Capstone Companies, Inc.

Garett Gough – Investor Relations-Kei Advisors LLC Stewart Wallach – President and Chief Executive Officer Gerry McClinton – Chief Financial Officer and Chief Operating Officer Aimee Gaudet – Corporate Secretary

Michael Levine – Private Investor

Thank you, and good morning, everyone. We appreciate your time and interest in Capstone Companies.

On the call today is Stewart Wallach, Capstone’s President and Chief Executive Officer; and Gerry McClinton, Chief Financial Officer and Chief Operating Officer. They’ll be discussing the second-quarter results, as well as giving you an update on their strategy and outlook.

If you do not have the release that was distributed yesterday afternoon, it is available on the Company’s website at www.capstonecompaniesinc.com. As you are aware, we may make some forward-looking statements during today’s teleconference.

These statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from what we say today. These factors are outlined in our earnings release as well as in the documents filed by the Company with the SEC, which can be found at capstonecompaniesinc.com or at sec.gov.

With that, I will now turn the call over to you, Stewart.

Thank you, Garrett, and good morning to everyone. I appreciate your time with us today.

Before introducing Gerry McClinton to review the Q2 financial results, I would like to take a few moments to discuss some salient points that contributed to the results of Q2. I am pleased to report this morning that Capstone’s momentum is continuing strongly into 2016.

Actual here today and will read in our financials, we have considerably exceeded our projections, which were estimated at $4.5 million for the quarter during our Q4 2015 teleconference held in March 2016. As our long-time shareholders are aware, we are consistently conservative in our projections, as we are sensitive to the matters which we cannot control, for instance, change of shipping windows, factory supply chain issues, and logistical issues.

These occurrences could significantly impact the timing of shipments from quarter-to-quarter. When I forecasted of $6.5 million for the first half, it was not indicative of our backlog alone, but rather are based upon our then-current capacities at OEM factory levels.

Through the efforts of our overseas team, our factories exceeded our expectations and ramped up capacities, enabling them to fulfill the Q2 backlog in record time. The implications are significant in that now, at these increased production levels, we are very bullish on our abilities to fulfill the Q3 backlog on a timely basis as well.

I will discuss the Q3 expectations little later in the webcast. However, it is clear that our sales strategies are working as we post another record quarter.

Consumers are purchasing and enjoying our products record levels, and our retail partners are commensurately becoming more supportive of our Company as they experience these products’ successes firsthand. At this time, I’d like to introduce Gerry McClinton to give a brief overview of the financials, after which I will comment on the Company’s outlook, followed by a question-and-answer session.

Gerry?

Thank you, Stewart, and good morning, everyone. I’d like to start by reminding everyone that on July 25, 2015, we effected a one for 15 reverse split.

And as a result, the historical financial results that were included in today’s release have been adjusted where appropriate to reflect the post-reverse-split share count. Net revenue in the second quarter was a record $8.9 million, which is up $8.6 million over last year’s second quarter – obviously a measurable increase.

Growth was driven by the strong results in our battery-powered portable lighting categories under both the Capstone Lighting and Hoover HOME LED brands. We also saw strong growth in international sales, with approximately $500,000 of international sales in the second quarter and $1.6 million in the first-half 2016.

We had $382,000 of international sales in the first half of 2015. Net revenue was after approximately $739,000 investment in a marketing campaign.

The campaign will be kicking off to coincide with the upcoming holiday shopping season. This marketing investment has the impact of reducing revenue in the second quarter by this $739,000.

Gross profit of $2.1 million in the quarter increased $2 million over the prior-year period. As a percentage of sales, gross margin of 23.9% expanded 550 basis points compared with 18.4% in the second quarter of 2015.

The 550 basis point improvement in gross margin was the result of our strong revenue growth, combined with the efforts of our overseas forcing and procurement team to meet demand growth while keeping costs under control drove margin expansion. Second-quarter operating expenses of $967,000 increased by $266,000.

