we entered into a Stock Purchase Agreement with CAPI and Stewart Wallach, the sole shareholder, a director and a senior executive officer of CAPI.  Under the Stock Purchase Agreement, we acquired 100% of the issued and outstanding shares of Capstone Common Stock in exchange for $750,000 in cash (funded by the previously reported credit line provided by certain directors of CAPC) and $1.25 million in Series B Preferred Stock, $0.01 par value per share, which Series B Stock is convertible into 15.625 million “restricted” shares of our Common Stock, $0.0001 par value (“Common Stock”).   On July 9, 2009, the outstanding Series B Preferred Shares were converted to Series B-1 Preferred Shares. The series B-1 shares are convertible into common stock; at a rate of 66.66 of common shares for each share of series “B-1” On December 17, 2009, the outstanding Series B-1 shares were converted into common stock.

Available Information

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

Government Regulation

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

Note Payable – Sterling National bank

On September 8,2010, in order to fund increasing Accounts Receivables and support working capital needs, CAPI secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank),  located in New York, whereby CAPI receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted.  There will be a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is ¼% above Sterling National Bank Base Rate, which at the time of closing was 5%.  As of December 31, 2013 and 2012, the balance due to Sterling was $4,237,144 and $1,245,159 respectively

In July, 2011, Stewart Wallach, the Chief Executive Officer and Director of CAPC and JWTR Holdings, L.L.C. owned by a director, Jeffrey Postal entered into  a Securities and Notes Payable Agreement with Howard Ullman, the previous Chairman of the Board of CAPC, whereby they would purchase equally all of Howard Ullmans notes including the notes subordinated to Sterling National Bank.

On July 12, 2011, Stewart Wallach individually and accepted by Sterling National Bank, agreed to be the sole personal guarantor to Sterling National Bank for all of Capstone Industries, Inc. loans.

Effective July 12, 2011, Capstone Industries, Inc., credit line with Sterling was increased from $2,000,000 to $4,000,000 to provide additional funding for increased revenue growth.

 Effective December 2nd, 2013, Capstone Industries, Inc., credit line with Sterling National Bank was further increased from $4,000,000 up to $6,000,000 to provide additional funding for increased revenue during the fourth quarter. The credit line reverted back to $4,000,000 on February 28th, 2014.

Effective October 1, 2011, Sterling Capital Funding conducted business as the Factoring and Trade Division of Sterling National Bank. All obligations under our agreements have been assigned to Sterling National Bank.

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Item 1A.  Risk Factors.

In addition to other information contained in this Annual Report on Form 10-K, 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.

CAPC faces risks associated with global economic conditions.

In general, CAPC’s financial results can be significantly affected by negative economic conditions, inflationary or deflationary pressures, high labor or material costs, and unforeseen changes in consumer demand or buying patterns.  These general risks were heightened recently as economic conditions globally deteriorated significantly and the recovery in most developed markets remains sluggish.  Such economic conditions could have potentially significant impacts on employment levels and consumer demand in many countries where CAPC markets its products, with a direct impact on our sales, profitability and our ability to generate sufficient internal cash flows or access credit at reasonable rates in order to meet future operating expenses, fund capital expenditures or repay debt as it becomes due.

The recent economic conditions caused a number of our retailer customers to reduce their inventories and more critically analyze their inventory management and product offerings, including possibly shifting purchasing patterns to lower-cost options.  Similar retailer customer activity could negatively impact CAPC’s operating results.  In addition, declining financial performance by certain of our retailer customers could impact their ability to pay us on a timely basis, or at all.  Increasing retailer customer concentration on a global scale could result in reduced sales outlets for our products, greater negotiating pressures on CAPC, and global pricing requirements across markets.

Future unfavorable economic conditions may impact CAPC’s earnings performance and our opportunities to reduce discretionary spending may be limited. Any reductions in discretionary spending may have a greater than anticipated negative impact on future sales or brand equity.

CAPC success depends largely on the continued service and availability of key personnel.

Much of CAPC’s future success depends on the continued availability and service of key personnel, including its Chief Executive Officer, executive team and other highly skilled employees.

CAPC’s inadequate or expensive funding and financing alternatives

CAPC’s current short term debt level as of December 31, 2013, was approximately $7,457,218.  Long Term Debt which matures after twelve months is approximately $0 of scheduled debt maturities.  Our current debt structure consists of private placement note agreements from insiders to fund investment, operations and extraordinary transactions and Sterling National Bank funding.  Future 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, and could hinder our ability to remain in compliance with our current debt covenants.  If we have a shortfall in revenues without a corresponding reduction to its 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 the  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;

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

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

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

·   develop and fund research and technological innovations,

·   receive and maintain necessary intellectual property protections,

·   obtain governmental approvals and registrations,

·   comply with governmental regulations, and

·   anticipate consumer needs and preferences successfully.

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

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

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

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

Competition is based upon brand perceptions, product performance and innovation, customer service and price. CAPC’s ability to compete effectively may be affected by a number of factors:

·   CAPC’s primary competitors have substantially greater financial, marketing and other resources and greater market share in certain segments than CAPC does, as well as significant scale and negotiating leverage with retailers;

·   CAPC’s competitors may have lower production, sales and distribution costs, and higher profit margins, than CAPC, which may enable them to compete more aggressively in offering retail discounts and other promotional incentives;

·   loss of key retailer customers to competitors may erode CAPC’s market share; and

·   the level and nature of advertising and promotional spending by CAPC could impact consumer demand, retailer decisions regarding our product offerings, limit our access to shelf space, and hinder our ability to expand distribution to new retailer customers.

The success of our products can suffer if our marketing plans or new product offerings do not have the desired impact on our brand’s image or ability to attract consumers.  Further our operating results could be adversely affected if one of our leading products suffers damage to its reputation due to real or perceived quality issues.

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

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

·   the possibility of expropriation, confiscatory taxation or price controls

·   adverse changes in local investment or exchange control regulations;

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

·   legal and regulatory constraints;

·   tariffs and other trade barriers; and

·   difficulty in enforcing contractual and intellectual property rights.

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

All of CAPC’s sales in fiscal 2013 were transacted in U.S. dollars, and 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.

Changes in raw material costs or disruptions in the supply of raw materials could erode CAPC’s profit margins and negatively impact manufacturing output and operating results.

Pricing and availability of raw materials for use in our businesses can be volatile due to numerous factors beyond our control, including general, domestic and international economic conditions, labor costs, production levels, competition, consumer demand, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us, and may, therefore, have a material adverse effect on our business, results of operations and financial condition. In the past, substantial increases in the cost of a number of raw materials have been partially offset by price increases.   However, there is no certainty that CAPC will be able to offset future increases in raw material prices, especially given the competitive environment. In addition, the supply of certain raw materials can be significantly disrupted by labor activity, political conflict, and disruptions to sourcing or transportation activities, which could impact our manufacturing output.

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

The Company supplies product to the most recognized big box retailers across America and the highest concentration of its business in 2013 was in the flourishing warehouse club channel.  The Company’s sales are made pursuant to purchase orders and we do not have supply agreements or guarantees of minimum purchases from them.   As a result, these customers may cancel their purchase orders or reschedule or decrease their level of purchases from us at any time.   The loss or a substantial decrease in the volume of purchases by any of the Company’s top customers would harm it’s sales and profitability.

CAPC’s businesses are subject to regulation in the U.S. and abroad.

The manufacture, packaging, labeling, storage, distribution, advertising and sale of our products are subject to extensive regulation in the U.S. and abroad. This regulation includes, but is not limited to, the following:

·   in the U.S., claims and advertising with respect to our products are regulated by the Federal Trade Commission;

·   our operations are subject to taxation by federal, state, local and foreign taxing authorities;

·   in foreign countries where we manufacture or sell our products, we are subject to similar regulation, and in the U.S. by state and local authorities; and

·   our selling practices are regulated by competition and anti-trust authorities in the U.S. and abroad.

A finding that we are in violation of, or not in compliance with, applicable laws or regulations could subject us to civil remedies, including fines, damages, injunctions or product recalls, or criminal sanctions, which could be material.   Even if a claim is unsuccessful, is not merited or is not fully pursued, the negative publicity surrounding such assertions regarding our products or processes could jeopardize our reputation and brand image.   Damage to our reputation or loss of consumer confidence in our products for any of these reasons could have a material adverse effect on our businesses, as well as require resources to rebuild our reputation.

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While we believe we have obtained the necessary regulatory approvals to manufacture and sell our currently marketed products, new or more restrictive regulations or more restrictive interpretations of existing regulations could have an adverse impact on our businesses.  Additionally, changing  laws,   regulations  and  standards   relating  to  corporate governance and public  disclosure,  including the  Sarbanes-Oxley Act of 2002 or "SOX" .and new SEC  regulations  are creating  uncertainty for companies such as ours.  These new or changed  laws,  regulations  and  standards  are  subject to varying interpretations in many cases due to their lack of specificity, and as a result,  their  application  in practice may evolve over time as new guidance is provided by regulatory  and governing  bodies,  which could result in continuing uncertainty  regarding  compliance  matters  and higher  costs  necessitated  by ongoing  revisions to disclosure and governance practices.  We intend to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.  If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation and attraction as an investment may be substantially harmed.

CAPC’s manufacturing facilities or supply channels may be subject to disruption from events beyond our control.

We currently operate a number of manufacturing and packaging facilities in China for our products. Operations at such facilities may be subject to disruption for a variety of reasons, including:

·availability of raw materials;

·work stoppages or other labor disputes;

·power supply disruptions;

·industrial accidents or other occupational health and safety issues;

·disruptions in logistics;

·loss or impairment of key manufacturing sites;

·raw material and product quality or safety issues;

·licensing requirements and other regulatory issues; and

·acts of war, terrorism, pandemics, fire, earthquake, flooding or other natural disasters.

There is a possibility that third party manufacturers, which produce our products, could discontinue production with little or no advance notice, or experience financial problems or problems with product quality or timeliness of product delivery, resulting in manufacturing delays or disruptions, regulatory sanctions, product liability claims or consumer complaints.

Although we have contingency plans in place, and our multiple facilities and third-party manufacturers can provide alternative sources of product supply in the event of manufacturing disruptions, if a major disruption were to occur, it could result in delays in shipments of products to customers or suspension of operations.

CAPC’s business involves the potential for product liability and other claims against us, which could affect our results of operations and financial condition.

We face exposure to product liability claims in the event that one of our products is alleged to have resulted in property damage, bodily injury or other adverse effects.  Although we maintain product liability insurance in amounts that we believe are reasonable, we cannot assure you that we will be able to maintain such insurance on acceptable terms, if at all, in the future or that product liability claims will not exceed the amount of insurance coverage.   Additionally, we do not maintain product recall insurance.  As a result, product recalls or product liability claims could have a material adverse effect on our business, results of operations and financial condition.

In addition, we face potential exposure to unusual or significant litigation arising out of alleged defects in our products or otherwise.  We spend substantial resources ensuring compliance with governmental and other applicable standards. However, compliance with these standards does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk.  We do not maintain insurance against many types of claims involving alleged defects in our products that do not involve personal injury or property damage.  As a result, these types of claims could have a material adverse effect on our business, results of operations and financial condition.

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

CAPC relies on trademark, trade secret, patent and copyright laws to protect our intellectual property rights.  In particular, our trademarks are of material importance to our business and are among our most important assets. In fiscal 2012, 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.

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

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

We may not be able to continue to identify and complete strategic acquisitions and effectively integrate acquired companies to achieve desired financial benefits.

We may not be able to identify and successfully negotiate suitable strategic acquisitions, obtain financing for future acquisitions on satisfactory terms or otherwise complete future acquisitions.   Furthermore, our existing operations may encounter unforeseen operating difficulties and may require significant financial and managerial resources, which would otherwise be available for the ongoing development or expansion of our existing operations.

Even if we can complete future acquisitions, we face significant challenges in consolidating functions and effectively integrating procedures, personnel, product lines, and operations in a timely and efficient manner.  The integration process can be complex and time consuming, may be disruptive to our existing and acquired businesses, and may cause an interruption of, or a loss of momentum in, those businesses.  Even if we can successfully complete the integration of acquired businesses into our operations, there is no assurance that anticipated cost savings, synergies, or revenue enhancements will be realized within the expected time frame, or at all.  CAPC is subject to a number of significant risks associated with acquisitions, including:

·   the  risk  that  our  industry  may  develop  in  a  different direction  than  anticipated  and  that  the  technologies  we acquire do not prove to be those we need to be  successful  in the industry;

·   the risk that future  valuations  of acquired  businesses  may decrease from the market price we paid for these acquisitions;

·   the generation of insufficient revenues by acquired businesses to offset acquisition costs and increased  operating expenses  associated with these acquisitions;

·   the potential  difficulties in completing  in-process research and development  projects and delivering high quality products to our customers;

·   the  potential   difficulties  in  integrating  new  products, businesses  and  operations  in  an  efficient  and  effective manner

·   the risk  that our  customers  or  customers  of the  acquired businesses may defer  purchase  decisions as they evaluate the impact of the acquisitions on our future product strategy

·   the potential   loss  of  key   employees  of  the  acquired businesses;

·   the risk that acquired businesses will divert the attention of our senior  management from the operation of our core Capstone business; and

·   the risks of entering new markets in which we have limited experience and where competitors  may have a stronger  market presence.

·   Our inability  to  successfully  operate  and  integrate newly-acquired  businesses  appropriately,  effectively  and in a timely  manner  could have a material adverse effect on our ability to take advantage of further  growth in demand for products in our  marketplace,  as well as on our  revenues, gross margins and expenses.

