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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March
31, 2023
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 000-28831
CAPSTONE COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Florida |
84-1047159 |
(State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
431 Fairway Drive, Suite
200, Deerfield
Beach, Florida 33441 |
(Address
of principal executive offices) |
(954) 252-3440 |
(Issuers
Telephone Number) |
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. ☒ Yes ☐ No
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large, accelerated file,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or emerging growth company. See the definitions of “large,
accelerated filer, “accelerated filer, “smaller reporting company
and “emerging growth company in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ☐ |
Accelerated
filer ☐ |
Non-accelerated filer ☒ |
Smaller
reporting company ☒ |
Emerging
Growth company ☐ |
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
Trading
Symbol(s) |
Name
of each exchange on which registered |
None |
N/A |
N/A |
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange
Act). ☐ Yes ☒ No
As of May
8, 2023, the Company had 48,826,864 shares
of Common Stock issued and outstanding. The Common Stock is quoted
on the OTCQB Venture Market of the OTC Markets Group, Inc. under
the trading symbol “CAPC”.
Use of Certain Defined Terms. Except as otherwise
indicated by the context, the following terms have the stated
meanings.
As used in this Form 10-Q Quarterly Report for the fiscal period
ending March 31, 20232 (“Form 10-Q Report” or “Form 10-Q”),
“COVID-19” refers to Coronavirus/COVID-19 virus and all variants of
that virus, a highly contagious novel virus that was declared a
global pandemic by the World Health Organization or “WHO on March
11, 2020. “COVID-19 pandemic” refers to “global pandemic” (as
defined by WHO) caused by COVID-19. “Company”, “Capstone”, “we,
“our”, and “us” refers to Capstone Companies, Inc. and its
subsidiaries, unless context indicates just Capstone Companies,
Inc.
Additionally:
(1) |
“Capstone
Lighting Technologies, L.L.C.” or “CLTL” is a wholly owned
subsidiary of Capstone Companies, Inc. |
(2) |
“Capstone
International Hong Kong Ltd” or “CIHK” is a wholly owned subsidiary
of Capstone Companies, Inc. and a Hong Kong registered Company,
that is currently moving to a dormant status. |
(3) |
“Capstone
Industries, Inc.”, a Florida corporation and a wholly owned
subsidiary of CAPC, may also be referred to as “CAPI” |
(4) |
“Capstone
Companies, Inc.”, a Florida corporation, may also be referred to as
“we”, “us,” “our”, “Company”, or “CAPC”. Unless the context
indicates otherwise, “Company” includes in its meaning all of
Capstone Companies, Inc. Subsidiaries. |
(5) |
“China”
means People’s Republic of China. |
(6) |
“W”
means watts. |
(7) |
References
to “33 Act” or “Securities Act” means the Securities Act of 1933,
as amended. |
(8) |
References
to “34 Act” or “Exchange Act” means the Securities Exchange Act of
1934, as amended. |
(9) |
“SEC”
or “Commission” means the U.S. Securities and Exchange
Commission. |
(10) |
“Subsidiaries”
means Capstone Industries, Inc. (“CAPI”), Capstone International
H.K Ltd., (“CIHK”), and Capstone Lighting Technologies, Inc.
(“CLTL”). |
(11) |
Any
reference to fiscal year in this Annual Report on Form 10-K means
our fiscal year, ending December 31, 2022. |
(12) |
“LED”
or “LEDs” means a light-emitting diode component(s) which can be
assembled into light bulbs or can be used in lighting
fixtures. |
(13) |
“OEM”
means “original equipment manufacturer. |
(14) |
“Connected
Surfaces” or “Connected Products” means smart home devices with
embedded sensors that provide communication and data transfer
between the Connected Surface and internet-enabled systems of the
Company or associated third parties. Connected Surfaces may permit
internet access for defined functions. |
We
may use “FY” to mean “fiscal year” and “Q” to mean fiscal quarter
ended March 31, 2023.
CAPSTONE COMPANIES, INC.
Quarterly Report on Form 10-Q
Three Months Ended March 31, 2023
TABLE OF CONTENTS
CAPSTONE COMPANIES, INC.,
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March 31, |
|
December 31, |
|
|
2023 |
|
2022 |
Assets: |
|
(Unaudited) |
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
24,398 |
|
|
$ |
61,463 |
|
Accounts receivable, net |
|
|
2,152 |
|
|
|
7,716 |
|
Inventories, net of allowances of $524,994 and $533,254,
respectively |
|
|
404,000 |
|
|
|
412,261 |
|
Prepaid expenses |
|
|
35,537 |
|
|
|
37,090 |
|
Total Current Assets |
|
|
466,087 |
|
|
|
518,530 |
|
|
|
|
|
|
|
|
|
|
Operating lease- right of use asset, net |
|
|
17,229 |
|
|
|
34,151 |
|
Deposit |
|
|
12,891 |
|
|
|
24,039 |
|
Goodwill |
|
|
1,312,482 |
|
|
|
1,312,482 |
|
Total Assets |
|
$ |
1,808,689 |
|
|
$ |
1,889,202 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity: |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
468,269 |
|
|
$ |
309,439 |
|
Notes payable related parties and accrued interest-current |
|
|
643,084 |
|
|
|
413,425 |
|
Notes payable unrelated party and accrued interest-current |
|
|
209,179 |
|
|
|
206,712 |
|
Operating lease- current portion |
|
|
18,932 |
|
|
|
37,535 |
|
Total Current Liabilities |
|
|
1,339,464 |
|
|
|
967,111 |
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities: |
|
|
|
|
|
|
|
|
Notes payable related parties and accrued interest, less current
portion |
|
|
831,264 |
|
|
|
821,647 |
|
Notes payable unrelated party and accrued interest, less current
portion |
|
|
364,638 |
|
|
|
360,446 |
|
Deferred tax liabilities -long-term |
|
|
285,379 |
|
|
|
285,379 |
|
Total Long-Term Liabilities |
|
|
1,481,281 |
|
|
|
1,467,472 |
|
Total Liabilities |
|
|
2,820,745 |
|
|
|
2,434,583 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies: ( Note 4 ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
Preferred Stock, Series A, par value $.001 per
share, authorized 6,666,667 shares,
issued and outstanding- 0-
shares |
|
|
— |
|
|
|
— |
|
Preferred Stock, Series B-1, par value $.0001 per
share, authorized 3,333,333 shares,
issued and outstanding- 15,000 shares
at March 31, 2023, and December 31, 2022 (Liquidation Preference
$15,000) |
|
|
2 |
|
|
|
2 |
|
Preferred Stock, Series C, par value $1.00 per
share, authorized 67 shares,
issued and outstanding -0-
shares |
|
|
— |
|
|
|
— |
|
Common Stock, par value $.0001 per
share, authorized 56,666,667 shares,
issued and outstanding 48,826,864 shares
at March 31, 2023 and December 31, 2022. |
|
|
4,884 |
|
|
|
4,884 |
|
Additional paid-in capital |
|
|
8,550,510 |
|
|
|
8,550,510 |
|
Accumulated deficit |
|
|
(9,567,452 |
) |
|
|
(9,100,777 |
) |
Total Stockholders’ Deficit |
|
|
(1,012,056 |
) |
|
|
(545,381 |
) |
Total Liabilities and Stockholders’ Deficit |
|
$ |
1,808,689 |
|
|
$ |
1,889,202 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended
March 31, |
|
|
2023 |
|
2022 |
|
|
|
|
|
Revenues, net |
|
$ |
5,552 |
|
|
$ |
262,979 |
|
Cost of
sales |
|
|
(2,351 |
) |
|
|
(187,063 |
) |
Gross Profit |
|
|
3,201 |
|
|
|
75,916 |
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
18,781 |
|
|
|
132,930 |
|
Compensation |
|
|
137,783 |
|
|
|
196,553 |
|
Professional fees |
|
|
142,433 |
|
|
|
156,462 |
|
Product development |
|
|
33,725 |
|
|
|
51,560 |
|
Other general and administrative |
|
|
114,721 |
|
|
|
140,073 |
|
Total Operating Expenses |
|
|
447,443 |
|
|
|
677,578 |
|
Operating Loss |
|
|
(444,242 |
) |
|
|
(601,662 |
) |
|
|
|
|
|
|
|
|
|
Other Income (Expenses): |
|
|
|
|
|
|
|
|
Other income |
|
|
— |
|
|
|
152,000 |
|
Interest expense, net |
|
|
(22,433 |
) |
|
|
(11,642 |
) |
Total Other Income (Expenses), net |
|
|
(22,433 |
) |
|
|
140,358 |
|
|
|
|
|
|
|
|
|
|
Loss Before Income Taxes |
|
|
(466,675 |
) |
|
|
(461,304 |
) |
|
|
|
|
|
|
|
|
|
Income Tax (Benefit) Expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(466,675 |
) |
|
$ |
(461,304 |
) |
|
|
|
|
|
|
|
|
|
Net Loss
per Common Share |
|
|
|
|
|
|
|
|
Basic and Diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding |
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
48,826,864 |
|
|
|
48,893,031 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2023, AND MARCH 31,
2022
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
Preferred Stock |
|
Preferred Stock |
|
|
|
Additional |
|
|
|
|
|
|
Series A |
|
Series B |
|
Series C |
|
Common Stock |
|
Paid-In |
|
Accumulated |
|
Total |
|
|
Shares |
|
Par Value |
|
Shares |
|
Par Value |
|
Shares |
|
Par Value |
|
Shares |
|
Par Value |
|
Capital |
|
Deficit |
|
Equity (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
15,000 |
|
|
$ |
2 |
|
|
|
— |
|
|
$ |
— |
|
|
|
48,826,864 |
|
|
$ |
4,884 |
|
|
$ |
8,550,510 |
|
|
$ |
(9,100,777 |
) |
|
$ |
(545,381 |
) |
Net Loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(466,675 |
) |
|
|
(466,675 |
) |
Balance
at March 31, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
15,000 |
|
|
$ |
2 |
|
|
|
— |
|
|
$ |
— |
|
|
|
48,826,864 |
|
|
$ |
4,884 |
|
|
$ |
8,550,510 |
|
|
$ |
(9,567,452 |
) |
|
$ |
(1,012,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
15,000 |
|
|
$ |
2 |
|
|
|
— |
|
|
$ |
— |
|
|
|
48,893,031 |
|
|
$ |
4,892 |
|
|
$ |
8,554,320 |
|
|
$ |
(6,437,026 |
) |
|
$ |
2,122,188 |
|
Stock options for compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,362 |
|
|
|
— |
|
|
|
3,362 |
|
Net Loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(461,304 |
) |
|
|
(461,304 |
) |
Balance
at March 31, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
15,000 |
|
|
$ |
2 |
|
|
|
— |
|
|
|
— |
|
|
|
48,893,031 |
|
|
$ |
4,892 |
|
|
$ |
8,557,682 |
|
|
$ |
(6,898,330 |
) |
|
$ |
1,664,246 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended |
|
|
March
31, |
|
|
2023 |
|
2022 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(466,675 |
) |
|
$ |
(461,304 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
— |
|
|
|
6,411 |
|
Stock based compensation expense |
|
|
— |
|
|
|
3,362 |
|
Noncash lease expense |
|
|
16,922 |
|
|
|
15,672 |
|
Accrued interest added to notes payable related and unrelated
parties |
|
|
21,785 |
|
|
|
12,575 |
|
(Increase) decrease in accounts receivable, net |
|
|
5,564 |
|
|
|
(143,532 |
) |
(Increase) decrease in inventories |
|
|
8,261 |
|
|
|
(526,276 |
) |
Decrease in prepaid expenses |
|
|
1,553 |
|
|
|
288,302 |
|
Decrease in deposits |
|
|
11,148 |
|
|
|
— |
|
Increase in accounts payable and accrued liabilities |
|
|
158,830 |
|
|
|
88,941 |
|
Income tax refundable |
|
|
— |
|
|
|
231,155 |
|
Increase in employee retention tax refundable |
|
|
— |
|
|
|
(152,000 |
) |
Decrease in operating lease liabilities |
|
|
(18,603 |
) |
|
|
(16,807 |
) |
Net cash used in operating activities |
|
|
(261,215 |
) |
|
|
(653,501 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from notes payable related parties |
|
|
224,150 |
|
|
|
— |
|
Net cash provided by financing activities |
|
|
224,150 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash |
|
|
(37,065 |
) |
|
|
(653,501 |
) |
Cash at
Beginning of Period |
|
|
61,463 |
|
|
|
1,277,492 |
|
Cash at
End of Period |
|
$ |
24,398 |
|
|
$ |
623,991 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cash paid |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
— |
|
|
$ |
— |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
NOTE
1 - ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Capstone Companies, Inc.
