Item 1. Business
Overview
Capstone Companies, Inc. (“Company”
or “CAPC”) is a public holding company, that on March 25, 2004, organized under the laws of the State of Florida. The Company
is a leading designer, manufacturer and marketer of consumer inspired products that simplify daily living through technology. Over the
past decade, the Company’s various product lines have been distributed globally including consumer markets in Australia, Japan,
Korea, North America, South America, and the United Kingdom. The primary operating subsidiary is Capstone Industries, Inc. (“Capstone”),
a Florida corporation located at the principal executive offices of the Company. Capstone International Hong Kong, Ltd., or “CIHK”,
was established to expand the Company’s product development, engineering, and factory resource capabilities. With the 2021 shift
of manufacturing to Thailand from China, the CIHK operation was downsized and put in dormant status in March 2022.
The Company’s focus through 2017 was the
integration of LEDs into most commonly used consumer lighting products in today’s home. Over the last few years there has been significant
LED price erosion, which has commoditized LED consumer products. The LED category has matured and is no longer the innovative “must
have” consumer product as in previous years, as such, revenues for the LED product line have declined significantly in 2022. The
Connected Surfaces is the Company’s effort to establish business in an emerging segment that is intended for future revenue growth.
The smart home segment is the umbrella category in which we intend to participate with the Connected Surfaces program.
In late 2017, as management recognized that
the LED category was maturing, it sought a business opportunity that would transition the Company’s revenue streams to an emerging
new product category. While we currently continue to supply LED products on a limited basis, our strategic plan to develop and launch
new innovative product lines, like Connected Surfaces’ Smart Mirrors, is believed to be essential for sustaining or growing revenues.
However, we were unable to establish the Connected Surfaces’ Smart Mirrors as a product line to replace the LED product line and
provide revenues sufficient to fully fund Company operations and overhead. The Smart Mirror product line continues to have limited sales
in the first three months of 2023.
The
Company began its foray into the electronics industry in 2019 with its Connected Surfaces
initiative. We decided to enter the market as we identified the smart home category to be
emerging with strong long-term growth potential.
The Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding
Internet of Things, wireless connected lifestyles prevalent today. The Smart Mirrors have
both touch and remote control interfacing and it’s casting capabilities offer voice
control through one’s smartphone. Full access to the internet and an operating system
capable of running downloadable applications makes the smart mirror customizable to one’s
usage preferences. The average selling prices are comparable to that of tablets and smartphones,
retailing between $799 - $999 per unit, with the goal to deliver cost-attractive products
and consumer value to mainstream America. Whereas, during the day your smartphone/tablet
keeps you connected, whether it is work or personal, now when entering your home, Capstone’s
new Connected Surfaces products are intended to enable users the same level of connectivity
in a more relaxed manner that does not require being tethered to these devices.
The Company will require third party
funding to cover operating overhead and to resume efforts to fund its marketing and product launch campaigns. The
future growth will be directly impacted by the level of exposure, messaging and distribution capabilities. Certain members of
the Company’s management (“Corporate Insiders and Directors”) have provided short-term funding from time to
time to support the Company’s basic operational funding needs, but there is no guarantee that this funding will continue
or be adequate to fund operations or Connected Surfaces program marketing and inventory as well as possible enhancements in functions
demanded by the consumers. The Company will require third party funding to sustain basic operations and continue efforts to market
the Connected Surfaces’ Smart Mirror product line.
The Company has historically competed in highly competitive consumer market
channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence, employment
levels, credit availability, commodity costs and the recovery from the global pandemic. As stated earlier, and based on historical trends,
the markets for LED home products have matured and growth within the category will continue to decline as markets are saturated. For
these reasons, our focus is directed to the expansion and advancement of the Company’s Connected Surfaces initiative. As planned,
in 2022 we began to exit the LED industry. Connected Surfaces Smart Mirrors program is intended to replace the LED product lines as the
Company’s primary business line and its success is critical to the Company’s business and financial performance in the future.
By working overseas with alternate manufacturers located
outside China, particularly in Thailand, we anticipated minimal impact to our selling prices and related margins of profit that could
otherwise be impacted by an ongoing trade dispute between the United States and China. Political unrest in Thailand in late 2020 and early
2021 did not affect our original equipment manufacturing (“OEM”) activities, however the transportation/logistics costs have
escalated as a result of the COVID-19 pandemic, but we are beginning to see more stability as we are able to book freight without the
surcharges imposed by container shortages experienced during 2021 and 2022.
While the Company announced the plan to launch
its ecommerce initiative in March 2021, that effort was continually delayed because the COVID-19 pandemic forced factory closures overseas
and inventories planned for Q3 2021 sales were shipped in December 2021, which pushed the formal product launch into January 2022. The
COVID-19 pandemic and transitioning to Thailand OEM’s as well as to be expected delays in developing an acceptable new product essentially
delayed our launch of the Smart Mirror product line by a year into 2022, which combined with declining LED product sales, has adversely
impacted the Company’s business and financial performance. The initial inventory that arrived in our fulfilment center in the United
States at the end of Q4 2021 was damaged by the logistics company. We filed an insurance claim and were compensated for the damaged inventory
during 2022, however, incurred significant delays in our initial Smart Mirror product launch.
Beginning in 2020, the Company substantially
expanded its investment and commitment to social media marketing year over year. The Company was disappointed with the 2022 results of
the e-commerce efforts equating to high customer acquisition costs for a low level of sales. Since the Company was new to e-commerce and
social media marketing, the cost of developing an effective e-commerce program and social media marketing was greater than anticipated
by the Company.
The Company oversees and controls the manufacturing
of its products, which are currently made in Thailand and China by OEM contract manufacturers. To support the e-commerce model for 2022,
we transitioned inventories into warehouse facilities stateside for direct-to-consumer fulfillment. When introducing the Connected Surfaces
program to Big Box retailers as planned in the first half of 2023, the Company will resume its direct import model. At that time, the
Company’s products will be built to order for specific promotional periods and will not require replenishment domestically.
As of today, all of the Company’s retail
sales are made on an order-by-order basis, rather than through long-term sales contracts. As such, the nature of the Company’s business
did not provide visibility of material forward-looking information from its customers and suppliers beyond a few months.
The
Company started to actively market and sell the Smart Mirror product line in March 2022,
which is the first introduction within the Capstone Connected Surfaces program. The initial
marketing launch was at the Consumer Electronics Show in early 2020 but its release to the
retail market was delayed due to product development delays at our suppliers and other related
approval and certification delays resulting from the impact of COVID-19, which impact was
mainly limitations on staff work and staffing causing delays in completion of work and backlogs
in work at suppliers and certification or regulatory organizations. The Company commenced
production after a long awaited FCC approval. This review process,
which historically has taken 4-5 weeks, was delayed continuously and was finalized
after 5 months of delays. These are not unfamiliar steps to management, as all our products
are subject to
most of the same approval processes; however, we
do not control the speed at which the testing companies advance. and as a result of the pandemic and shift to decentralized
operations the delays were unforeseen. Our first 1,000 Smart Mirrors were shipped and arrived in January 2022 at our fulfillment
center. These inventories were originally expected in Q2 2021. We air-freighted initial inventories to the U.S. so that we could
activate our e-commerce program and fulfill orders immediately. The inventories were partially damaged in transit causing a 30 day
delay on the contracted receipt date. The full 1,000 Smart Mirror inventory was available for e-commerce sales in March 2022.
Our business operations and financial performance
for the year ended December 31, 2022 were significantly and adversely impacted by the long term impacts of the global pandemic as
well as our shortage of e-commerce industry expertise. When the global pandemic restrictions gradually lifted during 2022, the consumer’s
buying habits had been altered. After stocking up on home goods, home improvements and electronics during the stay at home orders, once
those orders were lifted, consumers chose to spend their money on things to do versus things to have. This change in consumer spending
on activities versus goods negatively impacted the 2022 launch of the Smart Mirror significantly. Sales of the Smart Mirror severely
underperformed management’s expectations, generating approximately $74,000 in net sales for an approximate 105 units sold. In addition
to the change in consumer spending, the Company changed its marketing course in late 2021 and 2022 by moving away from the Big Box retailers
and put all of its marketing effort into the e-commerce marketing industry. The Company’s first parlay into e-commerce proved to
be very costly and a difficult market to secure customer acquisition with the Company spending approximately $285,000 in 2022 on social
media, advertising and trade shows, and increase of $260,000 over the prior year. The Company has decided to re-focus their marketing
strategy in 2023 and move back to brick and mortar and Big Box retailers, which was their core strength with the Lighting Products and
which they feel they could replicate with the Connected Surfaces product lines. Management has spent Q1 2023 actively marketing
the Connected Surfaces product lines to brick-and-mortar retailers while maintaining their e-commerce presence. As of the date of this
filing of the Form 10-K, we have not produced any orders from Big Box retailers and there can be no assurance that it will succeed
in establishing a revenue stream that is able to sustain the Company’s operations.
Our Growth Strategy
The Company’s looking forward
strategy requires continued expansion of its product development and engineering, manufacturing base marketing and distribution
of a broadened portfolio of consumer electronic products. Subject to adequate funding and cash flow from Smart Mirrors product
line, the Company will pursue new revenue opportunities through the introduction and expansion of its “Connected Surfaces”
portfolio into alternate distribution channels including e-commerce and others that the Company has not previously focused on.
The Company also intends to leverage its existing valuable customer base and strong relationships to achieve organic growth initiatives
within this new category. These efforts will depend on having adequate working capital from funding and cash flow from product
sales. We have not achieved such adequate funding as of the date of the filing of this Form 10-K and we
may be unable to achieve sufficient working capital when and, in the amounts, required to meet operational needs and overhead.
The lack of adequate, timely and affordable funding may undermine the efforts of. the Company to establish a revenue stream from
the Smart Mirrors product line and efforts to sustain Company operations.
The Company competes in competitive consumer market
channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence, employment
levels, credit availability and commodity costs. Demand for the Company’s products is highly dependent on economic drivers such
as consumer spending and discretionary income. Since the Company produces products, both LED lighting and Smart Mirrors, that are discretionary
purchases of consumers and not necessities, general and regional economic conditions affect consumer confidence which in turn usually
affects the willingness of consumers to purchase Company products. The Company has been unable to sell any significant number of Smart
Mirrors in 2022 and the lack of sales has continued into the first fiscal quarter of 2023.
While COVID-19 pandemic spikes have impacted
full functioning of overseas factories, which delayed shipments of Smart Mirrors, the Company has been unable to sell its available inventory
of Smart Mirrors as of the date of the filing of this Form 10-K and that inability may reflect that the Smart Mirrors are not matching
consumer preferences. While increased marketing may improve sales of Smart Mirrors, there can be no assurance that the Company can afford
an extended, expanded marketing campaign or that an extended, expanded marketing campaign would significantly increase sales or consumer
demand for Smart Mirrors.
Organic Growth Strategy
Subject to adequate funding and
favorable cash flow from Connected Surfaces products, which has not been achieved, the Company intends to pursue various initiatives
to execute its organic growth strategy, which is designed to enhance its market presence, expand its customer base and maintain
its recognition as an industry leader in new product development. Key elements of our organic growth strategy include:
Connected Surfaces.
