UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31 2020.
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 000-28831
CAPSTONE COMPANIES, INC.
(Exact name of small business issuer as specified in its charter)
Florida | 84-1047159 |
(State or Other Jurisdiction of Incorporation) | (I.R.S. Employer No.) |
431 Fairway Drive, Suite 200
Deerfield Beach, Florida33441
(Address of principal executive offices) (Zip Code)
(954)252-3440
(Small
business issuer'sissuers telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Trading | Name of each exchange on which registered | Symbol(s) |
None | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.0001 PAR VALUE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes _ ☐ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ ☐ No x
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 preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x☒
No _
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).Yes x. Yes ☒ No _☐
1
Indicate by check mark whether the registrant
is a large, accelerated filer, an accelerated filer, a non-accelerated filer, emerging growth company or a smallersmaller
reporting company. See definitions of "largelarge, accelerated filer"filer, "accelerated filer"accelerated filer, "emergingemerging growth
company"company and "smallersmaller reporting Company"Company in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer __☐ Accelerated filer ___ ☐ Non-accelerated filer ___ ☒ Smaller reporting Company [X]☒ 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. [_]
Indicate
by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes _ ☐ No X
more of the outstanding common stock have been excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
0
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’smanagements assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Number
of estimated shares outstanding of the Registrant'sRegistrants Common Stock as of March 22, 202114, 2022 is 46,296,364
DOCUMENTS INCORPORATED BY REFERENCE
None
2
TABLE OF CONTENTS
3
DEFINITIONS:
As used in this Annual Report on Form 10-K, the following terms have the stated meaning or meanings:
(1) |
(2) |
(3) |
(4) |
(5) |
(6) |
(7) | References to |
(8) | References to |
(9) |
(10) |
(11) | Any reference to fiscal year in this Annual Report on Form 10-K means our fiscal year, ending December
31st. |
(12) |
(13) |
(14) |
We may use "FY"“FY” to mean "fiscal year"“fiscal year” and "Q"“Q
or QTR” to mean fiscal quarter in this Report.Report
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FORWARD LOOKING STATEMENTS
This Form 10-K report contains "forward-looking statements"“forward-looking
statements”. Those statements appear in a number of places in this Form 10-K report and include, without limitation, statements
regarding the intent, belief and current expectations of the Company, its directors or its officers, with respect to: Company'sCompany’s
future business and financial prospects; the commercialization of new products; the Company'sCompany’s policies regarding investments, dispositions,
financings, conflicts of interest and other matters; and trends affecting the Company'sCompany’s financial condition or results of operations.
Forward looking statements include words like "expect," "anticipate," "hope," "project," "may," "should," "could,"“expect,” “anticipate,” “hope,” “project,”
“may,” “should,” “could,” or similar words or variants thereof. Any such forward-looking statement is not
a guarantee of future performance and involves several risks and uncertainties. Actual results may differ materially from those results
implied in the forward-looking statement as a result of various factors, some factors being beyond the Company'sCompany’s control or ability
to foresee. Among the factors that could cause plans, actions and results to differ materially from current expectations are, without
limitation: disruption from natural or human causes, including severe weather, accidents, fires, earthquakes, terrorist acts and epidemic
or pandemic diseases, such as the COVID-19 pandemic, which pandemic could result and has resulted in delays or suspension of product production
from Thailand and China or other regions, where our products are made, or otherwise dampen consumer demand for products like our products,
which are a discretionary purchase. The accompanying information contained in this Form 10-K report, including the "Management's“Management’s
Discussion and Analysis of Results of Operations and Financial Condition"Condition” and "Risk Factors"“Risk Factors” identifies other important
factors that could cause such differences. With respect to any such forward-looking statement that includes a statement of its underlying assumptions
or bases, the Company cautions that, while it believes such assumptions or bases to be reasonable and has formed them in good faith, assumed
facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be significant
or "material"“material” depending on the circumstances. When, in any forward-looking statement, the Company, or its management, expresses
an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable
basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. Further, the Company
is a "penny stock"“penny stock” company with no primary market makers. Such a status makes highly risky any investment in the Company securities.
See “Risk Factors”“Risk Factors” below. The forward-looking statements in this Form 10-K report are made as of the date hereof, and, unless
required by law or regulation, we do not assume any obligation to update, amend or clarify them to reflect events, new information or
circumstances occurring after the date hereof.
You should read this Form 10-K report and the documents that we may reference in this Form 10-K report and have filed with the SEC, with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
5
PART I
Item 1. Business
Overview
Capstone Companies, Inc. (“Company”(“Company”
or “CAPC”“CAPC”) is a public holding company, that on March 25, 2004, organized under the laws of the State of Florida. The Company
is a designer, manufacturer and marketer of consumer inspired products that simplify daily living through technology. Over the past decade,
the Company’sCompany’s various product lines have been distributed globally including consumer markets in Australia, Japan, Korea, North
America, South America, and the United Kingdom. The primary operating subsidiary is Capstone Industries, Inc. (“CAPI”(“Capstone”),
a Florida corporation located at the principal executive offices of the Company. To oversee and manage business activities in the Pacific
Rim, the Company established Capstone International Hong Kong, Ltd., or "CIHK"“CIHK”, allowing it to expand the Company'sCompany’s
product development, engineering, and factory resource capabilities. The Company has a history of exploiting technologies in areas of
induction charging, power failure control, security and home LED lighting products and most recently has entered the electronics market
with its introduction of Capstone’sCapstone’s Connected Surfaces Smart Mirrors – Internetinternet connected and interactive mirror.
The Company'sCompany’s focus through 2017
has been inwas the integration of LEDs into most commonly used consumer lighting products in today'stoday’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”“must have” consumer product as in previous years. The Connected Surfaces is the Company’sCompany’s effort to establish a new product line.
This direction is in keeping with the
Company’s history in identifying emerging product categories where Capstone’sCapstone’s management experienceand innovativeness can be fully leveraged.
Over the past decade, the Company’sCompany’s consistent low-cost manufacturing and operations have provided an advantage in delivering quality
products at very competitive prices.
In late 2017, as management recognized that
the LED category was maturing, it sought a business opportunity that would transition the Company’sCompany’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’Surfaces’ Smart Mirrors, is believed to be essential for sustaining or growing revenues.
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. This strategy would require the Company to adopt a different short term business model as a way of building awareness and revenues. The business model is consumer direct through e-commerce marketing including a company webstore as well as third party resellers like Amazon, Wayfair and other recognized, available e-commerce platforms. The smart mirror business requires maintenance of inventory in order to be responsive to e-commerce and retail sales orders and lessen the impact of logistical problems with the delivery of products from Asia. The e-commerce platform is designed to build product awareness among consumers but will also allow the Company to potentially exploit and promote sales of products in brick-and-mortar retailers’ stores.
Our expectationstrategy is based on our expectations
that the new portfolio of Connected Surfaces appealswill appeal to a much larger audience than our traditional LED lighting product line. The
new Connected Surfaces portfolio is designed to tap into consumer’sconsumer’s ever-expanding Internet, wireless connected lifestyles prevalent
today. The productsmirrors have both touch screen and voiceremote control 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 retails to start at $699.00$899.00 per
unit, with the goal to deliver cost-attractive product and consumer value to mainstream America. Whereas, during the day your smartphone/tablet
keeps you connected, whether it is work or personal, now when entering your home, Capstone’sCapstone’s new Connected Surfaces products willis
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'sCompany’s financial initiatives are driven
by its entry tointo 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 been diminished substantially, 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 effort.e-commerce platform. The Company’sCompany does not
have prior experience in operating and promoting its own e-commerce website. The Company’s e-commerce marketing and sales strategy
will shift its historic reliance on ‘Big Box’‘Big Box,” brick and mortar retailers while delivering more profitable business.to an emphasis on e-commerce marketing and sales.
If Connected Surfaces is successful, the gross margins generated by the e-commerce model should be substantially greater than in the past and should provide strong cash flows.LED consumer lighting
products. The Company will require additional funding to build its marketing effort, inventory levels and service levels, oncewhich funding
must be timely and affordable to fund the initialdesired marketing phase validates the Company’s strategic initiatives.and product launch. The future growth will be directly impacted by the level
of exposure, messaging and distribution capabilities. For the short-term, certainCertain members of the Company’s management (“(“Corporate Insiders and
Directors”Directors”) have stated an intentprovided short-term funding from time to continue supportingtime to support the Company’sCompany’s basic operational funding needs.needs, but
there is no guarantee that this funding will continue or be adequate to fund operations or Smart Mirror program marketing and inventory
as well as possible enhancements in functions demanded by the consumers.
6
The Company has historically competed in highly competitive
consumer market channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence,
employment levels, credit availability, commodity costs and the recovery from the global pandemic. As stated earlier, and based on historical
trends, the markets for LED home products have matured and growth within the category will continue to decline as markets are saturated. While we will continue to maintain supply for the short-term,For
these reasons, our focus is directed to the expansion and advancement of the Company’sCompany’s Connected Surfaces initiative.
By working diligently overseas with alternate manufacturers located
outside China, particularly in Thailand, we anticipateanticipated minimal impact to our selling prices and related margins of profit that could
otherwise be impacted by an ongoing trade dispute between the United States and China. PoliticalChina .Political unrest in Thailand in late 2020 and early
2021 hasdid not affectedaffect our OEM activities, however the transportation/logistics costs have escalated as of the date of the filing of this Form 10-K report.
While the Company has commencedannounced the plan to
launch its ecommerce initiative in March 2021, that effort was continually delayed because the COVID-19 pandemic forced factory closures
overseas and inventories planned for Q3, 2021 sales were only shipped in December 2021,which will facilitate January 2022 sales planning.
The COVID-19 pandemic and transitioning to Thailand OEM’s as well as to be expected delays in developing an acceptable new product
essentially delayed our launch of the Smart Mirror product line by a new e-commerce initiative on itsyear, which delay combined with declining LED product website,sales, has
adversely impacted the Company’s business and financial performance. The initial inventory that efforts has just commenced, and itarrived in our fulfilment center
in the United States was damaged by the logistics company, therefore. It is unclearprobable that as of the date of the filing of this Form 10-K
report if, our Q1 2022 e-commerce initiativeactivity will not compensate for the loss of extensive store foot traffic.