(“CAPC”, “Company”, “we”, “our” or “us”), a Florida corporation and
its wholly owned subsidiaries is presented to assist in
understanding the Company’s consolidated financial statements. The
accounting policies conform to accounting principles generally
accepted in the United States of America (“U.S. GAAP”) and have
been consistently applied in the preparation of the consolidated
financial statements.
Organization and
Basis of Presentation
The condensed consolidated financial statements contained in this
report are unaudited. In the opinion of management, the condensed
consolidated financial statements include all adjustments, which
are of a normal recurring nature, necessary to present fairly the
Company’s financial position as of March 31, 2023, and results of
operations, stockholders’ equity and cash flows for the three
months ended March 31, 2023 and 2022. All material intercompany
accounts and transactions are eliminated in consolidation. These
condensed consolidated financial statements and notes are presented
in accordance with the rules and regulations of the United States
Securities and Exchange Commission (“SEC”) relating to interim
financial statements and in conformity with U.S. GAAP. Certain
information and note disclosures have been condensed or omitted in
the condensed financial statements pursuant to SEC rules and
regulations, although the Company believes that the disclosures
made herein are adequate to make the information not misleading.
The condensed unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2022 (the “2022 Annual Report”) filed with the
SEC on March 31, 2023.
The operating results for any interim period are not necessarily
indicative of the operating results to be expected for any other
interim period or the full fiscal year.
From 2020 into 2022, the COVID-19 pandemic adversely impacted our
Company at the same time as we were implementing a major shift in
product line, from mature LED products to new Connected Surfaces
products, amplified the financial impact of COVID-19 pandemic by
disrupting development and production of new Connected Surfaces
products in Thailand and China and resulting delay in the Company
being able to promote, market and sell Connected Surfaces products.
This delay in launching the new product line coupled with the
decline in sales of the LED product line adversely impacted the
Company and created uncertainty about the ongoing viability of the
current product lines of the Company. The Company’s plan to orderly
transition from LED lighting products to Connected Surfaces
products as the primary source of revenues was undermined by these
delays and disruptions. By the time that the Company was ready to
fill bulk orders for Smart Mirrors, the traditional primary
customers for Company products did not place orders and the
Company’s e-commerce initiative did not generate any significant
orders. This ‘perfect storm’ of events has left the Company without
a current product line that is generating significant revenues. The
Company is evaluating the best way for the Company to establish a
product line or business line that provides a sufficient revenue
source to fund working capital and growth needs of the Company,
which evaluation includes new Connected Surfaces products, new
industry focus for those products and potential new business
lines.
Liquidity and Going
Concern
The accompanying unaudited condensed consolidated financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business.
As of March 31, 2023, the Company had negative working capital of
approximately $873,000,
an accumulated deficit of approximately $9,567,000,
a cash balance of $24,000,
short- term notes payable of $852,000 and $1,481,000 of long-term
liabilities for notes payable and deferred taxes. Further, during
the three months ended March 31, 2023, the Company incurred a net
loss of approximately $467,000
and used cash in operations of approximately $261,000.
These liquidity conditions raise substantial doubt about the
Company’s ability to continue as a going concern. We are seeking
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.
Certain insiders and directors have provided necessary funding
including a working capital line to support the Company’s cash
needs through this period of revenue development. Unless the
Company succeeds in raising additional capital or successfully
increases cash generated from operations, management believes there
is substantial doubt about the Company’s ability to continue as a
going concern and meet its obligations over the next twelve months
from the filing date of this report.
Nature of
Business
The Company has its principal executive offices in Deerfield Beach,
Florida.
Since 2007, the Company, through CAPI, has been primarily engaged
in the business of developing, marketing, and selling home LED
products (“Lighting Products”) through national and regional
retailers in North America and in certain overseas markets. The
Lighting Products are targeted for applications such as home indoor
and outdoor lighting and have different functionalities to meet
consumer’s needs. 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, the Company entered into another home goods product segment
by developing a smart interactive mirror (“Smart Mirror”) for
residential use. The Company planned for the Smart Mirror product
launch in 2021, but its release to the retail market was delayed
until March 2022 due to product development delays at the Company’s
suppliers, resulting from the impact of COVID-19. The development
of the Smart Mirrors is part of the Company’s strategic effort to
find new product lines to replace the Lighting Products that are
nearing or at the end of their product life cycle. These products
are offered either under the Capstone brand or licensed brands but
are not actively promoted in 2023 by the Company.
The Company’s products are typically manufactured in Thailand and
China by contract manufacturing companies. As of the date of these
condensed consolidated financial statements, the Company’s future
product development effort is focused on the development of a
“Connected Surfaces” portfolio. The Connected Surfaces portfolio is
designed to tap into consumer’s ever-expanding Internet of Things,
wireless connected lifestyles prevalent today, with the initial
product launch of the Smart Mirror, an internet connected and
interactive mirror. Subject to adequate funding, the Company’s
current business strategy is to seek to expand the new line of
Connected Surfaces in 2023 and 2024. The Company is finalizing a
kitchen utility item, the “Connected Chef”, which is a product
currently undergoing certification testing and expected to be ready
for formal introduction in Q2 2023.
The Company’s operations consist of one reportable segment for
financial reporting purposes: Consumer Home Goods.
Inventories
The Company’s inventory, which consists of finished Thin Cast Smart
Mirror products for resale to consumers by Capstone, is recorded at
the lower of landed cost (first-in, first-out) or net realizable
value. The Company writes down its inventory balances for estimates
of excess and obsolete amounts. The Company reduces inventory on
hand to its net realizable value on an item-by-item basis when the
expected realizable value of a specific inventory item falls below
its original cost. Management regularly reviews the Company’s
investment in inventories for such declines in
During 2022, Management reviewed the valuation of inventory on hand
as of the year ended December 31, 2022, and considered the need for
a reserve for slow moving inventory due to sales not meeting
projected forecasts during 2022. Management estimated a 50% reserve
for inventory held in domestic warehouses and a 100% reserve for
inventory held in international warehouses , which resulted in an
increase in the inventory reserve of $533,254.
The inventory reserve was revised for the period ended March 31,
2023 to reflect the Smart Mirrors sold or used in promotional
events during the first quarter of 2023, for a revised ending
balance of $524,994.
Goodwill
On September 13, 2006, the Company entered into a Stock Purchase
Agreement with Capstone Industries, Inc., a Florida corporation
(“CAPI”). Capstone was incorporated in Florida on May 15, 1996 and
is engaged primarily in the business of wholesaling technology
inspired consumer products to distributors and retailers in the
United States. Under the Stock Purchase Agreement, the Company
acquired 100% of the issued and outstanding shares of CAPI’s Common
Stock, and recorded goodwill of $1,936,020. Goodwill acquired in
business combinations is initially computed as the amount paid by
the acquiring company in excess of the fair value of the net assets
acquired. Goodwill is tested for impairment on December 31 of each
year or more frequently if events or changes in circumstances
indicate that the asset might be impaired. If the carrying amount
exceeds its fair value, an impairment loss is recognized. Goodwill
is not amortized. The Company estimates the fair value of its
single reporting unit relative to the Company’s market
capitalization. There was no impairment charge for the three months
ended March 31, 2023 or December 31, 2022.
Fair Value
Measurement
The accounting guidance under Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC), “Fair Value
Measurements and Disclosures (ASC 820-10) requires the Company to
make disclosures about the fair value of certain of its assets and
liabilities. ASC 820-10 clarifies the principle that fair value
should be based on the assumptions market participants would use
when pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. ASC 820-10 utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels. The three levels of the hierarchy
are as follows:
Level 1: Observable inputs such as quoted prices in active markets
for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for
the asset or liability, either directly or indirectly.
Level 3: Significant unobservable inputs.
Earnings Per Common
Share
Basic earnings per common share is computed by dividing net
income(loss) by the weighted average number of shares of common
stock outstanding as of March 31, 2023 and 2022. Diluted earnings
per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock. For calculation of the diluted
earnings per share, the basic weighted average number of shares is
increased by the dilutive effect of stock options and warrants
using the treasury stock method. In periods where losses are
reported, the weighted average number of common shares outstanding
excludes common stock equivalents because their inclusion would be
anti-dilutive. As of March 31, 2023 and 2022, the total number of
potentially dilutive common stock equivalents excluded from the
diluted earnings per share calculation
was 608,288 options, 199,733 warrants and 15,000 of
preferred B-1 stock convertible into 999,900 shares of common stock
for 2023 and 880,000 options, 199,733 warrants and 15,000
of preferred B-1 stock convertible into 999,900 shares of common
stock for 2022.
Revenue
Recognition
The Company generates revenue from developing, marketing and
selling consumer products through national and regional retailers.
The Company’s products are targeted for applications such as home
indoor and outdoor lighting as well as Internet-of-Thing devices
and will have different functionalities. CAPI currently operates in
the consumer electronic products category in the United States and
in specific overseas markets. These products may be offered either
under the CAPI brand or a private brand.
A sales contract occurs when the customer-retailer submits a
purchase order to buy a specific product, a specific quantity, at
an agreed-fixed price, within a ship window, from a specific
location and on agreed payment terms. The selling price in all of
our customers’ orders has been previously negotiated and agreed to
including any applicable discount prior to receiving the customer’s
purchase order. The stated unit price in the customer’s order has
already been determined and is fixed at the time of invoicing.
The Company recognizes lighting product revenue when the Company’s
performance obligations as per the terms in the customers purchase
order have been fully satisfied, specifically, when the specified
product and quantity ordered has been manufactured and shipped
pursuant to the customers requested ship window, when the sales
price as detailed in the purchase order is fixed, when the product
title and risk of loss for that order has passed to the customer,
and collection of the invoice is reasonably assured. This means
that the product ordered and to be shipped has gone through quality
assurance inspection, customs and commercial documentation
preparation, the goods have been delivered, title transferred to
the customer and confirmed by a signed cargo receipt or bill of
lading. Only at the time of shipment when all performance
obligations have been satisfied will the judgement be made to
invoice the customer and complete the sales contract.