Historically, LED lighting products have been our core business. The Capstone Lighting and Hoover Home LED brands, combined, have
sold millions of LED lighting products over the recent years and consequently the Company holds a well-respected position in the retail
lighting category. While consistently launching successful lighting programs, the Company determined that it needed to develop a new
product line with greater profit margin potential than LED Lighting. The Company has refocused its development and marketing initiatives
and is focused on developing the Connected Surfaces products as its primary business line to replace the LED lighting business, which
is no longer being actively promoted by the Company due to gross margin reductions as a result of increased tariffs and declining consumer
interest. The Company’s product roadmap outlines the plan for an additional product launch in 2023, branded Connected Chef, a kitchen
utility item, and this will continue to expand as consumer product acceptance validates its innovations. The Company believes this program
will leverage existing relationships with its current retail partners and collectively contribute organic growth for the Company. The
ability of the Company to promote any of its Connected Surface products will depend on securing adequate, affordable and timely funding
from lenders and investors. As of the date of the filing of this Form 10-K, the Company has not secured that funding, however a director/officer
has been providing interim financing while other financing options are being considered.
The Company anticipates that smart homes will
become more mainstream over the next several years based on increasing developments of smart home technologies and products and consumer
purchases of smart home technologies and products and will present a significant, potential growth opportunity for the Company and its
Connected Surfaces portfolio. While our Connected Surface products is aimed at the smart home market, we are also targeting the medical
industry for a Smart Mirror to assist with the growing digital health services including but not limited to physical therapy, dermatology
uses and home health care.
Perceived or Essential Strengths
Our Chief Executive Officer’s experience
in hardline product manufacturing has prepared the Company for successful entries into various consumer product markets, especially its
experience in using foreign OEMs to provide capabilities not possessed internally by our company.
Product Quality: Through
a combination of sourcing quality components, stringent manufacturing quality control and conducting rigorous third-party testing, product
quality has been a priority of the Company and essential to competing in competitive markets.
To deliver cost-competitive products without compromising quality standards, we leverage purchasing volume and capitalize on strategic
vendor relationships. This advantage has not been realized in 2022 with respect to the Smart Mirrors
due to perceived changes in purchasing habits of consumers and resulting changes in buying habits of Company’s core retailer customer
base.
Perceived Weaknesses
The Company does not possess the business, marketing,
and financial resources of larger competitors or the brand recognition or international markets of some of the larger competitors. The
declining financial performance of the Company due to discontinuation of the LED lighting product line has placed the Company in a weakened
financial position, which in turn increases the need for working capital funding from investors or lenders. The Company lacks the hard
assets for affordable, sufficient debt financing and the low market price of its Common Stock makes equity funding difficult in terms
of finding suitable investors who will provide adequate, affordable, timely working capital funding.
The product launch of the Smart
Mirrors did not meet projected sales forecasts for 2022. Customer acquisition costs of the e-commerce marketplace were high while
producing low conversion into sales. In addition, the consumer’s buying habits were altered during the global pandemic.
After stocking up on home goods, home improvements and electronics during the stay at home orders, once those orders were lifted,
consumers chose to spend their money on things to do versus things to have. This change in consumer spending on activities versus
goods negatively impacted the 2022 launch of the Smart Mirror significantly.
The plan to expand the Company’s product
portfolio through Connected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding increase
in operational revenues and profits. Expense categories including molds, prototyping, engineering, advertising, public relations, tradeshows
and social media platforms will continue to be incurred for a period before revenues occur.
The Company does not have the large
internal research and development capability of its larger competitors. Capstone operates with a limited number of employees whose functions
are dedicated to executive management, sales and marketing or administrative support. The limited number of employees may hinder or delay
the ability of the Company to identify or respond to consumer preferences or new technology developments in a product line. Hiring may
be required with any growth and qualified personnel may not be readily available. We cannot match the compensation packages to prospective
employees that many larger competitors may offer, and we lack the funding and other resources to change our operational model and its
reliance on contractors for many functions and capabilities, including development, production, shipping, warehousing and distribution
of products.
As a smaller reporting company, we are
more vulnerable to events like COVID-19 pandemic, production and shipping delays, travel and operational disruptions and restrictions
and an accelerated shift to e-commerce from reliance on brick-and-mortar retail sales. We lack the staff, money, internal capabilities
and resources and operational experience to significantly or timely respond to significant challenges and adverse changes in business
and financial requirements.
COVID-19 pandemic closures of companies and
shipping-distribution channels produced a delay in shipping and receipt of products from abroad and in the United States. The problems
include a lack of sufficient drivers for the trucking industry. The Company relies on OEM’s
located in Thailand and China, which have been impacted by the COVID-19 pandemic in meeting development, production and shipping deadlines.
The extent of the continuing economic impact of the COVID-19 pandemic and resulting logistical delays is uncertain as of the date of
this Form 10-K report.
Capstone’s international purchases can
become more expensive if the U.S. Dollar weakens against the foreign currencies. Should the increased U.S. tariffs imposed on Chinese
manufactured goods remain it may increase the cost of electronic components used in our products.
While we have established new production capacity in Thailand, there is
no final resolution of the U.S. / China trade dispute from which specific components are sourced. Developing a new, efficient OEM relationship
in a new country takes time and effort to reach acceptable production efficiencies. We have only a short operational experience with Thai
OEM’s and cannot predict long term effectiveness of the relationship.
The financial condition of the Company has included seeking a significant
corporate transaction, including, without limitation, a possible merger and acquisition transaction or reorganization to sustain operations
or to acquire a new business line that can support company operations. Like many companies, the Company conducts periodic strategic reviews
where the feasibility of significant corporate transactions are considered, including mergers, asset purchases or sales and diversification
or change in business lines. The Company lacks the financial resources of larger companies to withstand adverse, significant and sustained
changes in business and financial condition. This vulnerability necessitates an ongoing consideration of alternatives to current operations.
Due to the decline in financial performance of the Company since 2021, and the Company being in transition from a declining product line
and not yet establishing a profitable product line, as well as the Company having its shares of Common Stock quoted on The OTC Markets
Group, Inc. QB Venture Market, the Company may be unable to consummate a corporate transaction that sustains operations.
Products and Customers
While the Company is expanding its product portfolio
through the introduction of the Capstone Connected Surfaces program, it still maintains a select number of LED lighting products under
the “Capstone Lighting®” brand available through Amazon and Wayfair e-commerce websites.
The product lines available as of the date of
this Form 10-K report are as follows:
Connected
Surfaces – Smart Mirrors:
Standard
Rectangular
Wardrobe/Fitness
Mirror
LED Lighting :
Discontinued in 2023
The plan to expand the Company’s
product portfolio through Connected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding
increase in operational revenues and profits. Expense categories including molds, prototyping, engineering, advertising, public
relations, tradeshows and social media platforms will continue to be incurred before shipments and related revenues occur. Promotion
of the Connected Surfaces product line was hampered in 2022 by the lack of adequate, long-term funding and declining revenues
from product sales.
Over the past ten years, the Company has established
product distribution relationships with numerous leading international, national and regional retailers, including but not limited to:
Amazon, Costco Wholesale, Sam’s Club-Walmart, the Container Store and Firefly Buys. These distribution channels may sell the Company’s
products through the internet as well as through retail storefronts and catalogs/mail order. The Company believes it has developed the
scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche product opportunities
in our largest consumer domestic and international markets. While Capstone has traditionally generated the majority of its sales in the
U.S. market, urbanization, rising family incomes and increased living standards abroad have spurred a perceived demand for small consumer
appliances internationally. To capture this market opportunity, the Company has continued its international sales by leveraging relationships
with our existing global retailers and by strengthening our international product offerings. The Company sold Capstone brand LED products
to markets outside the U.S., including Australia, Japan, and South Korea. International sales for the year ended December 31, 2022 were
$45 thousand or 13% of net revenue as compared to $341 thousand or 50% in fiscal 2021. The Company’s performance depends on a number
of assumptions and factors. Critical to growth are the economic conditions in the markets that we serve, as well as success in the Company’s
initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new technology or features. Efforts
to expand into new international markets may be adversely impacted in the near term by COVID-19 pandemic.
The Company’s products are subject to general
economic conditions that impact discretionary consumer spending on non-essential items. Such continued progress depends on a number of
assumptions and factors, including ones mentioned in “Risk Factors” below. Critical to growth are economic conditions in the
markets that foster greater consumer spending as well as success in the Company’s initiatives to distinguish its brands from competitors
by design, quality, and scope of functions and new technology or features. The Company’s ability to fund the pursuit of our goals
remains a constant, significant factor.
Tariffs. The previous U.S. administration
implemented certain tariffs that directly affected the Company’s competitiveness. While all companies in certain industries are
affected equally, the appeal for these products to consumers was negatively impacted when retail prices increased due to higher duty rates.
The Company has seen promotional schedules cut back and retailers have requested pricing adjustments that would not be known to them in
advance to products being shipped. Capstone’s previous business model insulates the Company from paying duties as its retail partners
are the importers of record. The obvious unknown is the final impact of tariffs to the landed costs. Accordingly, retailers have demonstrated
caution in their promotional planning schedules and will continue to do so until the administration has clarified its position enabling
importers to calculate estimated landed costs.
Tariffs and trade restrictions imposed by the
previous U.S. administration provoked trade and tariff retaliation by other countries. A “trade dispute” of this nature or
other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand
for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our
businesses. As of the date of this Report, the new U.S. administration is currently reviewing its future position on this issue and there
has not been a resolution of the Chinese-American trade dispute.
Sales and Marketing
We use direct sales by our Chief Executive Officer
and sales agents to sell our products, which effort includes direct sales to Big Box retailers.
Our sales within the U.S. are primarily made
by our in-house sales team and our independent sales agencies. Our independent sales agencies are paid a commission based upon sales made
in their respective territories. Our sales agencies are recruited, trained and monitored by us directly. We will utilize an agency as
needed to help us provide service to our retail customers as required. The sales agency agreements are generally one (1) year agreements,
which automatically renew on an annual basis, unless terminated by either party on 30 days’ prior notice. Our international sales
to divisions of U.S. based retailers are made by our in-house sales team.
The Company has historically promoted its products
to retailers and distributors at North American trade shows, such as the Consumer Electronics Show (“CES”) or the International
Hardware Show, but also relies on the retail sales channels to advertise its products directly to the end user consumers through various
promotional activities. Subject to adequate working capital, this marketing effort will continue as a complement to the social media and
e-commerce initiatives.
Direct Import Sales. We currently ship
finished products directly to our retail customer from Thailand and China. The sales transaction and title of goods are completed by delivering
products to the customers overseas shipping point. The customer takes title of the goods at that point and is responsible for inbound
ocean freight and import duties. Direct import sales are made in larger quantities (generally container sized lots) to customers worldwide.
Domestic Sales. The strategy of selling
products from a U.S. domestic warehouse enables the Company to provide timely delivery and serve as a domestic supplier of imported goods.