During the year, the Company hasalso experienced some limitations
in employee resources resulting from travel restrictions and “stay“stay at home” orders.home” orders due to precautions due to COVID-19 pandemic
and its “waves” of variants of the virus. Despite these restrictions, the Company staff continues to efficiently manage the overseas supply
chain requirements of our customers.
Since early 2020, the Company has been
building its infrastructure to transition into the online retail business by developing an e-commerce website. E-commerce increasingly
is the means by which consumer purchase products, and it has experienced substantial increasesgrowth during the COVID-19 pandemic. The Company
saw a change in consumer buying trend before the COVID-19 pandemic impact and has been investing in developing a social media presence
over the last year and is now readyin order to be prepared to officially launch shipping product by its online Smart Mirror business in April 2021. Prior to 2021,January 2022.
The delay of the roll-out of the Smart Mirror products delayed the roll-out of the planned Company relied on brick and mortar retail for sale of its products to consumers and sought to piggyback off retailers’ e-commerce websites as well as dedicated online retailers like Amazon.
We believe the COVID-19 virus and the
related economic conditions will continue to have an impact on retail store markets through the first half of 2021, perhaps longer if mass vaccination does not reduce the national economic impact on2022 by depressing consumer
shopping at brick and severity of COVID-19 pandemic by the summer of 2021, but as we focus our channel strategy toward e-commerce, disruption to our business in 2021 due to the impact of the COVID-19 pandemic onmortar retail store market should be moderated if our e-commerce efforts create sufficient revenues.stores. Consumer confidence should rise commensurately with increased job opportunities and income
recovery upon a decrease of the impact of the COVID-19 pandemic.pandemic and as the CDC guidelines are relaxed. The extent to which COVID-19 pandemic
will continue to impact the Company’sCompany’s results will depend primarily on future developments, including the severity and duration
of the crisis, the speed and effectiveness of the national vaccine inoculation program, potential mutations of COVID-19 pandemic, and
the impact of future actions that will be taken to contain the COVID-19 pandemic or treat its impact. These future developments are highly
uncertain and cannot be predicted with confidence, especially if mutations of the COVID-19 virus become widespread and prove resistant
to vaccines.
We continue to make product investments to ensure
that we provide quality, useful products. Additionally, the Company continues to enhance its customer service support. In 20202021 and 2019,2020,
the Company substantially expanded its investment and commitment to social media marketing. With the growing importance of on-line commerce
and social media to consumers, this marketing will play a vital role in expanding our lifestyle brands and will also serve to establish
credibility with the Company’sCompany’s growing consumer base. The effort will focus on creating a more extensive and aggressive social media
presence through use of third-party social media like Facebook, Twitter, YouTube and Instagram. Continued
analytics will govern and refine our investments in these social media campaigns.
7
As the Company focuses on e-commerce as an important distribution channel for
its new product line, it faces intense competition from established, competing e-commerce websites as well as the daunting challenge of
attracting consumer attention through social media and online marketing. Consumers have many options in e-commerce. The Company is not usingexperimenting
with online sponsors or promoters, known as ‘influencers,’ but rather is relying on a‘influencers,’ in addition to traditional promotion on social media websites like
Facebook. There has not been sufficient operating experience with the Company e-commerce effort to opine on its effectiveness.
The Company oversees and controls the manufacturing
of its products, which are currently made in ChinaThailand and ThailandChina by OEM contract manufacturers, through three wholly owned operating subsidiaries:
CAPI, CIHK and CLTL. To support the current e-commerce model that will drive our business in 2021,2022, we will be putting inventories into
warehouse facilities stateside for direct-to-consumer fulfillment. When introducing the Connected Surfaces program to Big Box retailers
in the backfirst half of 2021,2022, the Company will resume its direct import model. At that time, the Company'sCompany’s products will be built to
order for specific promotional periods and does not require replenishment domestically. While the Company is stressingfocusing its efforts on establishing
an effective e-commerce presence, sales of products through brick and mortar retail stores of retailers will remain part of distribution ofa priority in marketing
connected surfaces until and unless the e-commerce program is established as sales leader for the product and sale to consumers. The effectivenessline.
With the establishment of the national vaccination programoverseas
suppliers, particularly in Thailand, the need and contribution of the CIHK operation has been greatly reduced. With the reduced revenue,
the Company evaluated the necessity of the CIHK operation, and decided to allowclose the operation in 2022, particularly as manufacturing and
product development are now focused in Thailand. Two key product sourcing employees of CIHK were retained as independent contractors.
COVID-19 pandemic impact on the ability of CIHK staff to operate without restrictions on travel and meeting internally and with others
was a return to pre-COVID-19 pandemic economy and revivalsecondary factor in closing CIHK.
As of consumer store front traffic will be key to our brick and mortar retail efforts for the Connected Surface products.
The Company has now developedstarted to actively market and is marketing a smart mirrorsell the
Smart Mirror product line in February 2022, which is the first introduction within the Capstone Connected Surfaces program. The initial
marketing launch was at the Consumer Electronics Show in early 2020 but its release to the retail market has beenwas delayed due to product development
delays at our suppliers and other related approval and certification delays resulting from the impact of COVID-19.COVID-19, which impact was mainly
limitations on staff work and staffing causing delays in completion of work and backlogs in work at suppliers and certification or regulatory
organizations. The Company is planningcommenced production immediately following the varying certification processesafter a long awaited FCC approval. This review process which historically has taken 4-5
weeks, was delayed continuously and testing required for North American products, which are currently underway.was finalized after 5 months of delays. These are not unfamiliar steps to management, as all our products
are subject to most of the same approval processes; however, we do not control the speed at which the testing companies advance. There
iswas a backlog at the testing laboratories as so many companies were dormant for the past 12 months but are now resuming normal business
activities. As of the filing of this Form 10-K report, we are planning production to commenceour first 1,000 Smart Mirrors were shipped and arrived in April. As necessary, we will air-freightJanuary 2022 at our fulfillment
center. These inventories were originally expected in Q2 2021. We air-freighted initial inventories to the U.S.soU.S. so that we maycould activate
our Amazon program whichand fulfill pre-orders. Amazon requires that inventory be available for immediate delivery in their facilities. Depending on availabilityfacilities so that
effort was delayed until receipt of containers, which are now facing shortagesthe air shipments. The inventories were partially damaged in the region, we may have to compromise our marginstransit and misplaced causing a 30 day
delay on the early shipments and ship more product by air than planned. Our primary goal is to deliver mirrors to our customers that have been patiently waitingcontracted receipt date. The full 1,000 Smart Mirror inventory was available for the mirrors to be available.
Our Growth Strategy
The Company's focus in recent years has been in the integration of LEDs into most commonly used lighting products for today's home. The LED lighting market is now mainstream and opportunities for growth have been minimized. Further impacting the category were the tariff penalties resulting from the trade dispute between U.S. and China making products less competitive.
Capstone’s past success has been in its
ability to identify emerging product categories where Capstone’sCapstone’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’sCompany’s low-cost manufacturing and operations have typically, in the past, provided an advantage in delivering great
products affordably.
8
Our expectation is that the new product portfolio advancing in 2021
appeals to a much larger audience than our traditional LED lighting product line. The new Connected Surfaces portfolio is designed
to tap into consumer’sconsumer’s 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 retailsMSRP retail to start at $699.00,$899.00, with the goal to deliver exceptional consumer value to mainstream
America. Whereas, during the day your smartphone/tablet keeps you connected, whether it is work or personal, now when entering your home,
Capstone’sCapstone’s new Connected Surfaces products will enable users the same level of connectivity in a more relaxed manner that does not
require being tethered to these devices.
The Company competes in competitive consumer market
channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence, employment
levels, credit availability and commodity costs. Demand for the Company’sCompany’s products is highly dependent on economic drivers such
as consumer spending and discretionary income.
Although the overseas factories arehave previously
been fully functioning, at this time, a resurgence of the globalDelta variant of COVID-19 pandemic could impact thecaused sporadic regional lockdowns with certain overseas factories
again and could delaythat delayed shipments of products from Thailand and China, which produces all of our products. The Company’s new factory in Thailand has produced and shipped orders in 2020. This facility will provide the Company with more flexibility in determining which location should produce goods for future orders. With the United States now being impacted
by the resurgenceDelta variant of the COVID-19 pandemic, we believe the impact of the virus in the U.S. will continue untilinto 2022. As the mid-halfOmicron
variant in the first quarter of 2021, but this disruption has2022 demonstrated, the COVID-19 pandemic continues to produce variants and waves of infections and it
is not impactedclear if further variants of COVID 19 may arise and impact our long-term strategy and initiatives as ofoperations or consumer confidence in 2022.
Last year, the date of the filing of this Form 10-K report.
Organic Growth Strategy
Subject to adequate funding and cash flow from Smart Mirror sales, the Company intends to pursue various initiatives to execute its organic growth strategy, which is designed to enhance its market presence, expand its customer base and maintain its recognition as an industry leader in new product development. Key elements of our organic growth strategy include:
Connected Surfaces
. Historically, LED lighting products have been our core business. The Capstone Lighting andHoover
The Company acknowledgesanticipates that smart homes will
become more mainstream over the next several years based on increasing developments of smart home technologies and products and consumer
purchases of smart home technologies and products and will present a significant, potential growth opportunitiesopportunity 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.
The automobile segment leads the Smart
Mirror industry as technology has imbedded into automobile mirrors. As of the date of this Form 10-K Annual Report, the Company’sCompany’s Connected
Surfaces products target the smart home segment.segment only.
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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.
Capstone’s core executive team has been working together for over three decades and has successfully built and managed other consumer product companies.
Operating Management'sManagement’s experience
in hardline product manufacturing has prepared the Company for successful entries into various consumer product markets.