Marketing allowances include the cost of underwriting an in-store
instant rebate coupon or a target markdown allowance on a specific
product. The Company retains these allowances for a period of 3 to
5 years in the event the customer chargebacks for a promotional
allowance against an open invoice or submits an invoice for their
claim. Cash discounts represent discounts offered to the retailer
off outstanding accounts receivable in order to initiate early
payment. These allowances are evaluated when our relationship with
a customer is terminated, or we cease selling a specific product to
a customer and may be released as other income if deemed not
required.
Direct-to-consumer orders for the Connected Surfaces Smart Mirrors
are sold initially through e-commerce platforms. The Company also
sells the Connected Surfaces Smart Mirror program through
independent retailers. The Company will only bill the customer and
recognize revenue upon the customer obtaining control of the Smart
Mirror order which generally occurs upon delivery.
The Company expenses license royalty fees and sales commissions
when incurred and these expenses are recognized during the period
the related sale is recorded. These costs are recorded within sales
and marketing expenses.
The following table presents net revenue by geographic location
which is recognized at a point in time:
Schedule of Net Revenue by Major Source
|
|
For the Three Months Ended
March 31, 2023 |
|
For the Three Months Ended
March 30, 2022 |
|
|
Revenues |
|
% of Revenue |
|
Revenues |
|
% of Revenue |
Lighting Products- U.S. |
|
$ |
— |
|
|
|
— |
% |
|
$ |
202,259 |
|
|
|
77 |
% |
Lighting Products- International |
|
|
— |
|
|
|
— |
% |
|
|
44,640 |
|
|
|
17 |
% |
Smart Mirror Products- U.S. |
|
|
5,552 |
|
|
|
100 |
% |
|
|
16,080 |
|
|
|
6 |
% |
Total Net Revenue |
|
$ |
5,552 |
|
|
|
100 |
% |
|
$ |
262,979 |
|
|
|
100 |
% |
We provide our wholesale customers with limited rights of return
for non-conforming product warranty claims. As a policy, the
Company does not accept product returns from customers, however
occasionally as part of a customers in store test for new product,
we may receive back residual inventory.
Sales reductions for allowances and other promotional coupons are
recognized during the period when the related revenue is recorded.
The reduction of accrued allowances is included in net revenues and
amounted to $10,174 and $1,000, for the three months ended
March 31, 2023, and 2022, respectively.
Warranties
For the LED product line, the Company provides the end user with
limited rights of return as a consumer assurance warranty on all
products sold, stipulating that the product will function properly
for the warranty period. The warranty period for all products is
one year from the date of consumer purchase. Certain retail
customers may receive an off invoice-based discount such as a
defective/warranty allowance, that will automatically reduce the
unit selling price at the time the order is invoiced. This
allowance will be used by the retail customer to defray the cost of
any returned units from consumers and therefore negate the need to
ship defective units back to the Company. Such allowances are
charged to cost of sales at the time the order is invoiced. For
those customers that do not receive a discount off-invoice, the
Company recognizes a charge to cost of sales for anticipated
non-conforming returns based upon an analysis of historical product
warranty claims and other relevant data. We evaluate our warranty
reserves based on various factors including historical warranty
claims assumptions about frequency of warranty claims, and
assumptions about the frequency of product failures derived from
our reliability estimates. Actual product failure rates that
materially differ from our estimates could have a significant
impact on our operating results. Product warranty reserves are
reviewed each quarter and recognized at the time we recognize
revenue.
For the new online Smart Mirror customers the product has a One
Year Limited Warranty. The purchaser must register the product
within 30 days from date of purchase with specific product
information to activate the warranty. CAPI warrants the product to
be free from defects in workmanship and materials for the warranty
period. If the product fails during normal and proper use within
the warranty period, CAPI at its discretion, will repair or replace
the defective parts of the product, or the product itself.
Advertising and
Promotion
Advertising and promotion costs, including advertising, public
relations, and trade show expenses, are expensed as incurred and
included in sales and marketing expenses. Advertising and promotion
expense was $8,699
and $121,375 for
the three months ended March 31, 2023 and 2022. Due to declining
revenues, and the end of the LED product line as a revenue source,
the Company reduced advertising and promotion expenses in 2023.
Product
Development
Our research and development team located in Thailand working with
our designated factories, are responsible for the design,
development, testing, and certification of new product releases.
Our engineering efforts support product development across all
products, as well as product testing for specific overseas markets.
All research and development costs are charged to results of
operations as incurred.
For the three months ended March 31, 2023 and 2022, product
development expenses were $33,725 and
$51,560, respectively.
The first quarter 2023 expenses were related to the development of
the Connected Chef, expanding the Connected Surfaces product
portfolio. The first quarter 2022 expenses were related to the
Smart Mirror development expenses.
Accounts Payable
and Accrued Liabilities
The following table summarizes the components of accounts payable
and accrued liabilities as of March 31, 2023, and December 31,
2022, respectively:
Schedule of Components of Accounts Payable and
Accrued Liabilities
|
|
March 31, |
|
December 31, |
|
|
2023 |
|
2022 |
Accounts payable |
|
$ |
55,782 |
|
|
$ |
38,056 |
|
Accrued warranty reserve |
|
|
347 |
|
|
|
1,926 |
|
Accrued compensation and deferred wages, marketing allowances,
customer deposits. |
|
|
412,140 |
|
|
|
269,457 |
|
Total |
|
$ |
468,269 |
|
|
$ |
309,439 |
|
Income
Taxes
The Company is subject to income taxes in the U.S. federal
jurisdiction, various state jurisdictions and certain other
jurisdictions.
The Company accounts for income taxes under the provisions of
740 Income Taxes. ASC 740 requires recognition of
deferred income tax assets and liabilities for the expected future
income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets
and liabilities. The Company and its U.S. subsidiaries file
consolidated income tax returns.
The Company recognizes the tax benefit from an uncertain tax
position only if it is more likely than not the tax position will
be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in
the financial statements from such positions are then measured
based on the largest benefit that has a greater than 50% likelihood
of being realized upon settlement.
Tax regulations within each jurisdiction are subject to the
interpretation of the relaxed tax laws and regulations and require
significant judgement to apply. The Company is not subject to U.S.
federal, state and local tax examinations by tax authorities
generally for a period of 3 years from the later of each return due
date or date filed.
If the Company were to subsequently record an unrecognized tax
benefit, associated penalties and tax related interest expense
would be recorded as a component of income tax expense.
Stock Based
Compensation
The Company accounts for stock-based compensation under the
provisions of ASC 718 Compensation- Stock Compensation,
which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and
directors, including employee stock options, based on estimated
fair values. ASC 718 requires companies to estimate the fair value
of share-based payment awards on the date of the grant using an
option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expenses over the
requisite service periods in the Company’s condensed consolidated
statements of operations. Stock-based compensation expense
recognized during the period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest
during the period. In conjunction with the adoption of ASC 718, the
Company adopted the straight-line single option method of
attributing the value of stock-based compensation expense. The
Company accounts for forfeitures as they occur.
Stock-based compensation expense recognized during the three months
ended March 31, 2023, and 2022 was $0 and $3,362,
respectively.
Use of
Estimates
The preparation of condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses and the disclosure of contingent
assets and liabilities. The Company evaluates its estimates on an
ongoing basis, including those related to revenue recognition,
periodic impairment tests, product warranty obligations, valuation
of inventories, tax related contingencies, valuation of stock-based
compensation, other contingencies and litigation, among others. The
Company generally bases its estimates on historical experience,
agreed obligations, and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis of making judgments about the carrying value
of assets and liabilities that are not readily apparent from other
sources. Historically, past changes to these estimates have not had
a material impact on the Company’s financial statements. However,
circumstances could change, and actual results could differ
materially from those estimates.
Adoption of New
Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU)
2016-13, “Financial Instruments – Credit Losses. This ASU
sets forth a current expected credit loss model which requires the
Company to measure all expected credit losses for financial
instruments held at the reporting date based on historical
experience, current conditions, and reasonable supportable
forecasts. This replaces the existing incurred loss model and is
applicable to the measurement of credit losses on financial assets
measured at amortized cost and applies to some off-balance sheet
credit exposures. In November 2019, the effective date of this ASU
was deferred until fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years, with early
adoption permitted. The Company adopted ASC 326 on January 1, 2023
and ASC 326 did not have a material impact on its condensed
consolidated financial statements.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK
AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to
credit risk consist principally of cash and accounts receivable.
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts
or other foreign hedging arrangements.
Cash
The Company at times has cash with its financial institution in
excess of Federal Deposit Insurance Corporation (“FDIC) insurance
limits. The Company places its cash with high credit quality
financial institutions which minimize the risk of loss. To date,
the Company has not experienced any such losses. As of March 31,
2023 and December 31, 2022, the Company had approximately
$0, respectively, in excess of
FDIC insurance limits.
Accounts Receivable
The Company grants credit to its customers, located throughout the
United States and their international locations. The Company
typically does not require collateral from national retail
customers. Credit risk is limited due to the financial strength of
the customers comprising the Company’s customer base and their
dispersion across different geographical regions. The Company
monitors exposure of credit losses and maintains allowances for
anticipated losses considered necessary under the circumstances. As
the Company’s ecommerce revenue starts to increase the makeup of
the accounts receivable will change significantly. Stripe is the
company that processes online payments for our e-commerce website.
We should receive payment from them within 3 days of the product
shipment. If the product is shipped through Amazon online platform,
it could take between 20 and 30 days for collection.
Financial instruments that potentially subject the Company to
credit risk, consist principally of cash and accounts receivable.
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts
or other foreign hedging arrangements.
Major Customers
The Company did not have any major customers from the three months
ended March 31, 2023. The Company had two customers who
comprised 77% and 17%, respectively, of net revenue
during the three months ended March 31, 2022. The lack of major
customers is the result of the LED product line no longer being a
revenue source and direct-to-consumer sales for the Smart Mirrors
in first quarter of 2023.
As of December 31, 2022, approximately $7,716 thousand or 100% of accounts
receivable was from two customers.
Major Vendors
The Company did not have any major vendors during the three months
ended March 31, 2023. The Company had two vendors from which it
purchased 72% and 23%, respectively, of merchandise during the
three months ended March 31, 2022. As of December 31, 2022,
approximately $3,200 or 8% of accounts payable was due to one
vendor.
NOTE 3 – NOTES
PAYABLE TO RELATED AND UNRELATED PARTIES
Purchase Funding Agreement with Directors and Unrelated
Party
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 business.
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
who is not affiliated with the Company. This agreement was
finalized on October 18, 2021, and the Company has received the
funding of $1,020,000 on October 18, 2021 with an original maturity
of April 2023 which was extended an additional 12 months. Under
this agreement the interest terms are 5% based on a 365- day year.
The note payable is due on April 13, 2024. As of March 31, 2023,
the principal outstanding and accrued interest is $1,020,000 and
$73,916, respectively.