With this model the Company imports goods from overseas and is responsible for all related costs including ocean freight, insurance, customs
clearance, duties, storage, and distribution charges related to such products and therefore such sales command higher sales prices than
direct sales. Domestic orders are for a much smaller size and could be as low as a single unit directly to the end consumer if ordered
through an online website. To support an effective e-commerce business model, we will be required to warehouse adequate inventory levels
enabling the Company to ship orders directly to the end consumer expediently.
Occasionally as part of the marketing program
the Company may provide marketing allowances to the customer to ensure, that the retailer is not left with unsold inventories at the end
of the program. As an accounting practice, depending on the item and its selling history, the Company will accrue a reserve for possible
future markdowns and will retain these reserves for a period 3 to 5 years in the event the customer deducts such a promotional allowance
against an open invoice or submits us an invoice. These reserves will be released if not used or needed by the retailer. These allowances
are also evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer. As of 2022,
the Company reversed $81 thousand of promotional allowance accruals, recognizing miscellaneous income as of the year ended December 31,
2022, due to the discontinuation of the LED product line.
The United States is one of the
largest consumers of technology-based products, particularly smart home products Currently there are in excess of 120+ million
homes in the United States alone with fixed broadband subscriptions. Moreover, there are more than 300+ million smart phone
users. These data points alone are indicative of the burgeoning growth potential which is driving investment into Smart Home Products
and awareness. Household penetration for smart home devices in 2018 was approximately 7.5% and recent statistics for 2023 state
as many as 46% of households as of the date of this filing have at least one smart home device.
For
the year ended December 31, 2022, the Company had two customers who comprised approximately 71% of net revenue .
Although we have long established relationships with our LED customers, we do not have contractual arrangements to purchase a fixed
quantity of products annually. A decrease of business or a loss of any of our major customers could have a material adverse effect
on our results of operations and financial condition.
Starting in late 2021, we have
utilized social media platforms and online advertising campaigns to further grow the Company’s online presence. In addition
to Facebook, Instagram, Pinterest and LinkedIn, Capstone has launched a You Tube channel to host Smart Mirror videos and established
a Twitter account. Our Social Media marketing has not resulted in any significant sales of products in 2022. We may not be able
to effectively compete in e-commerce and Social Media marketing and sales. As such, in 2023 we are returning to marketing to
the brick and mortar and Big Box retailers. The Company has a Social Media presence on the following Social Media platforms:
FACEBOOK1: https://www.facebook.com/capstoneindustries
and https://www.facebook.com/capstoneconnected
INSTAGRAM2: https://www.instagram.com/capstoneconnected
PINTEREST3: https://www.pinterest.com/capstoneconnected/
LINKEDIN4: https://www.linkedin.com/company/6251882
TWITTER5 https://twitter.com/CAPC_Capstone
YOUTUBE6 https://www.youtube.com/channel/UCMX5W8PV0Q59qoAdMxKcAig
1 Facebook is a registered trademark of Facebook, Inc.
2 Instagram is a registered trademark of Instagram.
3 Pinterest is a registered trademark of Pinterest.
4 LinkedIn is a registered trademark of LinkedIn Corporation.
5 Twitter is a registered trademark of Twitter Corporation.
6YouTube is a registered trademark
of YouTube Corporation.
Competitive Conditions
The Company operates in a highly competitive
environment, both in the United States and internationally, in the lighting and internet of things segments. The Company competes with
large multinationals with global operations as well as numerous other smaller, specialized competitors who generally focus on narrower
markets, products, or particular categories.
Other competitive factors include rapid technological
changes, product availability, credit availability, speed of delivery, ability to tailor solutions to customer needs, quality and depth
of product lines and training. Smart Mirrors and other Connected Surface products are an emerging industry, and the Company’s product
line is innovative and does not require licensing of technologies, as the Connected Surfaces program is developed with open source resources.
The Company is also under development of proprietary features that would further establish the Company as a market innovator. As such,
applications have been filed. However, the Company may be unable to develop or license emerging new technologies that are dominant.
Research, Product Development, and Manufacturing
Activities
The Company’s research and development
operations based in Florida and Thailand design and engineer many of the Company’s products, with collaboration from its third-party
manufacturing partners, software developers and Capstone U.S. engineering advisers. The Company outsources the manufacture and assembly
of our products to a select group of OEM manufacturers overseas. Our research and development focus includes efforts to:
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Establish Capstone Connected
Surfaces portfolio as an innovator in the smart home segment. |
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Develop product with increasing
technology and functionality with enhanced quality and performance, and at a very competitive cost; and |
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Solidify new manufacturing
relationships with contract manufacturers in Thailand. |
The Company establishes strict engineering specifications
and product testing protocols with the Company’s contract manufacturers and ensure that their factories adhere to all Regional Labor
and Social Compliance Laws. These contract manufacturers purchase components that we specify and provide the necessary facilities and
labor to manufacture our products. We leverage the strength of the contract manufacturers and allocate the manufacturing of specific products
to the contract manufacturer best suited to the task. Quality control and product testing is conducted at the contract manufacturers facility
and at their 3rd party testing laboratories overseas.
Capstone
uses its proprietary manufacturing expertise by
maintaining control over all outsourced production and critical production molds. To ensure
the quality and consistency of the Company’s products manufactured overseas, Capstone
uses globally recognized certified testing laboratories such as United Laboratories (UL)
or Intertek (ETL) to ensure all products are designed and tested to adhere to each country’s
individual regulatory standards. The Company also hires quality control inspectors who examine
and test products to Capstone’s specification(s) before shipments are released.
To successfully implement Capstone’s
business strategy, the Company must continually improve its current products and develop new product segments with innovative
imbedded technologies to meet consumer’s growing expectations. The Connected Surfaces product development is our current
effort to achieve those expectations. The continuation of Company’s declining business and financial performance may significantly
hinder or undermine efforts to establish a profitable Connected Surface product line capable of sustaining operations. Establishing
the Connected Surfaces product line as a viable revenue source is essential to sustaining the Company as a consumer product company.
The Company will need adequate funding in 2023 to sustain that business line and operations. Investments in technical and
product development are expensed when incurred and are included in the operating expenses.
Raw Materials
The principal raw materials currently used by
Capstone are sourced in Thailand and China, as the Company orders product exclusively through contract manufacturers in the region. These
contract manufacturers purchase components based on the Company’s specifications and provide the necessary facilities and labor
to manufacture the Company’s products. Capstone allocates the production of specific products to the contract manufacturer the Company
believes is more experienced to produce the specific product and whose facility is located in the country that most benefits from the
U.S. Tariff regulations. To ensure the consistent quality of Capstone’s products, quality control procedures have been incorporated
at each stage of the manufacturing process, ranging from the inspection of raw materials through production and delivery to the customer.
These procedures are additional to the manufacturers’ internal quality control procedures and performed by Quality Assurance personnel.
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Raw Materials – Components
and supplies are subject to sample inspections upon arrival at the contract manufacturer, to ensure the correct specified components
are being used in production. |
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● |
Work in Process –
Our quality control inspectors conduct quality control tests at different points during the product stages of our manufacturing process
to ensure that quality integrity is maintained. |
| |
● |
Finished Goods –
Our inspectors perform tests on finished and packaged products to assess product safety, integrity and package compliance. |
Raw materials used in manufacturing
include plastic resin, copper, LED bulbs, batteries, and corrugated paper. Prices of materials have remained competitive
in the last year. The Company believes that adequate supplies of raw materials required for its operations are available at the
present time. The Company 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.
Section 1502 of Title XV of the Dodd-Frank
Wall Street Reform and Consumer Protection Act requires SEC-reporting companies to disclose annually whether any conflict minerals
are necessary to the functionality or production of a product. Based on our inquiries to our manufacturers, we do not believe as of the
date of such inquiries that any conflict minerals are used in making our products.
Distribution and Fulfillment
Since January 2015, the Company has outsourced
its U.S. domestic warehousing and distribution needs to a third-party warehousing facility situated in Anaheim, California. The warehouse
operator provides full inventory storage, packaging and logistics services including direct to store and direct to consumer shipping capabilities
that electronically interface to our existing operations software. The warehouse operator provides full ERP (Enterprise Resource Planning),
Inventory Control and Warehouse Management Systems.
These fulfillment services can be expanded to
the east coast in Charleston, South Carolina, if the Company needed to establish an east coast distribution point. This relationship,
if required, will allow us to fully expand our U.S. distribution capabilities and services. As the Company transitions into the e-commerce
and direct to consumer marketplace, the Company has developed a new website with full shopping cart capabilities. To complete this project
the Company has negotiated contracts for secured credit card processing capability, state sales tax compliance services and order fulfillment
and logistics services, at a very competitive rate.
Seasonality
In general, sales for household products and
electronics are seasonally influenced. Certain gift products cause consumers to increase purchases during key holiday winter season of
the fourth quarter, which requires increases in retailer inventories during the third quarter. In addition, natural disasters such as
hurricanes and tornadoes can create conditions that drive increased needs for portable power and power failure light sales. Climate change
may increase the number and severity of hurricanes, tornadoes and flooding. Historically, the lighting products had lower sales during
the first quarter due to the Chinese New Year holiday as factories are closed and shipments are halted during this period. Our transition
to Thailand manufacturers may reduce the impact of Chinese New Year holiday.
We do not have sufficient operational experience with
Connected Surfaces to predict the seasonality of Connected Surfaces.
Intellectual Property
CAPC owns a number of patents
and trademarks as denoted below:
| Patent
/ Trademark Serial Number |
Patent
/ Trademark Name |
Status
/ Issue Date |
Patent
/ Trademark Expiration Date |
Country |
Description |
| 97365117 |
Connected
Chef |
Pending |
N/A |
USA |
Trademark
on name |
| 90758255 |
Capstone
Connected |
Pending |
N/A |
USA |
Trademark
on name and logo |
| 90286667 |
Thin
Cast |
Pending |
N/A |
USA |
Trademark
on name and logo |
| 10,203,262 |
Apparatus
and method for switch state detection and controlling electrical power |
03/12/2019 |
03/12/2039 |
USA |
apparatus
and method for switch state detection and controlling electrical power |
| D779,109
S |
Lamp
simulating a UFO |
02/14/2017 |
02/14/2032 |
USA |
Design
patent – lamp simulating UFO |
While the Company may license third party technologies
for its products, or may rely on other companies, especially OEMs, for design, engineering and testing, the Company believes that its
oversight of design and function of its products and its marketing capabilities are significant factors in the ability of the Company
to sell its products.
Value of Patents
The actual protection afforded by a patent,
which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies
in the country. Issued patents or patents based on pending patent applications or any future patent applications may not exclude competitors
or may not provide a competitive advantage to us. In addition, patents issued or licensed to us may not be held valid if subsequently
challenged and others may claim rights in or ownership of such patents. The validity and breadth of claims in technology patents involve
complex legal and factual questions and, therefore, the extent of their enforceability and protection is highly uncertain.
Reverse engineering, unauthorized copying or
other misappropriation of our technologies could enable third parties to benefit from our technologies without paying us. We cannot assure
shareholders that our competitors have not developed or will not develop similar products, will not duplicate our products, or will not
design around any patents issued to or licensed by us. We will assess any loss of these rights and determine whether to litigate to protect
our intellectual property rights on a case by case basis.