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
Capstone believes that its competitive weaknesses are:
It 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.
Declining financial performance of the Company
due to declining sales and appeal of its 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’sCompany 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 Company’s current products lines
are focused on consumer LED lighting, which is a declining revenue source with relatively low profit margins, and long-term revenue prospects
of the recent diversification into Connected Surfaces products is uncertain as of the date of this Form 10-K report. As a mature product
line, LED business is a declining business line and revenue source.
The Company does not have the large internal research and development capability of its larger competitors.
As a smaller reporting company, we are more vulnerable to events like COVID-19 pandemic, production and shipping delays, travel and operational disruptions and restrictions and an accelerated shift to e-commerce from reliance on brick-and-mortar retail sales. We lack, the staff, money, internal capabilities and resources and operational experience to significantly or timely respond to significant challenges and adverse changes in business and financial requirements.
COVID-19 pandemic closures of companies
and shipping-distribution channels produced a delay in shipping and receipt of products from abroad and in the United States. The problems
include a lack of sufficient drivers for trucking industry. The Company relies on OEM'sOEM’s located in Thailand and China, which have
been impacted by the COVID-19 pandemic in meeting development, production and theshipping deadlines. The extent of the continuing economic
impact of the COVID-19 pandemic and resulting logistical delays is uncertain as of the date of this Form 10-K report.
Capstone’s international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies.
Should the increased U.S. tariffs imposed
on Chinese manufactured goods remain it may negatively impact demand and/or increase the cost forof electronic components used in our products at retail.products.
10
While we have established new production
capacity in Thailand, there is no final resolution of the U.S. / China trade dispute from which specific components are sourced. Developing
a new, efficient OEM relationship in a new country takes time and effort to reach acceptable production efficiencies. We have only a short
operational experience with Thai OEM’sOEM’s and cannot predict long term effectiveness of the relationship.
If the COVID-19 pandemic were to continue,has any continuing adverse
impact on operations and consumer confidence in 2022, it could have a detrimental impact on our ability to maintain operations by depressing
consumer purchase of our products, – whether online or in retail stores. Withstanding continued losses could cause the Company to consider
significant corporate transaction, including, without limitation, a possible merger and acquisition transaction or reorganization to protect
the core operations from the ongoing impact of the COVID-19 pandemic. 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.
Products and Customers
While the Company is expanding its product
portfolio through the introduction of the Capstone Connected Surfaces program, it still maintains a select number of LED lighting products
under the "Capstone“Capstone Lighting®®”” brand at both Costco and Sam’s Wholesale Clubs and available through Amazon.
The product lines available as of the date of this Form 10-K report are as follows:
Connected Surfaces –– Smart Mirrors
Standard Rectangular
Wardrobe/Fitness Mirror
LED Puck Lights
LED Undercabinet Light Bars
LED Motion Sensor Lights
Eco-i-Lites
Wireless Remote-Control Outlets
Wireless Remote-Controlled LED Accent Lights
The plan to expand the Company’sCompany’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. While the Company makes significant investments into the Connected Surfaces portfolio, it is reasonable
to expect the Company to post losses while building the market for a new category of products which were formally launchedinitially marketed at the 2020
Consumer Electronics Show but faced delays to the market as a result of the COVID-19 pandemic. Expense categories including molds, prototyping,
engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred for six to nine months before shipments and related
revenues occur.
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'sSam’s Club-Walmart, the Container Store and Firefly Buys. These distribution channels may
sell the Company'sCompany’s products through the internet as well as through retail storefronts and catalogs/mail order. The Company believes
it has developed the scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche
product opportunities in our largest consumer domestic and international markets. While Capstone has traditionally generated the majority
of its sales in the U.S. market, urbanization, rising family incomes and increased living standards abroad have spurred a perceived demand
for small consumer appliances internationally. To capture this market opportunity, the Company has continued its international sales by
leveraging relationships with our existing global retailers and by strengthening our international product offerings. CIHK assists the Company in placing more products into foreign market channels as well. The Company sold
Capstone brand products to markets outside the U.S., including Australia, Japan, South Korea, and the United Kingdom.Korea. International sales for the year ended December
31, 20202021 were $704$341 thousand or 25%50% of net revenue as compared to $1.2 million$704 thousand or 10%25% in fiscal 2019.2020. The Company'sCompany’s performance
depends on a number of assumptions and factors. Critical to growth are the economic conditions in the markets that we serve, as well as
success in the Company'sCompany’s initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new
technology or features. Efforts to expand into new international markets may be adversely impacted in the near term by COVID-19 pandemic.
The Company'sCompany’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"“Risk Factors” below. Critical to growth are economic conditions in the
markets that foster greater consumer spending as well as success in the Company'sCompany’s initiatives to distinguish its brands from competitors
by design, quality, and scope of functions and new technology or features. The Company'sCompany’s ability to fund the pursuit of our goals
remains a constant, significant factor.
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The Company believes that it will provide retailers with a broader and more diversified portfolio of consumer products across product categories, which should add diversity to the Company's revenues and cash flows sources. Within the selection of products offered, Capstone 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 ability to serve retailers with an array of branded products and quickly introduce new products to continue to allow Capstone to further penetrate its existing customer bases, while also attracting new customers. The Company's’s primary, perceived challenge
is creating sustained consumer demand for its products in a growing number of markets and attaining sustained profitability, which challenge
is complicated by the cost of new product development and costs of penetrating new markets. An extensive product line, especially new
product line, increases the investment in product development and, as such, increases operating overhead.
With the Company's “Connected Surfaces”Company’s “Connected
Surfaces” category, Capstone has developed a comprehensive product offering. Within the selection of products offered, Capstone
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 abilitystrategy to sell direct tooffer 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
Tariffs and trade restrictions imposed by
the previous U.S. administration provoked trade and tariff retaliation by other countries. A "trade dispute"“trade dispute” of this nature
or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand
for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our
businesses. As of the date of this Report, the new U.S. administration is currently reviewing its future position on this issue and there
has not been a resolution of the Chinese-American trade dispute.
Sales and Marketing
Our LED products arehave been sold nationally
and internationally through a direct sales force. The sales force markets the Company'sCompany’s products through numerous retail locations
worldwide, including larger retail warehouse clubs, hardware centers and e-commerce websites. Our business model has been designed to
support “direct“direct import sales”sales” made directly to the retail customer. However, we also offer “domestic sales”“domestic sales” programs
which will be expanded in the futureare under expansion as a result of the Capstone Connected Surfaces program becomesbecoming available.
Direct Import Sales.
We currently ship finished products directly to our retail customer from Thailand and China. The sales transaction and title of goods are completed by delivering products to the customers overseas shipping point. The customer takes title of the goods at that point and is responsible for inbound ocean freight and import duties. Direct import sales are made in larger quantities (generally container sized lots) to customers worldwide.
Occasionally as part of the marketing program the Company may provide marketing allowances to the customer to ensure, that the retailer is not left with unsold inventories at the end of the program. As an accounting practice, depending on the item and its selling history, the Company will accrue a reserve for possible future markdowns and will retains these reserves for a period 3 to 5 years in the event the customer deducts such a promotional allowance against an open invoice or submits us an invoice. These reserves will be released if not used or needed by the retailer. These allowances are also evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer.
Domestic Sales.
The strategy of selling products from a U.S. domestic warehouse enables the Company to provide timely delivery and serve as a domestic supplier of imported goods. With this model the Company imports goods from overseas and is responsible for all related costs including ocean freight, insurance, customs clearance, duties, storage, and distribution charges related to such products and therefore such sales command higher sales prices than direct sales. Domestic orders are for a much smaller size and could be as low as a single unit directly to the end consumer if ordered through an online website. To support an effective e-commerce business model, we will be required to warehouse adequate inventory levels enabling the Company to ship orders directly to the end consumer expediently.
We continue to make investments to expand
our sales, marketing, technical applications support and distribution capabilities to sell our product portfolio. We also continue to
make investments to promote and build market awareness of the products and brands we offer. 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’days’ prior notice. Our international sales
to divisions of U.S. based retailers are made by our in-house sales team. Other international sales are made by our Hong-Kong based CIHK office staff.
The Company actively promotes its products
to retailers and distributors at North American trade shows, such as the Consumer Electronics Show (“CES”(“CES”) or the International
Hardware Show, but also relies on the retail sales channels to advertise its products directly to the end user consumers through various
promotional activities.
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Although we planned to launch to the public in 2021, due to pandemic related delays our program was pushed back and, formally launched in January 2022 at the Consumer Electronics Show. Our Smart Mirrors are unlike any other smart mirror product available. The Company is assessing various organic and digital paid advertising campaigns to define its long term marketing strategy. Capstone Smart Mirrors are the only product of its type available today and we believe we are best positioned to capture a significant market share long -term.
It is undeniable that today’s population is more connected than ever. Just as smart phones tablets and broadband subscriptions expanded from 2010 to 2018 across all age groups and income levels, Capstone envisioned the continuing simplification and access to content and data in new device formats would prove to be an emerging opportunity. The United States is one of the largest consumers of technology-based products, particularly smart home products Currently there are in excess of 110 million homes in the United States alone with fixed broadband subscriptions. Moreover there are more than 230 million smart phone users. These data points alone are indicative of the burgeoning growth potential which is driving investment into Smart Home Products and awareness. Household penetration for smart home devices in 2018 was approximately seven and a half percent and is currently projected to be an estimated 20% in 2022.
For the year ended December 31, 2020,2021,
the Company had two customers who comprised approximately 89%87% of net revenue and two customers who comprised 98%89% of net revenues in 2019.2020.
Although we have long established relationships with our customers, we do not have contractual arrangements to purchase a fixed quantity
of product annually. A decrease of business or a loss of any of our major customers could have a material adverse effect on our results
of operations and financial condition.