OUR COMMON STOCK

Our Common Stock is subject to certain "penny stock" rules promulgated by the SEC.  Those rules impose certain sales practice requirements  on brokers who sell "penny stock" ( that is, stock with a market price below $5 per share and more commonly  below $1 per share) to persons other than  established  customers and accredited  investors  (generally institutions  with assets in excess of $5,000,000 or individuals  with net worth in excess of $1,000,000).   Brokers must make a special suitability determination for the purchaser and receive the purchaser's written consent to the transaction prior to the sale.  Furthermore,  the penny stock rules generally require, among other things,  that brokers engaged in secondary trading of penny stocks provide customers with written  disclosure  documents,  monthly statements of the market value of penny stocks,  disclosure of the bid and asked prices and disclosure of the  compensation  to the  brokerage  firm and  disclosure  of the sales  person working for the brokerage firm.  These rules and regulations adversely affect the ability of brokers to sell or promote our Common Stock shares and limit the liquidity and market price of our securities.  Our lack of any sustained history of sustained profitability from operations also depresses the market value of our Common Stock.

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We lack primary market makers and institutional support for our Common Stock traded in the public markets.  As result, whenever the market price for our Common Stock experiences any significant increase in market price, in terms of percentage increase,  it is difficult for our Common Stock to maintain such an increased market price due to  the pressure of shareholders selling shares of Common Stock to reap any profits from such increase in market price and the lack of primary market makers and institutional investors to stabilize and support any such increase in market price of our Common Stock (by not selling their positions of such stock in response to market price increases and entering the market to purchase more shares of our Common Stock).  Further, trading of a relatively small volume of our Common Stock may have a greater impact on the trading price for our Common Stock than would be the case if our public float were larger or our Common Stock was actively supported by market makers. We cannot predict the prices at which our Common Stock will trade in the future.

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

·   our lack of primary market makers for our Common Stock – we have market makers but none

·   are primary market makers who maintain an inventory of our Common Stock and actively  support the Common Stock;

·   general worldwide economic conditions and the current crisis in the financial markets;

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

·   additions or departures of key personnel;

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

·   our status as a “Penny Stock” Company;

·   our ability to execute our business plan;

·   operating results being below expectations;

·   loss of any strategic relationships;

·   industry or product developments;

·   sale of a substantial number of shares may cause the price of our common stock to decline;

·   economic and other external factors; and

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

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

Item 1B.  Unresolved SEC Staff Letters.

None for fiscal year ended December 31, 2013.

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 at 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442. Rent expense, included in general and administrative expenses, for the years ended December 31, 2013 and 2012 amounted to $55,871 and $56,157, respectively.  The Company has no current plans to expand its facilities and believes that its current facilities will be adequate for future growth. Capstone Industries entered into a new lease agreement for the same office space as currently located. The new lease agreement dated January 17, 2014 and effective February 1, 2014, has a 3 year lease with a base annual rent of $46,810 paid in equal monthly installments. The company has the one time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term. Under the new lease agreement, Capstone is responsible for its apportioned charges for electricity or any other utility consumed in the leased premises.

Item 3.  Legal Proceedings.

We are not a party to any material pending legal proceedings and, to the best our knowledge, no such action by or against us has been threatened.  From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. Although occasional adverse decisions or settlements may occur in such routine lawsuits, we believe that the final disposition of such routine lawsuits will not have material adverse effect on our financial position, results of operations or status as a going concern.

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Other Legal Matters

To the best of our knowledge, none of our directors, officers or owner of record of more than five percent (5%) of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us in reference to pending litigation.

Item 4.  Mine Safety Disclosures (Not Applicable).

PART II

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

As of December 31, 2013, there were approximately 1,273 holders of record (excluding OBO/Street Name accounts) of our Common Stock and 657,760,532outstanding shares of the Common Stock. We have not previously declared or paid any dividends on our Common Stock and do not anticipate declaring any dividends on our Common Stock in the foreseeable future. The following table shows the high and low bid prices of the Common Stock as quoted on the OTC Bulletin Board or OTC Markets Group, Inc. QB Market, by quarter, during each of our last two fiscal years ended December 31, 2013 and 2012. 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 Bulletin Board or The OTC Markets Group, Inc. QB Market, for the respective periods.

	2013		2012
	high	low	high	low
1st Quarter	.009	.007	.019	.0010
2nd Quarter	.008	.005	.017	.091
3rd Quarter	.007	.004	.019	.005
4th Quarter	.019	.005	.010	.003

Effective July 6, 2012, Company’s  corporate name changed to  “Capstone Companies, Inc.”  from “CHDT Corporation” and the trading symbol for the Company’s Common Stock, $0.0001 par value per share, changed from “CHDO” to “CAPC.”  The Company’s Common Stock is quoted on The OTC Markets Group, Inc.’s QB Tier.

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 will be at the sole discretion of our board of directors, but we do not anticipate declaring or paying any dividends in the foreseeable future due to our need to fund business and product development.

Recent Sales of Unregistered Securities

Except as set forth herein or reported in our Information Statement to be filed within 120 days after the end of our fiscal year ended December 31, 2013, we have no recent sales of unregistered securities that have not been previously reported in filings with the SEC.

Item 6.  Selected Financial Data. (Not Applicable)

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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 Form 10-K contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, 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 Form 10-K 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 Form 10-K. All information presented herein is based on CAPC’s fiscal calendar. Unless otherwise stated, references to particular years or quarters refer to the CAPC’s fiscal years ended in December and the associated quarters of those fiscal years. CAPC assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Executive Overview

Capstone Industries started supplying the lighting departments of recognized big box retailers in early 2006 prior to its acquisition by Capstone Companies Inc.  The company exploited a niche category referred to as power failure lighting. Capstone entered the business strategically through its introduction of induction charging and stylish designs in what was commonly considered a utility type product category.   We continue to develop and manufacture a range of stylish, innovative and easy to use consumer lighting products including portable booklights, specialty book-lights, multi-task lights, night lights and wireless motion sensor lights in addition to our most recognized brand of Eco-I-Lites.  In 2012 we also developed a new product called “Door Security Monitor” that launched the Company into the home security market.  Our products are primarily sold under our wholly-owned subsidiary.  CAPI’s “Capstone’s” brand name as well as under store brands from time to time.  CAPC seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers with products that make their lives simpler and safer.  Disposable income remains limited for many consumers, and because the company's products are seen as necessity for safety and security reasons, sales at retail remain consistent. Consumers often give these useful products as gifts as well which is evidenced by the substantial historic holiday sales.

To date the Company has been focused on five product categories: (1) Rechargeable Handheld Power Failure lights and night lights.  (2) Battery powered Wireless Motion Sensor Lights (3) Power Failure lights in several styles including handheld and wall fixtures. (4) Portable booklights and tasklights; and (5) Door Security Monitor to be used for residential and commercial security applications.  Within these categories, the Company follows a closely defined business strategy to develop and increase market leadership positions in these key product segments. These product categories are prioritized based on their capacity to maximize the use of the organization’s core competencies and to deliver sustainable long-term growth.

Our ongoing strategy is to develop and maintain positions ofinnovative and technical leadership in our chosen markets, and leverage those positions to grow the amount of volume of product sold to those markets and to selectively acquire business with similar technical capabilities that could benefit from our leadership position and strategic direction.  Historically we 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 improving odds for the company to win a profitable niche of the market share.   We continue to look for opportunities in all of our markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions.  The company's investment in AC Kinetics is indicative of the type of investment where some strategic benefit in addition to a financial return can be realized.

On an ongoing basis, 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. The Company 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.

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

We operate in a highly competitive industry with aggressive pricing and frequent changes in technology or design.  We may not have sufficient or 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.

We also operate in product lines which have moderate profit margins.  As such, we are very selective when planning new product launches in an effort to minimize too many instances of launching or producing products that do not appeal to consumers and produce sufficient consumer demand or sales.

We do not perform third party or independent marketing studies or consumer surveys, but rely on customer feedback to our salespeople and our review of industry trends in trade journals and news media and at trade shows to formulate a marketing and product development plan.

CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK

(Dollars in thousands)	2013			2012			2011
Sales	$	14,594		$	8,363		$	10,249
Gross Margin %		24.7	%		21.4	%		24.2	%
SG& A Expenses	$	2,494		$	2,121		$	1,606
SG&A Expenses as a Percentage of Sales		17.1	%		25.4	%		15.7	%
Interest Expense	$	389		$	274		$	296
Effective Tax (Benefit) Rate		0	%		0	%		0	%
Net (Loss) Earnings	$	727		$	(607	)	$	576

CONSOLIDATED OVERVIEW OF OPERATIONS

Net Revenue for the year ended December 31, 2013 and 2012 were approximately $14,594,000 and $8,363,000, respectively, an increase of $6,231,000 or 74.5% increase over 2012 revenue.  For the 4th quarter 2013 net revenues were approximately $7,253,000 as compared to $2,512,000, in the 4th quarter 2012.  This was an increase of $4,741,000 or 188.7% over the same quarter last year. We would also note that gross revenue for 2013 was $15,844,000 but we provided more than $1,250,000 of allowances to retailers to promote our existing and new product launches.

The increased net revenue during 2013 was impacted by two situations.

1. The Company had previously made a strategic decision to expand distribution, so that products could be offered from our Los Angeles warehouse for US domestic shipments, to such noted retailers as Home Depot, Target, Office Depot, True Value and Wal-Mart for non-promotional periods. This enabled retailers to stock our products daily and replenish inventory based on rates of sale in their stores, as a result we could react much quicker to retailer needs. This program has been very successful in 2013 and also helped to normalize planned business volumes by minimizing the spikes in activity associated with the majority of the Company's business being promotional or seasonal.

2. The Company also launched two new product lines, the 10 LED Wallplate Night Light and the Wireless Motion Sensor Light. Both of these exciting new programs have been well received by Retailers and consumers in 2013.

Cost of Sales, for the year ended December 31, 2013 and 2012, were approximately $10,983,000 and $6,575,000 respectively.  This represents 75.3% and 78.6% respectively of total Net Revenue.  For the 4th quarter ended December 31, 2013 and 2012, costs of sales were approximately $5,584,000 and $2,050,000, that’s 77.0% and 81.6% of net revenue respectively.

Despite rising component and labor costs in China our overall material costs have increased only slightly during the year.  This has been achieved through strategic and volume materials buying and negotiations with our factories; however as a percent to net sales the cost percentage has decreased mainly because with our additional new product releases, we now have an improved blended unit cost.

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Gross Profit, for the year-ended December 31, 2013, was approximately $3,610,000, an increase of approximately $1,822,000 or 101.9% from the 2012 gross profit of $1,788,000.  Gross profit as a percentage of net sales was 24.7% for the year compared to 21.4% for 2012.  Gross Profit for the 4th quarter 2013 and 2012 was approximately $1,669,000 and $462,000 respectively, an increase of $1,207 or 261.3% % compared to same quarter in 2012.

The substantial gross profit increase from 2012 levels was the result of the increased sales volume in 2013 and the shipment of new products that provided an improved blended profit.  The increase of the gross profit as a percent to sales to 24.7% in 2013 compared to 21.4 % in 2012 was the result of effective overseas unit cost containment programs, effective volume buying with overseas suppliers and an improved profit resulting from an expanded product offering. Note the Company also provided $1,250,000 of allowances in 2013 to retailers to promote product awareness and sell through for the two new items launched in 2013

Operating Expenses were approximately $2,494,000 in 2013 as compared to $2,121,000 in 2012, a net increase of $373,000 or 17.6%.  Operating expenses for the 4th quarter ending December 31, 2013 and 2012 were approximately $862,000 and $606,000 an increase of $256,000 or 42.2% over 2012.  In 2013, as a percentage of net sales operating expenses were 17.1% as compared to 25.4% in 2012.

We also would note we have continued to invest significant expenses for future revenue growth, specifically:

Sales and Marketing expenses increased by $126,000 or 34.5% up from $364,000 in 2012 to $490,000, as we invested in the FIFA 2014 World Cup Watch program, trade shows, paid commission to new sales representative, and incurred  increased costs in warehousing - handling costs in maintaining  the US domestic program.

Compensation Expenses were approximately $973,000 in 2013, an increase of $72,000 or 8.0% from $901,000 in 2012, as executive management earned full approved salary and additional staff was added to support the increased revenue.

Professional Fees for 2013 were $ 326,000 compared to $269,000 in 2012, an increase of $57,000 or 21.1% as we incurred additional expenses in staffing the new entity CIHK with a Director and Manager, package design and rebranding of our product line, and increased accounting fees associated with the addition of a new Hong Kong based accounting firm to support Capstone International and increased fees associated with quarterly reporting of the Company’s results.

Product Development expenses for 2013 was $226,000 as compared to $227,000 a slight reduction of $1,000 over 2012.

Other General and Admin expenses for 2013 were $479,000; up $119,500 from $360,000 in 2012.  Some of this increased expense was the result of the achieved higher volumes, such as our insurance liability increased by $25,000 alone because of the higher net revenue.  National Sterling Bank fees also increased by approximately $29,000 as a result of the increased funding line that has been made available to the Company.

For the year ending December 31, 2013, interest expenses were approximately $389,000 an increase of $115,000 as compared to $274,000 expensed in 2012.  This increase was the result of funding requirements to purchase product overseas during the 2013. In December 2013, we did pay off some old loans due to affiliates and it is our goal to continue to reduce old outstanding loans when cash flow allows to reduce the interest burden as much as possible.

For the year ended December 31, 2013, the Company had net income of approximately $727,000.  For the year ended December 31, 2012 the Company had a net loss of approximately $607,000.  For the 4th quarter ended December 31, 2013, the Company had a net income of approximately $683,000 as compared to a net loss of $236,000 in the 4th quarter, 2012.  For the year 2013 that is a net profit improvement of $1,334,000 as compared to 2012. For the 4th quarter 2013, the net profit improvement was $919,000 compared to the 4th quarter in 2012.

The effective tax (benefit) rate was 0% in 2013 compared with 0% in 2012.

SEGMENT RESULTS OF OPERATIONS AND OUTLOOK

Operating profit, as presented below, is sales less cost of sales and other operating expenses excluding interest expense, corporate expenses and other non-operating revenue and expenses.  Cost of sales and operating expenses are directly attributable to the respective segment.  Operating profit is reconciled to earnings before income taxes in Note 8 of Item 8, Financial Statements and Supplementary Data, of this report.