Working Capital Loan with Directors and Unrelated
Party
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. The term of each agreement is 18 months
with principal accruing a simple interest rate of 5 percent per
annum, maturing November 1, 2023. These loans may be prepaid in
full or partially without any penalty. As of March 31, 2023, the
principal outstanding and accrued interest is $600,000 and $27,534,
respectively.
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 term of this agreement is
18 months and principal accrues simple interest at a rate of 5
percent per annum, maturing April 13, 2024. As of March 31, 2023,
the principal outstanding and accrued interest is $50,000 and
$1,158, respectively.
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 term of this agreement is
18 months and principal accrues simple interest at a rate of 5
percent per annum, maturing June 1, 2024. The loan may be prepaid
in full or partially without any penalty. As of March 31, 2023, the
principal outstanding and accrued interest is $50,000 and $829,
respectively.
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. Principal accrues simple interest at a rate of 5
percent per annum, maturing August 31, 2023. The loan may be
prepaid in full or partially without any penalty. As of March 31,
2023, the principal outstanding and accrued interest is $40,000 and
$477, respectively.
On March 27, 2023, the Company negotiated a Working Capital Funding
agreement with Director S. Wallach to provide funding for daily
operations. Total funding under the agreement amounted to $184,150
as of March 31, 2023. Principal accrues simple interest at a rate
of 5 percent per annum, maturing June 27, 2023. The loan may be
prepaid in full or partially without any penalty. See Note 6. As of
March 31, 2023, the principal outstanding and accrued interest is
$184,150 and $101, respectively.
As of March 31, 2023 and December 31, 2022, the Company had a total
of $2,048,165 and $1,802,230, of outstanding
principal respectively, on the above referenced funding agreements,
which includes accrued interest of $104,015 and $82,230,
respectively. The outstanding principal balances and accrued
interest has been presented on the condensed and consolidated
balance sheet as follows:
NOTES PAYABLE TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
|
Notes Payable |
|
|
March 31, 2023 |
|
December 31, 2022 |
Current portion of notes payable and accrued interest, related
parties |
|
$ |
643,084 |
|
|
$ |
413,425 |
|
Current portion of notes payable and accrued interest, unrelated
parties |
|
|
209,179 |
|
|
|
206,712 |
|
Long-term portion of notes payable and accrued interest, related
parties |
|
|
831,264 |
|
|
|
821,647 |
|
Long-term portion of notes payable and accrued interest, unrelated
parties |
|
|
364,638 |
|
|
|
360,446 |
|
Total notes payable principle and accrued interest |
|
|
2,048,165 |
|
|
|
1,802,230 |
|
Less accrued interest |
|
|
(104,015 |
) |
|
|
(82,230 |
) |
Total notes payable |
|
$ |
1,944,150 |
|
|
$ |
1,720,000 |
|
Management believes that without additional capital or increased
cash generated from operations, there is substantial doubt about
the Company’s ability to continue as a going concern and meet its
obligations over the next twelve months from the filing date of
this report.
NOTE 4– COMMITMENTS AND
CONTINGENCIES
Operating Leases
The Company had operating lease agreements for its principal
executive offices in Fort Lauderdale, Florida expiring at June
2023. The Company’s principal executive office is located at 431
Fairway Drive, Suite 200, Deerfield Beach, Florida 33441. The
Company is currently reviewing executive office leasing
opportunities as we do not plan to renew the expiring lease.
Effective November 1, 2019, the Company entered a prime operating
lease with the landlord, 431 Fairway Associates, LLC, ending June
30, 2023, for the Company’s executive offices located at 431
Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 with an
annualized base rent of $70,104 and with a base rental adjustment
of 3% commencing July 1, 2020 and on July 1st of
each subsequent year during the term. Under the lease agreement,
CAPI is also responsible for approximately 4,694 square feet of
common area maintenance charges (“CAM”), respectively in the leased
premises which has been estimated at $12.00 per square foot or
approximately $56,000 on an annualized basis. The CAM charges are
expensed monthly as incurred and excluded from the recorded lease
liability. On an annual basis, the leasing agent may request
payment for additional CAM expenses incurred but not included in
the estimated monthly CAM pro-rata square foot charges. The Company
will record these additional expenses upon receiving the CAM
adjustment from the landlord. As of March 31, 2023, accrued
expenses include additional CAM charges of $17,124 that will be paid in a
subsequent period related to the 2022 operating lease year.
The Company’s rent expense is recorded on a straight-line basis
over the term of the lease. The rent expense for the three months
ended March 31, 2023 and 2022, amounted to $54,866 and
$38,898, respectively, including the monthly CAM charges and
additional CAM charges included in accrued expenses.
Schedule of Right Of Use Asset and Lease
Liability
|
|
|
Supplemental balance sheet information related to leases as of
March 31, 2023 is as follows: |
|
|
Assets |
|
|
|
|
Operating lease - right-of-use asset |
|
$ |
231,077 |
|
Accumulated amortization |
|
|
(213,848 |
) |
Operating lease - right - of -use asset , net |
|
$ |
17,229 |
|
Liabilities |
|
|
|
|
Current |
|
|
|
|
Current portion of operating lease |
|
$ |
18,932 |
|
|
|
|
|
|
Noncurrent |
|
|
|
|
Operating lease liability, net of current portion |
|
$ |
— |
|
|
|
|
|
|
Lease term and Discount Rate |
|
|
|
|
Weighted
average remaining lease term (months) |
|
|
3 |
|
Weighted
average Discount Rate |
|
|
7 |
% |
Scheduled maturities of operating lease liabilities outstanding
as of March 31, 2023 are as follows:
Scheduled Maturities of Operating Lease Liabilities
Outstanding
|
|
|
Year |
|
Operating
Lease |
|
2023 |
|
|
$ |
19,153 |
|
|
Less:
Imputed Interest |
|
|
|
221 |
|
|
Present
Value of Lease Liabilities |
|
|
$ |
18,932 |
|
Employment Agreements
On February 5, 2023, the Company entered into a new Employment
Agreement with Stewart Wallach, whereby Mr. Wallach will be paid
$301,521 per annum. The initial term of this new agreement began
February 5, 2023 and ends February 5, 2025. The parties may extend
the employment period of this agreement by mutual consent with
approval of the Company’s Board of Directors, but the extension may
not exceed two years in length.
On February 5, 2020, the Company entered into an Employment
Agreement with James McClinton, whereby Mr. McClinton will be paid
$191,442 per annum. The term of agreement began February 5, 2020
and ended February 5, 2022. On February 6, 2022, the Company
entered into an Employment Agreement with James McClinton (Chief
Financial Officer and Director), whereby Mr. McClinton was paid
$736 per day. On November 30, 2022, Mr. McClinton retired from all
positions with the Company.
Beginning in 2020 and through 2023, executive salaries and
consulting fees have been deferred from time to time to conserve
cash flow. Deferrals amounted to approximately $386,000 and
$252,000, as of March 31, 2023 and December 31, 2022, respectively,
and are included in accounts payable and accrued liabilities.
There is a provision in Mr. Wallach’s employment agreement, if the
officer’s employment is terminated by death or disability or
without cause, the Company is obligated to pay to the officer’s
estate or the officer, an amount equal to accrued and unpaid base
salary as well as all accrued but unused vacation days through the
date of termination. The Company will also pay sum payments equal
to: the sum of twelve (12) months base salary at the rate the
Executive was earning as of the date of termination and (b) the sum
of “merit” based bonuses earned by the Executive during the prior
calendar year of his termination. Any payments owed by the Company
shall be paid from a normal payroll account on a bi-weekly basis in
accordance with the normal payroll policies of the Company. The
amount owed by the Company to the Executive, from the effective
Termination date, will be payout bi-weekly over the course of the
year but at no time will be no more than twenty (26) installments.
The Company will also continue to pay the Executive’s health and
dental insurance benefits for 6 months starting at the Executives
date of termination. If the Executive had family health coverage at
the time of termination, the additional family premium obligation
would remain theirs and will be reduced against the Executive’s
severance package. The employment agreements have an
anti-competition provision for 18 months after the end of
employment.
The following table summarizes potential payments upon termination
of employment :
Summary of Potential Payments upon Termination of
Employment
|
|
Salary
Severance |
|
Bonus
Severance |
|
Gross up
Taxes |
|
Benefit
Compensation |
|
Grand Total |
Stewart Wallach |
|
$ |
301,521 |
|
|
$ |
— |
|
|
$ |
12,600 |
|
|
$ |
6,600 |
|
|
$ |
320,721 |
|
Directors Compensation
On July 5, 2022, The Board of Directors voted to suspend granting
compensation to the independent directors for the remainder of the
fiscal year 2022. There have been no payments to the Board of Directors
during the period ended March 31, 2023.
NOTE 5 - STOCK
TRANSACTIONS
Stock Purchase Agreements
On April 5, 2021, the Company entered into a Private Equity
Placement with five separate securities purchase agreements
(“SPAs”) whereby the Company privately placed an aggregate of
2,496,667 shares (“Shares”) of its common stock, $0.0001 par value
per share, (“common stock”) for an aggregate purchase price
$1,498,000. The five unrelated 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 to
purchase start up inventory for the Company’s Smart Mirror product
line, as well as for advertising and working capital. Under the
SPA, each investor is granted five-year piggyback, ‘best efforts’
registration rights with no penalties. The Shares are ‘restricted
securities” under Rule 144 of the Securities Act and are subject to
a minimum six month hold period. Based on representations made to
the Company, the five investors do not constitute a “group” under
17 C.F.R. 240.13d-3 and have purchased the Shares solely as an
investment for each investor’s own account. No individual investor
owns more than 2% of the issued and outstanding shares of common
stock.
Warrants
On April 28, 2021, Company issued common stock warrants to purchase
199,733 shares of common stock at an exercise price of $0.66 and
exercisable for five years from the issuance date. The warrants
were issued to Wilmington Capital Securities, LLC, a FINRA and SEC
registered broker under a financial services and placement
agreement with a broker dealer in connection with the Company’s
placement of $1.4 million of restricted shares of common stock to
five investors on April 5, 2021. The issuance of these
warrants were made an exemption from registration under Section
4(a)(2) and Rule 506(b) of Regulation D under the Securities
Act.
As of March 31, 2023 and December 31, 2022, the Company had 199,733
warrants outstanding.
Series B-1 Preferred Stock
On June 7, 2016, the Company authorized 3,333,333 of the B-1
preferred stock(“B-1”). The B-1 preferred stock are convertible
into common shares, at a rate of 66.66 of common stock for each
share of B-1 convertible preferred stock. The par value of the B-1
preferred shares is $0.0001. The B-1 shares shall not be entitled
to any dividends and have no voting rights. In the event of a
liquidation, the B-1 holders are entitled to distribution prior to
common stockholders but not before any other preferred
stockholders.
On January 4, 2021, the Company entered a $750,000 working capital
loan agreement with Directors, Stewart Wallach and Jeffrey Postal
(“Lenders”). In consideration for the Lenders allowing for loan
advances under the loan agreement, a below market rate of interest
and the loan made on an unsecured basis, as payment of a finance
fee for the loan, the Company issued a total of 7,500 shares of B-1
Convertible Preferred Stock to each of the Lenders. Each preferred
share converts into 66.66 shares of common stock at option of
Lender. The Preferred Shares and any shares of common stock issued
under the loan agreement are “restricted” securities under Rule 144
of the Securities Act of 1933, as amended.