Market growth is directly related to smart
home devices becoming more price competitive and technologies becoming more compatible with one another. People understand the benefits
associated with the internet of things and are embracing and consuming internet devices of several types. Security, doorbells, smart speakers,
smart light bulbs, smart refrigerators to name a few are all being welcomed into today’s homes. When we evaluated the market potential,
we identified a niche that would bring internet access to the walls of one’s home. Mirrors are common to all homes and essential
to modern day life and the integration of technology into a traditional mirror was an obvious form factor to exploit. To be successful
,we believed the Capstone Smart Mirrors had to be affordable for mainstream consumers and provide feature sets that are commonly found
in the retail marketsmartphones and tablets.
Starting in late 2021, which we intend to
continue, the Company is focused on expanding the product portfolio currently offered into new innovative electronic categories that will also allow the Company to expand into different retail departments and channels of distribution.
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
TWITTER5https://twitter.com/capc capstone
YOUTUBE6https://www.youtube.com/channel/UCMX5W8PV0Q59qoAdMxKcAig
1Facebook is a registered trademark of Facebook, Inc.
2 Instagram is a registered trademark of Instagram.
3Pinterest is a registered trademark of Pinterest.
4LinkedIn 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.internationally, in the lighting and smart mirror segments. The Company competes with large
multinationals with global operations as well as numerous other smaller, specialized competitors who generally focus on narrower markets,
products, or particular categories.
Competition is influenced by technological
innovation, brand perceptions, product quality, value perception, customer service and price. Over the past several years while the Company'sCompany’s
focus has been on LED lighting, principal competitors include Energizer, Feit Electric and Jasco (GE). The Company believes private-label sales by large retailers has some impact on the market in some parts of the world as many national retailers such as Costco, Home Depot, Target and Sam’s/Wal-Mart offer lighting as part of their private branded product lines. Many of the Company'sCompany’s competitors
have greater resources and capabilities, including greater brand recognition, research and development budgets and broader geographical
market reach. Competitors with greater resources could undermine Capstone'sCapstone’s expansion efforts by marketing campaigns targeting its
expansion efforts or price competition. This is not the case in the new Connected Surfaces category as the Company is recognized as early
entry to the retail market.
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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,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 wella Smart Mirror program is developed with open source resources.
The Company is also under development of proprietary features that would further establish the Company as service and support provided by the distributor to the customer.
The COVID-19 pandemic has accelerated the decrease
in consumer reliance on traditional brick-and-mortar retailing and heightened the importance of e-commerce and online marketing and sales.
We have just started our Social Media marketing. Many competitors have more established, widespread and effective e-commerce and Social
Media campaigns than we do.do, however none of these companies are marketing a competitive product to our Thin Cast and Smart Mirror programs.
We may not be able to effectively compete in e-commerce and Social Media marketing and sales. The COVID-19 pandemic has dramatically impacted
marketing and sales of many products and the long-term impact of the pandemic remains uncertain as of the date of the filing of this Form
10-K report.
With trends and technology continually evolving,
and subject to adequate and affordable funding, Capstone will continueintends to invest and develop new products that are competitively priced with
consumer centric features and benefits easily articulated to influence point of sale decision making. Success in the markets we serve
depends upon product innovation, pricing, retailer support, responsiveness, and cost management. The Company continues to invest in developing the technologies and design critical to competing in our markets. Our ability to invest is limited
by operational cash flow and funding from third parties, including members of management and the Board of Directors, and by the ongoing
impact of the COVID-19 pandemic on our business and financial performance.
Research, Product Development, and Manufacturing Activities
The Company'sCompany’s research and development
departmentoperations based in Hong Kong designs and engineersThailand design and engineer many of the Company'sCompany’s products, with collaboration from its third-party
manufacturing partners, software developers and software developers.Capstone U.S. engineering advisers. The Company outsources the manufacture and assembly
of our products to a numberselect group of contractOEM manufacturers overseas. Our research and development focus includes efforts to:
● | Establish Capstone 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'sCompany’s contract manufacturers and ensure that their factories adhere to
all Regional Labor and Social Compliance Laws. These contract manufacturers purchase components that we specify and provide the necessary
facilities and labor to manufacture our products. We leverage the strength of the contract manufacturers and allocate the manufacturing
of specific products to the contract manufacturer best suited to the task. Quality control and product testing is conducted at the contract
manufacturers facility and at their 3rd party testing laboratories overseas.
Capstone’s research and development team
enforces its proprietary manufacturing expertise by maintaining control over all outsourced production and critical production molds.
To ensure the quality and consistency of the Company'sCompany’s products manufactured overseas, Capstone uses globally recognized certified
testing laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all products are designed and tested to adhere to each
country'scountry’s individual regulatory standards. The Company also useshires quality control inspectors who examine and test products to Capstone'sCapstone’s
specification(s) before shipments are released. CIHK office capabilities include product development, project management, sourcing management,
supply chain logistics, factory compliance auditing, and quality enforcement for all supplier factories located in Hong Kong, China, and
Thailand.
To successfully implement Capstone'sCapstone’s
business strategy, the Company must continually improve its current products and develop new product segments with innovative imbedded
technologies to meet consumer'sconsumer’s growing expectations. The Connected Surfaces product development is our current effort to achieve
those expectations.
Investments in more technical and innovative product categories. These costsdevelopment are expensed
when incurred and are included in the operating expenses.
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Raw Materials
The principal raw materials currently used
by Capstone are sourced in Thailand and China, as the Company orders product exclusively through contract manufacturers in the region.
These contract manufacturers purchase components based on the Company'sCompany’s specifications and provide the necessary facilities and
labor to manufacture the Company'sCompany’s products. Capstone allocates the production of specific products to the contract manufacturer
the Company believes is more experienced to produce the specific product and whose facility is located in the country that most benefits
from the U.S. Tariff regulations. To ensure the consistent quality of Capstone'sCapstone’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'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 performs 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. CIHK is responsible for developing and sourcing finished products from Asia in order to
grow and diversify our product portfolio. Quality testing for these products is performed both by CIHK and by our globally recognized third party quality
testing laboratories.
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 transferredoutsourced
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.
Royalties
We have, from time to time, entered into agreements whereby we have agreed to pay royalties for the use of nationally recognized licensed brands on Company product offerings. Royalty expense incurred under such agreements is expensed at the time of shipment.
In 2019recent years the Company’sCompany’s marketing
objective was to transition existing licensed lighting product lines into the Capstone Lighting brand, which was successfully achieved.
On February 3, 2020, the remaining Royaltyroyalty license
expired as the Company did not achieve the stated net sales volumes for the renewal period.expired.
15
Seasonality
In general, sales for household products and electronics are seasonally influenced. Certain gift products cause consumers to increase purchases during key holiday winter season of the fourth quarter, which requires increases in retailer inventories during the third quarter. In addition, natural disasters such as hurricanes and tornadoes can create conditions that drive increased needs for portable power and power failure light sales. Climate change may increase the number and severity of hurricanes, tornadoes and flooding. Historically, the lighting products had lower sales during the first quarter due to the Chinese New Year holiday as factories are closed and shipments are halted during this period. Our transition to Thailand manufacturers may reduce the impact of Chinese New Year holiday.
We do not have sufficient operational experience with
Connected Surfaces to predict the seasonality of connected surfaces.
Intellectual Property
CAPC 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'sCAPC’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 OEM’s,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.
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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'customers’ demands.
We have incorporated into our data network
various on and off siteoff-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.
Employees
The Company’sCompany’s top priority has been to take
appropriate actions to protect the health and safety of our employees as a result of the COVID-19 pandemic. We have adjusted standard
operating procedures within our business operations to ensure the continued safety of our employees and we continually monitor evolving
health guidelines to ensure ongoing compliance and protection of our employees. These procedures include expanded and more frequent cleaning
within facilities, implementation of appropriate social distancing programs, requiring use of certain personal protective equipment, screening
protocols and work from home programs.
The Company will continue to evolve these programs to protect the health and safety of our employees.
As of December 31, 2020,2021, we employed 87 employees
in our U.S. office and 32 employees (that in March 2022 were converted to independent contractors) in our Hong Kong operation. We consider
our relations with our employees to be good. None of our employees are covered by a collective bargaining agreement. We have no part-time
workers. We believe that our staff is adequate to handle the current operations, but we recognize that the new product line and social
media marketing will probably require additional personnel –– either employees or contractors in 2021-2022.2022-2023. Our ability to hire additional
personnel is subject to adequate revenue flow and funding.
The following table sets forth the number of employees by function:
Employee Function | Number of Employees |
Executive | |
Sales/Customer Service/Distribution | |
Research | 2 |
Administrative | 2 |
TOTAL |
Corporate Information
Our principal executive offices are located at 431 Fairway Drive, Suite #200, Deerfield Beach, Florida, USA 33441. Our telephone number is (954)570-8889 and our website is at URL: www.capstonecompaniesinc.com. Our U.S. subsidiaries operate out of our principal executive offices. The Company believes that its current facilities are adequate for conduct of its business.
We file our financial information and other materials required under the Exchange Act electronically with the SEC. These materials can be accessed electronically via the Internet at www.sec.gov. Such materials and other information about the Company are also available through our corporate website : https://www.capstonecompanies.com.
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Government Regulation
Our operations are subject to regulation
by federal and state securities authorities as well as various federal, state, foreign and local laws and regulations governing a consumer
products company and a for-profit business. We are not subject to any U.S. federal, state or local regulation that poses, in our opinion,
any special or unusual burden or obstacle to conducting our business and financial affairs. Our main concern, although greatly diminished
in terms of government regulation is the changing regulatory environment in China and its impact on our ability to access our LED lighting product manufacturing
sources and obtain our specific consumer products. While the general trend in China has to be conducive to trade and commerce, China is
a still a single-party nation-state in which the central government has the power to dramatically and immediately change its trade and
commercial policies and laws. Political or military conflict between the United States and China, who are rivals for power and influence
in Asia and to an increasing extent all along the Pacific Rim as well as being diametrically opposed to one another over the status of
Taiwan, could provoke a change in Chinese trade or commercial law that makes it more difficult or expensive for us to obtain consumer
products. Such a development would have a serious impact on our ability to compete in the United States in the niche LED consumer product
market.