We rely on trademark, trade secret, patent,
and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be effectively
utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual
property rights, or, where appropriate, license intellectual property rights from others to support new product introductions. There can
be no assurance that we can acquire licenses under patents belonging to others for technology potentially useful or necessary
to us and there can be no assurance that such licenses will be available to us, if at all, on terms acceptable to us. Moreover, there
can be no assurance that any patent issued to or licensed by us will not be infringed or circumvented by others or will not be successfully
challenged by others in lawsuits. We do not have a reserve for litigation costs associated with intellectual property matters. The cost
of litigating intellectual property rights claims may be beyond our financial ability to fund.
As is customary in the retail
industry, many of our customer agreements require us to indemnify our customers for third-party intellectual property infringement
claims. Such claims could harm our relationships with customers and might deter future customers from doing business with us. With
respect to any intellectual property rights claims against us or our customers, we may be required to cease manufacture of the
infringing product, pay damages and expend significant Company resources to defend against the claim and or seek a license.
Information Technology
The efficient operation of our business is dependent
on our information technology systems. We rely on those systems to manage our daily operations, communicate with our customers and maintain
our financial and accounting records. In the normal course of business, we receive information regarding customers, associates, and vendors.
Since we do not collect significant amounts of valuable personal data or sensitive business data from others, our internal computer systems
are under a light to moderate level of risk from hackers or other individuals with malicious intent to gain unauthorized access to our
computer systems. Cyberattacks are growing in number and sophistication and are an ongoing threat to business computer systems, which
are used to operate the business on a day to day basis. Our computer systems could be vulnerable to security breaches, computer viruses,
or other events. The failure of our information technology systems, our inability to successfully maintain our information or any compromise
of the integrity or security of the data we generate from our systems or an event resulting in the unauthorized disclosure of confidential
information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers,
could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors, results
of operations, product development and make us unable or limit our ability to respond to customers’ demands.
We have incorporated into our data network various
on and off-site data backup processes which should allow us to mitigate any data loss events, however our information technology systems
are vulnerable to damage or interruption from:
| |
● |
hurricanes, fire, flood
and other natural disasters |
| |
● |
internet, computer system,
telecommunications or data network failure Hacking as well as malware, computer viruses, ransomware and similar malicious software
code |
Environmental Regulations
We believe that the Company is in compliance with
environmental protection regulations and will not have a material impact on our financial position and results of operations. The Company
is not aware of any national, state or local environmental laws or regulations that will materially affect our earnings or competitive
position or result in material capital expenditures. However, the Company cannot predict the effect on our operations due to possible
future environmental legislation or regulations. During 2022, there were no material capital expenditures for environmental control facilities
and no such material expenditures are anticipated.
Employees
As of December 31, 2022, we employed 3 employees in
our U.S. office and maintain consulting agreements with 4 individuals, 2 of which resided in Hong Kong, formerly employees of our Hong
Kong operation. We consider our relations with our employees to be good. None of our employees are covered by a collective bargaining
agreement. We believe that our staff is adequate to handle the current operations, but we recognize that the new product line and social
media marketing may require additional personnel. Our ability to hire additional personnel is subject to adequate revenue flow and funding.
The following table sets forth the number of individuals
by function:
| Employee
Function | |
Number
of Employees |
| Executive | |
| 1 | |
| Sales/Customer Service/Distribution | |
| 2 | |
| Research & Development/Technology/Product
Development | |
| 2 | |
| Administrative | |
| 2 | |
| TOTAL | |
| 7 | |
Corporate Information
Our principal executive offices
are located at 431 Fairway Drive, Suite #200, Deerfield Beach, Florida, USA 33441. Our telephone number is (954)570-8889 and our
website is at URL: www.capstonecompaniesinc.com. Our U.S. subsidiaries operate out of our principal executive offices.
We file our financial information
and other materials required under the Exchange Act electronically with the SEC. These materials can be accessed electronically
via the Internet at www.sec.gov. Such materials and other information about the Company are also available through our corporate
website: https://www.capstonecompanies.com.
Government Regulation
Our
operations are subject to regulation by federal and state securities authorities as well as various federal, state, foreign and local
laws and regulations governing a consumer products company and a for-profit business. We are not subject to any U.S. federal, state or
local regulation that poses, in our opinion, any special or unusual burden or obstacle to conducting our business and financial affairs.
Our main concern, although greatly diminished in terms of government regulation is the changing regulatory environment in China and greater
Asia and its impact on our ability to access manufacturing sources and obtain our specific consumer products. Despite some political
uncertainty, Thailand continues to encourage foreign direct investment as a means of promoting economic development, employment, and
technology transfer. We established Thailand as an alternative to China. While the general trend in China has to be conducive to trade
and commerce in terms of U.S. companies conducting business with domestic companies, China is a still a single-party nation-state in
which the central government has the power to dramatically and immediately change its trade and commercial policies and laws. The Chinese
government has also imposed its laws, policies and directives in Hong Kong SAR, which has created uncertainty about whether Hong Kong
SAR will continue to encourage and enable foreign companies to conduct business in Hong Kong SAR without undue interference from the
Chinese government. Chinese government intervention in Hong Kong’s political and legal affairs
since 2020, which has taken the form of unilaterally imposing Chinese laws and policies in Hong Kong, create a heightened threat of Hong
Kong’s traditional pro-foreign business policies, regulation and economic environment being altered to suit national security concerns
and international objectives of the Chinese government and becoming untenable for foreign businesses, especially U.S. companies conducting
business in Hong Kong in light of growing U.S.-Chinese tensions in international affairs and global economic competition. Chinese government’s
imposition of the National Security Law in Hong King on June 30, 2020 undermined Hong Kong’s autonomy
and introduced heightened uncertainty for foreign and local firms operating in Hong Kong. On March 5, 2022, Chinese Premier Li Keqiang
asserted that Beijing intends to exercise “overall jurisdiction over the two SARs,” referring to Hong Kong and Macau.
Political or military conflict between the United States and China, who are rivals for power and influence in Asia and to an increasing
extent all along the Pacific Rim as well as being diametrically opposed to one another over the status of Taiwan, could provoke a even
more strident, anti-U.S. change in Chinese trade or commercial laws and
regulation, including Hong Kong trade and commercial laws, that makes it more difficult or expensive for us to obtain consumer products.
Such a development would have a serious impact on our ability to compete in the United States in the niche LED consumer product market.
While Thailand has experienced
a degree of political instability for decades, due to the influence and intervention of the Thai military in political affairs,
the trade and commercial environment in Thailand has been generally receptive to and encouraging foreign commerce in Thailand.
U.S. State Department 2022 assessment of Thailand concluded that Thailand remains encouraging to foreign investment and commerce.
Due to uncertainties associated with conducting business in China and Hong Kong, the Company established manufacturing capabilities
in Thailand through a local contract manufacturing concern in order to reduce reliance on China and Hong Kong for products and
engineering.
Working Capital Requirements and Financing
In
order to successfully launch the online Connected Surfaces business, the Company was required
to maintain sufficient on hand available inventory levels, to allow for immediate fulfilment
of an online order. This required additional investment combined
with investments in new product expansion of Connected Surfaces, new product molds, product
testing and outside certifications, package design work, and further expansion of its capabilities
in Thailand, the Company may require additional working capital.
On January 4, 2021, the Company entered a $750,000
working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The short-term facility ended June 30, 2021 (“Initial
Period’). The Company had the option to extend the Initial Period for an additional six consecutive months, ending December 31,
2021, but decided not to renew.
On April 5, 2021, the Company entered into five
separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares of
Common Stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement”). The
five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited
investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, (“Securities Act”). The
$1,498,000 in proceeds from the Private Placement was used mostly to purchase start up inventory for the Company’s new Smart Mirror
product line, for a major online e-commerce fulfilment company, and the remainder for advertising and working capital.
On July 2, 2021, the Board of
Directors (“Board”) resolved that the Company required a purchase order funding facility to procure additional inventory
to support the online Smart Mirror product. The Board resolved that certain Directors could negotiate the terms of a Purchase Order
Funding Agreement for up to $1,020,000 with Directors S. Wallach and J. Postal and E. Fleisig, a natural person. On October 18,
2021 the Company received the $1,020,000 funding under this agreement. The term of the agreement is 30 months with principal accruing
a simple interest rate of 5 percent per annum. These loans may be prepaid in full or partially without any penalty.
On May 1, 2022, the Company negotiated three
$200,000 working capital funding agreements, to provide $600,000 in funding for daily operations. The Board resolved that certain Directors
could negotiate the terms of a Working Capital Funding Agreement for up to a total of $600,000, with Directors S. Wallach (through Group
Nexus, a company controlled by Mr. Wallach), J. Postal and Mouhaned Khoury, a natural person. On May 1st the three individual
agreements became effective. The term of each agreement is 18 months with principal accruing a simple interest rate of 5 percent per annum.
These loans may be prepaid in full or partially without any penalty.
On October 13, 2022, the
Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations
(the “Working Capital Funding Agreement”). The term of this agreement is 18 months and principal accrues simple interest
at a rate of 5 percent per annum. The loan may be prepaid in full or partially without any penalty.
On December 1, 2022, the
Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations
(the “Working Capital Funding Agreement”). The term of this agreement is 18 months and principal accrues simple interest
at a rate of 5 percent per annum. The loan may be prepaid in full or partially without any penalty.
As of December 31, 2022, the Company had a total
of $1,802,230 outstanding on the above referenced funding agreements, which includes accrued interest of $82,231.
The Company’s ability to maintain sufficient
working capital is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have
a material adverse effect on the Company’s working capital, ability to obtain financing, and its operations in the future.
With the net operating loss of $2.663 million,
the Company utilized $1.904 million of cash for operating expenses during the twelve months ended December 31, 2022, as compared to $2.371
million used in the same period last year. During the period, the Company’s cash decreased approximately $1.2 million after securing
net proceeds of $700 thousand in working capital loans. As of December 31, 2022, the Company had working capital deficit of approximately
($448 thousand), an accumulated deficit of approximately $9.1 million, and a cash balance of $61 thousand. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern.
On July 15, 2021, Jeffrey Guzy a Company director,
exercised a previously granted non-qualified stock option and purchased 100,000 shares of Company common stock for an aggregate purchase
price of $43,500 or a per share price of $.435. The shares are restricted shares under federal securities laws and were acquired by independent
Director Guzy. The proceeds were used by the Company for general working capital to support the rollout of the Smart Mirror product line.
During 2023 and
through the date of this filing, the Company has received $183,500 in working capital note payable proceeds from Director, Stewart
Wallach. Principal accrues simple interest at a rate of 5 percent per annum, maturing June 26, 2023 with the ability for the Company
to request a 90-day extension. The loan may be prepaid in full or partially without any penalty.
