CAPC 10-Q Quarter ended March 31, 2014

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2014

o 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 or organization)	(I.R.S. Employer Identification No.)

350 Jim Moran Boulevard, Suite 120, Deerfield Beach, Florida    33442

(Address of principal executive offices)

(954) 252-3440

(Issuer’s Telephone Number)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	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). o Yes x No

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date.  As of March 31, 2014, there were 654,010,532 shares of the issuer's $.0001 par value common stock issued and outstanding.

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

General – Capstone Companies, Inc., a Florida corporation, (“CAPC,” “Company,” “we,” or “our”) is a public holding company with its Common Stock, $0.0001 par value per share, (“Common Stock”) quoted on the OTCQB system of The OTC Markets Group, Inc. and since July 6, 2012 under the trading symbol “CAPC.”  This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's annual report on Form 10-K for the year ended December 31, 2013.

Available Information

The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company’s website at http://www.capstonecompaniesinc.com/Investor Relations and on the SEC’s website at http://www.sec.gov. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549, or through the aforesaid website URL’s. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov . The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.

Forward Looking Statements

Management’s Discussion and Analysis contains “forward-looking” statements within the meaning of Private Securities Litigation Reform Act of 1995, as amended, as well as historical information. The expectations reflected in these forward-looking statements may prove to be incorrect or could change with changing circumstances. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors – many of those factors being beyond our control or ability to predict. Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable at the time made, these statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements.  Actual results may differ significantly from anticipated business and financial results.  The Company is a “penny stock” under Commission rules and the public stock market price for its Common Stock has been depressed for several consecutive fiscal quarters.  The Company’s Common Stock lacks sufficient or active market maker and institutional investor support in the public market and this lack of suppor t means that any increase in the per share price of our Common Stock in the public market is usually eliminated by selling pressure from profit taking by investors.  As of April 28, 2014, the Common Stock was trading at $.0231 on the Bid Investment in our Common Stock, which is highly risky and should only be considered by investors who can afford to lose their investment and do not require liquidity.  Investors should consider risk factors in this Report and other SEC filings of the Company.

All forward-looking statements attributable to us are expressly qualified in their entirety by the above and all other applicable risk factors. We undertake no obligation to update or revise these forward-looking statements, except as required by law, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.

Introduction

The following discussion and analysis provides an introduction to our company, its current strategy and customers and summarizes the significant factors affecting: (i) our consolidated results of operations for the three months ended March 31, 2014 compared with the same period in 2013 and (ii) final liquidity and capital resources.

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.  Company 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, and are primarily marketed and sold by our wholly-owned subsidiary, Capstone Industries, Inc., a Florida corporation organized in 1997 and acquired on September 13, 2006 by the Company (“Capstone”).  Our other wholly owned subsidiaries are:  (a) Capstone International Hong Kong Ltd, a Hong Long limited liability company organized in 2012  (“CIHK”) and (b) Capstone Lighting Technologies, LLC, a Florida limited liability Company organized in 2004  (“CLTL”). CLTL has no significant business operations at this time. Capstone International (Hong Kong), Ltd. will support the development of innovative products outside the company’s current categories, provide quality control and logistics support to contract manufacturers and sell products internationally from Hong Kong.

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 and which, we believe,  enhanced its market image further and better reflected the Company's unique product innovations and technology advancements within its product 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.

As previously announced, the Company also seeks and reviews potential acquisitions of new products and technologies that are complementary to our product lines, or the acquisition of companies with such products and technologies.  We have not entered into any agreements or commitments with respect to such efforts, but the effort is ongoing and part of our growth strategy and strategy to enhance shareholder value.

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.  We believe that 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.

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 U.S. 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 the second fiscal quarter of 2014.

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 2008-2009 period 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 wall plate 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.

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 the Company 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

The Company’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 sales 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 Industries, Inc. 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 our capital needs, Sterling National Bank approved access to 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, the Company 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.