The B-1 shares have a liquidation preference of $1.0 per share or
$15,000 as of March 31, 2023.
Options
In 2005, the Company authorized the 2005 Equity Plan that made
available shares of common stock for issuance through awards of
options, restricted stock, stock bonuses, stock appreciation rights
and restricted stock units.
As of March 31, 2023, there were 608,288 stock options
outstanding and vested held by directors of the Company. The stock
options have a weighted average exercise price of $0.449 and
have a weighted average contractual term remaining
of 1.38 years. During the three months ended March 31,
2023, there were no stock option grants, exercises, or
forfeitures,
Stock options were issued under Section 4(a)(2) and Rule 506(b) of
Regulation D under the Securities Act of 1933.
For the three months ended March 31, 2023 and 2022, the Company
recognized stock-based compensation expense of $0 and $3,362,
respectively, related to these stock options. Such amounts are
included in compensation expense in the accompanying condensed and
consolidated statements of operations.
Adoption of Stock Repurchase Plan
On August 23, 2016, the Company’s Board of Directors authorized the
Company to implement a stock repurchase plan for up outstanding
common stock. The stock purchases can be made in the open market,
structured repurchase programs, or in privately negotiated
transactions. The Company has no obligation to repurchase shares
under the authorization, and the timing, actual number and value of
the shares which are repurchased will be at the discretion of
management and will depend on several factors including the price
of the Company’s common stock, market conditions, corporate
developments, and the Company’s financial condition. The repurchase
plan may be discontinued at any time at the Company’s
discretion.
On December 19, 2018, Company entered a Purchase Plan pursuant to
Rule 10b5-1 under the Exchange Act, with Wilson Davis & Co.,
Inc., a registered broker-dealer. Under the Purchase Plan, Wilson
Davis & Co., Inc will make periodic purchases of shares at
prevailing market prices, subject to the terms of the Purchase
Plan.
On May 31, 2019, the Company’s Board of Directors approved a
further extension of the Company’s stock repurchase plan through
August 31, 2020. The Board of Directors also approved that the
maximum amount of aggregate funding available for possible stock
repurchases under the stock repurchase program remained at
$1,000,000 during the renewal period.
On May 6, 2021, the Company’s Board of Directors approved a further
extension of Rule 10b-5, the Company’s stock purchase agreement
with Wilson-Davis & Company, Inc. through August 31, 2022.
During May and June 2022, the Company repurchased 66,167 shares of
the Company’s outstanding common stock in the open market. The
total purchase cost was $11,662.
On July 7, 2022, the Board of Directors resolved to discontinue the
stock purchase agreement.
As of March 31, 2023 a total of 816,167
shares of the Company’s common stock has been repurchased since the
plan was incepted at a total cost of $119,402.
The cost of the repurchased shares were recorded as a reduction of
additional paid-in capital.
NOTE
6 - SUBSEQUENT
EVENTS
Working Capital Loan with Directors
Subsequent to March 31, 2023 and through the date of this filing,
the Company has received an additional $130,000 in working capital
note payable proceeds from Chief Executive Officer and Director
Stewart Wallach. The total principle outstanding under this note
payable is $314,150 as of the date of this filing. 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.
Operating Leases
Subsequent to March 31, 2023, the Company notified the landlord
they would not renew the executive office lease set to expire on
June 30, 2023 (see Note 4). On April 26, 2023, the landlord amended
the terms for the operating lease and related common area
management expenses (“CAM”) owed by the Company for its principal
executive office to extend the payment terms for the remaining
three months of the lease term over the following nine months
through December 31, 2023. In addition to the monthly rent expense,
the landlord included an estimate for additional CAM charges for
the 2023 operating lease year of $5,435 and $17,124 for additional
CAM charges for the 2022 operating lease year. The Company will pay
a total of $58,500 with monthly payments of $6,500 per month for
nine months commencing April 1, 2023 and ending December 31, 2023,
to satisfy the aforementioned operating lease liabilities for the
executive office lease.
Increase in Authorized Shares
On May 9, 2023, by way of written consent of Common Stock
shareholders of the Company with the requisite voting power to
amend the Company’s Amended and Restate Articles of Incorporation,
those shareholders consented to amend Article 1 of the
Corporation’s Amended and Restated Articles of Incorporation to
increase the authorized shares of capital stock from 60,000,000 to
300,000,000 shares of capital stock authorized, of which
295,000,000 shares shall be Common Stock, par value of $0.0001 per
share, and 5,000,000 shares of Preferred Stock. The effectiveness
of this increase in authorized shares of the capital stock will not
occur until: the filing of a Definitive 14C information statement
with the SEC, expiration of twenty days after that filing, and then
the filing with, and acceptance of Amendment to the Amended and
Restated Articles of Incorporation by, the Secretary of State of
the State of Florida.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
This discussion should be read in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of
Operations in the Company’s 2022 Annual Report.
Cautionary Statement Regarding Forward-Looking
Statements
This Form 10-Q Report contains forward-looking statements that are
contained principally in the sections describing our business as
well as in “Risk Factors, and in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”. These
statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance, or
achievements to be materially different from any future results,
performances or achievements expressed or implied by the
forward-looking statements. All statements other than statements of
historical facts contained, or incorporated by reference, in this
Form 10-Q Report, including, without limitation, those regarding
our business strategy, financial position, results of operations,
plans, prospects, actions taken or strategies being considered with
respect to our liquidity position, valuation and appraisals of our
assets and objectives of management for future operations, our
ability to weather the impacts of the COVID-19 pandemic (including
variant viruses), financing opportunities, and future cost
mitigation and cash conservation efforts and efforts to reduce
operating expenses and capital expenditures are forward-looking
statements. These risks and uncertainties include, but are not
limited to, the factors described in the section captioned “Risk
Factors” in our latest 2022 Annual Report. In some cases, you can
identify forward-looking statements by terms such as “anticipates,
“believes, “could, “estimates, “expects, “intends, “may, “plans,
“potential, “predicts, “projects, “should, “would and similar
expressions (including the negative and variants of such words).
Forward-looking statements reflect our current views with respect
to future events and are based on assumptions and are subject to
various risks and uncertainties. Given these uncertainties, a
reader of this Form 10-Q Report should not place undue reliance on
these forward-looking statements. The forward-looking statements
contained in this Form 10-Q Report are made as of the date of
filing this Form 10-Q Report. You should not rely upon
forward-looking statements as predictions of future events. The
Company assumes no obligation to revise or update any
forward-looking statements for any reason, except as required by
law. Examples of these risks, uncertainties and other factors
include, but are not limited, to the impact of:
● |
Emergence
of new variants of COVID 19 virus and a new COVID-19 pandemic that
could adversely affect or impact our ability to obtain acceptable
financing in an amount equal to the resulting reduction in cash
from operations; disruption of our Thai or Chinese OEM operations
and supply chain logistics; the retail market place that is the
traditional customer base of our products; consumer confidence and
on the ability or desire of consumers to purchase nonessential
goods, such as our products; and adverse impact on public market
and market price for our Common Stock. |
● |
Failure
of e-commerce marketing and sales initiatives to counter reduced
sales of products in retail brick-and-mortar or to elicit consumer
interest in our Connected Surface product line. |
● |
Adverse
general economic and related factors, such as fluctuating or
increasing levels of unemployment, declines in the securities and
real estate markets, and perceptions of these conditions that
decrease the level of disposable income of consumers or consumer
confidence and the impact of inflationary cost increases to
disposable income. Heightened inflation in the United States in
2022 and into 2023 may further adversely impact consumers’
willingness to purchase products like our Connected Surfaces
products. |
● |
The
spread of global epidemics, pandemics, and viral outbreaks other
than COVID 19 and resulting economic and other impact of a new
global epidemic or pandemic. |
● |
Our
anticipated need for additional, potentially ongoing funding or
financing, which may not be available on favorable terms, or at
all, and may be dilutive to existing shareholders. |
● |
Our
ability to raise sufficient capital or take other actions to
improve our liquidity position or otherwise meet our liquidity
requirements that are sufficient to eliminate the substantial doubt
about our ability to continue as a going concern. |
● |
An
impairment of our goodwill, in future reporting
periods. |
● |
The
risks and increased costs associated with production of products in
foreign nations and shipment to U.S. customers. |
● |
Fluctuations
in foreign currency exchange rates and impact of inflation in the
U.S. and abroad. |
● |
Our
expansion into and investments in new product categories and any
inability to establish the Connected Surface product line or a new
product or business line as a viable primary revenue source in
2023. |
● |
Our
inability to obtain adequate insurance coverage. |
● |
Volatility
and disruptions in the credit and financial markets, which may
adversely affect our ability to borrow or obtain
funding. |
● |
Our
inability to recruit or retain qualified personnel or the loss of
key personnel. |
● |
Our
inability to keep pace with developments in technology and changes
in consumer preferences. |
● |
Other
factors are set forth under “Risk Factors” in our 2021 Annual
Report. |
It is not possible to predict or identify all such risks. There may
be additional risks that we consider immaterial, or which are
unknown as of the date of the filing of this Form 10-Q.
The challenge facing the Company is to establish a new profitable
product line, whether the Connected Surfaces or another product
line, before the cost of marketing and penetrating a new product
market company impose unsustainable financial burdens and losses on
the Company.
The Company is a “penny stock” company under Commission rules and
the public stock market price for our common stock is impacted by
the lack of significant institutional investor and primary market
maker support. Investment in our common stock is highly risky and
should only be considered by investors who can afford to lose
their investment and do not require on demand liquidity. Potential
investors should carefully consider risk factors in our SEC
filings. The Company’s common stock lacks the primary market maker
and institutional investor support to protect the public market
from being unpredictable and volatile. Investors may not have
liquidity or desired liquidity in our common stock as an
investment.
The above examples are not exhaustive and new risks emerge from
time to time. Such forward-looking statements are based on our
current beliefs, assumptions, expectations, estimates and
projections regarding our present and future business strategies
and the environment in which we expect to operate in the future.
These forward-looking statements speak only as of the date made. We
expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement
to reflect any change in our expectations with regard thereto or
any change of events, conditions, or circumstances on which any
such statement was based, except as required by law.
Overview of Our Business
Capstone
Companies, Inc. (“Company” or “CAPC”) is a public holding company
organized under the laws of the State of Florida. The Company is
a designer, manufacturer and marketer of consumer inspired
products that bridge technological innovations. The primary
operating subsidiary is Capstone Industries, Inc., a Florida
corporation located in the principal executive offices of the
Company, (“CAPI”). 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.
Our products are made by third party original manufacturers who
work closely with the Company on design, finish, functions, quality
and pricing. We may seek production of products in Mexico in order
to shorten and reduce cost and complexity of shipment of products
to U.S.
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 for 2023, as of
the date of this filing.