Most of this increase was in sales and marketing expense, which increased by $221,000 in the quarter. This included a $150,000 royalty payment to meet our obligations with the North American trade license agreement for Hoover.

We also invested $64,000 towards new product development in the quarter. This is up slightly from $61,000 in the prior-year period.

It is critical for a company like ours to be continually focused on creating new innovations to ensure that we are able to meet the appetite for new products and design by end-users. As a result, changes to new product development are driven by the timing and needs of the product development cycle as opposed to quarter-to-quarter revenue fluctuations.

Our significant operating leverage on higher volumes resulted in second-quarter operating income of $1.2 million. That’s up $1.8 million over the loss in the last year’s second quarter.

Operating margin as a percent of sales was 13%. Net income of $1.1 million in the second quarter improved from a $705,000 net loss in the 2015 second quarter.

Diluted earnings per share increased to $0.02 from $0.02 per share loss in the prior-year period. During the second quarter, cash used in operating activities was approximately $1.6 million.

Accounts receivables were up $6 million because of the timing of our strong second-quarter shipments. Our capital expenditure requirements are not significant because of our business model.

Total debt as of June 30, 2016, was $6 million, which was up from $4.3 million on December 31, 2015. We exercised our credit line with Sterling National Bank for working capital to fund product shipments to customers.

Our results for the first half of 2016 demonstrate again how our strategy of expanding and updating our product lines and building a large addressable market through international expansion has transformed the Company. Revenue for the first six months of the year was $11 million, up $10 million over first-half 2015 revenue of $1 million.

Gross profit increased to $2.7 million compared to $400,000 during the prior-year period. And operating income of $1.1 million or 10.2% of sales was up $2.1 million from an operating loss of $1 million in the prior-year period.

Net income for the 2016 year-to-date period was $1 million or $0.02 per diluted share compared with a net loss of $1.1 million or $0.02 loss per diluted share in the prior-year period. This concludes my financial summary for the second-quarter and six-months ended June 30, 2016.

I will now turn the call back to Stewart.

Thank you, Gerry. Let’s continue the discussion by looking forward to Q3 and the balance of 2016.

As Gerry pointed out, we had a record Q2 of $8.9 million, which brings our first half to approximately $11 million. Our outstanding growth this year is obviously exciting for all of us at Capstone, but let me share another perspective to expand on what was achieved behind the scenes, so to speak.

We produced and successfully delivered on time an estimated 3.8 million production units. So once again, we are not only achieving record results in the areas of sales and marketing, but we are also excelling in all areas of operations.

Along those lines, now that our capacities have been increased and our factory capabilities are able to scale at these levels, we are anticipating Q3 shipments equal to or greater than that of the second quarter. In summary, we are anticipating $19.5 million to $20 million in revenues through Q3, and our Q4 backlog is still building.

We have continued to take a disciplined approach to the business, following strategies which are based upon our combined business experiences. And I trust you will agree the results speak for themselves.

Capitalizing on the operating leverage created by our business model, maintaining a lean headcount, and controlling our overhead allows us to invest more into the promotional plans and support programs of our retail partners. As previously mentioned, we invested an estimated $740,000 of retail support programs in this quarter, which clearly drove our sales growth.

We believe we are in a much better position to more proactively market to investors that will be interested in a high growth, highly profitable microcap company. Record sales, record manufacturing productivity, and record backlog have propelled us to initiate actions that will improve our investment relations strategy.

The goal is simple: to expand the market’s recognition of our improving operations and future prospects for growth. The strategy is to improve the tradability of CAPC shares.

To enable an effective investor relations program, we had to take certain steps to make us a more investable stock. I’ve recently talked about our commitment to driving shareholder value through both the execution of our growth strategy and also by implementing a more encompassing investor relations strategy.

Without going into great detail, the two most important, significant developments that we can report at this time are the decisions to reverse-split the stock and to uplist off the pink sheets to OTCQB. We executed a 1 for 15 reverse split on July 25, resulting in an improvement of our per-share price to a range closer to $0.35 per share, with a marginal impact on our overall market capitalization.