CIHK is subject to the laws of Hong Kong
SAR, which is a part of and subject to governance by China. In light of the specificreducing operational role of CIHK in our company, we do not
believe that such regulation poses a significant risk factor in terms of the business and financial condition of the Company.
Working Capital Requirements and Financing
In order to successfully launch the online Smart Mirror business, the Company will be required to maintain sufficient on hand available inventory levels, to allow for immediate fulfilment of an online order. This will require additional investment in on hand domestic inventory and require an efficient logistics system that will provide for inventory staged throughout the supply chain to provide for efficient inventory replenishment to support forecasted sales. The Company, as needed, will strategically increase its inventory levels held at its designated fulfilment centers. Combined with investment in new product expansion, new product molds, product testing and outside certifications, package design work, and further expansion of its capabilities in Thailand , the Company may require additional working capital to fund these strategic projects.
Since terminating its factoring agreement with Sterling
National Bank. TheBank last year, the Company has been inhad discussions with alternate funding sources that offer extensive programs that are more in line with
the Company’sCompany’s future business model, particularly a facility that provides funding options that are suitable for the e-commerce
business that the Company is transitioning into. The borrowing costs associated with such financing programs are dependent upon market
conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowingThe Company has retained its daily cash operating account with Sterling National Bank.
The Company, through Sterling National Bank,
applied for a loan under the Paycheck Protection Program (“PPP”). On May 11, 2020, the Company received loan proceeds in the
future.
The Company used the proceeds for purposes consistent with the PPP. On October 30, 2020, the SBA notified the Company that the PPP loan principal of $89,600 and $428 of accumulated interest had been fully forgiven.
On January 4, 2021, the Company entered a $750,000
working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The term of the loan started January 4, 2021 and endsshort-term facility ended June 30, 2021 (“(“Initial
Period’Period’). The Company mayhad the option to extend the Initial Period for an additional six consecutive months, ending December 31,
2021, but decided not to renew.
On April 5, 2021, the Company entered into five
separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares of
Common Stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement”). The
five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited
investors” (under Rule 501(a) of Regulation D under the sameSecurities Act of 1933, as amended, (“Securities Act”). The
$1,498,000 in proceeds from the Private Placement was used mostly to purchase start up inventory for the Company’s new Smart Mirror
product line, for a major online e-commerce fulfilment company, and the remainder for advertising and working capital.
On July 2, 2021, the Board of Directors (“Board”)
resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror
business. The Board resolved that certain Directors could negotiate the terms and conditions as the Initial Period, by providing written notice of the election to extend to the lenders prior to the expiration of the Initial Period. The Company may borrow and reborrow under the agreementa Purchase Order Funding Agreement for up to $750,000$1,020,000
with Directors S. Wallach and prepay wholly or partiallyJ. Postal and E. Fleisig, a natural person. This agreement has finalized, and the unpaid principal amount at any time and do so without pre-pay penalty or charge. The unpaid principal amount and all accrued interest is due and payable in full atCompany received the end$1,020,000
funding under this agreement on October 18, 2021. As of the Initial Period or expiration of the extended date, being December 31, 2021, (the “Maturity Date”), in a single lump sum balloon payment.the Company had $1,030,340 outstanding note on the facility,
which includes accrued interest of $10,340.
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The Company'sCompany’s ability to maintain sufficient
working capital is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have
a material adverse effect on the Company'sCompany’s working capital, ability to obtain financing, and its operations in the future. However, achieving expected results
With the net operating loss of $1.964 million,
the Company utilized $2.381 million of cash, during the twelve months ended December 31, 2021, as accomplishedcompared to $1.857 million used in 2017 and 2016,the
same period last year. During the period, the Company’s cash increased approximately $54 thousand after securing net proceeds of
$1.393 million in a private equity investment, after approximately $104.9 thousand in stock placement fees. As of December 31, 2021, the
Company had working capital of approximately $1.965 million, an accumulated deficit of approximately $6.4 million, and provideda cash balance
of $1.277 million. These conditions raise substantial doubt about the Company with liquidity’s ability to transition intocontinue as a new innovative category without creating debt.
On July 15, 2021, Jeffrey Guzy a Company director, exercised a previously granted non-qualified stock option and purchased 100,000 shares of Company common stock for an aggregate purchase price of $43,500 or a per share price of $.435. The shares are restricted shares under federal securities laws and were acquired by independent Director Guzy. The proceeds were used by the Company for general working capital to support the rollout of the Smart Mirror product line.
In addition, we intend to seek alternative
sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures. However, instability
in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us.
An economic recession or a slow recovery could adversely affect our business and liquidity. The ongoing impact of the COVID-19 pandemic
on the Company’sCompany’s business and financial performance may also affect the Company’sCompany’s ability to obtain funding.
The Company had $0 debt outstanding.
Item 1A. Risk Factors.
Described below and throughout this Form 10-K report
are certain factors and risks that the Company’sCompany’s management believes are applicable to the Company’sCompany’s business and the industries
in which it operates. If any of the described events occur, the Company’sCompany’s business, results of operations, financial condition,
liquidity, or access to the capital marketsfunding could be materially adversely affected. When stated below that a risk or factor may have a material adverse
effect on the company’sCompany business, it means that such risk may have one or more of these effects. There may be additional risks that are
not presently material or known. There are also risks within the economy, the industry, and the capital markets that could materially adversely affecthave a material
adverse effect on the company,Company, including those associated with an economic recession, inflation, a global economic slowdown, political
instability, government regulation (including tax regulation), employee attraction and retention, and customers’customers’ inability or refusal
to pay for the products and services provided by the company. There are also risks associated with the occurrence of extraordinary events,
such as terrorist attacks or natural disasters (such as tsunamis, hurricanes, tornadoes, and floods). and pandemics or epidemics. These
risks and factors affect businesses generally, including the Company, its customers and suppliers and, as a result, are not discussed
in detail below, but are applicable to the Company. As a "penny stock"“penny stock” without primary market maker support, any investment
in our Common Stock is highly risky and should only be considered by investors who can afford to lose their entire investment and do not
require immediate liquidity. These risk factors are not the only risks that we or our subsidiaries may face. Additional risks and uncertainties
not presently known to us or not currently believed to be important also may adversely affect our business.
Business and Operational Risks
COVID 19 pandemic and measures intendedactions to
reducestem or combat its spread has,impact adversely impacted our business and financial performance in 2021 and first quarter of 2022 and may continue
to adversely affectdo so in the remainder of 2022. COVID 19 pandemic and remedial actions was especially detrimental to the Company in that they delayed
the development, production, shipping and availability as inventory of our Smart Mirrors product line until first quarter of 2022, which
resulted in the LED lighting product line as the Company’s primary and declining business line and revenue source in 2021 and continuation
of operating losses.
The principal adverse impact of COVID-19 pandemic
and remedial responses on our business resultswas to delay the development, production, shipping, adequate available inventory and full marketing
and sales of operationsour new product line, the Smart Mirrors, as a timely replacement for our LED lighting product line as our primary business
line and revenue source. Instead of launching the Smart Mirror product line in 2021, the launch was delayed into early 2022. With declining
sales from the mature LED product line and without a replacement product line in 2021, the Company suffered a worsening financial condition
with accumulating operating losses in 2021 and may hamperinto first quarter of 2022. The delay has contributed to the Company having mounting losses
and a need for working capital funding to cover operating overhead and cost of implementing the efforts to establish the Smart Mirror
product line as the primary business line and revenue source for the Company in 2022. This delay also allowed competitors to establish
their smart mirror products in the marketplace during the increased consumer interest in home and interactive smart home technologies
in 2020 and 2021 – the period when the COVID-19 pandemic forced widespread remote working and other activities from the home. The
Company just commenced the sales of the Smart Mirror in first quarter of 2022 and does not have sufficient sales and operational experience
to determine whether the adverse impact of COVID-19 pandemic in 2021 and into 2022 will materially, adversely impact our sales of Smart
Mirror product line in 2022. The success of the Smart Mirror product line in 2022 is critical to our ability to fundsustain operations and
will also affect our ability to raise working capital when and if needed to sustain operations without obtaining adequate, affordable funding, which funding may not be available as needed
19
Specifically, in 2021, the COVID-19 pandemic has spread across the globe and continues to impact worldwide economic activity, including Southern Florida where the Company offices are located and in China and Thailand where the Company has its products made. The COVID-19 pandemic has prevented
our employees, suppliers, logistics services and other partners from conducting business activities at full capacity for a period of time,
due to the community spread of the disease or due to shutdowns that were requested or mandated by governmental authorities or businesses.
While it is not possible at this time to estimate the full impact that the COVID-19 pandemic could have on our business, the continued spread of COVID-19 and the measures taken by the governments and businesses in affected areas and in whichIn 2021, we operate have disrupted and may continue to disrupt our product development, manufacturing supply chain, the retail marketplace and overall consumer buying confidence. For example, despite the phased reopening of the economy in many U.S. states, the resurgence of COVID-19 has paused many phased re-openings. Due to social distancing and other mandates implemented by federal, state and local governments, many individuals are working remotely and staying at home resulting in retail stores remaining closed and demand for consumer goods remaining uncertain. As the COVID-19 pandemic continues to remain a serious health threat, the retail marketplace may have continued declines, which has reduced and may continue to reduce revenue and, as a result, could continue to adversely affect our operating results and financial condition. The overall negative impact of the COVID-19 pandemic on the economy has also impacted, and may continue to impact, the number of potential retail customers for our products. The COVID-19 outbreak and government and business mitigation measures have also had an adverse impact on global economic conditions, which has had and could continue to have an adverse effect on our business and financial condition and could impact our ability to access the capital markets on terms acceptable to us, if at all. In addition, we have taken and may further take temporarytook precautionary measures intended to help minimize the risk of COVID-19 pandemic to our employees, including closing the
corporate office, temporarily requiring employees to work remotely, suspending all non-essential travel for our employees, which could
negatively affect our business. Our personnel is limited to management and a limited number of employees in Florida and Hong Kong and
OEM factories initially in China (supplemented and then replaced by Thailand OEMs in 2021), all of which were fully functioning up to
mid-2020. However, in Q2, 2021 and continuing through 2021, a COVID-19 surge in Thailand and in certain Chinese provinces delayed final
product testing and inventory production. This resulted in product tests, components production and assembly work being delayed and has
also created significant logistics and ocean freight delays from Thailand to the U.S. The Company placed orders for the initial inventory
which should have originally been received in the U.S.in June and July 2021. We assessed the situation and estimated the major inventory
shipments were delayed months until early 2022. As a result of these unforeseen delays, revenue for the fourth quarter 2021 and year to
date in 2021 was significantly reduced, resulting in further, spreadmounting operating losses.