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(In thousands, except percentages)	2013			2012			2011
Sales	$	14,594		$	8,363		$	10,249
Operating Profit	$	3,610		$	1,788		$	2,478
Operating Margin		24.7	%		21.4	%		24.2	%
(In thousands, except percentages)		2013			2012			2011
Total Assets	$	11,278		$	6,113		$	4,138

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

With the current retail interest in our product offerings, expansion of distribution channels through the domestic purchase program, the establishment of Capstone International Hong Kong. Ltd, and its new direct to retail campaign,  and the introduction of new products and the product development program implemented with AC Kinetics Technologies the Company expects its sales volumes  to significantly grow

Off Balance Sheet Arrangements

We do not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.

Contractual Obligations

The following table represents contractual obligations as of December 31, 2013:

	Payments Due by Period
(In thousands)	Total		2014		2015		2016		After 2016
Purchase Obligations	$	1,931	$	1,931	$	0	$	0	$	0
Short-Term Debt		7,457		7,457		0		0		0
Long-Term Debt		0		0		0		0		0
Operating Leases		241		85		96		56		4
Interest on Long-Term Debt		44		44		0		0		0
Other Long-Term Liabilities		0		0		0		0		0
Total Contractual Obligations	$	9,673	$	9,517	$	96	$	56	$	4

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.

Note Payable and Long-Term Debt — See Item 8, Financial Statements and Supplementary Data, Note 4 in this report.

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

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LIQUIDITY AND CAPITAL RESOURCES

(In thousands)	2013		2012		2011
Net cash provided (used) by:
Operating Activities	$	(2,944)	$	(1,397)	$	1,281
Investing Activities		(513)		(110)		(59)
Financing Activities		3,482		1,754		(1,172)

Our borrowing capacity with Sterling National Bank, funding support from directors and cash flow from operations provide us with the financial resources needed to run our operations and reinvest in our business.

Operating Activities

Cash flow used in operating activities was approximately $(2.944) million in 2013 compared with approximately $(1.397) million used by operating activities in 2012.  As of 12/31/13 Accounts Receivable was $4.254 million, higher than last year, due to large shipments in the 4th quarter.  Higher sales is the main reason for the increase in Cash use at the end of the year.

Our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers.  Sales are influenced significantly by the build rates of products, which are subject to general economic conditions.  Our sales are also impacted by our ability to obtain new orders.  Over time, sales will also be impacted by our success in executing our strategy to increase productivity volume.

Investing Activities

Cash used for investing activities in 2013 was $(513K) compared to $(110K) in 2012.  The Company invested $500k in another company called AC Kinetics and a further $13k in equipment to support new product launches.  Future capital requirements depend on numerous factors, including expansion of existing product lines and introduction of new products.  Management believes that our cash flow from operations and current borrowing sources will provide for these necessary capital expenditures.

Financing Activities

Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing and our operations in the future.  Net Cash provided by financing activities for the year as of December 31, 2013 was $3.482 million and $1.754 million in 2012. At December 31, 2013, the Company was in compliance with all of the covenants pursuant to existing credit facilities.  The Company’s cash needs for working capital, debt service and capital equipment during 2014 are expected to be met by cash flows from operations and cash balances, the existing bank loan facility, a working capital loan funded by a director, and if necessary additional notes payable funding from established sources.

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, but we do not anticipate declaring or paying any dividends in the foreseeable future due to our need to fund business and product development.

RELATED-PARTY TRANSACTIONS

See Note 4 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

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

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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 included after the signature page to this report on Form 10-K.

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

There are not and have not been any disagreements between the Company and its accountants on any matter of accounting principles, practices, financial statements disclosure or auditing scope or procedure.

Item 9A.  Controls and Procedures.

Management’s Evaluation of Disclosure Controls and Procedures.  Since 2010 our Chief Financial Officer, assisted by the Corporate Controller, is responsible for establishing and maintaining adequate internal disclosure control over financial reporting  (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company.  Since December 2007, our Chief Financial Officer, often assisted by the Chief Operating Officer, has been responsible for establishing and maintaining adequate internal disclosure control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

As of the date of this Report on Form 10-K, Stewart Wallach is our Chief Executive Officer and James Gerald (“Gerry’) McClinton is our Chief Financial Officer and Chief Operating Officer.  Mr. Laurie Holtz, our previous Chief Financial Officer, retired in 2009.  Laurie Holtz was appointed as our Chief Financial Officer in December 2007.  Mr. McClinton handled the chief financial duties prior to Mr. Holtz’s appointment.

Our Chief Financial Officer has reviewed the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) and internal control over financial reporting (as defined in Securities Exchange Act of 1934, as amended, Rules 13a-15(f) and 15d-15(f)) as of the fiscal year end of this Form 10-K.

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

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

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

This annual report does not include an attestation report of CAPC’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by CAPC’s registered public accounting firm pursuant to rules of the Commission that permit CAPC to provide only management’s report in this annual report on Form 10-K.

Item 9B.  Other Information

None

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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.  Mr. Sloven is an outside director.

The Company typically elects directors by written consent because a majority of the voting securities are held by members of the Company’s management and a former director and officer and his wife. The Company has been unable to date to obtain sufficient written consents to date to elect the proposed management slate of director nominees without conducting a general solicitation subject to Regulation 14A or Regulation 14C reporting requirements. Further, the Company may propose resolutions requiring shareholder approval at a shareholder meeting requiring a general solicitation under Regulation 14A, but such proposals are not ready for presentation for shareholder approval. For these and other reasons, the Company may be unable to file an information statement or proxy statement within the required 120 days after the end of its fiscal year and, as such, the Company is completing this Part III of the Report on Form 10K for the fiscal year ending December 31, 2013.

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 2013, all directors attended at least 75% of all 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 shareholders 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 Information Statement 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 public auditors, 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 2013 were Jeffrey Guzy and Jeffrey Postal. The Company believes that Mr. Guzy is an independent director under applicable NASDAQ standards.

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REPORT OF THE AUDIT COMMITTEE

The material in this section is not deemed filed with the SEC and is not incorporated by reference in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this Information Statement 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 Company’s internal compliance programs. The function of the Audit Committee is not intended to duplicate or to certify the activities of 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.

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 2013 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 fiscal year 2013 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, Robison Hill & Company, required by Independence Standards Board Standard No. 1 (“Independence Discussions with Audit Committee”) and has discussed with Robison Hill & Company 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 10K  for the fiscal year ended December 31, 2013, as filed with the Commission on March 26, 2014.

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

/s/Jeffrey Guzy

Jeffrey Guzy, Chairman

March 27, 2014

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REPORT OF THE COMPENSATION AND NOMINATING 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 OF 1933 OR EXCHANGE ACT, EXCEPT TO THE  EXTENT  THAT THE  COMPANY  SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.

OBJECTIVES

The Compensation Committee is primarily responsible for reviewing the compensation  arrangements for the Company's executive  officers,  including the Chief Executive  Officer and Chairman of the Board,  and  for  administering  the  Company's  stock-based compensation plans. The Compensation Committee was established in January 2005. The Compensation Committee held one meeting in fiscal year 2013.  Larry Sloven, Jeffrey Guzy and Jeff Postal are committee members for 2013.  The Company believes that Mr. Guzy is an independent director under applicable NASDAQ standards.  Mr. Sloven is not deemed to meet those standards because of his company's product development and outsourcing relationship with the Company.

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

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

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

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

The Compensation and Nominating Committee, together with our board, establishes compensation for our Chief Executive Officer and our other executive officers and administers the 2005 Equity Plan. The Compensation Committee has a written charter, which is available on the Company Web Site (located at http://www.capstonecompaniesinc.com).

The purpose of our Compensation Committee is to:

·   discharge the board’s responsibilities relating to compensation of our executive officers;

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

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

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The Compensation and Nominating Committee did not use outside consultants in fiscal year 2013.  It used compensation arrangements by other microcap companies to judge the appropriateness of the Company compensation arrangements.

The Company compensates people with:

Cash Compensation.  Cash compensation consists of base salary and annual bonus potential. Our compensation consultant assists us in analyzing similar or “peer” companies to guide our determination of appropriate cash compensation. Our cash compensation goals for our executive officers are based upon the following principles:  (1) compensation levels are comparable to industry levels as adjusted for experience and skills of individual officers; and (2) pay should retain key personnel.

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

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

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

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

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

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

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

CODE OF ETHICS

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

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DIRECTOR MEETINGS IN FISCAL YEAR 2013

The Board of Directors had three official meetings in fiscal year 2013.  During fiscal year 2013, 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 public shareholders.  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 Board of Directors believes that having different people serve as Chairman of the Board of Directors and Chief Executive Officer is an important structural safeguard to proper risk assessment.  Further, the Chief Financial Officer is allowed and encouraged to address the Board of Directors on any risk issues facing the Company.

The Chief Executive Officer or “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.

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

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

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The Company faces a number of risks, including, without limit:  (1) persistent net losses in consecutive fiscal quarters and years, which losses require outside funding or financing through the sale of our securities or insider loans to the Company (all of which usually dilute our existing shareholders and discourage public investors in investing in our Common Stock); (2) chronically low public stock market price, which hinders our ability to fund and grow our business; (3) reliance on regional and national distributors and retailers to sell  our products in a highly competitive market filled with competitors who possess significantly greater resources and market share than our company; (4) negative impact of the ongoing worldwide recession on consumer demand for the kind of discretionary products that we sell; (5) customary operational risks; (6) lack of a strong brand name for our products; (7) reliance on key personnel and the lack of key man insurance that pays for replacements; (8) lack of primary markets and lack of institutional support for our publicly traded Common Stock; (9) low market price of our Common Stock hindering our ability to consummate or attract merger and acquisition candidates; (10) lack of assets (other than accounts receivable) to attain commercially reasonable financing for operations; and (11) the risks faced by any product company in today’s challenging environment.

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

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

Director - Minimum Qualifications.  The Nominating and Compensation 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 Nominating and Compensation Committee will then evaluate the prospective nominee to determine if he or she possesses the following qualifications, qualities or skills:

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

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

familiarity with the Company’s market;

personal and professional integrity, honesty and reputation;

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

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

independence under applicable Commission and listing definitions.

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The Nominating and Compensation 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 Nominating and Compensation 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 Nominating and Compensation 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 Nominating and Compensation 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 Nominating and Compensation Committee has not used an independent search firm to identify nominees.

In evaluating potential nominees, the Nominating and Compensation 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 Nominating and Compensation 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 Nominating and Compensation 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 Nominating and Compensation Committee may choose not to consider an unsolicited recommendation if no vacancy exists on the Board of Directors and the Nominating and Compensation Committee does not perceive a need to increase the size of the Board of Directors.  To avoid the unnecessary use of the Nominating and Compensation Committee’s resources, the Nominating and Compensation Committee will consider only those director candidates recommended in accordance with the procedures set forth below.

Shareholder Proposal Procedures.To submit a recommendation of a director candidate to the Nominating and Compensation Committee, a stockholder should submit the following information in writing, addressed to the Chairperson of the Nominating and Compensation 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.

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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 Nominating and Compensation 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 62, 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 58, is the Interim 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 35 was appointed on January 16, 2013 as Company Secretary.  She is also Executive Assistant to Stewart Wallach at CAPC Corporation.

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 shareholders 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 2013 by the Company’s directors and officers.

Item 11.  Executive Compensation.

Executive Compensation Philosophy, Strategy and Objectives

The principal objectives of our senior officer compensation are to attract, motivate and retain the services of qualified officers who can lead the Company to achieve its business goals and enhance public shareholder 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 interests of our officers with the interests of the shareholders in long term profitability of the Company.

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

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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 2013, we did not benchmark compensation. Compensation was last benchmarked in 2008, when 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 2008 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 reviewed were:

1)   Acuity Brands, Inc.

2)   AZZ Inc.

3)   Hubbell, Inc.

4)   Lightening Science Group Corp.

5)   LSI Industries, Inc.

6)   Plasmatech, Inc.

7)   Thomas & Betts Corp.

An independent director of the Company also reviewed an unpublished consulting firm’s review of executive compensation for micro-cap companies during the last benchmarking of salaries.

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 50th 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 Committee

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

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

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

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

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

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

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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, especially when market factors, such as freight demand, lag behind supply of industry-wide capacity and meeting pre-established goals for an annual incentive bonus have not been attainable for several years. 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.

Executive Compensation Components

For 2013, the principal components of compensation for each officer were:

base salary;

annual incentive;

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

perquisites and other benefits.

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

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EXECUTIVE COMPENSATION

Set forth below is the approved compensation of each officer for each year of their agreements in 2012, 2011, 2010 and 2009.  Each of the officers served as a director of the Company in fiscal year 2012 but they were not compensated for such service.

Name & Principal Position	Year	Salary $	Bonus (6) $	Stock Awards $	Non-Equity Incentives (7) $	All Other $	TOTAL $
Stewart Wallach	2013	$285,586	-0-	-0-	-0-	-0-	$285,586
Chief Executive Officer (1,2,3)	2012	$273,488	-0-	-0-	-0-	-0-	$272,237
	2011	$260,465	-0-	-0-	-0-	-0-	$260,463
	2010	$248,060	-0-	-0-	-0-	-0-	$248,060
	2009	$236,250	-0-	-0-	-0-	-0-	$236,250
Gerry McClinton(1,4,5)	2013	$190,398	-0-	-0-	-0-	-0-	$190,398
Operating Officer & CFO	2012	$182,325	-0-	-0-	-0-	-0-	$181.403
	2010	$173,643	-0-	-0-	-0-	-0-	$173,643
	2010	$165,375	-0-	-0-	-0-	-0-	$165,375
	2009	$157,500	-0-	-0-	-0-	-0-	$157,500

Footnotes:

(1)   Each Employment Agreement provides for an annual minimum salary increase of 5%.