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, CAPI’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 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’s financial initiatives are driven by its entry into
new distribution channels and calls for an increased emphasis on an
e-commerce business model. As a result of the COVID-19 pandemic,
retail foot traffic has diminished, and e-commerce platforms have
advanced with consumers across all product lines. The COVID-19
pandemic accelerated an existing trend of consumers purchasing more
products online. The Connected Surfaces category is intended to
find its way to retail shelves after it has been established
through its direct-to-consumer e-commerce platform. The Company
does not have prior experience in operating and promoting its own
e-commerce website. The Company’s e-commerce marketing and sales
strategy sought to shift our historic reliance on ‘Big Box, brick
and mortar retailers’ to an emphasis on e-commerce marketing and
sales. This initiative has not produced significant revenues as of
the first quarter of 2023. If Connected Surfaces is successful, the
Company believes the gross margins generated by Connected Surfaces
products, especially if sold through the e-commerce model should be
greater than LED consumer lighting products. This assumption is
subject to the Company establishing a viable e-commerce presence on
an affordable basis and establishing the Connected Surfaces product
line as a viable revenue source. The Company will require
additional funding to build its marketing effort, inventory levels
and service levels, which funding must be timely and affordable to
fund the desired marketing and product launch. 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
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 and sustain operations
or to fund the Smart Mirror program marketing and inventory as well
as possible enhancements or an expansion of the portfolio with
additional items.
Goodwill Impairment
As a result of the economic uncertainties caused by the resurgence
of the COVID-19 pandemic and poor performance of the Connect
Surfaces Smart Mirror sales, management determined sufficient
indicators existed to trigger the performance of interim goodwill
impairment analysis during 2022. The Company will continue to
complete a goodwill impairment analysis at each reporting period.
The analysis concluded that the Company’s fair value exceeded the
carrying value of its single reporting unit and a goodwill
impairment charge was not required.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities and
commitments in the normal course of business.
Our business operations and financial performance for the three
months ended March 31, 2023 continued to be adversely impacted the
poor sales of the Smart Mirrors. For the three months ended March
31, 2023 and 2022, the Company reported a $257,000 or 98% decrease
in net revenue from $263,000 in 2022 to $5,500 thousand in 2023.
The net loss for the three months ended March 31, 2023 and 2022 was
approximately $467,000 as compared to approximately $461,000 in
2022. During the three months ended March 31, 2023 and 2022 the
Company used in operating activities approximately $260,000 of cash
in 2023 and $653,000 in 2022. The decrease in net cash used in
operations primarily relates to inventory purchased first quarter
of 2022 of approximately $526,000 versus no purchases of inventory
during first quarter of 2023.
As of March 31, 2023, the Company has negative working capital of
approximately $873,000 and an accumulated deficit of $9,567,000.
The Company’s cash balance decreased by approximately $37,000 from
$61,000 as of December 31, 2022 to $24,000 as of March 31, 2023.
These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
As discussed above, the overall impact of the COVID-19 pandemic to
our business, financial condition, cash flow and results of
operations remains uncertain. If the Connected Surfaces program is
not accepted by consumers, then the revenue could further decline,
which could have a material adverse effect on our business,
financial condition, results of operations and liquidity.
The Company is actively seeking 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.
As part of its traditional strategic planning, the Company reviews
alternatives to its current business approach, including, without
limitation, the currently on-going development of the new Connected
Chef product to expand the Connected Surfaces portfolio, sale of
the public company or merger of the Company with a private
operating company and other common strategic alternatives to a
company facing business and financial challenges and uncertainties
such as ours. Management is closely monitoring its operations,
liquidity, and capital resources and is actively working to
minimize the current and future impact of this unprecedented
situation.
Director and Chief Executive Officer, Stewart Wallach, has funded
working capital since 2022 as the Company navigates these
challenges. Total working capital note proceeds received as of the
date of this filing are $314,150. The note payable accrues simple
interest at a rate of 5 percent per annum, matures June 26, 2023,
with the ability for the Company to request a 90-day extension.
Our Growth Strategy
The Company’s existing 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 available working capital,
the Company intends to pursue new revenue opportunities through the
introduction and expansion of its “Connected Surfaces” portfolio
into alternate distribution channels that the Company has not
previously focused on. In the event of new revenue opportunities,
the Company’s approach is typically to leverage its existing
valuable customer base to achieve organic growth initiatives within
a new category with sufficient market acceptance. These efforts
will depend on having adequate working capital from funding and
cash flow from product sales. We may be unable to achieve
sufficient working capital when and, in the amounts, required to
meet operational needs and overhead or pursue or establish new
product lines.
CAPI’s past success has been in its ability to identify emerging
product categories where CAPI’s management experience can be fully
leveraged. We demonstrated this when the Company entered the LED
lighting category. Our branding and product strategies delivered
the Company to a well-respected market position. The Company’s
low-cost OEM manufacturing and operations have typically, in the
past, provided an advantage in delivering great products
affordably. Subject to adequate working capital and a product line
with sufficient orders, the Company intends to expand its product
manufacturing sources to include Mexico in 2023. The quicker
turnaround time, reduced transit costs and easier access make this
a practical option.
With respect to the Connected Surfaces portfolio, our expectation
is that the new product portfolio appeals to a much larger audience
than our traditional LED lighting product line. The new
Connected Surfaces portfolio is designed to tap into consumers
ever-expanding connected lifestyles prevalent today. The products
have both touch screen and voice interfacing, internet access and
an operating system capable of running downloadable applications.
The average selling prices will be comparable to that of tablets
and smartphones, expected MSRP retail to start at $899.00, with the
goal to deliver exceptional consumer value to mainstream America.
Connected Surfaces products will enable users the same level of
connectivity as smartphones in a more relaxed manner that does not
require being tethered to these devices.
The Company competes In emerging, 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 and commodity costs. Demand
for the Company’s products is highly dependent on economic drivers
such as consumer spending and discretionary income as well as
providing a product line that is in demand when offered to
consumers.
In 2022, the Company expanded its investment and commitment in
social media marketing. Based on the results from the Smart Mirrors
product rollout and related e-commerce promotion efforts, the
Company’s social media marketing efforts and e-commerce platform
have not succeeded as of the first quarter of 2023 in generating
significant revenues. Due to working capital constraints, the
Company is not investing any significant funds in e-commerce
marketing and promotion efforts in the first quarter of 2023 and is
re-evaluating the potential of e-commerce efforts to generate
significant revenues.
Organic Growth Strategy
Subject to adequate funding and favorable cash flow from Connected
Surfaces products, which has not been achieved, the Company is
exploring various potential initiatives to execute its traditional
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, and also alternative
business lines and new product lines. Key elements of our
traditional organic growth strategy include:
Connected Surfaces. Historically, LED lighting products have
been our core business. While consistently launching successful
lighting programs in years prior to 2022, the Company determined
that it needed to develop a new product line with greater profit
margin potential than LED Lighting and as a replacement revenue
generating source. The Company 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. The failure of the LED lighting product line was due
in part to gross margin reductions as a result of increased tariffs
and declining consumer interest. The Company’s existing product
roadmap outline a plan for an additional product launch in 2023,
branded Connected Chef, a kitchen utility item. The Company
believes this program will leverage existing relationships with its
current retail partners and collectively contribute organic growth
for the Company. Assuming the Company does not elect to pursue a
new business line or new product concept in 2023, the ability of
the Company to promote any of its Connected Surface products and
any new, related “connected” consumer 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-Q, the
Company has not secured that funding. A Director and senior officer
has been providing interim financing while the Company pursues
other financing options.
We are also considering other industries in which our ability to
develop connected products may have the potential for market
penetration and a significant revenue source. None of these
alternative markets have produced any orders as of the first
quarter of 2023.
The Company acknowledges that smart homes will become more
mainstream over the next several years and will present significant
growth opportunities for the Company and its Connected Surfaces
portfolio.
While our focus of Connected Surface products is the smart home
market, smart mirrors are being employed by retailers like Ralph
Lauren and Neiman Marcus to allow customers to compare outfits on
fitting room smart mirrors. Further, single application smart
mirrors are emerging in the fitness industry for interactive
workouts at home as a result of the global pandemic. These other
markets are not a focus of our company but show the scope of
applications and appeal of smart mirrors.
Perceived or Essential Strengths
Capstone believes that the following competitive strengths serve to
support its business strategies.
In North America, the Company has been recognized for more than a
decade as an innovator and highly efficient, low-cost manufacturer
in several product niches. Capstone believes that its insight into
the needs of retail programming and its proven execution track
record with noted retailers globally positions it well for future
growth.
Capstones core executive team has been working together for over
three decades and has successfully built and managed other consumer
product companies.
Operating Managements 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 experiences by consumers are
of the highest ranking. To deliver cost-competitive products
without compromising quality standards, we leverage purchasing
volume and capitalize on strategic vendor relationships.
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 a credit line for long term general
working capital or growth 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 or first quarter 2023. Customer
acquisition costs of the e-commerce marketplace were high while
producing low conversion into sales.
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.
The Company relies on OEM’s located in Thailand and China, which
have been periodically 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-Q.
CAPI’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 OEMs and cannot predict long term
effectiveness of the relationship.
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 financial
condition of the Company has prompted an enhance consideration and
search for 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 and
being a “penny stock”, 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 CAPI Connected Surfaces program, it still
offers a select number of LED lighting products under the “Capstone
Lighting” brand for both the U.S. and overseas market. The product
lines available as of the date of this Form 10-Q Report are as
follows:
Connected Surfaces – Smart Mirrors
Standard Rectangular
Wardrobe/Fitness Mirror
LED Power Failure Handheld Lights
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. 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 and a
lack of bulk orders from brick-and-mortar retailers and e-commerce
resellers for a discretionary purchase item like the Smart
Mirrors.
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. The Company may have to pursue a different
market segment if it cannot secure adequate orders from these
traditional distribution channels.
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.
CAPI seeks to service the needs of a wide range of consumers by
providing products to satisfy their different interests,
preferences, and budgets. The Company believes in its strategy to
offer consumers with an array of innovative connected products and
quickly introduce additional products to continue to allow Capstone
to further penetrate this developing market.
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. CAPI’s
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 Form 10-Q 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
and home-goods chain retailers. Company’s e-commerce initiatives
have not provided significant sales as of first quarter of
2023.
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 relied 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 traditional
marketing effort will continue as a complement to the social media
and e-commerce effort. Reliance will be on traditional direct sales
to retailers and distributors and trade show promotion.
In the three months ended Marth 31, 2023, and 2022, the Company had
two customers who comprised approximately 0 % and 94%,
respectively, of net revenue. Through the LED lighting industry, we
have maintained long-established relationships with our customers
who were comprised of the Big Box retailers. With the current
e-commerce, direct to consumer sales model for the Smart Mirrors,
we currently do not have major customers.
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, CAPI 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 have not and 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 former LED lighting
product segment and in the new Connected Surfaces internet of
things product segments. The Company competes with large
multinationals with global operations as well as numerous other
smaller, specialized national or regional 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 and demanded by consumers,
retailers, distributors and resellers. Consumer tastes and
preferences change and timing the product line with consumer demand
is important in establishing a market for the product line.
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 CAPI 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:
|
● |
Establish
CAPI Connected
Surfaces portfolio as an innovator in the smart home
segment. |
|
● |
Develop product with increasing technology and functionality
with enhanced quality and performance, and at a very
competitive cost; and |
|
● |
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.
CAPI 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, CAPI 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 CAPI’s specification(s) before shipments are
released.
To successfully implement CAPI’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 CAPI 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. CAPI 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
CAPI’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.