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, the Company believes that adequate supplies of raw materials required for its operations are available at the present time. Company, 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, the Company 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.

CONSOLIDATED OVERVIEW OF OPERATIONS

Revenue

For the 3 months ended March 31, 2014 and 2013, total net sales were approximately $4,088,300 and $659,800, respectively, an increase of $3,428,500 or 520% from the previous year. Approximately $1,000,000 of this was expected to be shipped in the second quarter.  However, shipping dates required our factories to meet earlier than projected shipping windows.

Cost of Sales

For the 3 months ended March 31, 2014 and 2013, cost of sales were approximately $ 2,781,800 and $ 465,900, respectively, an increase of $2,315,900 or 497% from the previous year as a result of the higher sales volumes.

Gross Profit

For the 3 months ended March 31, 2014 and 2013, gross profit was approximately $1,306,500 and $193,800 respectively, an increase of $1,112,700 or 574% as compared to the comparable period in 2013. Gross Profit as a percentage of net sales was 31.9% in the quarter compared to 29.4% in the same quarter in 2013.

The significant increase in revenue is attributed to the continued strong sales performance of our Motion Sensor Light, and Power Failure Light programs. We also had Sales of the FIFA World Cup Brazil 2014 souvenir watches. The higher gross profit as a percentage of net sales reflects an improved margin resulting from the product mix shipped during the period.

Operating Expenses

For the 3 months ended March 31, 2014 and 2013, operating expenses were approximately $944,700 and $506,100 respectively, an increase of $438,600 or 87% as compared to same period in 2013.

Expenses for the first quarter were significantly higher than the first quarter 2013. The main reasons were our continued investment in product marketing and new product development. The following summarizes the major expense variances by category in the quarter compared to 2013.

Sales and Marketing Expenses - for the 3 months ended March 31, 2014 and 2013 were approximately $300,700 and $57,300 respectively, an increase of $243,400 or 425%. During the quarter ended March 31, 2014, the Company continued its marketing-product promotion strategy and invested a further $216,000 in product advertising and marketing to further develop consumer product awareness. That compares to $3,200 spent in the prior year and accounts for most of the increase in the quarter.

Compensation Expenses - for the 3 months ended March 31, 2014 and 2013 were $295,300 and $230,100 respectively, an increase of $65,200 or 28.3%.  This increase is mainly the result of added sales personnel in the United States and added personnel in our Capstone International Hong Kong office.

Professional Fees - for the 3 months ended March 31, 2014 and 2013 were approximately $73,800 and $91,700 respectively, a reduction of $17.900 or 19.5%.

Product Development - for the 3 months ended March 31, 2013and 2013 was approximately $132,300 and $23,600 respectively, that’s an increase of $108,700 or 460% in the quarter.  We have continued to make significant investments in developing, sourcing and testing new innovative products for future revenue growth. In an effort to accelerate the launch of new products incorporating the AC Kinetics technology, we engaged an additional industrial design firm stateside to help the overseas team execute at factory levels in the most effective way possible.

Other General Administrative - for the 3 months ended March 31, 2014 and 2013 were approximately $142,500 and $103,400 respectively, an increase of $39,100 or 37.8%.This expense increase was mainly the result of additional rental expense with the opening of the Hong Kong office and with an increase of insurance premiums associated with the Company’s higher revenue volumes.

Total Operating Expenses - for the 3 months ended March 31, 2014 and 2013 were approximately $944,700 and $506,100 respectively, an increase of $438,600 or 86.6%. In summary of the $438,600 expense increase, we have invested $352,000 of that increase in product development and product promotion for future revenue growth.

Net Operating Income (Loss)

For the 3 months ended March 31, 2014 and 2013, Operating Income was approximately $361,900 and $(312,300), respectively, for a net improvement of $674,200 as compared to same period in 2013.

Interest Expense

For the 3 months ended March 31, 2014 and 2013, interest expenses were approximately $101,100 and $73,700, respectively, for an increase of $27,400 as compared to same period in 2013.