On January
3, 2023, the Company negotiated a $40,000 Working Capital Funding agreement with Director Stewart. Wallach (through Group Nexus, a company
controlled by Mr. Wallach), to provide funding for daily operations (the “Working Capital Loan Agreement”). The term was
originally 60 days but allowed for the maturity date to be extended 90 days by the Company with written notice to Mr. Wallach. Therefore,
the $40,000 working capital advance plus accrued interest matures June 2023. Principal accrues simple interest at a rate of 5 percent
per annum. The loan may be prepaid in full or partially without any penalty.
In addition, we intend to seek alternative sources
of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures. However, instability
in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us.
An economic recession or a slow recovery could adversely affect our business and liquidity. The ongoing impact of the COVID-19 pandemic
on the Company’s business and financial performance may also affect the Company’s ability to obtain funding.
The Company’s liquidity and cash requirements
are discussed more fully in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,
below.
Item 1A. Risk Factors.
Described below and throughout this Form 10-K report
are certain factors and risks that the Company’s management believes are applicable to the Company’s business and the industries
in which it operates. If any of the described events occur, the Company’s business, results of operations, financial condition,
liquidity, or access to funding could be materially adversely affected. When stated below that a risk or factor may have a material adverse
effect on the Company business, it means that such risk may have one or more of these effects. There may be additional risks that are
not presently material or known. There are also risks within the economy, the industry, and the capital markets that could have a material
adverse effect on the Company, including those associated with an economic recession, inflation, a global economic slowdown, political
instability, government regulation (including tax regulation), employee attraction and retention, and customers’ inability or refusal
to pay for the products and services provided by the company. There are also risks associated with the occurrence of extraordinary events,
such as terrorist attacks or natural disasters (such as tsunamis, hurricanes, tornadoes, and floods) and pandemics or epidemics. These
risks and factors affect businesses generally, including the Company, its customers and suppliers and, as a result, are not discussed
in detail below, but are applicable to the Company. As a “penny stock” without primary market maker support, any investment
in our Common Stock is highly risky and should only be considered by investors who can afford to lose their entire investment and do not
require immediate liquidity. These risk factors are not the only risks that we or our subsidiaries may face. Additional risks and uncertainties
not presently known to us or not currently believed to be important also may adversely affect our business.
Business and Operational Risks
The declining revenues in 2021 and 2022
of our primary business line of LED lighting products, the delay in launching our new Connected Surfaces product line and the product
line not becoming a replacement revenue source have resulted in significant operating losses and imposed a need to sustain operations
with outside funding of working capital. If the Company cannot obtain adequate, affordable funding, whether equity or debt, as needed,
the Company will have difficulty sustaining the Company as a going concern.
The adverse financial results on our business and
financial performance in 2022 from the COVID-19 pandemic, inflation and changes in consumer spending during 2022 coupled with the declining
performance of the LED product lines placed a significant financial strain on our Company. Cash flow from operations was and is not sufficient
to sustain operations and support launch of Connected Surfaces Smart Mirror product line as a primary revenue source. In order to attempt
to secure adequate working capital in 2022, we took the actions detailed below. These actions are not deemed sufficient to meet all expected
working capital needs for 2023 for a full implementation of our plan to establish the Connected Surfaces product lines as viable product
lines and to meet general operating overhead needs. We anticipate the need to raise working capital funding to meet our funding needs
in 2023 and supplement any cash flow from operations. Because of the low market price and liquidity of our Common Stock, our declining
financial performance and condition in 2021 and 2022, lack of hard assets required for asset based loans, and our transition from a declining
product line and primary source to a new, unproven product line, we may be unable to raise necessary, affordable and timely working capital
in 2023 and that failure could be fatal to our ability to sustain the Company as an operating company.
During the year ended December 31, 2022, the Company
used cash in operations of approximately $1.9 million and generated net operating losses of approximately $2.6 million. As of December
31, 2022, the Company has working capital deficit of approximately ($448 thousand) and an accumulated deficit of $9.1 million. The Company’s
cash balance decreased approximately $1.2 million from $1.3 million as of December 31, 2021 to $61 thousand as of December 31, 2022. Although
we have cash on hand, the Company does not have sufficient cash on hand to finance its plan of operations for the next 12 months from
the filing of this report and we will need to seek additional capital through debt and/or equity financing to fully fund operational overhead
and fully fund the effort to establish the Connected Surfaces Smart Mirror product line as the primary revenue source in 2023. While certain
directors have provided working capital funding to the Company in the past, including 2022, there is no guarantee, and none can be given
that these insiders will do so when and as required by the Company in 2023.
We took the following actions to obtain or arrange
sources of working capital funding in 2022 and 2023:
On May 1, 2022, the Company negotiated
three $200,000 working capital funding agreements, to provide $600,000 in funding for daily operations. The Board resolved that
certain Directors could negotiate the terms of a Working Capital Funding Agreement for up to a total of $600,000, with Directors
S. Wallach (through Group Nexus, a company controlled by Mr. Wallach), J. Postal and Mouhaned Khoury, a natural person. On May
1, 2022, the three individual agreements became effective. The term of each agreement is 18 months with principal accruing
a simple interest rate of 5 percent per annum. These loans may be prepaid in full or partially without any penalty.
On October 13, 2022, the
Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations
(the “Working Capital Funding Agreement”). The term of this agreement is 18 months and principal accrues simple interest
at a rate of 5 percent per annum. The loan may be prepaid in full or partially without any penalty.
On December 1, 2022, the
Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations
(the “Working Capital Funding Agreement”). The term of this agreement is 18 months and principal accrues simple interest
at a rate of 5 percent per annum. The loan may be prepaid in full or partially without any penalty.
On January 3, 2023, the
Company negotiated a $40,000 Working Capital Funding agreement with Director S. Wallach (through Group Nexus, a company controlled
by Mr. Wallach), to provide funding for daily operations (the “Working Capital Loan Agreement”). The term of this
agreement is 5 months and principal accrues simple interest at a rate of 5 percent per annum. The loan may be prepaid in full
or partially without any penalty.
Subsequent
to December 31, 2022, and through the date of this filing, the Company has received $183,500
in working capital note payable proceeds from Director, Stewart Wallach. Principal
accrues simple interest at a rate of 5 percent per annum, maturing June 26, 2023 2023 with
the ability for the Company to request a 90-day extension. The loan may be prepaid in full
or partially without any penalty.
As of December 31, 2022, we had approximately $61
thousand of cash. We have taken a number of actions short-term and long-term to preserve existing capital, including reducing capital
expenditures, reducing employee workforce, reducing discretionary expenditures, executive management salary reductions and deferment of
payment, expense reductions related to closing the CIHK operations in Hong Kong and reductions in travel, hotel and show expenses. The
Company has been in discussions with alternate funding sources that provide additional sourcing options for the Connected Surfaces business
channel that the Company is transitioning into. However, in the event that we are unable to negotiate a new credit facility or if cash
on hand and cash generated from operations are not sufficient to meet our cash requirements, we will need to seek additional capital,
potentially through debt or equity financing, to fund our operations and future growth. Our ability to access the credit and capital markets
in the future as a source of liquidity, and the borrowing costs associated with such financing, are dependent upon market conditions and
our credit rating and outlook. With our reported losses in recent years, we cannot assure that we will be able to negotiate competitive
rates, which could increase our cost of borrowing in the future. In addition, equity financing may be on terms that are dilutive or potentially
dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the
current price per share of our common stock. The holders of new securities may also have rights, preferences or privileges which are senior
to those of existing holders of common stock. If new sources of financing are required, but are insufficient or unavailable, we will be
required to modify our growth and operating plans based on available funding, if any, which would harm our ability to grow or sustain
our business.
The Company does not have an
alternative product line to replace the Connected Surfaces product lines in 2023. If the Connected Surfaces product line does
not become a viable revenue source in 2023, the Company will need funding to sustain operations and efforts to establish
the Connected Surface product line as a viable revenue source.
The Company does not have an alternative
product line to the Connected Surfaces product lines and would be unable to develop an alternative in 2023. The failure of Connected
Surfaces product lines to produce sufficient cash flow in 2023 or early 2024 could potentially force the Company to effect an
extraordinary corporate transaction to protect shareholder value and sustain the Company as an operating company. An extraordinary
corporate transaction could include a merger or sale of the Company or reorganization of the Company under bankruptcy protection
or otherwise or could result in the liquidation of the current business and efforts to fund a new business line in 2023 or 2024
– if adequate, affordable funding is available. The Company may be unable to effect, if necessary, an extraordinary corporate
transaction or obtain significant funding for a new product line in 2023 to sustain the Company as an operating company. Reorganization
under the protection of the bankruptcy code is one possible extraordinary corporate transaction if the Connected Surfaces product
lines does not become a viable revenue source and other extraordinary corporate transactions are not possible. While the Company
is continuing efforts to establish the Connected Surfaces product line as a viable revenue source, the Company is exploring possible
alternative new business lines, which alternative business lines could be internally developed with sufficient funding or acquired
in a merger or asset acquisition.
COVID 19 pandemic and actions to stem
or combat its impact adversely impacted our business and financial performance in 2022 and first quarter of 2023 and may continue to do
so in the remainder of 2023. COVID 19 pandemic and remedial actions was especially detrimental to the Company in that they delayed the
development, production, shipping and availability as inventory of our Connected Surfaces Smart Mirrors product line until first quarter
of 2022, which resulted in the LED lighting product line as the Company’s primary and declining business line and revenue source
in 2022 and continuation of operating losses.
The principal adverse impact of COVID-19 pandemic
and remedial responses on our business was to delay the development, production, shipping, adequate available inventory and full marketing
and sales of our new product line, the Smart Mirrors, as a timely replacement for our LED lighting product line as our primary business
line and revenue source. Instead of launching the Smart Mirror product line in 2021, the launch was delayed into early 2022. In addition,
consumer spending habits changed with the full re-opening of business. Consumers discretionary income was spent on social activities and
experiences such as restaurant dining, fitness club memberships, concerts, vacations and travel.. There was a significant decline in home
goods purchasing, for which the LED lighting and our Connected Surfaces products fall into, as the average consumer chose experiences
and social gatherings over home goods. Global inflation was at an all-time high in response to COVID 19’s impacts on the Global
economies, with the United States reporting a 9.1% inflation rate during 2022, the highest rate of inflation since the early 1980’s.
Furthermore the Company launched the Connected Surfaces Smart Mirror via a new e-commerce marketing strategy, for which the Company was
navigating in real time and had no prior industry experience with and seemingly struggled to convert marketing efforts into sales, These
factors contributed to the Company suffering a worsening financial condition with accumulating operating losses in 2022 and into first
quarter of 2023. The Company has a need for working capital funding to cover operating overhead and cost of implementing the efforts to
establish the Connected Surfaces products as the primary business line and revenue source for the Company in 2023. The Company commenced
the sales of the Smart Mirror in first quarter of 2022 and does not have sufficient sales and operational experience to determine whether
the adverse impact of COVID-19 pandemic, inflation and related ripple effects 2022 will materially, adversely impact our sales of Connected
Surfaces product lines in 2023. The success of the Connected Surfaces product lines in 2023 is critical to our ability to sustain operations
and will also affect our ability to raise working capital when and if needed to sustain operations in 2023 and into 2024.
