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Commitments And Contingencies And Subsequent Events
9 Months Ended
Sep. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies and Subsequent Events

NOTE 4 – COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENTS

 

Operating Leases

 

The Company has operating lease agreements for offices and showroom facilities in Fort Lauderdale, Florida and in Hong Kong, expiring at varying dates. The Company’s principal executive offices were located at 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442.  As of the date of this report, the Company’s principal executive offices are located at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441.

 

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

 

On May 15, 2018, the Company entered into a lease agreement with the previous landlord to provide for a premise’s relocation, lease termination and new sublease agreement. Under the agreement the Company relocated its principal executive offices located at 350 Jim Moran Blvd, Suite 120, Deerfield Beach, Florida 33442 to 4,694 square feet of office space on the second floor of 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441. The original lease terminated on the relocation date, being July 1, 2018, and the parties proceeded under the terms of the new sublease which expires on January 31, 2020. The base annual rent in the new sublease remains at the same rate as the previous agreement until January 31, 2020. At the expiration of the new sublease, the Company has the option to accept the prime lease with another 3 years renewal and with an option to renew for an additional 5-year period. It is not reasonably certain that the Company will be able to exercise the option. If the Company decides to further extend the sublease after January 31, 2020, the Company will be subject to the terms and conditions of the prime lease. The base monthly rent was $7,312 to January 31, 2019 and then base rent will be $7,514 until January 31, 2020 which includes an estimate for portion of the common area maintenance.

 

As consideration for the lease amendment, the Company received a rate abatement from the landlord, effective May 1, 2018 and for four months to September 1, 2018. The landlord delivered the relocation premises in a “turnkey” condition with requested renovations made at no expense to the Company. As further consideration, the existing landlord agreed to pay the Company $150,000 incentive to vacate the existing premises on completion of the relocation, which was fully paid as of December 31, 2018 and is being amortized over the life of the lease amendment resulting in the recognition of lease incentive income of $870 per month.

 

On May 9, 2019, per the terms of the lease agreement, the current landlord was notified of the Company’s intent to take over the prime lease. The terms of this lease are being negotiated but the lease when finalized will be an operating lease and fall under ASU 2016-02, Topic 842 guidance which will require the recording of a right-of-use asset and a lease liability for the life of the lease.

 

Capstone International Hong Kong Ltd, (CIHK), entered into a lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong.  The original agreement which was effective from February 17, 2014 has been extended various times. The lease was renewed for (12) months ending May 16, 2018 with a base annual rate of $54,193 paid in equal monthly installments. On April 24, 2018, the Company further extended the lease for (3) months ending August 16, 2018 with a base rate increase of $225 per month.  This agreement was further extended until August 16, 2019 with a base monthly rate of $5,006.  On August 17, 2019, the lease was  further extended with a base monthly rate of $5,100 for six months until February 16, 2020.

 

CIHK entered into a six (6) month rental agreement effective from December 1, 2016 for a showroom space at 3F, Wing Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. This agreement has been extended various times. The current lease with a base monthly rent of $1,290 expired August 16, 2019. The property is currently  being rented on a month by month basis.

 

The Company's rent expense for the three months ended September 30, 2019 and 2018 amounted to $21,228 and $30,976 respectively and $64,002 and $106,743 for the nine months ended September 30, 2019 and 2018, respectively. The decreased rent in the period resulted from the $8,383 per month office move incentive that has been amortized over the life of the lease that ends January 31, 2020. The Company did not record a right to use asset and liability under ASC 842 due to the short term length of its current leases.

 

Consulting Agreements

 

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

 

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

 

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

 

On January 1, 2019, the agreement was further amended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 2019 through December 31, 2020.

 

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

  

Employment Agreements

 

On February 5, 2018, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed two years in length.  This Employment Agreement replaced a prior Employment Agreement, dated February 6, 2016 and ended February 5, 2018.  Under this prior Employment Agreement, Mr. Wallach received an annual base salary of $287,163.

 

On February 5, 2018, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. The initial term of this new agreement began February 5, 2018 and ends February 5, 2020. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed one year in length.  This Employment Agreement replaced a prior Employment Agreement, dated February 5, 2016 and ended February 5, 2018.  Under the prior Employment Agreement, Mr. McClinton received an annual base salary of $191,442.

 

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

 

Directors Compensation

 

On May 31, 2019 the Company  approved that effective on June 1, 2019, each independent director, namely Jeffrey Guzy and Jeffrey Postal, will each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation will be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee.

 

On May 31, 2019, the Company also approved that the independent directors would be offered effective from June 1, 2019, the opportunity to participate as  a non-employee  in the Company’s Health Benefit Plan, subject to compliance with all plan participation requirements and on acceptance into the plan the director will be responsible to pay 100% of their plans participation cost.

 

Licensing Agreements

 

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

 

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

 

On April 12, 2018, the Company finalized the second amendment to the February 4, 2015 Licensing Agreement in which the license was further expanded to add an additional product category.

 

Royalty expense related to this Licensing Agreement for the three months ended September 30, 2019 and 2018, was $0 and $146,981 and $0 and $303,477 for the nine month period ended September 30, 2019 and 2018, respectively.

 

On January 9, 2017, the Company finalized a Licensing Agreement with a globally recognized battery company that allowed the Company to market under the licensed brand, a specific product to a specific retailer in the warehouse club distribution channel. This agreement expired on December 31, 2018.

 

Royalty expense related to this Licensing Agreement with the battery company for the three months ended September 30, 2019 and 2018, was $0 and $715, respectively and $0 and $30,555 for the nine months ended September 30, 2019 and 2018, respectively.

 

Public Relations Agreement

 

On September 27, 2018, the Company executed a public relations services agreement with Max Borges Agency, (“MBA”), a full – service public relations and communications agency with offices in Miami and San Francisco. The Company entered into the Agreement to obtain assistance from a nationally recognized firm, specializing in the development of, product branding, marketing and launching of technology products. The MBA agreement was effective on October 1, 2018 with a minimum 180 days term, which either party can cancel with 60 days’ advanced notice in writing on or after the 120th day of the effective date. MBA will receive a monthly fee of $11,250 and $476 subscription fee due on the first of each month.

 

On February 25, 2019, the MBA agreement was temporarily paused and on April 17, 2019, both Company’s agreed to restart the engagement effective May 1, 2019 with the same statement of work and terms as originally agreed.

 

Legal Matters

 

Cyberquest, Inc

 

As previously reported in prior reports under the Exchange Act, on September 27, 2018, Company settled a legal action to access corporate records and validate issuance of shares of preferred stock in the 1998 acquisition of Cyberquest, Inc. by a predecessor of the Company.   Both parties to this action filed a Joint Stipulation and Order for Dismissal with Prejudice with the U.S. district Court in Dallas, Texas, thereby ending this dispute in Cyberquest, Ltd. v. Capstone Companies, Inc.