(2)   Although approved for a salary of $260,463, Stewart Wallach took a voluntary salary reduction and earned $180,000 in 2011.

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

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

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

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

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

EMPLOYMENT AGREEMENTS

On March 1, 2013, the Company amended the terms of the employment agreements for Stewart Wallach and Gerry McClinton, extending the agreement term to February 5, 2016.  These amended agreements supersede any existing employment agreements and are the only employment agreements with Company officers:

(1)   Stewart Wallach, Chief Executive Officer and President. The 2008 employment agreement provides for an annual salary of $225,000 with a minimum annual increase in base salary of 5%.  Mr. Wallach may, at his option, elect to receive restricted shares of Common Stock in lieu of cash compensation, which shares are subject to piggyback registration rights. Mr. Wallach earned $272,237 in base salary for fiscal year 2012.  Mr. Wallach was entitled to a base salary of $260,463 for fiscal year 2011; however, his actual base salary in fiscal year 2011 was $180,000 because of a voluntary salary reduction for 2011.  Mr. Wallach was entitled to a base salary of $248,062 for fiscal year 2010; however, his actual base salary in fiscal year 2010 was $186,923 because of a voluntary salary reduction for 2010.

(2)   Gerry McClinton, Chief Operating Officer and Chief Financial Officer. The 2008 employment agreement provides for an annual salary of $150,000 with a minimum annual increase in base salary of 5%.  Mr. McClinton may, at his option, elect to receive restricted shares of Common Stock in lieu of cash compensation, which shares are subject to piggyback registration rights. Mr. McClinton earned $181,403 in base salary in fiscal year 2012. Mr. McClinton was entitled to a base salary of $173,643 in fiscal year 2011; however, his actual base salary in fiscal year 2011 was $146,250 because of a voluntary salary reduction for 2011.  Mr. McClinton was entitled to a base salary of $165,375 in fiscal year 2010; however, his actual base salary in fiscal year 2010 was $124,615 because of a voluntary salary reduction for 2010.

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Common Provisions in both 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, the Company is obligated to pay to the officer’s estate or the officer, as the case may be, a lump sum payment equal to  (a) the officer’s base salary through the termination date, plus a pro rata portion of the officer bonus for the fiscal year in which the termination occurred and (b) a lump sum payment equivalent to the sum of (i) one-year’s salary at the annual base salary rate officer was earning as of the date of termination; (ii) the bonus payment(s) officer received in the preceding fiscal year; and (iii) the cost of officer’s health and dental insurance premiums for the preceding fiscal year.

If the employment is terminated without cause by the Company or for “good reason” (as defined in the employment agreement) by the officer, then the Company must pay to the officer’s estate or the officer, a lump-sum payment equal to the greater of:  (aa) the sum of (i) one-year’s salary at the annual base salary rate that the officer was earning as of the date of termination and (ii) the bonus payment(s) officer received in the preceding fiscal year; and (bb) the sum of (i) the base salary that the officer would have earned had he remained employed through the remainder of the employment period and (ii) the bonus payment(s) officer received in the preceding fiscal year multiplied by the number of years remaining in the employment period (and adjusted on a pro rata basis for any partial year remaining in the employment period.

Om March 1st, 2013 ,the employment agreements  which have a three-year term,  have been amended for the second time, to extend the term for an additional 3 years (from February 5, 2013  until February 5, 2016).  These employment agreements can be extended by mutual consent of the parties for up to three (3) additional years.  Previously, on February 1, 2011, the employment agreements for Stewart Wallach and Gerry McClinton were extended to February 5, 2013, unanimously approved by the Board of Directors on February 1, 2011. 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 10K by the Company for fiscal year ended December 31, 2013 (as filed by the Company with the SEC on March 27, 2014).

SUMMARY TABLE OF OPTION GRANTS TO OFFICERS OF COMPANY

Name	No. of Shares Underlying	% of Total Options Granted Employees in FY2012	Expiration Date	Restricted Stock Grants	No. Shares underlying Options Options Granted in FY2012
Stewart Wallach	24,498,039	-0-	4/27/2017	-0-	-0-
Gerry McClinton	26,630,000	-0-	4/27/2017	-0-	-0-

OTHER COMPENSATION (1)

NAME/POSITION	YEAR	SEVERANCE PACKAGE	CAR ALLOWANCE	CO. PAID SERVICES	TRAVEL LODGING	TOTAL($)
Stewart Wallach	2013	-0-	-0-	-0-	-0-	-0-
Chief Executive	2012	-0-	-0-	-0-	-0-	-0-
Officer	2011	-0-	-0-	-0-	-0-	-0-
Gerry McClinton	2013	-0-	-0-	-0-	-0-	-0-
Chief Operating	2012	-0-	-0-	-0-	-0-	-0-
Officer & Chief	2011	-0-	-0-	-0-	-0-	-0-
Financial Officer

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

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Outstanding Equity Awards as Fiscal Year Ended 2013 Table

OPTIONS(1)

NAME	Securities Underlying Unexercised Options	Option Exercise Price	Option Expiration Date
Stewart Wallach	24,498,039	.029	4/27/2017
Gerry McClinton	32,250,000	.029	4/27/2017

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

2013 OPTION EXERCISES AND VESTED OPTIONS

Name	Number of Shares Acquired on Exercise	Value Realized on Exercise
Stewart Wallach	-0-	-0-
Gerry McClinton	-0-	-0-

POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT

	SALARY SEVERANCE	BONUS SEVERANCE	GROSS UP TAXES	BENEFIT COMPENSATION	GRAND TOTAL TOTAL
Stewart Wallach	$299,865	-0-	$11,350	$22,000	$333,215
Gerry McClinton	$199,918	-0-	$11,350	$22,000	$233,268

Indemnification.

CAPC has entered into indemnification agreements with its directors and executive officers. Under these agreements, the 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 the 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 officers liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material.

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

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

The sole class of voting Common Stock of the Company as of March 10, 2014, that are issued and outstanding is the Common Stock, $0.0001 par value per share, or "Common Stock".  The table below sets forth, as of  March 10, 2014, (“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. The table below also shows ownership as of the Record Date of shares of Series B Convertible Redeemable Preferred Stock, $0.10 par value, or the "Preferred Stock," which shares have no voting rights and shows ownership as of the Record Date. The table also shows ownership as of the Record Date of shares of Series C Convertible Redeemable Preferred Stock, $1.00 par value, or the Preferred Stock which shares have no voting rights.  There were 657,760,532shares of Common Stock outstanding on the Record Date and 1,000 shares of Preferred C Stock were outstanding as of March 10, 2014.

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OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
as of December 31, 2013
					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 (2)	147,618,822	22.4%	172,116,861	23.5%	24,498,039	0	0
Gerry McClinton, CFO, COO & Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442 (3)	504,949	0.1%	32,754,949	4.5%	32,250,000	0	0
Laurie Holtz, Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442 (4)	4,628,300	0.7%	7,128,300	1.0%	2,500,000	0	0
Jeff Postal, Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442 (5)	128,381,748	19.5%	131,881,748	18.0%	3,500,000	4,000,000	0
Jill Mohler, Secretary, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442 (6)	0	0.0%	600,000	0.1%	600,000	0	0
Jeff Guzy, Director,Director, 3130 19th St North, Arlington, VA  22201 (7)	832,000	0.1%	5,332,000	0.7%	4,500,000	0	0
Larry Sloven, Director, 350 Jim Moran Blvd, Suite 120, Deerfield Beach, FL  33442 (8)	792,000	0.1%	3,792,000	0.5%	3,000,000	0	0
ALL OFFICERS & DIRECTORS AS A GROUP	282,757,819	43.0%	353,605,858	48.3%	70,848,039	4,000,000	0
PRINCIPAL SHAREHOLDERS
Bart Fisher, 9009 Potomac Forest Drive, Great Falls, VA  22066 (9) (10)	3,399,484	0.5%	3,399,484	0%	0	0	0
Margaret Fisher, 9009 Potomac Forest Drive, Great Falls, VA  22066	3,000,000	0.5%	3,000,000	0.4%	0	0	0
SUBTOTAL PRINCIPAL SHAREHOLDERS	6,399,484	1.0%	6,399,484	0.9%	0	0	0
TOTAL	289,157,303	44.0%	360,005,342	49.1%	70,848,039	4,000,000	0

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Notes to Table

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

(2)  Total shares includes 22,733,333 million shares that Mr. Wallach has the current right to acquire under a non-qualified stock option and 1,764,706 shares of Common Stock issuable under the warrants issued to Mr. Wallach as part of his $100,000 investment in Company’s 2007 private placement under Rule 506 of restricted shares of Common Stock. Mr. Wallach was appointed Chief Executive Officer and President of the Company on April 23, 2007.

(3)  Total shares include 32,250,000 shares of Common Stock currently available for purchase under a non-qualified stock option agreement dated April 27, 2007.

(4) Total shares include 1,000,000 shares of Common Stock currently available for purchase under a non-qualified stock option agreement, dated June 9, 2010 and 1,000,000 shares of Common Stock available for purchase under a non-qualified stock option agreement, dated July 19, 2011.  Mr. Holtz was appointed as Chief Financial Officer in December 2007 and resigned from his position on June 1, 2009.  Mr. Holtz is still serving as a Director of the Board.

(5)  Total shares include 4,000,000 shares of Common Stock for purchase under a Warrant Agreement dated July 11, 2008, 1,000,000 shares of Common Stock available for purchase under a non-qualified stock option agreement dated June 9, 2010 and 1,000,000 shares of Common Stock available for purchase on, under a non-qualified stock option agreement, dated July 19, 2011.

(6)  Ms. Mohler was appointed as Secretary on February 5, 2008, and replaced Gerry McClinton, who resigned on that same date to focus on his duties as Chief Operating Officer.  Ms. Mohler was granted a non-qualified stock option for 150,000 shares of Common Stock in 2008 as part of her compensation arrangement.   On June 15, 2010, an additional 300,000 shares were granted under a non-qualified stock option agreement. On July 19, 2011, Ms. Mohler was granted another 150,000 shares of Common Stock under a non-qualified stock option agreement.

(7)  Total shares include 1,500,000 shares of Common Stock currently available for purchase under a non-qualified stock option agreement dated June 9, 2010 and 1,500,000 shares of Common Stock, available for purchase under a non-qualified stock option agreement dated July 19, 2011.

(8)  Total shares include 1,000,000 shares of Common Stock currently available for purchase under a non-qualified stock option agreement dated June 9, 2010 and 1,000,000 shares of Common Stock available for purchase under a non-qualified stock option agreement, dated July 19, 2011.

(9)(10)  Bart Fisher is the spouse of Margaret Fisher. Bart Fisher was an officer and director of the Company in 2002. If the ownership of Bart Fisher is combined with his spouse’s holdings, then Bart Fisher may be deemed to be an “affiliate” of the Company under the rules of the Securities Exchange Act of 1934, as amended, and on the basis of owning more than 10% of the Company’s outstanding shares of Common Stock.

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The following table sets forth beneficial ownership of Series C Convertible Preferred Stock of members of Company management as of March 10, 2014.

Name	Number of Shares of Preferred	% of Shares	Number of Outstanding Shares of Common Stock issuable Upon Conversion of Series C Stock	% of Shares of Common Stock Owned upon Conversion of Series C Stock
Involve, LLC	1,000	100%	67,979,425	8.8%
c/o Harris & Cramer, LLP

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

INDEPENDENT DIRECTORS

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

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

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

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

·   Total value of the transaction;

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

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

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

From time to time, the Company borrows working capital on a short term basis, usually with maturity dates of less than a year, from Company directors and officers.  The Company believes that these working capital loans are commercially reasonable, especially in light of the inability of the Company to obtain such short term financing from traditional funding sources.  A summary of the current working capital loans from Company officers and directors is set forth below.   While these loans are not typically reviewed by the Audit Committee, the Company has decided to have all working capital loans from Company directors or officers to the Company reviewed by the Audit Committee under the Company related person transaction policy, effective March 1, 2012.  The loans from Company directors or officers are usually convertible into shares of Company stock or are converted into shares of Company stock in order to preserve the cash reserves or cash flow from operations of the Company for payment of expenses that are necessary to maintain the Company operations.  Such conversions are usually approved by the disinterested directors of the Company’s board of directors. Effective March 1, 2012, the Company has decided to have all conversions of loans from Company directors or officers reviewed under the Company’s related person transaction policy.

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Name of Lending Officer or Director	Amount of Principal of Loan	Interest Rate	Maturity Date	Principal Balance as of March 1, 2014
Stewart Wallach	$250,000	8%	04/01/2014	$250,000
Jeffrey Postal	$250,000	8%	04/01/2014	$250,000
Stewart Wallach	$209,473	8%	04/01/2014	$209,473
JWTR Holdings LLC	$209,473	8%	04/01/2014	$209,473
Stewart Wallach	$50,000	8%	04/01/2014	$50,000
Stewart Wallach	$100,000	8%	04/01/2014	$100,000
Stewart Wallach	$50,000	8%	04/01/2014	$50,000
Stewart Wallach	$75,000	8%	04/01/2014	$75,000
Jeffrey  Postal	$250,000	8%	04/01/2014	$250,000
Jeffrey  Postal	$100,000	8%	04/01/2014	$100,000
Group Nexus LLC	$150,000	8%	04/01/2014	$150,000
Postal Capital Funding	$498,000	8%	04/01/2014	$498,000
Total	$2,191,946			$2,191,946

Item 14.  Principal Accountant Fees & Services

The following is a summary of the fees billed to us by Robison, Hill & Company for professional services rendered for the years ended December 31, 2013 and 2012:

	2013	2012
Audit Fees	$60,310	$61,849
Tax Fees	$2,850	$2,750
Total	$63,160	$64,599

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 Securities & Exchange Commission and related comfort letters and other services that are normally provided by Robison, Hill & Company 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.

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 2013 audit fees, audit-related fees, tax fees, and all other fees to the extent the services occurred after the effective date of the Securities and Exchange Commission’s final pre-approval rules.