Net Income (Loss)

For the 3 months ended March 31, 2014 and 2013, the Company had a net income of approximately $260,800 as compared with a net loss in the same period last year of ($386,000), that’s a net income improvement of $646,800.

With the current retail interest in our product offerings, expansion of distribution channels through the domestic purchase program, the launch of exciting new products this year and the opportunities provided by Capstone International HK Ltd, the Company expects its sales volumes to grow and produce gross revenues in the projected range of $15 million to $20 million within the next rolling 12 months from March 2014 through March 2015, subject to economic conditions not deteriorating and other factors impacting on consumer sales (including, without limitation, competitors’ new products and sales efforts, changes in consumer purchasing habits, technological developments in our industry, and other risk factors set forth in our Exchange Act filings) .  The Company anticipates this growth potential as a result of the increased retail distribution achieved in 2013, the rebranding of Capstone’s Power Failure Product line and the new product launches at the National Hardware Show in May of 2014, and we anticipate additional projects and programs through Capstone International.  Having attended for the first time last year, the International Hotel, Motel and Restaurant Show we are actively pursuing opportunities with our Power Failure Solutions products and Door Security Monitor in this new distribution channel.  These assumptions would have to be accurate to achieve the projected gross revenues.

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 March 31, 2014:

		Payments Due by Period
		Total				2014				2015				2016				After 2016
(In thousands)
Purchase Obligations		$	1,092			$	1,092			$	-			$	-			$	-
Short-Term Debt			4,382				2,541				1,841				-				-
Long-Term Debt			-				-				-				-				-
Operating Leases			238				81				98				59				-
Interest on Short-Term Debt			96				96				-				-				-
Other Long-Term Liabilities			-				-				-				-				-
Total Contractual Obligations		$	5,808			$	3,810			$	1,939			$	59			$	-

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.

LIQUIDITY AND CAPITAL RESOURCES

(In thousands)		March 31, 2014				March 31, 2013
Net cash provided (used) by:
Operating Activities		$	3,144			$	889
Investing Activities		$	(10	)		$	(506	)
Financing Activities		$	(3,119	)		$	(552	)

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 provided by operating activities was approximately $3,144,000 in the first three months of 2014 compared with approximately $889,000 in the same period 2013.  Accounts receivable collections in the fiscal quarter ended March 31, 2014 were $2,978,000 and profits generated cash of $261,000 which accounted for most of the cash flow generated in the first quarter.

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.

Investing Activities

Cash used for investing activities in the fiscal quarter ended March 31, 2014 was $10,000, compared to $506,000 in the same period in 2013.  In 2013, the Company invested $500,000 in another company called AC Kinetics and a further $6,000 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 used by financing activities for the three months as of March 31, 2014 was $3,119,000 and $552,000 in 2013. The cash was used to repay outstanding notes and loans. It is our stated objective to pay off and reduce loans, whenever cash flow allows, so that we can reduce our interest expense.  As of March 31, 2014, 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, 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.

Directors & Officers Insurance : We currently operate with directors’ and officers’ insurance and we believe our coverage is adequate to cover likely liabilities under such a policy.

Impact of Inflation: Our major expenses have been the cost of selling and marketing product lines to customers in North America.  That effort involves mostly sales staff traveling to make direct marketing and sales pitches to customers and potential customers trade shows around North America and visiting China to maintain and seek to expand distribution and manufacturing relationships and channels.  As a result of world economic conditions and the current price of world oil and resulting increased material costs, there are now pressures from Chinese Manufacturers to increase costs.  We generally have been able to reduce cost increases by strong negotiating, volume purchases or re-engineering products, but may have to increase the price of our products in fiscal year 2014 in response to such inflationary pressures and any dollar currency depreciation with the Chinese currency.  Since we operate in industries where the consumer tends to be price sensitive, any such increase in the prices of our products may adversely impact our sales and financial results in fiscal year 2014.