The reverse split got our share count to a level where net income translates to earnings per share. It also is a level that is more attractive to investors and traders, because we no longer look like a less-than-credible investment.

We have been approved and anticipate uplisting on August 22 to OTCQB. Uplisting to this exchange has a number of requirements, but in particular, all member companies must be current with their SEC reporting.

And this will help convince investors to take a closer look at our Company. Based on our continuing momentum, solid results, and 2016 guidance, we believe by expanding the number of investors that will explore our Company, we should achieve greater valuations commensurate with our performance as we become viewed as a high-growth company by educated, rational investors.

We have also created a roadmap to get our story in front of a growing number of both individual and institutional investors that will recognize the value we are creating. We recently were interviewed by UPTICK Newswire, who featured our interview on their website, which is focused on microcap stocks, and their partners’ websites.

That interview is also posted on our website, and I encourage you to visit us at capstonecompaniesinc.com to listen to it. We are evaluating several investor conferences that cater to the type of investors that we have identified as our near-term target audience and plan to attend at least one conference within the next six months once we have confirmed the right fit.

We will continue to look at other opportunities to share our story with new investors and help ensure that our story is recognized and reflected in our share price. Once again, in closing, to our long-time shareholders, I would like to personally thank you for your continued support; and to our new and potential shareholders, I’d like to welcome you to this exciting time in our Company’s history.

Thank you and have a good day.

Thanks, Matt. So we received quite a few questions via email.

I’d like to start off with this one, which is directed towards Stewart: it seems that Hoover brand is doing quite well. Are you planning on expanding into other products under that brand?

Thanks, Aimee. The answer is yes, we are.

Wireless motion sensor lights and bath vanity lights are already underway and have been added to the selection. In fact, they are being shipped later in Q3 and Q4.

There are other expansions that are also taking place as well; but for competitive reasons, of course, I will not publicly announce that. But yes, we absolutely have it in our strategy to expand the program wherever there’s a good fit with the main group.

Okay, great. Second question: as a longtime shareholder, I had mixed emotions about the reverse stock split.

Can you give me a little insight as to what you feel the benefits are?

Gerry, why don’t you field that?

All right, let me do this one. During my prepared remarks, I made a reference to our goal of making our stock more investable.

We believe that one of the major factors that was resulting in our stock being removed from consideration at the very early stages of screening by potential investors was the fact that our share price has consistently been low – below $0.10 per share. Now, by reducing the number of shares outstanding, we have successfully increased our share price with a marginal impact on our total market capitalization.

Additionally, reducing the number of shares outstanding has made it easier for the investing community to evaluate our financial results on a per-share basis, which helps investors compare our valuation multiples to our peers and other companies with a similar growth profile.

Okay, great, thanks, Gerry. This question is about the CPC bulb.

Is the CPC bulb available at retail yet?

The CPC bulb – the power failure bulb – is expected to be available at retail before year-end. In accordance with our vendor agreements, I can’t divulge the specific retail partners that are planning on purchasing, but I can assure you that the intentions have been made very clear and that we anticipate purchases and shipments to occur in Qs three and four.

Okay, it looks like this question might be directed towards you, Stewart. You made mention of the uplist.

What does that exactly mean for our Company? How does the uplist play into the share price?

Well, the uplist means that starting on August 22, our stock will be listed and traded OTCQB Venture Market Exchange. Currently, as you know, we are trading on the OTC pink sheets.

And by being on the OTC pink sheets, we were likely being screened out of consideration by prospective investors because the pink sheets basically have no requirement that issuers remain current with their disclosures to the SEC. The OTCQB does require their issuers to do so.

And as a result, prospective investors can immediately have more confidence in Capstone’s legitimacy without the need for that additional burden of research.

Okay, question five. I have seen other companies go through a reverse stock split, and the share price ends up right back where it started.

Can you provide some insight as to why you think ours won’t?

Well, let’s continue that discussion. I will start by saying that every company has a different, unique investment story.