38

Part IV

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

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

1.  FINANCIAL STATEMENTS

F-1 Report of Independent Registered Public Accountants

F-2 Consolidated Balance Sheets as of December 31, 2013, and 2012

F-3 Consolidated Statements of Operations for the years ended December 31, 2013 and 2012

F-4 Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2013 and 2012

F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012

F-6 Notes to Consolidated Financial Statements

2. FINANCIAL STATEMENT SCHEDULES

The following financial statement schedules required by Regulation S-X are included herein.  All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

3. EXHIBITS

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

2.1.1.1	Stock Purchase Agreement dated September 15, 2006, by and between CHDT Corporation, and Capstone Industries, Inc. +++
3.1	Articles of Incorporation of CHDT Corp.*
3.1.1	Amended and Restated Articles of Incorporation of Capstone Companies, Inc. ∞
3.2	By-laws of the Company***
3.3	Certificate of Designation of the Preferences, Limitations, and Relative Rights of Series B Convertible Preferred Stock of CHDT Corp. ****
10.4	Purchase Agreement, dated December 1, 2007, by Capstone Industries, Inc. and Magnet World, Ltd. For sale of operating assets of Souvenir Direct, Inc. ++++
10.6	2005 Equity Plan of CHDT Corp.^^
10.7	2011 Employment Agreement by Stewart Wallach and CHDT Corp.^^
10.8	2011 Employment Agreement by James Gerald (Gerry) McClinton and CHDT Corp. ^^
10.9	2011 Employment Agreement by Howard Ullman and CHDT Corp.^^
10.10	Form of Non-Qualified Stock Option+
10.11	Non-Employee Director Compensation^^
10.12	Working Capital Loan Agreement, dated April 1, 2012, between Capstone Companies, Inc. and Postal Capital Funding, L.L.C. ∞∞`
14	Code of Ethics Policy, dated December 31, 2006+++++
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Stewart Wallach, Chief Executive Officer^
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Gerry McClinton, Chief Financial Officer and Chief Operating Officer^
32.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Stewart Wallach, Chief Executive Officer. ^
32.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Gerry McClinton, Chief Financial Officer & Chief Operating Officer^

39

*	Incorporated by reference to Annex G to the Special Meeting Proxy Statement, Dated April 15, 2004, filed by CHDT Corporation with the Commission on April 20, 2004.
**	Incorporated by reference to Exhibit 3(I) to the Form 8-K filed by CHDT Corporation with the Commission on July 10, 2007.
***	Incorporated by reference to Annex H the Special Meeting Proxy Statement, Dated April 15, 2004, filed by CHDT Corporation with the Commission on April 20, 2004.
****	Incorporated by reference to Exhibit 99.2 to the Form 8-K filed by CHDT Corp. With the Commission on November 6, 2007.
+	Incorporated by reference to Exhibit 2 to the Form 8-K filed by CHDT Corporation with the Commission on January 31, 2006.
++	Incorporated by reference to Exhibit 2 to the Form 8-K filed by CHDT Corporation with the Commission on January 26, 2007.
+++	Incorporated by reference to Exhibit 2.1 to the Form 8-K filed by CHDT Corporation with the Commission on September 18, 2006.
++++	Incorporated by reference to Exhibit 99 to the Form 8-K filed by CHDT Corp. With the Commission on December 3, 2007.
+++++	Incorporated by reference to Exhibit 14 to the Form 10-KSB for the fiscal year ended December 31, 2006 and filed by CHDT Corp. With the Commission on April 17, 2007.
∞	Incorporated by reference to Exhibit 3.1 to Form 8-K filed by Capstone Companies, Inc. with the Commission on July 14, 2009.
∞∞	Incorporated by reference to Exhibit 10.1 to Form 8-K filed by Capstone Industries, Inc. with the Commission on April 6, 2012.
^^	Filed as an exhibit to the Form 10-K for the fiscal year ending December 31, 2007.
^	Filed Herein.

(b) Reports on Form 8-K filed.

The following reports were filed during the 2013 fiscal year:  Form 8-K, April 04, 2013; Form 8-K May 21, 2013,; Form 8-K, August 27, 2013; Form 8-K, November 04, 2013; and Form 8-K, November 06, 2013.

40

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, CAPSTONE COMPANIES, INC. has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Broward County, Florida on this 27 day of March 2014.

CAPSTONE COMPANIES, INC.

Dated:   March 27, 2014

By

/s/ 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 27, 2014

/s/ Gerry McClinton

Gerry McClinton

Chief Financial Officer

Chief Operating Officer and Director

March 27, 2014

/s/ Jeffrey Guzy

Jeffrey Guzy

Director

March 27, 2014

/s/ Jeffrey Postal

Jeffrey Postal

Director

March 27, 2014

/s/ Larry Sloven

Larry Sloven

Director

March 27, 2014

41

CAPSTONE COMPANIES, INC.

AND SUBSIDIARIES

-:-

INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS’ REPORT

DECEMBER 31, 2013 AND 2012

CONTENTS

	Page
Report of Independent Registered Public Accountants	F - 1
Consolidated Balance Sheets
December 31, 2013 and 2012	F - 2
Consolidated Statements of Operations for the
Years Ended December 31, 2013 and 2012	F - 3
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 2013 and 2012	F - 4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2013 and 2012	F - 5
Notes to Consolidated Financial Statements	F - 6

ROBISON, HILL & CO.	Certified Public Accountants
A PROFESSIONAL CORPORATION
	DAVID O. SEAL, CPA
	W. DALE WESTENSKOW, CPA
	BARRY D. LOVELESS, CPA
	STEPHEN M. HALLEY, CPA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders

Capstone Companies, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Capstone Companies, Inc. and Subsidiaries as of December 31, 2013 and 2012 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years in the two-year period ended December 31, 2013.  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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capstone Companies, Inc. and Subsidiaries as of December 31, 2013 and 2012 and the results of its operations and its cash flows for the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ Robison, Hill & Co.

Certified Public Accountants

Salt Lake City, Utah

March 27, 2014

F - 1

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
	December 31 ,			December 31,
	2013			2012
Assets:
Current Assets:
Cash	$	436,592		$	411,259
Accounts receivable - net		6,927,238			2,673,555
Inventory		298,099			584,370
Prepaid expense		1,082,784			351,003
Total Current Assets		8,744,713			4,020,187
Fixed Assets:
Computer equipment & software		66,448			66,448
Machinery and equipment		667,096			654,401
Furniture and fixtures		5,665			5,665
Less: Accumulated depreciation		(661,210	)		(597,042	)
Total Fixed Assets		77,999			129,472
Other Non-current Assets:
Product development costs - net		19,664			27,280
Investment (AC Kinetics)		500,000			-
Goodwill		1,936,020			1,936,020
Total Other Non-current Assets		2,455,684			1,963,300
Total Assets	$	11,278,396		$	6,112,959
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable and accrued expenses	$	1,931,527		$	1,114,166
Note payable - Sterling Factors		4,237,144			1,245,159
Notes and loans payable to related parties - current maturities		3,220,074			602,148
Total Current Liabilities		9,388,745			2,961,473
Long Term Liabilities
Notes and loans payable to related parties - Long Term		-			2,023,283
Total Liabilities		9,388,745			4,984,756
Commitments and Contingent Liablities (Note 5)
Stockholders' Equity:
Preferred Stock, Series A, par value $.001 per share, authorized 100,000,000 shares, issued -0- shares		-			-
Preferred Stock, Series B-1, par value $.0001 per share, authorized 50,000,000 shares, issued -0- shares		-			-
Preferred Stock, Series C, par value $1.00 per share, authorized 1,000 shares, issued 1,000 shares		1,000			1,000
Common Stock, par value $.0001 per share, authorized 850,000,000 shares, 657,760,532 & 655,885,532 shares issued at  December 31, 2013 & December 31, 2012		65,777			65,589
Additional paid-in capital		7,172,059			7,137,933
Accumulated deficit		(5,349,185	)		(6,076,319	)
Total Stockholders' Equity		1,889,651			1,128,203
Total Liabilities and Stockholders’ Equity	$	11,278,396		$	6,112,959
The accompanying notes are an integral part of these financial statements.

F - 2

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
	For the Years Ended
	December 31,
	2013			2012
Revenues	$	14,593,826		$	8,362,964
Cost of Sales		(10,983,364	)		(6,574,912	)
Gross Profit		3,610,462			1,788,052
Operating Expenses:
Sales and marketing		489,791			364,263
Compensation		972,922			900,628
Professional fees		326,077			269,335
Product Development		225,754			227,087
Other general and administrative		479,298			359,795
Total Operating Expenses		2,493,842			2,121,108
Net Operating Income (Loss)		1,116,620			(333,056	)
Other Income (Expense):
Interest expense		(389,486	)		(274,127	)
Total Other Income (Expense)		(389,486	)		(274,127	)
Net Income (Loss)	$	727,134		$	(607,183	)
Income (Loss) per Common Share	$	-		$	-
Weighted Average Shares Outstanding
Basic		657,503,683			650,724,916
Diluted		813,450,260			810,671,493
The accompanying notes are an integral part of these financial statements.

F - 3

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2013 AND 2012
	Preferred Stock				Preferred Stock				Preferred Stock								Additional
	Series A				Series B				Series C				Common Stock				Paid-In		Retained
	Shares		Par Value		Shares		Par Value		Shares		Par Value		Shares		Par Value		Capital		Deficit
Balance at December 31, 2011		-	$	-		-	$	-		1,000	$	1,000		649,510,532	$	64,951	$	7,041,858	$	(5,469,136	)
Stock options for compensation		-		-		-		-		-		-		-		-		36,750		-
Stock compensation		-		-		-		-		-		-		6,375,000		638		59,325		-
Net Income		-		-		-		-		-		-		-		-		-		(607,183	)
Balance at December 31, 2012		-	$	-		-	$	-		1,000	$	1,000		655,885,532	$	65,589	$	7,137,933	$	(6,076,319	)
Stock options for compensation		-		-		-		-		-		-		-		-		20,250		-
Stock compensation		-		-		-		-		-		-		1,875,000		188		13,875		-
Net Income		-		-		-		-		-		-		-		-		-		727,134
Balance at December 31, 2013		-	$	-		-	$	-		1,000	$	1,000		657,760,532		65,777		7,172,058		(5,349,185	)
The accompanying notes are an integral part of these financial statements.

F - 4

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
	For the Years Ended
	December 31,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Continuing operations:
Net Income (Loss)	$	727,134		$	(607,183	)
Adjustments necessary to reconcile net loss to net cash used in operating activities:
Stock issued for expenses		14,064			59,963
Depreciation and amortization		95,756			71,153
Compensation expense from stock options		20,250			36,750
(Increase) decrease in accounts receivable		(4,253,683	)		(1,196,276	)
(Increase) decrease in inventory		286,271			(525,653	)
(Increase) decrease in prepaid expenses		(731,781	)		66,740
(Increase) decrease in other assets		(23,972	)		(33,960	)
Increase (decrease) in accounts payable and accrued expenses		817,361			587,230
Increase (decrease) in accrued interest on notes payable		104,643			144,216
Net cash provided by (used in) operating activities		(2,943,957	)		(1,397,020	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment		(500,000	)		-
Purchase of property and equipment		(12,695	)		(109,883	)
Net cash provided by (used in) investing activities		(512,695	)		(109,883	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		12,737,405			7,568,000
Repayments of notes payable		(9,745,420	)		(6,764,448	)
Proceeds from notes and loans payable to related parties		4,538,000			3,043,000
Repayments of notes and loans payable to related parties		(4,048,000	)		(2,093,000	)
Net cash provided by financing activities		3,481,985			1,753,552
Net (Decrease) Increase in Cash and Cash Equivalents		25,333			246,649
Cash and Cash Equivalents at Beginning of Period		411,259			164,610
Cash and Cash Equivalents at End of Period	$	436,592		$	411,259
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	284,842		$	71,802
Franchise and income taxes	$	-		$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
None
The accompanying notes are an integral part of these 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”), a Florida corporation (formerly, “CHDT Corporation”) and its wholly-owned subsidiaries (“Subsidiaries”) is presented to assist in understanding the Company's financial statements.  The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the 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 OBS name was changed to “Black Box Innovations, L.L.C.” (“BBI”) on March 20, 2008. On January 31, 2012 “BBI” name was changed to “Capstone Lighting Technologies, L.L.C” (“CLT”).

On January 27, 2006, the Company entered into a Purchase Agreement with Complete Power Solutions ("CPS") to acquire 51% of the member interests of CPS. CPS was organized by William Dato on September 20, 2004, as a Florida limited Liability Company to distribute power generators in Florida and adjacent states.  The Company subsequently sold its 51% membership interest in CPS, pursuant to a Purchase and Settlement Agreement dated and effective as of December 31, 2006.

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 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 will be engaged in selling the Companies products Internationally and will provide other services such as, new product development, product sourcing, quality control, ocean freight logistics, product testing and factory certifications for the Companies other subsidiaries.

Nature of Business

Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors, in North America.  Capstone currently operates in five primary business segments: Induction Charged Power Failure Lights, LED Wall Plate Night Lights and Power Failure Lights, Motion Sensor Lights, Portable Book and Task Lights and Door Security Monitor.  The Company’s products are typically manufactured in the Peoples’ Republic of China by third-party manufacturing companies.

Cash and Cash Equivalents

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

F - 6

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Allowance for Doubtful Accounts

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

As of December 31, 2013, management has determined that the accounts receivable are fully collectible.  As such, management has not recorded an allowance for doubtful accounts.

Accounts Receivable Pledged as Collateral

As of December 31, 2013, 100% of the accounts receivable serves as collateral for the companies notes payable.

Inventory

The Company's inventory, which is recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $298,099 and $584,370 at December 31, 2013 and December 31, 2012, respectively.

