SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2016

SIGNIFICANT ACCOUNTING POLICIES (Policies)

Reverse Stock Split

Reverse Stock Split

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

Basis of Presentation

Basis of Presentation

The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position as of June 30, 2016 and results of operations and cash flows for the three months and six months ended June 30, 2016 and 2015. All significant intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC") relating to interim financial statements and in conformity with "US GAAP". Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Annual Report").

The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.

Nature of Business

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 product categories: Induction Charged Power Failure Lights; LED Night Lights and Power Failure Lights; Motion Sensor Lights; Wireless Remote Control Outlets and Wireless Remote Control Accent Lights.  The Company's products are typically manufactured in China by third-party manufacturing companies.

Inventory

Inventory

The Company's inventory, recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $618,995 and $205,708 at June 30, 2016 and December 31, 2015, respectively.

Net Income (Loss) Per Common Share

Net Income (Loss) Per Common Share

Basic earnings per common share were computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.  At June 30, 2016 and June 30, 2015, the total number of potentially post reverse split dilutive common stock equivalents was 5,908,701 and 5,698,693, respectively.

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

	For the Six Months Ended
	June 30, 2016		June 30, 2015
Basic weighted average shares outstanding		48,132,664		45,002,856
Dilutive Warrants		157,709		-
Diluted weighted average shares outstanding		48,290,373		45.002.856

Cost Method of Accounting for Investment

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.

Revenue Recognition, Policy

Revenue Recognition

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

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

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

During the six-month period ending June 30, 2016 and 2015, Capstone determined that $94,203 and $196,977, respectively of previously accrued promotional allowances were no longer required. The reduction of promotional allowances is included in net revenues for the six month periods ended June 30, 2016 and 2015.

Advertising and Promotion

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 $70,385 and $91,565 for the three months and $73,438 and $95,160 for the six months ended June 30, 2016 and 2015, respectively.  As of June 30, 2016 and December 31, 2015, the Company has $275,019 in capitalized advertising costs included in prepaid expenses on the balance sheet.

Shipping and Handling

Shipping and Handling

The Company's shipping and handling costs, are included in sales and marketing expenses and amounted to $31,142 and $19,536 for the three months and $57,397 and $33,823 for the six months ended June 30, 2015 and 2014, respectively.

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Income Taxes

Income Taxes

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

Stock-Based Compensation

Stock-Based Compensation

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

ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of options is determined using the Binomial Lattice (Suboptimal) option pricing model with estimate of option lives, stock price volatility and interest rates, then expressed over the periods of service. Changes in the estimated inputs or using option value methods could result in materially different option values and share based compensation expense.

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

In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.  As stock-based compensation expense is recognized during the period 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 for the periods ended June 30, 2016 and 2015, there were no material amounts subject to forfeiture.

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.

Stock-based compensation for the three-month period ended June 30, 2016 and 2015 totaled $14,250 and $29,433, respectively.  Stock-based compensation for the six-month period ended June 30, 2016 and 2015 totaled $28,500 and $58,866, respectively.

Significant Accounting Policies and Estimates

Significant Accounting Policies and Estimates

The Company's significant accounting policies are disclosed in the 2015 Annual Report. Since the date of the 2015 Annual Report, there have been no material changes to the Company's significant accounting policies. The preparation of the condensed consolidated financial statements in conformity with "US GAAP" requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions include valuing equity securities, allowance for doubtful accounts, notes receivable, inventory reserves, deferred taxes, and related valuation allowances, and the fair value of long lived assets, intangibles, goodwill and contingent consideration. Actual results could differ from the estimates.

Recent Accounting Standards

Recent Accounting Standards

In May 2014, the FASB made available ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and Intangible Assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

In August 2015, the effective date of this guidance was deferred by one year and now will be effective for the Company's annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), ("ASU 2016-08"). This ASU clarifies the implementation guidance on principal versus agent considerations. The updated guidance improves the understandability of determining whether an entity is a principal or agent, the nature of the good or service, and involvement of other parties in a sale. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) ("ASU 2016-10"). ASU 2016-10 clarifies two aspects of Topic 606: identifying performance obligation and the licensing implementation guidance, while retaining the related principles for those areas.  The amendments in ASU 2016-08 and ASU 2016-10 are effective in conjunction with ASU 2015-14. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

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

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

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company's fiscal year beginning after December 15, 2016 and subsequent interim periods. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the Company's consolidated financial statements.

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

Cash and Cash Equivalents

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 June 30, 2016, the Company had $0 funds in excess of FDIC limits.

Accounts Receivable

Accounts Receivable

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

Major Customers, Policy

Major Customers

The Company had two customers who comprised 64% and 35% of gross revenue during the period ended June 30, 2016 and two customers who comprised 54% and 20% of gross revenue during the period ended June 30, 2015.  The loss of these customers would adversely impact the business of the Company.

Approximately 15% and 54% of the Company's gross revenue for the periods ended June 30, 2016 and 2015, respectively, was from international sales.

As of June 30, 2016, approximately 99.81% of accounts receivable were from two customers. As of December 31, 2015, approximately 98.68% of accounts receivable were from two customers.

Major Vendors, Policy

Major Vendors

The Company had one vendor from which it purchased 97 % of merchandise during the six-month period ended June 30, 2016, and two vendors from which it purchased 50% and 35 % of merchandise during the six-month period ended June 30, 2015. The loss of these suppliers could adversely impact the business of the Company.

As of June 30, 2016, approximately 83% of accounts payable were due to one vendor. As of December 31, 2015, approximately 95% of accounts payable were due to two vendors.