The adverse financial results from the COVID-19 pandemic
on our business and financial performance coupled with our transition in new product focus on Connected Surfaces products and its inability
to date to produce necessary revenues to support operational overhead and declining performance of the LED Lighting product lines places
a significant financial strain on our Company.
Due to the limited number of employees
and contractors who conduct Company operations, COVID-19 pandemic has a more significant and lasting impact on our company than
larger competitor companies with significantly greater number of employees, contractors, facilities and overall resources. The
impact of COVID-19 pandemic was especially severe on the Company due to traditional reliance on Chinese-Hong Kong manufacturing
and the ongoing impact of COVID-19 pandemic in China and Hong Kong in 2021 and 2022.
We anticipate the available funding will sustain operations
for Q1 2023, but this assumption may prove to be incorrect. However, to sustain future operations and revenue growth we will also
need either adequate and affordable additional working capital funding including purchase order funding or adequate cash flow from sales
of products in fiscal year 2023. We can give no assurances that we will be able to secure affordable, adequate and timely funding as necessary
in the future. The economic disruption resulting from the COVID-19 pandemic has had an adverse impact on the global freight shipping industry
and on the cost of shipping our products. Continuation of current overall inflationary pressures coupled with any continuation or worsening
of shipping problems and associated increased costs could severely impact our business and financial condition by decreasing consumer
demand for Connected Surface products.
Our operating results and
sustainability as an operating company are substantially dependent on the acceptance of new products.
The Connected Surfaces product lines are our
effort to establish a viable product line to replace the matured LED product line and the success of the Connected Surfaces product lines
are critical to our continued operation as a consumer product company. Our future success depends on our ability to deliver innovative,
higher performing and lower cost solutions for existing and new markets and for customers to accept those solutions. As a small company,
innovation is critical to our ability to compete with larger competitors. We must introduce new products in a timely and cost-effective
manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex
process, and we have in some instances experienced delays in completing the development and introduction of new products. Our research
and development efforts are aimed at solving increasingly complex problems, and we do not expect that all our projects will be successful.
The successful development, introduction and acceptance of new products depend on a number of factors, including the following:
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Having adequate, affordable, timely working capital
funding. |
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achievement of technology
solutions required to make commercially viable products. |
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the accuracy of our predictions
for market requirements. |
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our ability to predict,
influence and / or reach evolving consumer and technical standards. |
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our timely completion of
product designs and development. |
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our ability to effectively
transfer increasingly complex products and technology from development to manufacturing; and |
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market acceptance of our
new product by retailers and consumers and availability of adequate inventory to timely meet demands of retailers and customers. |
If any of these or other similar factors becomes
problematic, we may not be able to deliver and introduce new products in a timely or cost-effective manner and be unable to effectively
compete in the product market segment.
As further detailed
below, the Connected Surfaces product line did not achieve the level of consumer acceptance as anticipated and, consequently, orders
from e-commerce for the Connected Surfaces product line were insignificant in 2022. The primary intended appeal of the Smart Mirrors,
being a residential Internet connected residential device for under $1,000, may not meet current consumer demands in the smart mirror
or connected device marketplace and Company efforts to establish the Smart Mirror line in 2023 as a viable revenue source may fail. While
the Company has developed a smart version of a cutting board in 2023, this prototype is under technical review as of the date of the
filing of this Form 10-K. The Company does not have an alternative product line as of the first fiscal quarter of 2023.
Our operations depend on a small
number of personnel and the loss of key personnel or the inability to replace or add key personnel could have a significant impact on
our ability to grow or sustain operations.
We operate the executive operations
with a relatively small number of personnel. Company has not developed personnel to readily replace key personnel. The loss of
key personnel, being Stewart Wallach, Company’s Chief Executive Officer would severely harm the business. As of December
31, 2022, James McClinton, our Chief Financial Officer for over 30 years, elected to retire. The Company hired Dana Eschenburg
Perez, as an external consultant as of January 1, 2023 to perform the functions of Chief Financial Officer. We do not have key
man life insurance.
Our personnel are focused on executive
management or marketing. Our marketing is supplemented by contractor sales agencies, and we have a relatively small research and
development capability overseas. We rely on OEMs for certain technical development and design, and we have no current plans to
develop an in-house technical development staff. The loss of an OEM would disrupt our business operations if we could not find
a suitable replacement in short order. Company evaluates potential OEM’s from time to time to identify possible alternative
production and technical development resources. If our operations grow, we may have to increase the number of our personnel in
the future to handle any growth or expansion of product lines or product categories. Our ability to find and retain qualified
personnel when needed by our growth or existing operations will be an important factor in determining our success in coping with
any growth or efficiently handling existing operational burdens.
During a downturn in the economy, consumer
purchases of discretionary items are affected, which could materially harm our sales, profitability and financial condition and our prospects
for growth. Historic inflation in 2022 has created uncertainty about consumer confidence and its impact on demand for our products in
2023.
Many of our products may be considered discretionary
items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions,
unemployment, the availability of consumer credit and consumer confidence in future economic conditions. Uncertainty in U.S. economic
conditions continues, particularly considering the impacts rising inflation, the COVID-19 pandemic, and trends in consumer discretionary
spending remain unpredictable. While the impact on the global economy remains uncertain, the United States has experienced a significant
reduction in unemployment and financial markets have remained robust and uncertain at times. Historically, consumer purchases of discretionary
items tend to decline during recessionary periods when disposable income is lower or during other periods of economic instability or uncertainty,
which may lead to declines in sales and slow our long-term growth expectations. Any near or long-term downturn in the U.S. market in which
we sell most of our products, or other key markets, may materially harm our sales, profitability and financial condition and our prospects
for growth.
The U.S. economy has experienced inflation of
6.4% for the Consumer Price Index for all Urban Consumers for the 12 months ended January 2023, which is a 40-year high rate, according
to the U.S. Bureau of Labor Statistics. Inflationary rate for energy costs i a major component of the historic inflation and the war between
Russian Federation and Ukraine added to the inflationary rate for energy costs. High inflation is one factor that could adversely impact
consumer purchases of discretionary items like smart mirrors as well as add to the cost of transporting our products from Asia to the
U.S. We do not have sufficient operating experience in the sale of the Smart Mirrors as of the date of the filing of this Form 10-K to
determine the impact on 2023 revenues of this inflationary increase.
If we are unable to effectively
develop, manage and expand our marketing programs and sales channels for our products, our operating results may suffer.
Our launch of an e-commerce website and social
media promotions of products are a new approach to marketing for our company and we lack sufficient operational history to judge the effectiveness
of the effort. These marketing efforts did not produce any significant sales of products in 2022 and the Company has returned to direct
sales efforts to brick-and-mortar retailers as the most cost effective marketing strategy. The success of the Connected Surfaces products
is critical to stabilizing and improving the business and financial condition as well as prospects of the Company. We do not have an extensive
staff devoted to e-commerce and social media promotions and we have not retained outside firms to assist on a regular basis in this effort.
The Company is seeking funding to support the promotion of the Connected Surfaces products. Attaining affordable funding of the marketing
effort may be critical to success of the marketing and promotion of the Connected Surfaces products. The cost and difficulty of establishing
a new product line is difficult to estimate and difficult to fund by a small company like the Company, especially when that effort is
faced with the inherent difficulties of penetrating an emerging, new product segment like smart mirrors, which has a growing number of
competitors and has an ongoing, evolving need to meet changing consumer expectations and demands for enhanced or new technologies and
functions; and against numerous competitors with significantly greater financial and technology resources, brand recognition and brand
loyalty by consumers and logistical and marketing capabilities than our company.
Retailers may alter their promotional pricing
or inventory strategies, which could impact our targeted sales of our products. If we are unable to effectively penetrate these channels
or develop alternate channels to ensure our products are reaching the intended customer base, our financial results may be adversely impacted.
In addition, if we successfully penetrate or develop these channels, we cannot guarantee that customers will accept our products.
The markets in which we operate
are highly competitive and have evolving technical or consumer requirements.
The markets for our smart mirror products are
highly competitive. The smart or interactive mirror market is an emerging market and attracting new competitors – many of those
competitors have significantly greater business, personnel, technical and financial resources than us and have greater access to distribution
channels on a domestic and international basis. They also have or have the ability to establish brand recognition and reputation with
consumers in domestic and international markets on a scale that we cannot match. Although the Company is seeking an apparently accessible
niche market in smart mirrors, the sub $1,000 residential market, the Company may be unable to overcome larger competitors in this niche
market or gain a profitable niche in this market. Since the Company relies on OEM’s for technical development, the Company may also
be unable to compete with new technologies and functions in the smart mirror market or be able to affordably license new technologies
or functions that are demanded by consumers.
In the consumer lighting market, which is a
maturing market for us, we compete with companies that manufacture and sell traditional lighting products and we compete with companies
that make smart mirrors for residential use, we compete with companies that have greater market share, name recognition and technical
resources than we do. Competitors continue to offer new products with aggressive pricing. Aggressive pricing actions by our competitors
in our businesses could reduce margins if we are not able to reduce costs at an equal or greater rate than the sales price decline.
With the increased demand for
consumer smart products, including the Connected Surfaces, which is the focus of our business, we will continue
to face increased competition in the future across our businesses. If the investment in capacity exceeds the growth in demand
the electronic consumer market is likely to become more competitive with additional pricing pressures. With the emerging and evolving
smart mirror market, we face growing competition and rapidly changing product technology and functionalities.
As competition increases in smart products,
including connected surfaces, we need to continue to develop new products that meet or exceed the needs of our customers. Adequate, affordable
and available funding is key to our ability to compete in the smart mirror markets. Competitors may also try to align with some of our
strategic customers. This could lead to lower prices for our products, reduced demand for our products and a corresponding reduction in
our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our
business, results of operations or financial condition.
As is true in any consumer product industry,
the ability of a company to respond to changing consumer tastes and purchasing habits is key to success in consumer products. Introduction
of new products brings the risk of increased development, production and marketing costs as well as that investment failing to produce
revenues or profits that justify the investment in new products.
If our products fail to perform or fail
to meet customer requirements or expectations, we could incur significant additional costs, including costs associated with the recall
of those items.
The manufacturing of our products involves complex
processes. We have just started to sell the Smart Mirrors in 2022 and we do not have sufficient consumer experience with our products
to determine the extent of any customer service problems or product returns and defects and those factors impact on revenues. Our customers
specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required
to replace or rework the products. In some cases, our products may contain undetected defects that only become evident after shipment
and used by consumers. Even if our products meet standard specifications, our customers may attempt to use our products in applications
for which they were not designed resulting in product failures and creating customer satisfaction issues. For a small company, identifying
and meeting consumer demand and product quality standards are critical to our business and financial performance.