Property and Equipment

Fixed assets 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 & software	3 - 7 years
Machinery and equipment	3 - 7 years
Furniture and fixtures	3 - 7 years

Long-lived assets to be held and used 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 impairments were recognized by the Company during 2013 or through December 31, 2013.

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.

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 expense was $64,168 and $ 50,849 for the period ended December 31 , 2013 and 2012, 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 as a whole, 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.

F - 7

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

An intangible asset (including goodwill) that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The impairment test consists of a comparison of the fair value of the intangible assets with its carrying amount.  If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.  Goodwill is not amortized.

It is the Company's policy to test for impairment no less than annually, or when conditions occur that may indicate impairment.  The Company's intangible assets, which consist of goodwill of $1,936,020 recorded in connection with the Capstone acquisition, were tested for impairment and determined that no adjustment for impairment was necessary as of December 31, 2013, whereas the fair value of the intangible asset exceeds its carrying amount.

Net Income (Loss) Per Common Share

Basic earnings per common share were computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year.  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, 2013 and 2012 the total number of potentially dilutive common stock equivalents was 155,946,577 and 159,946,577 respectively.

Principles of Consolidation

The consolidated financial statements for the years ended December 31, 2013 and 2012 include the accounts of the parent entity and its wholly-owned subsidiaries Capstone Lighting Technologies, L.L.C (formerly Black Box Innovations, L.L.C.), Capstone Industries, Inc. and Capstone International HK, LTD.

The results of operations attributable to subsidiaries are included in the consolidated results of operations beginning on the date on which the Company’s interest in a subsidiary was acquired.

Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, including cash, prepaid expenses, accounts receivable, accounts payable and accrued liabilities at December 31, 2013 and 2012 approximates their fair values due to the short-term nature of these financial instruments. The fair value hierarchy under 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 one — Quoted market prices in active markets for identical assets or liabilities;

·   Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

·   Level three — 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.

Cost Method of Accounting for Investment

Investments in equity securities that do not have readily determinable fair values and do not qualify for consolidation or the equity method are carried at cost.  Dividends received from those companies are included in other income.  Dividends received in excess of the Company’s proportionate share of accumulated earnings are applied as a reduction of the cost of the investment.  Other than temporary impairments to fair value are charged against current period income.

Reclassifications

Certain reclassifications have been made in the 2012 financial statements to conform to the 2013 presentation.  There were no material changes in classifications made to previously issued financial statements.

F - 8

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Revenue Recognition

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

Allowances for sales returns, rebates and discounts are recorded as a component of net sales in the period the allowances are recognized.  In addition, accrued liabilities contained in the accompanying balance sheet include accruals for estimated amounts of credits to be issued in future years based on potentially defective product, other product returns and various allowances.  These estimates could change significantly in the near term.

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 $67,591 and $ 156,897 for the twelve months ended December 31, 2013 and 2012, respectively.  As of December 31, 2013 the company has $275,019 in capitalized advertising costs included in prepaid expenses on the balance sheet.

Shipping and Handling

The Company’s shipping and handling costs, are included in sales and marketing expenses and amounted to $110,626 and $116,735 for the twelve months ended December 31, 2013 and 2012, respectively.

Accrued Liabilities

Accrued liabilities contained in the accompanying balance sheet include accruals for estimated amounts of credits to be issued in future years based on potentially defective products, other product returns and various allowances.  These estimates could change significantly in the near term.

Income Taxes

The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (FASB) Statement No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 (now 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 subsidiaries intend to file consolidated income tax returns.

Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payments, SFAS 123(R), (now ASC 718) 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 supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations, applied for periods through December 31, 2005.  In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to ASC 718.  The Company has applied the provision of SAB 107 in its adoption of ASC 718.

The Company adopted SFAS 123(R) using the modified prospective application transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year.  The Company’s consolidated financial statements as of and for the years ended December 31, 2006 and later, reflect the impact of SFAS 123(R).  In accordance with the modified prospective method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

F - 9

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

SFAS 123(R) 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 (loss).  Prior to the adoption of ASC 718, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25, as allowed under SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123).  Under the intrinsic value method, compensation expense under fixed term option plans was recorded at the date of grant only to the extent that the market value of the underlying stock at the date of grant exceeded the exercise price.  Accordingly, for those stock options granted for which the exercise price equaled the fair market value of the underlying stock at the date of grant, no expense was recorded.

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.  There was no stock-based compensation expense attributable to options for share-based payment awards granted prior to, but not vested as of December 31, 2005.  Such stock-based compensation is based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123.  Compensation expense for share-based payment awards granted subsequent to December 31, 2005, are based on the grant date fair value estimated in accordance with the provisions of ASC 718.

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.  As stock-based compensation expense is recognized during the period is based on awards ultimately expected to vest, it is subject to reduction for estimated forfeitures.  ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  As of and for the year ended December 31, 2011, there were no material amounts subject to forfeiture.  The Company has not accelerated vesting terms of its out-of-the-money stock options, or made any other significant changes, prior to adopting ASC 718, Share-Based Payments.

On April 23, 2007, the Company granted 130,500,000 stock options to two officers of the Company.  The options vest at twenty percent per year beginning April 23, 2007.  For the year ended December 31, 2007, the Company recognized compensation expense of $503,075 related to these options.  On May 1, 2008, 850,000 of the above stock options were canceled and on May 23, 2008, 74,666,667 of the above stock options were cancelled.  For year ended December 31, 2008, the Company recognized compensation expense of $405,198 related to these options.  For the year ended December 31, 2009, the Company recognized compensation expense of $156,557 related to these options.  For the year ended December 31, 2010, the Company recognized a compensation expense of $156,558 related to these options. For the year ended December 31, 2011, the Company recognized compensation expense of $52,186 related to these options. No further compensation expense will be recognized for these options.

On May 1, 2007, the Company granted 4,000,000 stock options to five employees of the Company.  The options vest over two years.  For the year ended December 31, 2007, the Company recognized compensation expense of $29,214 related to these options.  During 2008 and 2009, 1,500,000 of the above options were cancelled prior to vesting.  For the year ended December 31, 2008, the Company recognized compensation expense of $25,131 related to these options.  For the year ended December 31, 2009, the Company recognized compensation expense of $10,869 related to these options.  As of December 31, 2009 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

On October 22, 2007, the Company granted 700,000 stock options to a business associate of the Company.  The options vest over two years.  For the year ended December 31, 2007, the Company recognized compensation expense of $1,330 related to these options.  For the year ended December 31, 2008, the Company recognized compensation expense of $7,978 related to these options.  For the year ended December 31, 2009, the Company recognized compensation expense of $6,648 related to these options.  As of December 31, 2009 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

On January 10, 2008, the Company granted 1,000,000 stock options to an advisor of the Company.  The options vest over one year.  For the year ended December 31, 2008, the Company recognized compensation expense of $19,953 related to these options.  As of December 31, 2008 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

F - 10

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On February 5, 2008, the Company granted 3,650,000 stock options to four directors and one employee of the Company.  The options vest over two years.  For the year ended December 31, 2008, the Company recognized compensation expense of $59,619 related to these options.  For the year ended December 31, 2009, the Company recognized compensation expense of $2,603 related to these options.  As of December 31, 2009 these options were fully vested and compensation expense fully recognized.  During 2010, 3,500,000 of the above options expired.  No further compensation expense will be recognized for these options.

On May 1, 2008, the Company granted 850,000 stock options to an employee of the Company.  The options vest over two years.  For the year ended December 31, 2008, the Company recognized compensation expense of $5,242 related to these options.  For the year ended December 31, 2009, the Company recognized compensation expense of $7,862 related to these options.  For the year ended December 31, 2010, the Company recognized compensation expense of $2,620 related to these options. No further expense will be recognized for these options.

On June 8, 2009, the Company granted 4,500,000 stock options to four directors of the Company. The options vest in one year.  For the year ended December 31, 2009, the Company recognized compensation expense of $42,663 related to these options.  For the year ended December 31, 2010, the Company recognized compensation expense of $33,837 related to these options. No further expense will be recognized for these options.  These options expired on June 8, 2011.

On April 23, 2010, the Company granted 4,800,000 stock options to four directors of the Company and the Company Secretary. The options vest in one year.  For the year ended December 31, 2010, the Company recognized compensation expense of $27,000 related to these options.  For the year ended December 31, 2011 the Company recognized compensation expense of $12,000.  No further expense will be recognized for these options.

On July 1, 2011, the Company granted 4,650,000 stock options to four directors of the Company and the Company Secretary. The options vest in one year. For the year ended December 31, 2011 the Company recognized compensation expense of $16,500.  For the year ended December 31, 2012, the Company recognized an expense of $16,500.  No further expense will be recognized for these options.

On August 6, 2012, the Company granted 4,650,000 stock options to four directors of the Company and the Company Secretary. The options vest in one year.  The Company Secretary left the Company and 150,000 stock options were cancelled. For the year ended December 31, 2012, the Company recognized compensation expense of $20,250.  For the six months ended June 30, 2013, the Company recognized an expense of $20,250.  No further expense will be recognized for these options.

The Company recognizes compensation expense paid with common stock and other equity instruments issued for assets and services received based upon the fair value of the assets/services or the equity instruments issued, whichever is more readily determined.

As of the date of this report the Company has not adopted a method to account for the tax effects of stock-based compensation pursuant to ASC 718 and related interpretations.  However, whereas the Company has substantial net operating losses to offset future taxable income and its current deferred tax asset is completely reduced by the valuation allowance, no material tax effects are anticipated.

During the year ended December 31, 2005, the Company valued stock options using the intrinsic value method prescribed by APB 25.  Since the exercise price of stock options previously issued was greater than or equal to the market price on grant date, no compensation expense was recognized.

Stock-Based Compensation Expense

Stock-based compensation for the twelve months ended December 31, 2013 and 2012 was $20,250 and $36,750 respectively.

F - 11

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Recent Accounting Standards

In May 2011, FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820).” The amendments in ASU 2011-04 change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include (1) those that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements and (2) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. In addition, to improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in U.S. GAAP). The amendments that clarify the Board's intent about the application of  existing fair value measurement and disclosure requirements include (a) the application of the highest and best use and valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's shareholders' equity, and (c) disclosures about fair value measurements that clarify that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The amendments in this Update that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include (a) measuring the fair value of financial instruments that are managed within a portfolio, (b) application of premiums and discounts in a fair value measurement, and (c) additional disclosures about fair value measurements that expand the disclosures about fair value measurements. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company’s adoption of ASU 2011-04 did not have a material effect on the Company’s financial position, results of operations or cash flows.

In June 2011, FASB issued ASU 2011-05 “Comprehensive Income (Topic 220).”  Under the amendments in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income.  The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The amendments do not require any transition disclosures.  The Company’s adoption of ASU 2011-04 did not have a material effect on the Company’s financial position, results of operations or cash flows.

In December 2011, FASB issued ASU 2011-12 “Comprehensive Income (Topic 220).”  In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. The amendments are being made to allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company’s adoption of ASU 2011-04 did not have a material effect on the Company’s financial position, results of operations or cash flows.

F - 12

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In July 2012, the FASB issued ASU 2012-02, "Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"), which permits an entity to make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit's indefinite-lived intangible asset is less than the asset's carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that the fair value of a reporting unit's indefinite-lived intangible asset is more likely than not greater than the asset's carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2012-02 is effective for the Company for annual and interim indefinite-lived intangible asset impairment tests performed beginning October 1, 2012; however, early adoption is permitted. The Company’s adoption of ASU 2012-02 did not have a material impact on its consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"),  An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled.  ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, prospectively, with retrospective application permitted.  The Company does not expect it’s adoption of ASU 2013-11 to have a material impact on its consolidated financial statements.

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

Pervasiveness of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and the differences could be material.

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 at times has cash and cash equivalents with its financial institution in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.  The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks.  As of December 31, 2013, the Company had no cash in excess of FDIC limits.

F - 13

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Accounts Receivable

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

Major Customers

The Company had three customers who comprised at least six percent (6%) of gross revenue during the fiscal years ended December 31, 2013 and 2012.  The loss of these customers would adversely impact the business of the Company.  The percentage of gross revenue and the accounts receivable from each of these customers is as follows:

	Gross Revenue %			Accounts Receivable
	2013	2012		2013		2012
Customer A	62%	60%	$	6,418,071	$	2,208,495
Customer B	22%	10%		70,974		464,601
Customer C	6%	12%		336,432		35,435
	90%	82%	$	6,825,477	$	2,708,531

Major Vendors

The Company had two vendors from which it purchased at least five percent (5%) of merchandise during the fiscal year ended December 31, 2013 and December 31, 2012. The loss of these suppliers would adversely impact the business of the Company.  The percentage of purchases, and the related accounts payable from each of these vendors is as follows:

	Purchases %			Accounts Payable
	2013	2012		2013		2012
Vendor A	93 %	81%	$	1,320,945	$	818,883
Vendor B	5%	13%		112,952		28,834
	98 %	94%	$	1,433,897	$	847,717

NOTE 3 – 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 will be a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is ¼% above Sterling National Bank Base Rate which at time of closing was 5%.  The amounts borrowed under this agreement are 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, 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’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.  Capstone Companies, Inc., formerly (CHDT Corp) and

F - 14

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – NOTES PAYABLE (continued)

Howard Ullman, the previous Chairman of the Board of Directors of CHDT, had personally guaranteed Capstone Industries obligations under the Financial Agreement. As part of the agreement with Sterling National Bank, a subordination agreement was executed with Howard Ullman, a shareholder and director of the Company at that time.  These agreements subordinated the debt of $121,263 (plus future interest) and $81,000 (plus future interest) due to Howard Ullman (or his assigns), to the Sterling National Bank loan.  The Sterling National Bank has terminated the Subordination Agreements as of December 2, 2013 .  As of December 31, 2013 & 2012, the balance due to Sterling   National Bank was $4,237,144  and $1,245,159 respectively.

On July 21, 2011 Stewart Wallach, the Chief Executive Officer and Director of Capstone Companies, Inc. formerly (CHDT) and JWTR Holdings, LLC   owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Howard Ullmans notes including the notes subordinated to Sterling National Bank.