We believe we are less likely to experience what you’re referring to because of our consistent operational effectiveness, our strong growth prospects, and ability to meet and beat our financial guidance consistently – for almost a full year before we carried out the reverse split. Our research indicated that the share price clawback that you are referencing is typically limited to companies that did not have an established record of successful financial results like what we have put together over the last several quarters.

In my opinion, it would be a case of extreme market inefficiency if our market capitalization were to fall from the roughly $16.6 million on the last trading day prior to the stock split with no fundamental changes to our financial results or outlook.

Great, thanks, Stewart. This one actually looks like, Gerry, maybe you can help me out with this.

It’s interesting that you point out the production units. I never really thought about that as a shareholder.

Did you have to significantly increase your staff to accommodate this?

It’s a good question. Thank you for bringing this up for discussion.

No, in fact, we did not increase our headcount by a single person. We have over the last couple of years concentrated strongly on three or four OEM factories, and they understand our approach to the market.

And we continue to deliver strong growth for their businesses. They were very receptive to making significant investments at their end to allow for the increased capacity.

In some cases, that would mean they had to buy additional molds. But in all the cases, it did mean that they hired additional people at the factory level to facilitate the increased capacity.

So that’s their investment with us.

Okay, great. Thanks, Gerry.

With the recent divestment in AC Kinetics, what your plans for tech innovation? Stewart, can you elaborate on that?

Well, first of all, I want to clarify that the only innovation that was developed in concert with AC Kinetics was the CPC detection mechanism for the power failure control system. This is a highly advanced technology, and their expertise was paramount in its development.

I should point out that the concept and the idea was conceived by Capstone. Our innovations as it relates to new product concepts and the related technologies of those products – for instance, our signature bath vanity nightlight feature; Bluetooth speaker integration into the bath vanity light program; our wireless remote control outlets; our intelligent power control outlets, and so on, are all developed with our existing engineering staff and existing engineering staff at factory levels.

So, again, insofar as the relationship with AC Kinetics and their participation in tech innovation and development – that was completely focused only on the CPC.

Okay, great. It looks like we just have a few more questions.

Have you placed bath vanity lighting in any retailers? If not yet, when?

And can you comment on revenue and margins of the bath lighting?

Yes, we have placed the bath vanity lighting into specific regions. Because of the uniqueness of the product, retailers wanted to be able to gauge its potential by initially distributing into a controlled marketing area to determine its viability.

Based upon the sellthrough success in the initial launch, the distribution would then be expanded upon. This translates to a broader distribution in 2017.

Insofar as commenting on revenue and margins, as you know, this is not something we as a company would do publicly. However, I can say the margins are in accordance with our average margins as stated on our financials.

Okay, thank you, Stewart. Number nine, any plans to monetize the CPC patent?

Any interest from other companies to license the patent?

Yes, in fact, there is. And we are currently testing CPC in various product lines.

We are in discussion with other factories that are interested in integrating the CPC into their own products. This would be achieved through a licensing agreement.

We have been in these talks for some time. And as you can imagine, these are not simple agreements.

But once we have finalized these discussions and agreements, we will report on this in the future. But we absolutely do plan on monetizing the CPC patent through licensing arrangements.

Thanks, Stewart. Okay, this last question came in to Gerry.

This one was: I believe Mr. McClinton said that in 2016, that will be a banner year for Capstone.

How do you expect 2017? Will

We are looking forward to even stronger results than in 2016, resulting from our expanded product portfolio, which has in turn increased both our domestic and international business. We see no reason this trending will not continue.

In short, success breeds success, and our retailers are very, very happy with us.

Okay, fantastic. Thank you.

I believe that was the last one.

Good morning everyone. I have a question regarding, I guess, the Board of Director member – appointing a new outside Board of Director member.

What particular attributes are you looking for?

Let me field that, Gerry. This is Stewart speaking.

Hello, Michael.

Hi, good morning.

We have two goals there. One, of course, is to expand upon our independent Board participation.