As a result of the COVID-19 pandemic and actions taken to limit and combat the spread will impact our ability to carry out our business as normal, and may materially adversely impact our business, operating results and financial condition. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.
In the U.S., we rely on a third-party logistics provider
for our product distribution services. The current COVID-19 pandemic or its future recurrence may impede our ability to ship from the
distribution facility at full capacity. Significant disruptions or delays could lead to loss of customers or an erosion of our brand image.
In addition, our distribution capacity is dependent on the timely performance of services by a third party. This will include the shipping
of orders to our online customers. If our distribution providerproviders encounter such problems, our future results of operations, as well as
our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be
materially adversely affected.
There continues to be uncertainty over the continuing
impact of COVID-19 pandemic on the acceptance of new products.
In general and for customershistorically, our business is subject
to accept those solutions. As a small company, innovation is critical to our ability to compete with larger competitors. We must introduce new products in a timelysignificant pressure on costs and cost-effective manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex process, and we have in some instances experienced delays in completing the development and introduction of new products. Our research and development efforts are aimed at solving increasingly complex problems, and we do not expect that all our projects will be successful. The successful development, introduction and acceptance of new products depend on a number ofpricing caused by many factors, including the following:
We rely on third-party suppliers and manufacturers to provide raw materials for and to produce our products, and we have limited control over these suppliers and manufacturers and may not be able to obtain quality products on a timely basis or in sufficient quantity.
20
Some of the components used in our products may be technically advanced products developed by third parties and may be available, in the short-term, from a very limited number of sources. All of our products are manufactured by unaffiliated manufacturers. We have long -term relationships but no long-term contracts with our suppliers or manufacturing sources, and we compete with other companies for components, raw materials, production and capacity.
We may experience a significant disruption in the supply of components or raw materials from current sources or, in the event of a disruption, we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition, our unaffiliated manufacturers may not be able to fill our orders in a timely manner. If we experience significant increased demand, or we lose or need to replace an existing manufacturer or supplier because of adverse economic conditions or other reasons, additional supplies of components or raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us, or at all, or suppliers or manufacturers may not be able to allocate sufficient capacity to us to meet our requirements. In addition, even if we can expand existing or find new manufacturing or raw material sources, we may encounter delays in production and added costs because of the time it takes to train our suppliers and manufacturers on our methods, products and quality control standards. Any delays, interruption or increased costs in the supply of raw materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower net revenues and net income both in the short and long-term. These risks have materially increased and may persist with the significant disruptions caused by the COVID-19 pandemic.
We may in the future receive, shipments of product that fail to conform to our quality control standards. In that event, unless we can obtain replacement products in a timely manner, we risk the loss of net revenues resulting from the inability to sell those products and related increased administrative and shipping costs.
The declining revenues in 2020 and the backlog delayed marketing roll out of consumer products, including the Connected Surfaces Smart Mirrors. We anticipate production of the Connected Surfaces Smart Mirror in April 2021. Further, the Connected Surfaces Smart Mirrors are manufactured in Asia and shortages of shipping containers for ocean shipment may require us to use more expensive air freight to meet product availability requirements for sale of Connected Surfaces Smart Mirrors through Amazon, which is one2021 of our
distribution channels. The useprimary business line of air freight for shipment of product is more expensive than ocean vessel ratesLED lighting products and the initial inventory shipments for Amazon fulfillment that is shipped by air freight would experience lower profit margins.
The adverse effect on gross margin. In addition, if we underestimate the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships. These risks have materially increased and may persist with the market disruption caused byfinancial results from the COVID-19 pandemic.
During the year ended December 31, 20202021, the Company
used cash in operations of approximately $2.4 million and generated from operations was negatively impacted due to the global impactnet operating losses of the COVID-19 pandemic.
We took the following actions to obtain or arrange sources of working capital funding in 2021:
We secured a $750,000 thousand short-term working capital facility which ended on June 30, 2021.
In February 2021, the Company received $576 thousand of its income tax refundable with approximately a further $285k to be refunded later in 2022 when the 2021 tax filing is made.
On April 5th, 2021, the Company through Wilmington Capital secured a $1.498 million equity investment from 5 investors who in total acquired 2,496,667 shares. This private investment was used to procure inventory for the Smart Mirror program, funding for new tooling and working capital as needed.
21
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. This agreement was finalized, and the Company received the $1,020,000 funding under this agreement on October 18, 2021. The Company needed additional cash to secure inventories to support the 2022 program and as in the past the insiders provided a long term loan to allow the company to execute it marketing plan without disruption. This allowed the Company to build and pay for approximately $1.5m of retail inventory which will arrive at our third party fulfilment center in Q1, 2022. These lenders extended the credit facility for 18 months in order to give the Company time to turnover inventories and generate operating income. This is the only debt the Company has taken on in 2021. The Company will consider its capital requirements as an ongoing practice but does not believe it is necessary to explore debt that could be harmful to the Company’s share price.
The Company has had discussions with an alternate funding source, who offers more extensive programs that are more in tune with our future needs than what was previously available. The Company introduced the Smart Mirror on Amazon Marketplace and Way Fair who also offers business funding programs that we will be reviewing prior to finalizing a funding program. We do not have institutional financing in place and sales results of the Smart Mirrors and resulting revenues will be a factor in whether we can obtain institutional financing. With the current on hand cash, we believe we have sufficient funds to cover short-term operations for first half of 2022.
As of December 31, 2021, we had approximately $1.2
million of cash, and approximately $861$285 thousand of refundable income tax. We have also taken a number of actions short-term and long-term
to preserve existing capital, including reducing capital expenditures, reducing discretionary expenditures, executive management salary
reductions expense reductions related to the CIHK operations in Hong Kong and reductions in travel, hotel and show expenses. The credit
facility with Sterling National Bank was not renewed and terminated on July 31, 2020. The Company has been in discussions with alternate
funding sources that provides additional sourcing options for the e-commerce business channel that the Company is transitioning into.
However, in the event that we are unable to negotiate a new credit facility or if cash on hand and cash generated from operations are
not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financing, to
fund our operations and future growth. Our ability to access the credit and capital markets in the future as a source of liquidity, and
the borrowing costs associated with such financing, are dependent upon market conditions and our credit rating and outlook. With our reported
losses in recent years, we cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing
in the future. In addition, equity financing may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices
at which new investors would be willing to purchase our securities may be lower than the current price per share of our common stock.
The holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of common
stock. If new sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating
plans based on available funding, if any, which would harm our ability to grow or sustain our business.
The Company does not have an alternative product line to replace the Smart Mirror product line in 2022 if the Smart Mirror product line does not become a viable revenue source in 2022 and the LED lighting product line is not producing sufficient cash flow to sustain operations and fund a replacement product line from cash flow.
The Company does not have an alternative product line to the Smart Mirrors and would be unable to develop an alternative to smart mirrors in 2022. The failure of Smart Mirrors to produce sufficient cash flow in 2022 or early 2023 could potentially force the Company to effect an extraordinary corporate transaction to protect shareholder value and sustain the Company as an operating company. An extraordinary corporate transaction could include a merger or sale of the Company or reorganization of the Company under bankruptcy protection or otherwise or could result in the liquidation of the current business and efforts to fund a new business line in 2023 – if adequate, affordable funding is available. The Company may be unable to effect, if necessary, an extraordinary corporate transaction or obtain significant funding for a new product line in early 2023 to sustain the Company as an operating company. Reorganization under the protection of the bankruptcy code is one possible extraordinary corporate transaction if the Smart Mirror product line does not become a viable revenue source and other extraordinary corporate transactions are not possible.
Our operating results and sustainability as an operating company are substantially dependent on the acceptance of new products.
The Connected Surfaces product line is our effort to establish a viable product line to replace the matured LED product line and the success of the Connected Surfaces product line is critical to our continued operation as a consumer product company. Our future success depends on our ability to deliver innovative, higher performing and lower cost solutions for existing and new markets and for customers to accept those solutions. As a small company, innovation is critical to our ability to compete with larger competitors. We must introduce new products in a timely and cost-effective manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex process, and we have in some instances experienced delays in completing the development and introduction of new products. Our research and development efforts are aimed at solving increasingly complex problems, and we do not expect that all our projects will be successful. The successful development, introduction and acceptance of new products depend on a number of factors, including the following:
22
● | Having adequate, affordable, timely working capital funding. |
● | achievement of technology solutions required to make commercially viable products. |
● | the accuracy of our predictions for market requirements. |
● | our ability to predict, influence and / or reach evolving consumer and technical standards. |
● | our timely completion of product designs and development. |
● | our ability to effectively transfer increasingly complex products and technology from development to manufacturing; and |
● | market acceptance of our new product by retailers and consumers and availability of adequate inventory to timely meet demands of retailers and customers. |
If any of these or other similar factors becomes problematic, we may not be able to deliver and introduce new products in a timely or cost-effective manner and be unable to effectively compete in the product market segment.
Our operations depend on a small number of personnel and the loss of key personnel or the inability to replace or add key personnel could have a significant impact on our ability to grow or sustain operations.