On July 15, 2011, Stewart Wallach individually and accepted by Sterling National Bank, agreed to replace Howard Ullman as the sole personal guarantor to Sterling National Bank for all of Capstone Industries, Inc. loans previously guaranteed by Howard Ullman.

Effective July 12, 2011, Capstone Industries, Inc., credit line with Sterling National Bank was increased from $2,000,000 up to $4,000,000 to provide additional funding for increased revenue growth.

Effective October 1st, 2011, Sterling Capital Funding will be conducting business as the Factoring and Trade Division of Sterling National Bank.  All obligations under our agreements have been assigned to Sterling National Bank.

During the period from July 2013 through February 2014, the Company’s credit line with Sterling National Bank was temporarily increased from $4,000,000 up to $6,000,000 to provide additional funding to cover the increased sales volume during the holiday season.  As of February 28, 2014, the maximum amount that can be borrowed on this credit line is $4,000,000.

NOTE 4 – 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 is 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 CHDT and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Howard Ullmans notes including the subordinated notes net of any offsets, monies due by Howard Ullman to the Company. The original terms of all notes would remain the same. On July 12, 2011 this note payable was reassigned by Howard Ullman, equally split between Stewart Wallach Director and JWTR Holdings LLC.   The note balance of $466,886 was reduced by $47,940 for offsets due by Howard 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 is due on or before April 1, 2014.  At December 31, 2011, the total amount payable on the reassigned notes to Stewart Wallach was $216,498 which includes accrued interest of $7025 and JWTR Holdings, LLC was $216,498 which includes accrued interest of $7,025.  At December 31, 2012, the total amount payable on the reassigned notes to Stewart Wallach was $233,256 which includes accrued interest of $23,783 and JWTR Holdings, LLC was $233,256 which includes accrued interest of $23,783.  For the revised notes the interest payments are being accrued monthly to the note holders.  As of December 31, 2013 the total combined balance due on these two notes was $500,028which includes interest of $81,082

On July 11, 2008, the Company received a loan from a director of $250,000.  As amended, the note is due on or before April 1, 2014 and carries an interest rate of 8% per annum.  At December 31, 2012, the total amount payable on this note was $310,000 including interest of $60,000.  At December 31, 2013, the total amount payable on this note was $330,000 including interest of $80,000.

F - 15

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As part of this note payable, the Company also issued a warrant to the loan holder to purchase 4,000,000 shares of common stock at a price of $.025 per share.  At the date of issuance, the stock price was $.021 per share.  The Company accounted for the debt and warrants using APB 14, whereby the proceeds of $250,000 were allocated between the debt and warrants.  This resulted in the warrants being valued at $56,375, which was recorded as additional paid-in capital, and a discount on the note of $56,375 being recognized.  The discount was amortized over the term of the note (6 months) to interest expense.  At December 31, 2008, the discount had been fully amortized resulting in interest expense of $56,375 being recognized.

On March 11, 2010, the Company received a loan from a director of $100,000. As amended, the note is due on or before April 1, 2014 and carries an interest rate of 8% per annum.  At December 31, 2012 the total amount payable on this note was $122,466 including interest of $22,466.  At December 31 , 2013 the total amount payable on this note was $130,466 including interest of $30,466.

On May 11, 2010, the Company received a loan from a director of $75,000. As amended, the note is due on or before April 1, 2014 and carries an interest rate of 8% per annum.  The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.  At December 31, 2012 the total amount payable on this note was $90,847 including interest of $15,847.  At December 31, 2013 the total amount payable on this note was $96,847, including interest of $21,847.

On June 11, 2010, the Company received a loan from a director of $150,000. As amended, the note is due on or before April 1, 2014 and carries an interest rate of 8% per annum.  The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.  At December 31, 2012 the total amount payable on this note was $180,674 including interest of $30,674.  At December 31, 2013 the total amount payable on this note was $192,674 including interest of $42,674.

On April 8, 2013, the Company received a loan from a director of $150,000. The note is due on or before October 8, 2013 and carries an interest rate of 8% per annum. At September 30, 2013 the total amount payable on this note was $155,753 including interest of $5,753.  This note was paid off in full including interest in October 2013.

During the quarter ended June 30, 2008, the Company executed three notes payable for a combined total of $200,000 to an officer of the Company.  As amended, the notes are due on or before April 1, 2014 and carry an interest rate of 8% per annum.  These loans grant to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.  At December 31, 2012 the total amount due on these notes was $248,000, including interest of $48,000.  At December 31, 2013 the total amount due on these notes was $264,000 including interest of $64,000.

On January 15, 2013, the company received a new loan of $250,000 from Stewart Wallach, the Chief Executive Officer and Director of Capstone Companies, Inc. formerly (CHDT) with due date on or before April 1, 2014 and carries an interest rate of 8% per annum. This loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.  At December 31, 2013 the total amount payable on this note was $269,178 including interest of $19,178.

On January 15, 2013, the company received a new loan of $250,000 from a director of Capstone Companies, Inc. formerly (CHDT) with due date on or before April 1, 2014 and carries an interest rate of 8% per annum. This loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.  At December 31, 2013 the total amount payable on this note was $269,178 including interest of $19,178.

Capstone Industries – Notes Payable to Officers and Directors

On July 16, 2007, Capstone Industries executed a $103,000 promissory note payable to a director of the Company.  As amended, the note carries an interest rate of 8% per annum and is due on or before January 2, 2013.  In December 2008, the Company borrowed an additional $75,000 from this director.  As amended, this note was due on or before January 2, 2013, but it has been extended and is due on or before January 2, 2014. These loans grant to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.

F - 16

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capstone Industries – Notes Payable to Officers and Directors (continued)

On July 12, 2011 Stewart Wallach, the Chief Executive Officer and Director of CHDT and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement  with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase all of Howard Ullman’s notes including the subordinated notes. The original terms of all notes would remain the same.  On July 12, 2011 the subordinated note payable was reassigned by Howard Ullman, to Stewart Wallach director and JWTR Holding LLC.  The original note balance of $178,000 was reassigned to Stewart Wallach and to JWTR Holdings LLC. For the year 2011 the interest payments were paid monthly to the note holder as of July 31, 2011. As amended, this note was due on or before January 2, 2013 but it has been extended and is due on or before January 2, 2014.

At December 31, 2012 the total amount due on these two notes was $222,472, including interest of $44,472.  On December 4, 2013 this note was paid in full and no amount is due at December 31, 2013.

Purchase Order Assignment- Funding Agreements

During the Second Quarter 2012, Capstone Industries, Inc. received a $432,000 loan from George Wolf who is a business partner of the CEO. The loan is due on or before August 31, 2012 and carries an interest rate of 1.0% simple interest per month (12% annual).  As of December 31, 2012 the note balance was paid in full.

During the First & Second Quarter 2013, Capstone Industries, Inc. received three notes from George Wolf for $305,000, with payment due date of on or before January 02, 2014 and carried an interest rate of 1.0% simple interest per month (12% annual).  At September these notes are paid in full.

On August 26, 2013, Capstone Industries, Inc. received a $200,000 loan from George Wolf. The loan is due on or before January 2, 2014 and carries an interest rate of 1.0% simple interest per month.  This note was paid in full during November 2013 and no amount is due at December 31, 2013.

During the Second Quarter 2012, Capstone Industries, Inc. received a $746,000 loan from Jeffrey Postal a director of the Company. The loan was due on or before January 2, 2013 and carries an interest rate of 1.0% simple interest per month (12% annual).  As of December 31, 2012 the total amount due on these notes was $602,148 including interest of $27,148. During the first Quarter 2013, the loan balance was paid in full.

During the Second Quarter 2013, Capstone Industries, Inc. received total $1,150,000 under three notes from Jeffrey Postal a director of the Company.  These notes are due on or before January 2, 2014 and carry an interest rate of 1.0% simple interest per month (12% annual).  As of December 31, 2013 these notes were paid in full.

During the Third Quarter 2013, Capstone Industries, Inc. received $850,000 against two new notes from Jeffrey Postal a director of the Company. These notes are due on or before January 2, 2014 and carry an interest rate of 1.0% simple interest per month (12% annual).  These notes were paid in full during the fourth quarter and no amount is due at December 31, 2013.

On December 11, 2013, Capstone Industries, Inc. received $620,000 against new note from Jeffrey Postal a director of the Company. The note is due on or before July 2, 2014 and carry an interest rate of 1.0% simple interest per month (12% annul). As of December 31, 2013, the total amount due under this note was $624,077 including accrued interest of $4,077.

During the Second Quarter 2012, Capstone Industries, Inc. received a $375,000 loan from Phyllis Postal. Mrs. Postal is a mother of a director of the Company. The loan was due on or before September 30, 2012 and carried an interest rate of 1.0% simple interest per month (12% annual).  During the Third Quarter 2012, an additional $150,000 loan was received and then the entire balance was paid in full in September 2012.

On October 10, 2012, the Company entered into agreement with Phyllis Postal, which carried a simple interest rate of 1% per month (12% annual), the Company received $200,000 under this agreement which was paid in full with accrued interest as of December 31, 2012.  On May 21, 2013, the Company entered into agreement of $300,000 with Phyllis Postal  which carried a simple interest rate of 1% per month (12% annual) with payment due date on or before January 2, 2014.  This note was paid in full on August 14, 2013.

F - 17

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capstone Industries – Notes Payable to Officers and Directors (continued)

On September 15th 2013, Capstone Industries, Inc. received a $340,000 loan from Phyllis Postal. The loan is due on or before January 2, 2014 and carries an interest rate of 1.0% simple interest per month (12% annual).  As of September 30, 2013, the total amount due is $341,565 including accrued interest of $1,565. This note was paid in full on November 18, 2013.

During the Third Quarter 2012, Capstone Industries, Inc. received a $220,000 loan from Everett Fleisig who is the father in law of an officer of the company. The loan is due on or before January 2, 2013 and carries an interest rate of 1.0% simple interest per month (12% annual). As of December 31, 2012 this note was paid in full.

Working Capital Loan Agreements

On April 1st 2012, the Company signed a working capital loan agreement with Postal Capital Funding, LLC, (“PCF”) a private capital funding company owned by Jeffrey Postal and James McClinton who is a director and director and senior officer of the Company.  Pursuant to the agreement, the company may borrow up to a maximum of $1,000,000 of revolving credit from PCF.  Amounts borrowed were to be repaid by April 1, 2013 at an interest rate of 8%.  As amended, this note is due on or before April 1, 2014. As of December 31, 2012, the loan balance under this agreement was $382,310 including interest of $7,310. During the first two quarters 2013, additional $123,000 loan was received by the company. As of December 31, 2013, the loan balance under this agreement was $543,626 including interest of $45,626.

Notes and Loans Payable to Related Parties – Maturities

The total amount payable to officers, directors and related parties as of December 31, 2013 was $3,220,074 including accrued interest of $408,128.  The maturities under the notes and loan payable to related parties for the next five years are:

Year Ended December, 31,
2014	$3,220,074
2015	-
2016	-
2017	-
2018	-
Total future maturities	$3,220,074

NOTE 5 – 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 is leased on a month to month basis.  Monthly payments are approximately $4,650 per month.  Rental expense under the lease was approximately $55,871 and $56,158 for the periods ended December 31, 2013 and 2012, respectively

Capstone Industries entered into a new lease agreement for the same office space as currently located. The new lease agreement dated January 17, 2014 and effective February 1, 2014, has a 3 year lease with a base annual rent of $46,810 paid in equal monthly installments. The company has the one time option to renew the lease for three (3) years subject to a 3% increase per each year of the renewal term. Under the new lease agreement, Capstone is responsible for all charges for electricity or any other utility consumed in the leased premises.

Capstone International Hong Kong Ltd. Entered in a two year lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong.  The agreement is for the period from February 17, 2014 to February 16, 2016.  This lease has a base annual rent of $48,000 (HK$ 372,000) paid in equal monthly installments.

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CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – COMMITMENTS AND CONTINGENCIES (Continued)

The lease obligations under these agreements for the next five years is as follows:

Year Ended December, 31,	US	HK	Total
2014	$42,909	$42,000	$84,909
2015	48,083	48,000	96,083
2016	49,520	6,000	55,520
2017	4,137	-	4,137
2018	-	-	-
Total lease obligation	$144,649	$96,000	$240,649

Employment Agreements

On February 5, 2008, the Company entered into an Employment Agreement with Stewart Wallach, the Company’s Chief Executive Officer and President, whereby Mr. Wallach will be paid $225,000 per annum.  As part of the agreement, Mr. Wallach will receive a minimum increase of 5% per year.  For 2009, Mr. Wallach was paid $236,250, and for 2010 was paid $175,412.  For 2011 was  paid $180,000 and for 2012 he was paid $272,336.  For the year 2013 Mr. Wallach was paid $285,586. An amount of $40,233 has been accrued and is included on the balance sheet as part of accounts payable and accrued expenses for deferred wages in 2011.  This balance remains unpaid at December 31, 2013 and continues to be reported as part of accounts payable and accrued expenses.  The term of the contract begins February 5, 2008 and ends on February 5, 2011, but the term of the contract was extended for a further two years through February 5, 2013.  The Compensation Committee has further extended the agreement with the same terms for a further three years through February 5, 2016.

On February 5, 2008, the Company entered into an Employment Agreement with Gerry McClinton, the Company’s Chief Operating Officer, whereby Mr. McClinton will be paid $150,000 per annum.  As part of the agreement, Mr. McClinton will receive a minimum increase of 5% per year.  For 2009, Mr. McClinton was paid $157,500 and for 2010 was paid $113,546. For 2011, Mr. McClinton was paid $146,250 and for 2012 he was paid $181,403. For the year 2013 Mr. McClinton was paid $ 190,398.  An amount of $572 has been accrued and is included on the balance sheet as part of accounts payable and accrued expenses for deferred wages in 2011.  This balance remains unpaid at December 31, 2013 and continues to be reported as part of accounts payable and accrued expenses.  The term of the contract begins February 5, 2008 and ends on February 5, 2011 but the term of the contract was extended for a further two years through February 5, 2013. The Compensation Committee has further extended the agreement with the same terms for a further three years through February 5, 2016.