We are lacking there. We need to expand and include 1 to 2 more independents.

But predominantly, at this point, we will seek one of two things. We will either seek somebody who has some type of technology background whereby they can participate in the product development part of our business, and/or somebody that has specific involvement in our particular channels – i.e., the mass retailers – and have had a prior experience whereby possibly they can give us some guidance on shortcutting some of the opening of new channels.

Right now, as we have been for the last several years, we are running a very clean operation, consistent performance. And we have relied greatly on the fundamentals of the business to speak for themselves.

I do think that more rapid expansion is our goal. We are experiencing it now through the expanded product portfolio, but I also think that we can gain some assistance in those measures through people that have contacts within the market that we reach.

Okay. Next question: I noticed in the 10-Q report that there’s an increase in inventory to over $618,000.

Is that, first, in anticipation of increased holiday sellthrough sales? And second, can you predict a particular product that you introduce will be popular with the end consumer demand?

All right, Michael, let me explain the bump in inventory. This – and again, please understand, due to vendor agreements I cannot name the retailer.

But I can tell you that in part and parcel of that $740,000 investment we made, there is a substantial promotional effort that is going to be taking place in the months ahead. As part of that negotiation, the retailer asked that we bring in additional backup inventory – that they basically will commit to – that can fill in once the sellthrough is initiated without having the lag or the lead time typically associated with direct import.

So in essence, because the strong sellthrough that is anticipated by the retailer, those inventories – the majority of those inventories are there strictly to support that promotion and will be pulled out as needed. I would think that those inventories will be reduced no later than November 1.

And that’s a unique situation. We have not done that the past.

And we may be asked to do it again in the future.

Okay. Just also in the 10-Q you mentioned about e-commerce marketing.

So do you have any plans for e-commerce marketing – for example, online marketing using new websites such as Pinterest, Facebook? Any plans for that?

It’s always under consideration, but at the same time, our focus has to remain on the channel development that we have. We do – are expanding our business, by the way, through Amazon, which, if we are successful with that measure, then that pretty much will deliver the online activity we’re seeking.

But keep in mind that the online business also requires inventory buildup. So for us, one of the reasons – and we mentioned this in the prepared remarks – but one of the reasons we are successful and profitable is because of our business model.

And our business model does not call for excessive inventory buildup and/or projecting inventory buildup for projected sales. Our product is sold and shipped because it is – we have POs booked against it.

So it’s a constant discussion. Right now, it’s not in the top of our list, because we have so many significant opportunities staying with our current business model.

Okay, and one last question. You mentioned it in the call before today – something called intelligent power control outlets.

I also believe that was listed on your Facebook page. There was a picture of that.

Can you explain what that is?

Yes, we have, in the area of home automation, which is predominantly the integration of appliances’ systems, in-house thermostats, lighting, et cetera, all operating through Wi-Fi and, in turn, through an intelligent device like a smartphone. Home automation is here.

It’s here to stay. And it’s going to be a large growth market.

We do think that there’s going to be significant pricing fallout over the fourth quarter. And as such, before we launch and introduce our entire home automation program – which we have been in development of over the past year – we developed a few key items that would be very affordable: an easier introduction to the consumer base incorporating the Wi-Fi control mechanism through smartphones, et cetera, for a few specific items, one of which is the outlet.

If you’ll recall, Michael, we had before a wireless remote control outlet last year in the marketplace. The intelligent control outlet is a follow-up to that item – basically an outlet that one would control through their smartphone.

Okay, thank you very much.

You bet, Michael. Thanks for your participation.

Thanks, Matt. I’ll just finish up by thanking everybody for joining our call today.

I’m sure as you can tell, it’s an exciting time. We’ve got a lot of work ahead of us, but we appreciate your support as we go through all of these various milestones.

We’ll be back in touch in November for our third-quarter call. And then, as usual, I’m available if you have any follow-up questions.

You can get my email and my phone number off of our press release. Thank you very much.

Thanks, Garett. And thank you, everybody.