Country Risks - Changes in foreign, cultural, political and financial market conditions could impair Company’s international manufacturing operations and financial performance.

Company’s manufacturing is currently conducted in China.  Consequently, Company 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, including trade disputes between the U.S. and China; and

·	difficulty in enforcing contractual and intellectual property rights.

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

Interest Rate Risk - We do not have significant interest rate risk during the fiscal quarter ending March 31, 2014.

Credit Risk - We have not experienced significant credit risk, as most of our customers are long-term customers with superior payment records.  Our managers monitor our receivables regularly and our Direct Import Programs are shipped to only the most financially stable customers or advance payments before shipment are required for those accounts less financially secured.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.  Controls and Procedures

Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2013 and concluded that the disclosure controls and procedures were effective under Rules 13a-15(e) and 15d-15(e) under the Exchange Act and as of September 30, 2013, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Commission regulations and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Item 4(T).  Controls and Procedures.

Changes in internal controls. There were no changes in our internal controls over financial reporting that occurred during the three months covered by this Report of Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The certifications of our chief executive officer and chief financial officers attached as Exhibits 31.1 and to this Report include information concerning our disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in Item 4, including the information incorporated by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2013, for a more complete understanding of the matters covered by such certifications.

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings.

We are not a party to any material pending or threatened 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 our 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 its financial position, results of operations or status as a going concern.

Other Legal Matters .  To the best of our knowledge, none of our directors, officers or owners 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 1A.  Risk Factors.

In addition to risk factors set forth herein and in the Form 10-K for the fiscal year ended December 31, 2013, and other Commission filings, the following risk factors should be considered in any evaluation of the Company.

Investment in new business strategies and marketing and sales strategies could present risks not originally contemplated. The Company has invested, and in the future may invest, in new business strategies or marketing and sales strategies.  Such endeavors may involve significant risks and uncertainties, including insufficient revenue to offset liabilities assumed and expenses associated with the strategy, inadequate return of capital, and unidentified issues not discovered in the Company’s evaluation. These new strategies may be inherently risky and may not be successful.

Company relies on equity or debt funding from members of management or outside investors from time to time to meet working capital needs. Company receives equity or debt funding from time to time from members of management or outside investors to fund working capital needs.  Such funding may not always be available or adequate to meet such essential needs.  The lack of primary market makers and institutional investors for our publicly traded common stock makes it difficult for the Company’s common stock to appreciate in value, which, in turn, makes it difficult for the Company to raise money from outside investors or in the public markets. We believe that we need to develop new products or new product lines with higher profit margins to attain better financial results and, through any improved financial results, to possibly attract greater support for our Common Stock in the public markets.  We believe that greater market support for our Common Stock would assist in any efforts to raise working capital by the Company. We may be unable to develop higher profit margin products or achieve or sustain profitability and that failure would probably result in the aforementioned weakness in the public market for our Common Stock.

Company competes against larger competitors with greater resources and market share and recognition . The Company is relatively small in comparison to larger competitors with superior financial and technical resources and greater market recognition and market share in certain product categories.  This discrepancy in resources and market share makes it difficult for our company to attain a larger market share in certain regions or in certain product categories.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered issuances of Company securities in the quarter ending March 31, 2014.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to Vote of Security Holders

As of March 31, 2014, there have been no submissions of matters to vote at a regular or special shareholders meeting

Item 5.  Other Information

None.

Item 6.  Exhibits

EXHIBIT #	DESCRIPTION OF EXHIBIT
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 and Chief Operating Officer^

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^ Filed herein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Capstone Companies, Inc.

Dated:    May 15, 2014

/s/ Stewart Wallach
Stewart Wallach	Chief Executive Officer
Principal Executive Officer
/s/James G. McClinton
James G. McClinton	Chief Financial Officer and
Principal Operation Executive	Chief Operating Officer

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