● |
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. |
|
|
● |
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. CAPC believes that
adequate supplies of raw materials required for its operations are
available at the present time. CAPC 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, CAPC 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. For the e-commerce and direct to
consumer marketplace, the Company has developed a new website with
full shopping cart capabilities. 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. The Company will also
warehouse and supply its Smart Mirror program through Amazon
fulfilment.
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. However, we do not have sufficient operational
experience with Connected Surfaces to predict the seasonality of
Connected Surfaces.
Intellectual Property
CAPC subsidiary, CAPI, has filed a number of U.S. trademarks and
patents over the past decade. These include the following
trademarks: Exclusive license and sub-license to Power Failure
Technology; Capstone Power Control, Timely Reader, Pathway Lights,
and 10 LED - Eco-i-Lite Power Failure Light, 5 LED - Eco-i-Lite
Power Failure Light, 3 LED - Eco-i-Lite Power Failure Light, 3 LED
Slim Line Eco-i-Lite Power Failure Light, LED Induction Charged
Headlight. We also have a number of patents pending; Puck Light
(cookie), Puck Light Base, Multi-Color Puck Lights, LED Dual Mode
Solar Light, Integrated Light Bulb (Coach Light), LED Gooseneck
Lantern, Spotlights, Security Motion Activated Lights, Under
Cabinet Lighting and Bathroom Vanity Light. CAPC periodically
prepares patent and trademark applications for filing in the United
States and China. CAPC will also pursue foreign patent protection
in foreign countries if deemed necessary to protect a patent and to
the extent that we have the available cash to do so. CAPC’s ability
to compete effectively in the Home Lighting categories depends in
part, on its ability to maintain the proprietary nature of its
technology and manufacturing processes through a combination of
patent and trade secret protection, non-disclosure agreements,
licensing, and cross-licensing agreements. CAPC owns a number of
patents, trademarks, trademark and patent applications and other
technology which CAPC believes are significant to its business.
These intellectual property rights relate primarily to lighting
device improvements and manufacturing processes.
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 requires 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 |
|
|
● |
power
outage |
|
|
● |
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.
Critical Accounting Policies
We believe that there have been no significant changes to our
critical accounting policies during the three months ended March
31, 2023, as compared to those we disclosed in Management’s
Discussion and Analysis of Financial Condition and Results of
Operations included in our 2022 Annual Report.
CONSOLIDATED OVERVIEW OF RESULTS OF OPERATIONS
Results of operations.
Net Revenues
Revenue is derived from sales of our Connected Surfaces Smart
Mirrors. Previous to 2023, the Company derived revenue from
consumer home LED lighting for both indoor and outdoor applications
while the Smart Mirrors were sold directly to consumers via
e-commerce efforts. We recognize revenue upon shipment of the order
to the customer when all performance obligations have been
completed and title has transferred to the customer and in
accordance with the respective sale’s contractual arrangements.
Each contract on acceptance will have a fixed unit price. The
majority of our sales are to the U.S. market which in 2023
represented 100% of revenues and we expect to the U.S Market to
continue to be the major source of revenue for the Company. Net
revenue also includes the cost of instant rebate coupons,
promotional coupons, and product support allowances provided to
retailers to promote certain products. All of our revenue is
denominated in U.S. dollars.
Cost of Goods Sold
Our
cost of goods sold consists primarily of purchased products from
contract manufacturers and when applicable associated duties and
inbound freight. In addition, our cost of goods sold also includes
reserves for potential warranty claims and freight allowances. We
maintained Smart Mirror inventory on hand for direct to consumer
shipment to fulfill sales orders.
Gross Profit
Our gross profit has and will continue to be affected by a variety
of factors, including average sales price for our products, product
mix, promotional allowances, our ability to reduce product costs
and fluctuations in the cost of our purchased components.
Operating Expenses
Operating expenses include sales and marketing expenses, consisting
of sales representative’s commissions, advertising and trade show
expense and costs related to employee’s compensation. In addition,
operating expense include charges relating to product development,
office and warehousing, accounting, legal, insurance and
stock-based compensation.
CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
Three
Months Ended March 31, 2023, Compared to Three Months Ended March,
2022 |
(In
Thousands) |
|
|
March
31, 2023 |
|
March
31, 2022 |
|
|
Dollars |
|
%
of Revenue |
|
Dollars |
|
%
of Revenue |
Revenues,
net |
|
$ |
5 |
|
|
|
100 |
% |
|
$ |
263 |
|
|
|
100 |
% |
Cost
of sales |
|
|
(2 |
) |
|
|
(33 |
)% |
|
|
(187 |
) |
|
|
(71 |
)% |
Gross
Profit |
|
|
3 |
|
|
|
50 |
% |
|
|
76 |
|
|
|
29 |
% |
Operating
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing |
|
|
18 |
|
|
|
317 |
% |
|
|
133 |
|
|
|
51 |
% |
Compensation |
|
|
138 |
|
|
|
2300 |
% |
|
|
197 |
|
|
|
75 |
% |
Professional
fees |
|
|
142 |
|
|
|
2367 |
% |
|
|
156 |
|
|
|
59 |
% |
Product
development |
|
|
34 |
|
|
|
567 |
% |
|
|
52 |
|
|
|
20 |
% |
Other
general and administrative |
|
|
115 |
|
|
|
1917 |
% |
|
|
140 |
|
|
|
53 |
% |
Total
Operating Expenses |
|
|
447 |
|
|
|
7450 |
% |
|
|
678 |
|
|
|
258 |
% |
Operating
Loss |
|
|
(444 |
) |
|
|
(7400 |
)% |
|
|
(602 |
) |
|
|
(229 |
)% |
Other
Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income |
|
|
— |
|
|
|
— |
% |
|
|
152 |
|
|
|
58 |
% |
Other
expense |
|
|
(22 |
) |
|
|
(367 |
)% |
|
|
(12 |
) |
|
|
(5 |
)% |
Total
Other Income (Expense) |
|
|
(22 |
) |
|
|
(367 |
)% |
|
|
140 |
|
|
|
53 |
% |
Loss
Before Tax Benefit |
|
|
(466 |
) |
|
|
(7783 |
)% |
|
|
(461 |
) |
|
|
(175 |
)% |
Income
Tax (Expense) |
|
|
— |
|
|
|
— |
% |
|
|
— |
|
|
|
— |
|
Net
Loss |
|
$ |
(466 |
) |
|
|
(7783 |
)% |
|
$ |
(461 |
) |
|
|
(175 |
)% |
Net Revenues
Our business operations and financial performance for the quarter
ended March 31, 2023, reflected slow e-commerce sales for the Smart
Mirror. Executive management are actively pursuing brick and mortar
retailers for placement in large, home goods stores. Executive
management has redesigned the packaging for in-store placement,
versus warehouse storage for online retailers, for a more eye
catching and informative package design with the goal to be in
select stores by Q3 of 2023.
Net revenues for the three months ended March 31, 2023, were
$5,000, a decrease of $257,000 or 98% from approximately $263,000
in the same period 2022. Much of the decrease, approximately
$247,000, is due to the switch in product lines from the
deteriorating LED lighting market to the Smart Mirror whereas there
were no LED Lighting sales in the first quarter of 2023.
For the three months ended March 31, 2023, international sales were
$0 or 0% of revenue as compared to $45 thousand or 17% of revenue
in 2022.
The following tables disaggregates revenue by geographic
area:
|
|
For
the Three Months Ended March 31, |
|
For
the Three Months Ended March 31, |
|
|
2023 |
|
2022 |
|
|
Revenues |
|
% of Total Revenue |
|
Revenues |
|
% of Total Revenue |
Lighting Products- US |
|
$ |
— |
|
|
|
— |
% |
|
$ |
202,259 |
|
|
|
77 |
% |
Lighting Products- International |
|
|
— |
|
|
|
— |
% |
|
|
44,640 |
|
|
|
17 |
% |
Smart Mirror Products- U.S. |
|
|
5,552 |
|
|
|
100 |
% |
|
|
16,080 |
|
|
|
6 |
% |
Total Revenue |
|
$ |
5,552 |
|
|
|
100 |
% |
|
$ |
262,979 |
|
|
|
100 |
% |
Gross Profit and Cost of Sales
Gross profit for the three months ended March 31, 2023, and 2022,
was $3,200 and $76,000, respectively, a decrease of $73,000
thousand from the previous year. Gross Profit as a percent of
revenue was 50% in the first quarter 2023 as compared to 29% in the
same quarter 2022, due to a higher margin on the Smart Mirrors in
2023 versus the LED lighting products in 2022.
Operating Expenses and Other Income (Expenses)
The
Company made concerted efforts to reduce operating expenses in the
first quarter of 2023 in accordance with the low Smart Mirror
e-commerce sales, as denoted further. Last year’s poor performance
of e-commerce sales for the Smart Mirror proved to Executive
Management that e-commerce was not the ideal market for the Smart
Mirror product. Focus of sales and marketing efforts are now
re-directed to placement in brick and mortar retail stores with the
expectation of an enhanced consumer experience in person with the
Smart Mirror.
Sales and Marketing Expenses
For the three months ended March 31, 2023, and 2022, sales and
marketing expenses were approximately $18,000 and $133,000,
respectively, a decrease of $114,000 or 86%. The Company made
concerted efforts to reduce operating expenses in accordance with
the low Smart Mirror e-commerce sales. The Consumer Electronics
Show expense was $100,000 in January 2022 as compared to $0 in
2023. The Social Media expense was $3,000 in 2023 as compared to
$20,000 in 2022 and the smart mirror inventory storage, shipping
and handling charge was approximately $10,000 as compared to $7,000
in the same period 2022.
Compensation Expenses
For the three months ended March 31, 2023, and 2022, compensation
expenses were approximately $138,000 and $197,000 respectively, a
decrease of $59,000 or 30%. The Company’s CFO retired November 2022
and the Company hired a consultant as an Interim CFO which has
reduced compensation expenses. In addition, the Company has reduced
workforce to essential employees as it repositions the brand and
Connected Surfaces product line for a brick and mortar launch.
Professional Fees
For the three months ended March 31, 2023, and 2022, professional
fees were approximately $142,000 and $156,000 respectively, a
decrease of $14,000 or 9%.
Product Development Expenses
For the three months ended March 31, 2023, product development
expenses were approximately $34,000 as compared to $52,000 in 2022,
a reduction of $18,000 or 35%. During the first quarter 2022, fees
were incurred for patent and trademarks related to the Connected
Surfaces which were not incurred first quarter 2023. In addition,
first quarter 2022 included costs for prototypes for the Smart
Mirror which were not incurred first quarter 2023.
Other General and Administrative Expenses
For the three months ended March 31, 2023, other general and
administrative expenses were approximately $115,000 as compared to
$140,000 in 2022 for a reduction of $45,000 or 18%. Travel costs
were reduced as part of the reduction in nonessential expenses and
first quarter 2022 included an expense for a LED patent
infringement legal settlement of $22,000 that was not incurred
during first quarter 2023.
Total Operating Expenses
For the three months ended March 31, 2023, and 2022, total
operating expenses were approximately $447,000 and $678,000,
respectively, a decrease of approximately $230,000 or 34%.
Operating Loss
For the three months ended March 31, 2023 and 2022, the operating
loss was approximately $444,000 and $602,000, respectively, a
decreased loss of $157,000 or 26%.