We operate the executive operations with a relatively small number of personnel. Company has not developed personnel to readily replace key personnel. The loss of key personnel, being Stewart Wallach, Company’s Chief Executive Officer, and James McClinton, Company’s Chief Financial Officer, would severely harm the business. Our success also depends on our ability to identify, attract, hire, train and retain highly skilled technical, managerial, and sales and marketing personnel. Competition for these individuals is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. The inability to attract and retain such highly skilled personnel could harm our ability to obtain new customers and develop new products and could adversely affect our business and operating results. We do not have key man life insurance.
Our personnel are focused on executive management or marketing. Our marketing is supplemented by contractor sales agencies, and we have a relatively small research and development capability overseas. We rely on OEMs for certain technical development and design, and we have no current plans to develop an in-house technical development staff. The loss of an OEM would disrupt our business operations if we could not find a suitable replacement in short order. Company evaluates potential OEM’s from time to time to identify possible alternative production and technical development resources. If our operations grow, we may have to increase the number of our personnel in the future to handle any growth or expansion of product lines or product categories. Our ability to find and retain qualified personnel when needed by our growth or existing operations will be an important factor in determining our success in coping with any growth or efficiently handling existing operational burdens.
While our Smart Mirror is not primarily a fitness digital product and not primarily marketed as a fitness smart mirror, stressing overall connectivity functions rather than focusing on fitness like some competitors, fitness is one possible use of our product. As COVID-19 pandemic restrictions ease in 2022, consumers may opt to return to gyms and other outdoor activities, which may decrease consumer interest in fitness smart mirrors and possibly in our smart mirrors.
C.D.C. and states started to ease COVID-19 pandemic restrictions in 2022 and, as consumers resume activities like going to gyms or doing outdoor fitness, consumer interest in digital fitness products may wane. Fitness smart mirror competitors have been offering substantial rebates on their products in late 2021 or 2022. A decline in consumer interest in fitness smart mirrors may decrease consumer interest in smart mirrors in general. However, our Smart Mirrors are primarily marketed as a part of the smart home experience and IoT source and not primarily as a fitness smart mirror (as is the case with competitors like the MIRROR and TONAL smart mirrors). We do not have sufficient operational experience with Smart Mirrors to determine, and the extent and impact of consumers resuming pre-COVID-19 pandemic activities is not known as of the date of the filing of this Form 10-K for us to determine, if any decrease in consumer interest in fitness smart mirrors in 2022 will occur, or be significant, or adversely impact sales of our Smart Mirrors, which again are marketed and stress overall connectivity and IoT more than fitness functions.
During a downturn in the economy, consumer purchases of discretionary items are affected, which could materially harm our sales, profitability and financial condition and our prospects for growth. Historic inflation in 2022 has created uncertainty about consumer confidence and its impact on demand for our products in 2022.
Many of our products may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, unemployment, the availability of consumer credit and consumer confidence in future economic conditions. Uncertainty in U.S. economic conditions continues, particularly considering the impacts of the COVID-19 pandemic, and trends in consumer discretionary spending remain unpredictable. While the impact on the global economy remains uncertain, the United States has experienced a significant reduction in unemployment and financial markets have remained robust and uncertain at times. Historically, consumer purchases of discretionary items tend to decline during recessionary periods when disposable income is lower or during other periods of economic instability or uncertainty, which may lead to declines in sales and slow our long-term growth expectations. Any near or long-term downturn in the U.S. market in which we sell most of our products, or other key markets, may materially harm our sales, profitability and financial condition and our prospects for growth.
23
U.S. economy has experienced inflation of 7.9% for the Consumer Price Index for all Urban Consumers for the 12 months ended February 2022, which is a 40 year high rate, according to the U.S. Bureau of Labor Statistics. Inflationary rate for energy costs was a major component of the historic inflation and the conflict between Russian Federation and Ukraine is expected by many economists to add to the inflationary rate for energy costs. High inflation is one factor that could adversely impact consumer purchases of discretionary items like smart mirrors as well as add to the cost of transporting our products from Asia to the U.S. We do not have sufficient operating experience in the sale of the Smart Mirrors as of the date of the filing of this Form 10-K to determine the impact on 2022 revenues of this inflationary increase.
If we are unable to effectively develop, manage and expand our marketing programs and sales channels for our products, our operating results may suffer.
Our launch of an e-commerce website and
social media promotions of products are a new approach to marketing for our company and we lack sufficient operational history to judge
the effectiveness of the effort. E-commerce and social medica promotion may be critical to the success of the new Connected Surfaces products,
especially if consumer shopping at brick and mortar retailers continues to decline or remains depressed by COVID-19 pandemic concerns
and impact. The success of the Connected Surfaces products is critical to stabilizing and improving the business and financial condition
as well as prospects of the Company. We do not have an extensive staff devoted to e-commerce and social media promotions and we have not
retained outside firms to assist on a regular basis in this effort. We may have to devote more resources to e-commerce and social media
promotion in terms of staff, outside assistance or both and those expenditures will tax our financial resources. The Company is seeking
funding to support the promotion of the Connected Surfaces products. Attaining affordable funding of the marketing effort may be critical
to success of the marketing and promotion of the Connected Surfaces products. The cost and difficulty of establishing a new product line
is difficult to estimate and difficult to fund by a small company like the Company, especially when that effort faces the following challenges:
obstacles imposed by COVID-19 pandemic; inherent difficulties in penetrating an emerging, new product segment like smart mirrors, which
has a growing number of competitors and has an ongoing, evolving need to meet changing consumer expectations and demands for inventory purchasesenhanced
or new technologies and functions; and against numerous competitors with significantly greater financial and technology resources, brand
recognition and brand loyalty by consumers and logistical and marketing capabilities than our company.
As we seek to grow our new business line and expand into business channels that are different from those in which we have historically operated, those retailers may alter their promotional pricing or inventory strategies, which could impact our targeted sales of these products. If we are unable to effectively penetrate these channels or develop alternate channels to ensure our products are reaching the intended customer base, our financial results may be adversely impacted. In addition, if we successfully penetrate or develop these channels, we cannot guarantee that customers will accept our products.
The markets in which we operate are highly competitive and have evolving technical or consumer requirements.
The markets for our smart mirror products are highly competitive. The smart or interactive mirror market is an emerging market and attracting new competitors – many of those competitors have significantly greater business, personnel, technical and financial resources than us and have greater access to distribution channels on a domestic and international basis. They also have or have the ability to establish brand recognition and reputation with consumers in domestic and international markets on a scale that we cannot match. Although the Company is seeking an apparently accessible niche market in smart mirrors, the sub $1,000 residential market, the Company may be unable to overcome larger competitors in this niche market or gain a profitable niche in this market. Since the Company relies on OEM’s for technical development, the Company may also be unable to compete with new technologies and functions in the smart mirror market or be able to affordably license new technologies or functions that are demanded by consumers.
In the consumer lighting market, which is a maturing market for us, we compete with companies that manufacture and sell traditional lighting products and we compete with companies that make smart mirrors for residential use, we compete with companies that have greater market share, name recognition and technical resources than we do. Competitors continue to offer new products with aggressive pricing. Aggressive pricing actions by our competitors in our businesses could reduce margins if we are not able to reduce costs at an equal or greater rate than the sales price decline.
With the increased demand for consumer smart products, including the connected surfaces that is the focus of our business, we will continue to face increased competition in the future across our businesses. If the investment in capacity exceeds the growth in demand the electronic consumer market is likely to become more competitive with additional pricing pressures. With the emerging and evolving smart mirror market, we face growing competition and rapidly changing product technology and functionalities.
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As competition increases in smart products, including connected surfaces, we need to continue to develop new products that meet or exceed the needs of our customers. Therefore, our ability to continually produce smart, efficient and lower cost lighting products that meet the evolving needs of our customers will be critical to our success. Adequate, affordable and available funding is key to our ability to compete in LED lighting and smart mirror markets. Competitors may also try to align with some of our strategic customers. This could lead to lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our business, results of operations or financial condition.
As is true in any consumer product industry, the ability of a company to respond to changing consumer tastes and purchasing habits is key to success in consumer products. Introduction of new products brings the risk of increased development, production and marketing costs as well as that investment failing to produce revenues or profits that justify the investment in new products.
If our products fail to perform or fail to meet customer requirements or expectations, we could incur significant additional costs, including costs associated with the recall of those items.
The manufacture of our products involves complex processes. We have just started to sell the Smart Mirrors in 2022 and we do not have sufficient consumer experience with our products to determine the extent of any customer service problems or product returns and defects and those factors impact on revenues. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases, our products may contain undetected defects that only become evident after shipment and used by consumers. Even if our products meet standard specifications, our customers may attempt to use our products in applications for which they were not designed resulting in product failures and creating customer satisfaction issues. For a small company, identifying and meeting consumer demand and product quality standards are critical to our business and financial performance.
If failures or defects occur, they could result in significant losses or product recalls due to:
● | costs associated with the removal, collection and destruction of the product. |
● | payments made to replace product. |
● | costs associated with repairing the product. |
● | the write-down or destruction of existing inventory. |
● | insurance recoveries that fail to cover the full costs associated with product recalls. |
● | lost sales due to the unavailability of product for a period. |
● | delays, cancellations or rescheduling of order for our products; or |
● | increased product returns. |
A significant product recall could also result in adverse publicity, damage to our reputation and a loss of customer or consumer confidence in our products and could substantially undermine or delay any success in the critical Connected Surfaces product launch. Further, while we believe that product liability for consumer electronic products is not significant or widespread, we could face product liability lawsuits or regulatory proceedings by the Consumer Product Safety Commission (CPSC) and could suffer losses from a significant product liability judgment or adverse CPSC finding against us if the use of our products at issue is determined to have caused injury or contained a substantial product hazard to the public. We provide warranty periods of 1 year on our products. Although we believe our warranty reserves are appropriate, we are making projections about the future reliability of new products and technologies, and we may experience increased variability in warranty claims. Increased warranty claims could result in significant losses due to a rise in warranty expense and costs associated with customer support.
Delays in Testing or Shipping could adversely affect results from our Connected Surfaces Smart Mirror by delaying shipment of product and marketing roll-out of the product.