If failures or defects occur, they could result
in significant losses or product recalls due to:
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costs associated with the
removal, collection and destruction of the product. |
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payments made to replace
product. |
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costs associated with repairing
the product. |
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the write-down or destruction
of existing inventory. |
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insurance recoveries that
fail to cover the full costs associated with product recalls. |
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lost sales due to the unavailability
of product for a period. |
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delays, cancellations or
rescheduling of order for our products; or |
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increased product returns. |
A significant product recall could also result in
adverse publicity, damage to our reputation and a loss of customer or consumer confidence in our products and could substantially undermine
or delay any success in the critical Connected Surfaces product launch. Further, while we believe that product liability for consumer
electronic products is not significant or widespread, we could face product liability lawsuits or regulatory proceedings by the Consumer
Product Safety Commission (CPSC) and could suffer losses from a significant product liability judgment or adverse CPSC finding against
us if the use of our products at issue is determined to have caused injury or contained a substantial product hazard to the public. We
provide warranty periods of 1 year on our products. Although we believe our warranty reserves are appropriate, we are making projections
about the future reliability of new products and technologies, and we may experience increased variability in warranty claims. Increased
warranty claims could result in significant losses due to a rise in warranty expense and costs associated with customer support.
Historically, we depended on a limited number of retail customers
for a substantial portion of our LED revenue, and the loss of, or a significant reduction in purchases by, one or more of these customers
could adversely affect our operating results for any LED lighting product sales as well as any sales of Smart Mirror products sold through
these retailers.
While we are seeking to establish a vibrant
e-commerce capability and social media marketing effort to support the e-commerce initiative, we remain dependent on brick and mortar
retailers and their e-commerce efforts or on third party e-commerce retailers like Amazon and Wayfair. As such, if product sales from
our retail customers decline, it will adversely impact our financial and business performance, which could be especially damaging in light
of our need to transition from LED lighting product line to the new Smart Mirror product line.
Our results of operations could be materially
harmed if we are unable to accurately forecast demand for our products.
If we do not accurately predict consumer demand
for products, we may be unable to produce products that are in demand and our financial performance will suffer. Our ability to timely
exploit the enhanced consumer interest in smart mirrors was delayed by COVID-19 pandemic impact on our OEM’s and shipment of products
from China. The Smart Mirrors product line was intended to replace the declining sales of the LED lighting products and the continuing
efforts to establish the Smart Mirrors product line has a viable replacement product line has placed a significant financial stain on
the Company. While the Company has another product in development, the Company must secure outside funding to sustain operations while
it continues efforts to establish the Smart Mirror product line as a source for a viable revenue stream and, failing that, to explore
and pursue possible new business lines through joint venture, merger, acquisition, or other significant corporate transaction.
To ensure adequate inventory
supply for the new product categories and to support e-commerce, we must forecast inventory needs and place orders with our manufacturers
before firm orders are placed by our customers. If we fail to accurately forecast customer demand, we may experience excess inventory
levels or a shortage of products to deliver to our online customers. With the logistical problems referenced above, the
forecast of inventory needs is even more crucial to our business and financial performance and efforts to establish a viable Smart
Mirrors product line and revenue source. We could accurately predict inventory needs and timely place orders for products and
then have logistical problems delay delivering of products and result in a lack of inventory to fill orders. The ability to timely
fill orders for Smart Mirrors is an important achievement in the effort to establish the Smart Mirror product line as a viable
revenue source.
Factors that could affect our ability to accurately
forecast demand for our products include:
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an increase or decrease
in consumer demand for our products. |
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our failure to accurately
forecast consumer acceptance for our new products. |
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product introductions by
competitors. |
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unanticipated changes in
general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the
rate of reorders or at-once orders placed by retailers. |
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weakening of economic conditions
or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products; and |
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terrorism or acts of war,
or the threat thereof, political or labor instability or unrest or public health concerns and disease epidemics, such as the current
COVID-19 pandemic, which could adversely affect consumer confidence and spending or interrupt production and distribution of product
and raw materials. |
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constraints on marketing
and sales efforts and analysis due to limited financial resources. |
Inventory levels in excess of customer demand
may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution
channels, which could have an adverse effect on gross margin. In addition, if we underestimate the demand for our products, our manufacturers
may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products
and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships. These
risks have materially increased and may persist with the market disruption caused by the COVID-19 pandemic on our foreign OEM’s
and related supply chain problems.
The consumer electronics industry is subject to significant pricing pressure
caused by many factors, including technological advancements, intense competition, consolidation in the retail industry, pressure from
retailers to reduce the costs of products and changes in consumer demand. While unlikely as the product segment is in its earliest stages,
these factors could cause us to reduce our prices to retailers and consumers or engage in more promotional activity than we anticipate.
For example, in response to the COVID-19 pandemic’s impact on the retail industry, including retail store closures and
decreased consumer traffic and purchasing, many of our competitors have engaged in, and may continue to engage in, additional promotional
activities focused on e-commerce sales. As traditional brick-and-mortar stores reopened post-pandemic, we saw further discounting across
our industry as businesses manage excess inventory levels. In addition, our ability to achieve short-term growth targets may be negatively
impacted if we are unwilling to engage in promotional activity on a scale similar to that of our competitors and we are unable to simultaneously
offset declining promotional activity with increased sales at premium price points. This could have a material adverse effect on our results
of operations and financial conditions.
Fluctuations in the cost of products could negatively affect
our operating results.
The components used by our suppliers and manufacturers
are made of raw materials that may be subject to significant price fluctuations or shortages that could materially adversely affect our
cost of goods sold. In addition, certain of our manufacturers are subject to government regulations related to wage rates, and therefore
the labor costs to produce our products may fluctuate. The cost of transporting our products for distribution and sale is also subject
to fluctuation. Because our products are manufactured abroad, our products must be transported by third parties over large geographical
distances, increased demand for freight services at a time of reduced ocean freight capacity, can significantly increase costs. Manufacturing
delays or unexpected transportation delays, such as those caused by the COVID-19 pandemic, can also cause us to rely more heavily on airfreight
to achieve timely delivery to our customers, which significantly increases freight costs. Any of these fluctuations may increase our cost
of products and have an adverse effect on our profit margins, results of operations and financial condition. The continuation of the historic
inflation of 2022 could adversely impact our competitive pricing strategy by imposing increased production and shipping costs for the
Smart Mirrors in 2023.
Regulatory and Legal Risks
Our business may be impaired by claims
that we infringe the intellectual property rights of others.
Litigation between competitors over intellectual
property rights can be a common business practice in an industry as a means to protect or gain market share. Litigation to determine the
validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant
legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable
to us. In the event of an adverse result in such litigation, we could be required to:
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pay substantial damages. |
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indemnify our customers. |
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stop the manufacture, use
and sale of products found to be infringing. |
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discontinue the use of
processes found to be infringing. |
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expend significant resources
to develop non-infringing products or processes; or |
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obtain a license to use
third party technology. |
The risk of infringement claims may be greater
in emerging products and technologies like smart mirrors.
There can be no assurance that third parties will
not attempt to assert infringement claims against us with respect to our products. Additionally, if an infringement claim against the
Company or its customers is successful, the Company may be required to pay damages or seek royalty or license arrangements, which may
not be available on commercially reasonable terms. The payment of any such damages or royalties may significantly increase the Company’s
operating expenses and materially harm the company’s operating results and financial condition. Further, royalty or license arrangements
may not be available at all, which would then require the company to stop selling certain products or using certain technologies, which
could negatively affect the company’s ability to compete effectively. We do not have reserves for litigation or insurance for infringement
litigation costs. This kind of litigation is typically very expensive to litigate, and we may lack the funds to aggressively litigate
infringement claims against us or against competitors, which could lead to a materially adverse impact on our business.
Our operations in foreign countries expose us to certain risks
inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.
We have revenue, operations and contract
manufacturing arrangements in overseas that expose us to certain risks. Fluctuations in exchange rates may affect our revenue,
expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements.
We are also subject to other types of risks, including the following:
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Delays in shipping or production
of products or increased costs in production and shipping of products from international sources, including delays in unloading shipped
products in U.S. ports. |
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protection of intellectual
property and trade secrets. |
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tariffs, customs, trade
sanctions, trade embargoes and other barriers to importing/exporting materials and products in a cost effective and timely manner,
or changes in applicable tariffs or custom rules. |
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rising labor costs or labor
unrest. |
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the burden of complying
with foreign and international laws. |
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adverse
tax consequences. |
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the
risk that because our brand names may not be locally or nationally recognized, we must spend significant amounts of time and money
to build brand recognition without certainty that we will be successful. |
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political
conflict or trade wars affecting our efforts to conduct business abroad. |
Changes in regulatory, geopolitical, social,
economic, or monetary policies and other factors may have a material adverse effect on our business in the future or may require us to
significantly modify our current business practices. Abrupt political change, terrorist activity and armed conflict pose a risk of general
economic disruption in affected countries, which could also result in an adverse effect on our business and results of operations.
We do not have extensive prior experience in
conducting business in Thailand, which is the location of our product development and production (supplemented by contractors in China).
This lack of experience may delay accomplishing our business milestones for development or production of product from our Thailand OEM’s.
Our financial results and ability to grow our
business may be negatively impacted by economic, regulatory and political risks beyond our control.
All of our manufacturers are located outside
of the United States and in 2022, 13% of net revenue was generated by international business. As a result, we are subject to risks associated
with doing business abroad, including:
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political
or labor unrest, terrorism, public health crises, disease epidemics and economic instability resulting in the disruption of trade
from foreign countries in which our products are manufactured. |
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currency
exchange fluctuations or requirements to transact in specific currencies. |
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the
imposition of new laws and regulations or government-imposed protective or preventative measures, including those relating to labor
conditions, quality and safety standards and disease epidemics or other public health concerns, as well as rules and regulations
regarding climate change. |
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actions
of foreign or U.S. governmental authorities impacting trade and foreign investment, particularly during periods of heightened tension
between U.S. and foreign governments, including the imposition of new import limitations, duties, anti-dumping penalties, trade restrictions
or restrictions on the transfer of funds. |
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reduced
protection for intellectual property rights in some countries. |
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disruptions
or delays in shipments. |
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changes
in local economic conditions in countries where our customers, manufacturers and suppliers are located. |
These risks could negatively affect the ability
of our manufacturers to produce or deliver our products or procure materials and increase our cost of doing business generally, any of
which could have an adverse effect on our results of operations, cash flows and financial condition. If one or more of these factors,
make it undesirable or impractical for us to conduct business in a particular country our business could be adversely affected.
Additional Financial Risk Factors
Our inadequate or expensive funding and financing alternatives.
Our current short-term debt level as of December
31, 2022 and 2021 was approximately $620 thousand and $0, respectively.
The Company will need additional outside working
capital funding in fiscal year 2023 to support the Company’s operations and further marketing and distribution of the Smart Mirror
and development of the Connected Surfaces additional product lines.
Cash flow 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.
Other adverse consequences could include:
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a
significant portion of our cash from operations could be dedicated to the payment of interest and principal on future debt, which
could reduce the funds available for operations. |
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the
level of our future debt could leave us vulnerable in a period of significant economic downturn; and |
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we
may not be financially able to withstand significant and sustained competitive pressures. |
Since we are transitioning our product focus
to Connected Surfaces products past financial performance is not indicative of any future growth or future financial performance. We will
have to establish our Connected Surfaces product line in the face of extensive competition as an entirely new segment within the Smart
Home category.