Total Other Income (Expense), net
For the three months ended March 31, 2023, and 2022, other income
(expense) was ($22,000), net as compared to $140,000 for 2022. The
net other income for first quarter 2022 included $152,000 employee
retention tax credit income received under Cares act 2020-2021.
Net Loss
For the three months ended March 31, 2023 the net loss was
approximately $467,000 compared to a net loss of $461,000 in the
same period 2022, a decreased loss of $26,000 of 6%. Management
credits the reduction in net loss to its cost reduction efforts for
operating expenses during the first quarter of 2022.
Off-Balance Sheet Arrangements
The Company does not have material off-balance sheet arrangements
that have or are reasonably likely to have a material future effect
on our results of operations or financial condition.
Contractual Obligations
There were no material changes to contractual obligations for the
three months ended March 31, 2023.
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. Cash as
of March 31, 2023, and December 31, 2022, was approximately $24,000
and $61,000 respectively, a decrease of approximately $37,000.
Summary
of Cash Flows |
|
For
the Three Months ended March 31, |
|
|
2023 |
|
2022 |
(In
thousands) |
|
|
|
|
|
|
|
|
Net
cash used in: |
|
|
|
|
|
|
|
|
Operating
Activities |
|
$ |
(261 |
) |
|
$ |
(654 |
) |
Investing
Activities |
|
|
— |
|
|
|
— |
|
Financing
Activities |
|
|
224 |
|
|
|
— |
|
Net
decrease in cash |
|
$ |
(37 |
) |
|
$ |
(654 |
) |
As of March 31, 2023, the Company’s working capital deficit was
approximately $873,000. Current assets were approximately $466,000
and current liabilities were approximately $1,339,000 and
include:
● |
Accounts
payable of approximately $56,000 due vendors and service
providers. |
|
|
● |
Accrued
expenses of approximately $406,000 in deferred wages and $6,000 in
other liabilities. |
|
|
● |
Note
payable related and unrelated parties with accrued interest of
approximately $852,000. |
|
|
● |
Operating
lease liability-current portion of approximately
$19,000 |
Cash Flows used in Operating Activities
Cash used in operating activities in the three months ended March
31, 2023, and 2022 was approximately $261,000 and $654,000,
respectively, a decrease of $393,000 compared to last year. The
decrease in net cash used in operations primarily relates to
inventory purchased in the first quarter of 2022 of approximately
$526,000 versus no purchases of inventory during first quarter of
2023.
Cash Flows used in Investing Activities
Cash used in investing activities in the three months ended March
31, 2023, and 2022 was $0 and $0, respectively.
Cash Flows provided by Financing Activities
Cash provided by financing activities for the three months ended
March 31, 2023 and 2022, was approximately $224,000 and $0,
respectively.
As of March 31, 2023, and 2022, the Company had outstanding note
payable $2,048,000 and $1,802,000 which includes accrued interest
of $104,000 and $82,000, respectively.
Directors and Officers Insurance
The
Company currently has Directors and Officers liability insurance,
and the Company believes the coverage is adequate to cover likely
liabilities under such a policy.
Exchange Rates
We sell all of our products in U.S. dollars and pay for all of our
manufacturing costs in U.S. dollars. Our factories are located in
mainland China and Thailand.
During 2023 the average exchange rate between the U.S. Dollar and
Chinese Yuan have been relatively stable approximately RMB 6.86 to
U.S. $1.00.
The average exchange rate between the U.S. Dollar and Thai Baht has
been relatively stable at approximately Baht 34.00 to U.S.
$1.00.
Operating expenses in Hong Kong are historically paid in either
Hong Kong dollars or U.S. dollars. There were no expenses for Hong
Kong operations during the first quarter of 2023.
While exchange rates have been stable for several years, we cannot
assure you that the exchange rate between the United States, Hong
Kong, Chinese and Thailand currencies will continue to be stable
and exchange rate fluctuations may have a material effect on our
business, financial condition or results of operations.
Country Risks: Changes in foreign, cultural, political,
and financial market conditions could impair the Company’s
international manufacturing operations and financial
performance.
The Company’s manufacturing is currently conducted in China
and Thailand. Consequently, the Company is subject to a number of
significant risks associated with manufacturing in overseas,
including:
● |
The
possibility of expropriation, confiscatory taxation, or price
controls. |
|
|
● |
Adverse
changes in local investment or exchange control
regulations. |
|
|
● |
Political
or economic instability, government nationalization of business or
industries, government corruption, and civil unrest. |
|
|
● |
Legal
and regulatory constraints. |
|
|
● |
Tariffs
and other trade barriers, including trade disputes between the U.S.
and China. |
|
|
● |
Political
or military conflict between the U.S. and China, or between U.S.
and North Korea, resulting in adverse or restricted access by
U.S.-based companies to Chinese manufacturing and
markets. |
Currency: Currency fluctuations may significantly
increase our expenses and affect the results of operations,
especially where the currency is subject to intense political and
other outside pressures.
Interest Rate Risk: The Company does not have significant
interest rate risk during the three month period ended March 31,
2023. All outstanding loans have been disclosed including the
agreed interest rates.
Credit Risk: The Company has not experienced significant
credit risk. The e-commerce business requires customer credit
approval prior to shipment and the payment is received by the
Company between 5 and 20 days after shipment depending on which
ordering platform is used by the consumer. To date we have not
experienced any credit risk issues, but we will closely monitor the
process to assess that this trend continues.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
Not
applicable.
Item 4. Controls and
Procedures
Evaluation of disclosure controls and procedures.
Because the Company is a smaller reporting company, this Form 10-Q
Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to
attestation by our independent registered public accounting
firm.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the
participation of the Company’s management, the Company’s principal
executive officer and principal financial officer have concluded
that the Company’s disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) were effective as of March
31, 2023, to provide reasonable assurance that information required
to be disclosed by the Company in reports that it files or submits
under the Exchange Act is (i) recorded, processed, summarized
and reported within the time periods specified in the SEC rules and
forms and (ii) accumulated and communicated to the Company’s
management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Controls over Financial
Reporting.
There are no changes to our internal control over financial
reporting during the first quarter of 2023, the period covered by
this report, which were identified in connection with management’s
evaluation required by paragraph (d) of Rules 13a-15 and 15d-15
under the Exchange Act, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal
control over financial reporting.
The certifications of our Chief Executive Officer and Interim Chief
Financial Officer attached as Exhibits 31 and 32 and to this Form
10-Q Report include information concerning our disclosure controls
and procedures and internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management does not expect that our disclosure controls and
procedures or our internal control over financial reporting will
prevent or detect all errors and all fraud. Internal control over
financial reporting, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of internal control are met. Further, the design of
internal control must reflect the fact that there are resource
constraints, and the benefits of the control must be considered
relative to their costs. While our disclosure controls and
procedures and internal control over financial reporting are
designed to provide reasonable assurance of their effectiveness,
because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company,
have been detected.
PART II — OTHER
INFORMATION
Item 1. Legal
Proceedings.
The Company is not a party to any other pending or threatened legal
proceedings and, to the best our knowledge, no such action by or
against us has been threatened. From time to time, we are subject
to legal proceedings and claims that arise in the ordinary course
of our business. Although occasional adverse decisions or
settlements may occur in such routine lawsuits, we believe that the
final disposition of such routine lawsuits will not have material
adverse effect on its financial position, results of operations or
status as a going concern.
Other Legal Matters. To the best of our knowledge, none of
our directors, officers, or owners of record of more than five
percent (5%) of the securities of the Company, or any associate of
any such director, officer or security holder is a party adverse to
us or has a material interest adverse to us in reference to pending
litigation.
Item 1A. Risk
Factors.
You should carefully consider the “Risk Factors” disclosed under
“Item 1A. Risk Factors” in our 2022 Annual Report. You should be
aware that these risk factors and other information may not
describe every risk facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem
to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.
The Company has insufficient revenues to support its basic
operating overhead and relies on funding from a director and senior
officer to pay basic operating overhead. The Company may be unable
to sustain operations through 2023 without continued financial
support from the directors and senior officer or investment or
funding from a third party. There can be no assurance that the
Company can obtain sufficient funding to sustain operations through
2023. The financial difficulties of the Company severely hamper the
pursuit of Connected Surface products and any new business lines
and new products.
There is substantial doubt about our ability to continue as a going
concern, which may hinder our ability to obtain further financing.
Our public auditor’s report for the 2022 Annual Report stated that
the Company has incurred operating losses, has incurred negative
cash flows from operations and has an accumulated deficit, and
these and other factors raise substantial doubt about the Company’s
ability to continue as a going concern. Our financial statements do
not include any adjustments that may result from the outcome of
this uncertainty.
If funding sources are not available or are inadequate or unwilling
to fund operations, or the products at hand and under development
are not capable of generating sustainable revenues in the future,
we will be required to reduce operating costs even further, which
could further jeopardize any future strategic initiatives and
business plans. Furthermore, uncertainty concerning our ability to
continue as a going concern may hinder our ability to obtain future
financing. Continued operations and our ability to continue as a
going concern are dependent on our ability to obtain additional
funding in the near future and thereafter, and there are no
assurances that such funding will be available to us at all or will
be available in sufficient amounts or on reasonable terms.
There may be risks that are not presently material or known and not
discussed in this Form 10-Q or other SEC filings. There are also
risks within the economy, the industry, and the capital markets
that could materially adversely affect the Company, including those
associated with an economic recession, inflation, a global economic
slowdown, political instability, war, 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 COVID-19 pandemic
re-emerging due to new virus variants, terrorist attacks or natural
disasters (such as tsunamis, hurricanes, tornadoes, and floods).
These 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, and due to the decline in
financial performance of the Company in 2021 and 2022 and
continuing into 2023, an investment in our common stock involves a
very high degree of risk. You should carefully consider the risks
described below, together with all of the other information
included in this Form 10-Q Report and other SEC filings, before
making an investment decision. If any of the following risks
actually occurs or continues to impact our business, our business,
financial condition or results of operations could worsen. In that
case, the trading price of our common stock could decline, and you
may lose all or part of your investment. You should read the
section entitled “Cautionary Statement Regarding Forward-Looking
Statements above for a discussion of what types of statements
are forward-looking statements, as well as the significance of such
statements in the context of this Form 10-Q Report.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds.
The Company did not issue any unregistered securities in the fiscal
quarter ended March 31, 2023.
Item 3. Defaults Upon
Senior Securities
None.
Item 4. Mine Safety
Disclosures
Not Applicable.
Item 5. Other
Information
The Company has no information to disclose that was required to be
in a report on Form 8-K during the period covered by this report
but was not reported. There have been no material changes to the
procedures by which security holders may recommend nominees to our
board of directors or make shareholder proposals.
Item 6. Exhibits
The following exhibits are filed as part of this Report on Form
10-Q or are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Capstone Companies, Inc.
Dated: May 15, 2023
/s/
Stewart Wallach |
|
|
Stewart
Wallach |
|
Chief
Executive Officer |
Principal
Executive Officer |
|
|
/s/Dana
Eschenburg Perez |
|
|
Dana
Eschenburg Perez |
|
Interim
Chief Financial Officer |
Principal
Financial
Executive and Accounting Officer |
|
|
41
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