NOTE 6 - STOCK TRANSACTIONS

Series “C” Preferred Stock

On July 9, 2009, the Company authorized and issued 1,000 shares of Series C Preferred Stock in exchange for $700,000.  The 1,000 shares of Series C Stock are convertible into 67,979,725 common shares.  The par value of the Series C Preferred shares is $1.00.

Warrants

The Company has outstanding stock warrants that were issued in prior years to its officers and directors for a total of 5,975,000 shares of the Company's common stock. 1,975,000 of these warrants had an exercise price of $.05 and expired on November 11, 2011.  The remaining 4,000,000 warrants expire July 20, 2014. The warrants have an exercise price of $.03.

The Company issued a stock warrant to each of two former officers of the Company in December 2003 for a total of 35,000 shares of the Company's common stock. Each of the stock warrants expires on July 20, 2014, and entitles each former officer to purchase 10,000 and 25,000 shares, respectively, of the Company's common stock at an exercise price of $0.05.

During September and October 2007, the Company issued 31,823,529 shares of common stock for cash at $.017 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.  A total of 9,548,819 warrants were issued.  The warrants are ten year warrants and have an exercise price of $.025 per share.

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CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - STOCK TRANSACTIONS (continued)

On July 11, 2008, the Company received a loan from a director of $250,000.  As part of this note payable, the Company also issued a warrant to the loan holder to purchase 4,000,000 shares of common stock at a price of $.025 per share.  At the date of issuance, the stock price was $.021 per share.  The Company accounted for the debt and warrants using APB 14, whereby the proceeds of $250,000 were allocated between the debt and warrants.  This resulted in the warrants being valued at $56,375 which was recorded as additional paid-in capital, and a discount on the note of $56,375 being recognized.  The discount was amortized over the term of the note (6 months) to interest expense.  At December 31, 2008, the discount had been fully amortized resulting in interest expense of $56,375 being recognized.  These warrants expired as of July 10, 2013.

Options

In 2005, the Company authorized the 2005 Equity Plan that made available 10,000,000 shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.  On May 20, 2005 the Company granted non-qualified stock options under the company’s 2005 Equity Plan for a maximum of 250,000 shares of the Company’s common stock for $0.02 per share. The options expire May 25, 2015 and may be exercised any time after May 25, 2005.

On May 1, 2007, the Company granted 4,000,000 stock options to five employees of the Company under the 2005 Plan.  The options vest over two years.  During 2008, 1,000,000 of these options were cancelled prior to vesting.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2009 and 2008, the Company recognized compensation expense of $10,869 and $25,131 related to these stock options.  The following assumptions were used in the fair value calculations:

Risk free rate – 4.64%

Expected term – 11 years

Expected volatility of stock – 131.13%

Expected dividend yield – 0%

Suboptimal Exercise Behavior Multiple – 2.0

Number of Steps – 100

As of December 31, 2010 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

On April 23, 2007, the Company granted a ten-year non-qualified, non-statutory stock option for 102,400,000 “restricted” shares of the Company’s common stock to Stewart Wallach, the Company’s CEO, as incentive compensation.  The exercise price of the options is $.029 per share, which was the fair market value of the stock on the date of grant.  Twenty percent of the options vested on the date of issuance, and twenty percent per year will vest on the anniversary date through April 23, 2011.  On May 23, 2008, 74,666,667 of these options were cancelled.  Compensation expense was recognized through the date of the cancellation of the options. On July 31st, 2009, 5,000,000 of the fully vested options and fully expensed options were amended and transferred to G. McClinton.  Also on April 23, 2007, the Company granted a ten-year non-qualified, non-statutory stock option for 28,100,000 “restricted” shares of the Company’s common stock to Gerry McClinton, the Company’s COO and Secretary, as incentive compensation.  The exercise price of the options is $.029 per share, which was the fair market value of the stock on the date of grant.  Twenty percent of the options vested on the date of issuance, and twenty percent per year will vest on the anniversary date through April 23, 2011.  On May 1, 2008, 850,000 of these options were cancelled. On July 31st, 2009, 5,000,000 of S. Wallach fully vested and fully expensed options were amended and transferred to G. McClinton.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2010 and 2009, the Company recognized compensation expense of $156,558 and $156,557 related to these stock options.  The following assumptions were used in the fair value calculations:

Risk free rate – 4.66%

Expected term – 10 years

Expected volatility of stock – 133.59%

Expected dividend yield – 0%

Suboptimal Exercise Behavior Multiple – 2.0

Number of Steps – 100

F - 20

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - STOCK TRANSACTIONS (continued)

The Company has recognized compensation expense of $52,186 for the year ended December 31, 2011. As of December 31, 2011 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.  No further compensation expense will be recognized for these options after 2011.

On October 22, 2007, the Company granted 700,000 stock options to a business associate of the Company.  The options vest over two years.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2009 and 2008, the Company recognized compensation expense of $6,648 and $7,978 related to these stock options.  The following assumptions were used in the fair value calculations:

Risk free rate – 4.42%

Expected term – 11 and 12 years

Expected volatility of stock – 134.33%

Expected dividend yield – 0%

Suboptimal Exercise Behavior Multiple – 2.0

Number of Steps – 100

As of December 31, 2010 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

On January 10, 2008, the Company granted 1,000,000 stock options to an advisor of the Company.  The options vest over one year.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted.  During the year ended December 31, 2008, the Company recognized compensation expense of $19,953 related to these options.  The following assumptions were used in the fair value calculations:

Risk free rate – 3.91%

Expected term – 10 years

Expected volatility of stock – 133.83%

Expected dividend yield – 0%

Suboptimal Exercise Behavior Multiple – 2.0

Number of Steps – 100

As of December 31, 2010 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

On February 5, 2008, the Company granted 3,650,000 stock options to four directors and one employee of the Company.  The options vest over two years.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2009 and 2008, the Company recognized compensation expense of $2,603 and $59,619 related to these options.  The following assumptions were used in the fair value calculations:

Risk free rate – 1.93% to 3.61%

Expected term – 2 to 10 years

Expected volatility of stock – 133.83%

Expected dividend yield – 0%

Suboptimal Exercise Behavior Multiple – 2.0

Number of Steps – 100

As of December 31, 2010 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

F - 21

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - STOCK TRANSACTIONS (continued)

On May 1, 2008, the Company granted 850,000 stock options to an employee of the Company.  The options vest over two years.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2010 and 2009, the Company recognized compensation expense of $2,620 and $7,862 related to these options.  The following assumptions were used in the fair value calculations:

Risk free rate – 3.78%

Expected term – 11 years

Expected volatility of stock – 133.59%

Expected dividend yield – 0%

Suboptimal Exercise Behavior Multiple – 2.0

Number of Steps – 100

The Company recognized compensation expense of $2,620 in 2010 related to these stock options. As of December 31, 2010 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

On June 8, 2009, the Company granted 4,500,000 stock options to four directors of the Company.  The options vest over one year.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2010, the Company recognized compensation expense of $33,837 related to these options.  The following assumptions were used in the fair value calculations:

Risk free rate – 1.42%

Expected term – 2 years

Expected volatility of stock – 500.5%

Expected dividend yield – 0%

Suboptimal Exercise Behavior Multiple – 2.0

Number of Steps – 100

As of December 31, 2010 these options were fully vested and compensation expense fully recognized.  As of June 8, 2011 these options had expired. No further compensation expense will be recognized for these options.

On April 23rd, 2010, the Company granted 4,500,000 stock options to four directors of the Company and 300,000 stock options to the Company Secretary.  The options vest over one year.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted.  For the years ended December 31, 2010, the Company recognized compensation expense of $27,000 related to these options.  The following assumptions were used in the fair value calculations:

Risk free rate – 2.61%

Expected term – 5 to 10 years

Expected volatility of stock – 500.5%

Expected dividend yield – 0%

Suboptimal Exercise Behavior Multiple – 2.0

Number of Steps – 100

For the year ended December 31, 2011, the Company recognized compensation expense of $12,000 related to these stock options. As of December 31, 2011 these options were fully vested and compensation expense fully recognized.  No further compensation expense will be recognized for these options.

On July 1, 2011, the Company granted 4,500,000 stock options to four directors of the Company and 150,000 stock options to the Company Secretary.  The options vest over one year.

F - 22

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - STOCK TRANSACTIONS (continued)

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted.  The following assumptions were used in the fair value calculations:

Risk free rate – 1.80 – 3.22%

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

For the six months ended December 31, 2011 and June 30, 2012, the Company recognized compensation expense of $ 16,500 respectively, for a total compensation expense of $33,000 of compensation expense related to these stock options.  No further compensation expense will be recognized for these options.

On August 6, 2012, the Company granted 4,500,000 stock options to four directors of the Company and 150,000 stock options to the Company Secretary.  The options vest over one year.  The Company Secretary has subsequently left the Company and the 150,000 granted options that have been cancelled.

The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted.  The following assumptions were used in the fair value calculations:

Risk free rate – .65 – 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

For the period ended December31, 2012, the Company recognized compensation expense of $20,250 related to these stock options. For the 6 months ended June 30, 2013, $20,250 compensation expense was recognized.  No further compensation expense will be recognized for these options.

The following table sets forth the Company’s stock options outstanding as of December 31, 2013 and December 31, 2012 and activity for the years then ended:

			Weighted
		Weighted	Average
		Average	Remaining	Aggregate
		Exercise	Contractual	Intrinsic
	Shares	Price	Term (Years)	Value
Outstanding, January 1, 2012	69,883,333	$    0.029	5.26	$           -
Granted	4,650,000	0.029	-	-
Exercised	-	-	-	-
Forfeited/expired	150,000	0.029	-	-
Outstanding, December 31 , 2012	74,383,333	$    0.029	4.28	$           -
Granted	-	-	-	-
Exercised	-	-	-	-
Forfeited/expired	-	-	-	-
Outstanding, December 31, 2013	74,383,333	$    0.029	3.28	$           -
Vested/exercisable at December 31, 2012	69,883,333	$    0.029	4.26	$           -
Vested/exercisable at December 31, 2013	74,383,333	$    0.029	3.28	$           -

F - 23

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
$.020	250,000	1.42	$.020	250,000
$.029	54,983,333	3.33	$.029	54,983,333
$.029	2,500,000	4.33	$.029	2,500,000
$.029	700,000	5.33	$.029	700,000
$.029	1,000,000	4.00	$.029	1,000,000
$.029	150,000	4.08	$.029	150,000
$.029	850,000	5.42	$.029	850,000
$.029	4,500,000	1.33	$.029	4,500,000
$.029	300,000	6.33	$.029	300,000
$.029	4,500,000	2.50	$.029	4,500,000
$.029	150,000	7.50	$.029	150,000
$.029	4,500,000	3.58	$.029	4,500,000

NOTE 7 - INCOME TAXES

As of December 31, 2013, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $3,800,000 that may be offset against future taxable income through 2033. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.  No tax benefit has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carry forwards will expire unused. Accordingly, the potential tax benefits of the loss carryforwards are offset by a valuation allowance of the same amount.

	2013			2012
Net Operating (Profit) Losses	$	1,292,000		$	1,564,000
Valuation Allowance		(1,292,000	)		(1,564,000	)
	$	-		$	-

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

	2013			2012
Provision (Benefit) at US Statutory Rate	$	247,000		$	(206,000	)
State Income Tax		-			-
Depreciation and Amortization		(41,000	)		(68,000	)
Accrued Officer Compensation		-			-
Non-Deductible Stock Based Compensation		7,000			12,000
Other Differences		59,000			24,000
Increase (Decrease) in Valuation Allowance		(272,000	)		238,000
Income Tax Provision (Benefit)	$	-		$	-

The Company evaluates its valuation allowance requirements based on projected future operations.  When circumstances change and cause a change in management’s judgment about the recoverability of deferred tax assets, the impact of the change on the valuation is reflected in current income.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the Florida Department of Revenue for the years ending December 31, 2010 through 2013.  The Company recognizes interest and penalties related to income taxes in income tax expense. The Company had incurred no penalties and interest for the years ended December 31, 2013 and 2012.

F - 24

CAPSTONE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – OTHER ASSETS

Other Assets at December 31, 2013 and 2012 consists of the following:

	2013			2012			Life in Years
Packaging Artwork and Design	$	299,404			275,432			2
Less:  Accumulated Amortization		(279,740	)		(248,152	)
	$	19,664			27,280

Amortization expense for the year ended December 31, 2013 and 2012 was $31,588 and $20,304.

NOTE 9 – COST METHOD INVESTMENTS

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

In addition, the Company and AC Kinetics have agreed to cooperate in the development and commercialization of consumer and industrial products to be solely owned by the Company.  AC Kinetics will be the Company’s advanced product developer. AC Kinetics will notify the appropriate technology departments at Massachusetts Institute of Technology (“MIT”) of the Company’s ability and desire to commercialize consumer and industrial products developed in the MIT incubator departments.

The Company and AC Kinetics also entered into a royalty agreement whereby, the Company will receive a 7% Royalty on any licensing revenues received by AC Kinetics for products sold by them.  This royalty agreement will terminate upon receipt by the Company of royalties of $500,000.

The aggregate carrying amount of cost method investments at December 31, 2013 and 2012 consisted of the following:

	2013		2012
AC Kinetics Series A Convertible Preferred Stock	$	500,000	$	0

The company’s investment in AC Kinetics has not been evaluated for impairment.

It was not practicable to estimate fair value of AC Kinetics Series A Convertible Preferred Stock and such an estimate was not made because, during the twelve months ended December 31, 2013, there were no events or changes in circumstances that could have had a significant adverse effect on the fair value of such investments.

F - 25