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.
All our sales in 2022 were transacted in U.S.
dollars. The weakening of the U.S. dollar relative to foreign currencies can negatively impact our operating profits, through higher unit
costs. However, as the Company volumes increase, the leveraged buying power has enabled the Company to minimize the impact on costs. The
last economic crisis revealed that exchange rates can be highly volatile. Changes in currency exchange rates may also affect the relative
prices at which we and our competitors sell products in the same market. There can be no assurance that the U.S. dollar foreign exchange
rates will be stable in the future or that fluctuations in such rates will not have a material adverse effect on our business, results
of operations, or financial condition.
If we fail to maintain an effective system
of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition
or results of operations. If our internal control over financial reporting is not effective, it may adversely affect investor confidence
in us and the price of our common stock.
As a public company we are required to maintain internal
control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act
requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report
on our internal control over financial reporting. If we identify material weaknesses in our internal control over financial reporting,
we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal
control over financial reporting is effective, if our independent registered public accounting firm is unable to express an opinion as
to the effectiveness of our internal control over financial reporting, or if we are unable to comply with the requirements of the Sarbanes-Oxley
Act in a timely manner, then, we may be late with the filing of our periodic reports, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our common stock could be negatively affected.
Risk Factors for our Common Stock
Penny Stock and Volatile Market Price.
After the announcement of the $750,000 working capital
credit line by two Company directors and announcement of the new Connected Surfaces Smart Mirror product launch, the market price of our
common stock rose significantly in first fiscal quarter of 2021. As a matter of policy, the Company never recommends any investment in
its common stock to public investors.
Due to the factors described below, the Company’s
Common Stock is subject to possible volatile trading, including rapid increases and decreases in market price due to trading in the open
market. Company’s declining business and financial condition has depressed the already low market price of the Company’s Common
Stock in 2022. The Company’s Common Stock lacks the primary market makers and institutional investors who can protect the market
price from volatility in trading and market price. Company does not have any research analyst issuing recommendations. The common stock
is also a “penny stock” under SEC rules and suffers the limitations and burdens in trading of penny stocks. This lack of market
support and penny stock status means that trading, especially by day traders, can cause a rapid increase or decrease in market price of
the common stock and makes any investment in the common stock extremely risky and unsuitable for investors who cannot withstand the loss
of their entire investment and requires liquidity in the investment. An investment in the Common Stock remains an extremely risky investment
that is not suitable for investors who cannot afford the loss of investment and can withstand or tolerate a lack of liquidity.
In March 2021, our Common Stock was approved for DWAC/Fast
electronic transfer, which will enhance trading of our Common Stock, but will not eliminate the issues imposed by the lack of market support
for the Common Stock or the “penny stock” status of our Common Stock and, as such, will not lessen the volatility in trading
and market price of our Common Stock. Further, restricted stock cannot be DWAC/Fast transferred. Many brokerage houses do not want
or readily accept “penny stocks” in trading accounts.
We are also a former shell company under current SEC
rules and interpretations thereof. As such, our stock transfer agent requires a legal opinion as well as other paperwork to lift restrictive
legends from stock certificates for non-affiliated as well as affiliated shareholders. The restrictive legends can only be lifted for
at most a 90-day period for sales under Rule 144 for affiliated and non-affiliated shareholders. Further, our stock transfer agent will
not permanently remove restrictive legends on stock certificates held by shareholders. absent registration of the shareholder’s
shares of common stock under the Securities Act. This status may make our common stock even more unappealing to investors and potential
purchasers and more difficult to sell or trade. “Affiliated shareholders” are generally Company officers, directors, and holders
of more than 10% of the issued shares of the Common Stock.
Further, our common stock is quoted on The OTC Markets
Group, Inc. QB venture market. Many brokerage houses will not accept OTC stocks for deposit or for trading due to the compliance burdens
and reduced financial benefits of trading in OTC stocks. This difficulty further decreases the appeal of our common stock to investors.
No Dividends.
We have not paid, and we do not intend to pay dividends
on our Common Stock in the foreseeable future. We currently intend to retain all future earnings, if any, to finance our current and proposed
business activities. We may also incur indebtedness in the future that may further prohibit or effectively restrict the payment of cash
dividends on our Common Stock.
Our controlling stockholders may take
actions that conflict with your interests.
Certain of our officers and directors beneficially
own approximately 40% of our outstanding common stock as of the date hereof. Assuming support from public shareholders with a sufficient
voting power, then our officers and directors will be able to exercise control over all matters requiring stockholder approval, including
the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions, and they
will have significant control over our management and policies. The directors elected by these stockholders will be able to influence
decisions affecting our capital structure significantly. This control may have the effect of delaying or preventing changes in control
or changes in management or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best
interest. For example, our controlling stockholders will be able to control the sale or other disposition of our operating businesses
and subsidiaries to another entity.
General Risk Factors
Consumer shopping preferences and shifts
in distribution channels continue to evolve and could negatively impact our results of operations or our future growth.
Consumer preferences regarding the shopping
experience continue to rapidly evolve. We sell our products through a variety of channels, including through wholesale customers and we
launched our own direct to consumer business consisting of our brand and e-commerce platform. If we or our wholesale customers do not
provide consumers with an attractive in-store experience, our brand image and results of operations could be negatively impacted. In addition,
as part of our strategy to grow our e-commerce revenue, we are investing significantly in enhancing our platform capabilities and implementing
systems to drive higher engagement with our consumers. If we do not successfully execute this strategy or continue to provide an engaging
and user-friendly digital commerce platform that attracts consumers, our brand image and results of operations could be negatively impacted
as well as our opportunities for future growth. In addition, we cannot predict whether and how the COVID-19 pandemic will impact consumer
preferences regarding the shopping experience in the long-term and how quickly and effectively we will adapt to those preferences. We
have commenced our Social Media/e-commerce marketing initiative in response to current trends in consumer purchasing habits and in case
the traditional brick-and-mortar retail continues to suffer and decline under the assault from the COVID-19 pandemic as well as a growing
trend towards e-commerce shopping by consumers that pre-dates the COVID-19 pandemic.
The Company’s operations could be
disrupted by natural or human causes beyond its control.
The Company’s operations are subject to
disruption from natural or human causes beyond its control, including physical risks from hurricanes, severe storms, floods and other
forms of severe weather, accidents, fires, earthquakes, terrorist acts and epidemic or pandemic diseases such as the COVID-19, any of
which could result in suspension of operations or harm to people or the environment. While all of the Company’s corporate operations
are located in the United States, the Company participates in a Chinese and Thailand product supply chain, and if a disease spreads sufficiently
to cause a pandemic (or to cause the fear of a pandemic to rise) or governments regulate or restrict the flow of labor or products or
impede the travel of Company personnel, the Company’s ability to conduct normal business operations could be impacted which could
adversely affect the Company’s results of operations and liquidity. Most of the Company products are sourced and made in China and
Thailand and an increased or prolonged disruption of either economy by COVID-19 could substantially and adversely impact the Company’s
production of products. Currently, the Company’s Chinese and Thailand suppliers have reopened and building to full production capabilities.
We may not successfully execute our long-term
strategies, which may negatively impact our results of operations.
Our ability to execute on our long-term strategies
depends, in part, on successfully executing on strategic growth initiatives in key areas, such as our new Connected Surfaces category
and our new online direct to consumer sales channel. Our growth in these areas depends on our ability to continue to successfully market
these new products to existing customers, grow our e-commerce and mobile application offerings in the U.S. market and continue to successfully
increase our product offerings in the Connected Surfaces category. Our ability to invest in these growth initiatives on the timeline and
at the scale we expect will be negatively impacted if we continue to experience significant market disruption due to COVID-19 or other
significant events, particularly in the U.S. market and in declining sales. In addition, our long-term strategy depends on our ability
to successfully drive expansion of our gross margins, manage our cost structure and drive return on our investments. If we cannot effectively
execute our long-term growth strategies while managing costs effectively, our business could be negatively impacted, and we may not achieve
our expected results of operations.
If we fail to adequately protect intellectual
property rights, competitors may manufacture and market similar products, which could adversely affect our market share and results of
operations.
We rely on trademark, trade secret, patent and
copyright laws to protect our intellectual property rights. Our trademarks are of material importance to our business and are among our
most important assets. Accordingly, our future success may depend, in part, upon the goodwill associated with our trademarks and brand
names. We own a number of patents; patent applications and other technology which we believe are significant to our business.
Our products are made in China and Thailand.
We face risks that our proprietary information may not be afforded the same protection in China as it is in countries with well-developed
intellectual property laws, and local laws may not provide an adequate remedy in the event of unauthorized disclosure of confidential
information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights in China,
and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. We cannot be sure
that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not
be able to obtain and perfect, or maintain our own intellectual property rights or, where appropriate, license intellectual property rights
necessary to support new product introductions. We cannot be certain that these rights, if obtained, will not be invalidated, circumvented
or challenged in the future, and we could incur significant costs in connection with legal actions to defend our intellectual property
rights.
Even if such rights are obtained in the United
States, the laws of some of the other countries in which our products are or may be sold do not protect intellectual property rights to
the same extent as the laws of the United States. If other parties infringe our intellectual property rights, they may dilute the value
of our brands in the marketplace, which could diminish the value that consumers associate with our brands and harm our sales. The failure
to perfect or successfully assert our intellectual property rights could make us less competitive and could have a material adverse effect
on our business, operating results, and financial condition.
There may be emerging, or new technologies patented
by others. These new technologies may be critical to competing in a product niche, especially one like the emerging smart mirrors in smart
home industry. We may be unable to license or affordably license new technologies owned by others and critical to competing in the product
niche.
Our results of operations and financial
condition could be seriously impacted by security breaches, including cybersecurity incidents.
Failure to effectively prevent, detect and recover
from security breaches, including attacks on information technology and infrastructure by hackers; viruses; breaches due to employee error
or actions; or other disruptions could result in misuse of our assets, business disruptions, loss of property, and confidential business
information. Such attacks could result in unauthorized parties gaining access to at least certain confidential business information. However,
to date, we have not experienced any financial impact, changes in the competitive environment or business operations that we attribute
to such attacks. Although management does not believe that we have experienced any security breaches or cybersecurity incidents, there
can be no assurance that we will not suffer such attacks in the future. We actively manage the risks within our control that could lead
to business disruptions and security breaches and have expended significant resources to enhance our control environment, processes, practices
and other protective measures. Despite these efforts, as these threats continue to evolve, particularly around cybersecurity, such events
could adversely affect our business, financial condition or results of operations.
We expect our results of operations to
fluctuate on a quarterly and annual basis.
Company’s revenue and results of operations
could vary significantly from period to period and may fail to match expectations because of a variety of factors, some of which are outside
of our control. As a result of the potential variations in our revenue and results of operations, period-to-period comparisons may not
be meaningful and the results of any one period should not be relied on as an indication of future performance. In addition, our results
of operations may not meet the expectations of investors or public market analysts who follow us, which may adversely affect our stock
price. Since the Connected Surfaces products are a new product line, we lack the operational experience to determine if Connected Surface
products have seasonal sales cycles.