Like many consumer products, the Connected Surfaces
Smart Mirrors undergo independent laboratory testing to verify safety. COVID-19 pandemic caused a backlog of product testing at U.S. national
testing laboratories in 2020 and also in 202,1and the backlog delayed marketing roll out of consumer products, including the Connected
Surfaces Smart Mirrors. These delays slowed production and testing by to 5 months, We anticipate production of the Connected Surfaces
Smart Mirror in December 2021. Further, the Connected Surfaces Smart Mirrors are manufactured in Asia and shortages of shipping containers
for ocean shipment required us to use more expensive air freight to meet product availability requirements for sale of Connected Surfaces
Smart Mirrors through Amazon, which funding is criticalone of our distribution channels. The use of air freight for shipment of product is more expensive
than ocean vessel rates and the initial inventory shipments for Amazon fulfillment that is shipped by air freight would experience lower
profit margins.
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Historically, we depended on a limited number of retail customers for a substantial portion of our revenue, and the loss of, or a significant reduction in purchases by, one or more of these customers could adversely affect our operating results for any LED lighting product sales as well as any sales of Smart Mirror products sold through these retailers.
We typically receive a significant amount of our revenue from a limited number of customers. Most of our customer orders are made on a purchase order basis, which does not require any long-term customer commitments. Therefore, these customers may alter their purchasing behavior with little or no notice to us for various reasons, including developing their own product solutions; choosing to purchase from our competitors or incorrectly forecasting end market demand for their products. Retail customers may alter their promotional pricing; increase promotion of competitors’ products over our products; or reduce their inventory levels; all of which could negatively impact our financial condition and results of operations. If our customers alter their purchasing behavior, if our customers’ purchasing behavior does not match our expectations or if we encounter any problems collecting amounts due from them, our financial condition and results of operations could be negatively impacted.
While we are seeking to establish a vibrant
e-commerce capability and social media marketing effort to support the e-commerce initiative, we remain dependent on brick and mortar
retailers and their e-commerce efforts or on third party e-commerce retailers like Amazon and Wayfair. As such, if product sales from
our retail customers decline, it will adversely impact our financial and business performance, which could be especially damaging in light
of our need to transition from LED lighting product line to the launchnew Smart Mirror product line.
Our results of thisoperations could be
materially harmed if we are unable to accurately forecast demand for our products.
To ensure adequate inventory supply for
the new product line.
Factors that could affect our ability to accurately forecast demand for our products include:
● | an increase or decrease in consumer demand for our products. |
● | our failure to accurately forecast consumer acceptance for our new products. |
● | product introductions by competitors. |
● | unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders or at-once orders placed by retailers. |
● | weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products; and |
● | terrorism or acts of war, or the threat thereof, political or labor instability or unrest or public health concerns and disease epidemics, such as the current COVID-19 pandemic, which could adversely affect consumer confidence and spending or interrupt production and distribution of product and raw materials. |
Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could have an adverse effect on gross margin. In addition, if we underestimate the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships. These risks have materially increased and may persist with the market disruption caused by the COVID-19 pandemic.
The consumer electronics industry is subject
to significant pricing pressure caused by many factors, including technological advancements, intense competition, consolidation in the
retail industry, pressure from retailers to reduce the costs of products and changes in consumer demand. While unlikely as the product
segment is in its earliest stages, these factors could cause us to reduce our prices to retailers and consumers or engage in more promotional
activity than we anticipate. For example, in response to the COVID-19 pandemic’s impact on the retail industry, including
retail store closures and decreased consumer traffic and purchasing, many of our competitors have approximatelyengaged in, and may continue to engage
in, additional promotional activities focused on e-commerce sales. As traditional brick-and-mortar stores begin to reopen post-pandemic,
we may see further discounting across our industry as businesses manage excess inventory levels. In addition, our ability to achieve short-term
growth targets may be negatively impacted if we are unwilling to engage in promotional activity on a scale similar to that of our competitors
and we are unable to simultaneously offset declining promotional activity with increased sales at premium price points. This could have
a material adverse effect on our results of operations and financial condition.
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Fluctuations in the cost of products could negatively affect our operating results.
The components used by our suppliers and manufacturers are made of raw materials that may be subject to significant price fluctuations or shortages that could materially adversely affect our cost of goods sold. In addition, certain of our manufacturers are subject to government regulations related to wage rates, and therefore the labor costs to produce our products may fluctuate. The cost of transporting our products for distribution and sale is also subject to fluctuation. Because our products are manufactured abroad, our products must be transported by third parties over large geographical distances, increased demand for freight services at a time of reduced ocean freight capacity, can significantly increase costs. Manufacturing delays or unexpected transportation delays, such as those caused by the current COVID-19 pandemic, can also cause us to rely more heavily on airfreight to achieve timely delivery to our customers, which significantly increases freight costs. Any of these fluctuations may increase our cost of products and have an adverse effect on our profit margins, results of operations and financial condition. The emergence and continuation of historic inflation in early 2022 could adversely impact our competitive pricing strategy by imposing increased production and shipping costs for the Smart Mirrors in 2022.
Regulatory and Legal Risks
Our business may be impaired by claims that we infringe the intellectual property rights of others.
Litigation between competitors over intellectual property rights can be a common business practice in an industry as a means to protect or gain market share. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in such litigation, we could be required to:
● | pay substantial damages. |
● | indemnify our customers. |
● | stop the manufacture, use and sale of products found to be infringing. |
● | discontinue the use of processes found to be infringing. |
● | expend significant resources to develop non-infringing products or processes; or |
● | obtain a license to use third party technology. |
The risk of infringement claims may be greater in emerging products and technologies like smart mirrors.
There can be no assurance that third parties will not attempt to assert infringement claims against us with respect to our products. Additionally, if an infringement claim against the Company or its customers is successful, the Company may be required to pay damages or seek royalty or license arrangements, which may not be available on commercially reasonable terms. The payment of any such damages or royalties may significantly increase the Company’s operating expenses and materially harm the company’s operating results and financial condition. Further, royalty or license arrangements may not be available at all, which would then require the company to stop selling certain products or using certain technologies, which could negatively affect the company’s ability to compete effectively. We do not have reserves for litigation or insurance for infringement litigation costs. This kind of litigation is typically very expensive to litigate, and we may lack the funds to aggressively litigate infringement claims against us or against competitors, which could lead to a materially adverse impact on our business.
Our operations in foreign countries expose us to certain risks inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.
We have revenue, operations and contract manufacturing arrangement in overseas that expose us to certain risks. Fluctuations in exchange rates may affect our revenue, expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements. We are also subject to other types of risks, including the following:
● | Delays in shipping or production of products or increased costs in production and shipping of products from international sources, including delays in unloading shipped products in U.S. ports. |
● | protection of intellectual property and trade secrets. |
● | tariffs, customs, trade sanctions, trade embargoes and other barriers to importing/exporting materials and products in a cost effective and timely manner, or changes in applicable tariffs or custom rules. |
● | rising labor costs or labor unrest. |
● | the burden of complying with foreign and international laws. |
● | adverse tax consequences. |
● | the risk that because our brand names may not be locally or nationally recognized, we must spend significant amounts of time and money to build brand recognition without certainty that we will be successful. |
● | political conflict or trade wars affecting our efforts to conduct business abroad. |
Changes in regulatory, geopolitical, social, economic, or monetary policies and other factors may have a material adverse effect on our business in the future or may require us to significantly modify our current business practices. Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could also result in an adverse effect on our business and results of operations.
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We do not have extensive prior experience in conducting business in Thailand, which is the location of our product development and production (supplemented by contractors in China). This lack of experience may delay accomplishing our business milestones for development or production of product from our Thailand OEM’s.
Our financial results and ability to grow our business may be negatively impacted by economic, regulatory and political risks beyond our control.
All of our manufacturers are located outside of the United States and in 2021, 50% of net revenue was generated by international business. As a result, we are subject to risks associated with doing business abroad, including:
● | political or labor unrest, terrorism, public health crises, disease epidemics and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured. |
● | currency exchange fluctuations or requirements to transact in specific currencies. |
● | the imposition of new laws and regulations or government-imposed protective or preventative measures, including those relating to labor conditions, quality and safety standards and disease epidemics or other public health concerns, as well as rules and regulations regarding climate change. |
● | actions of foreign or U.S. governmental authorities impacting trade and foreign investment, particularly during periods of heightened tension between U.S. and foreign governments, including the imposition of new import limitations, duties, anti-dumping penalties, trade restrictions or restrictions on the transfer of funds. |
● | reduced protection for intellectual property rights in some countries. |
● | disruptions or delays in shipments. |
● | changes in local economic conditions in countries where our customers, manufacturers and suppliers are located. |
These risks could negatively affect the
ability of our manufacturers to produce or deliver our products or procure materials and increase our cost of doing business generally,
any of which could have an adverse effect on our results of operations, cash on handflows and financial condition. If one or more of $ 1.2 millionthese factors,
make it undesirable or impractical for us to conduct business in a particular country our business could be adversely affected.
Additional Financial Risk Factors
Our inadequate or expensive funding and financing alternatives.
Our current short-term debt level as of
December 31, 2021 those funds will be utilizedand 2020 was approximately $609 thousand and $889 thousand, respectively.
Based on past performances and current expectations,
Management believes that the recent $1,393,000 equity investment and the $1,020,000 purchase order funding facility provides adequate
liquidity to meet the Company’s cash needs for basic operating expenses in the United Statesour daily operations, capital expenditures and overseas, continued product developmentprocurement of the Connected Surfaces portfolio, Social Media marketingSmart Mirror inventory
for the first two quarters of 2022.
The Company will need additional outside funding
in fiscal year 2022, particularly for purchase order funding that will support the Company’s revenue growth and paymentinventory buildup
with the launch of marketing accruals to existing retail customers. We are seeking equity or debt funding for inventory purchases and marketing of our new Connected Surfaces in order to preserve cash on hand for operating expenses. Due to the decline in revenues from our traditional LED Lighting product line, we need to raise the funding for inventory and marketing of the Connected Surfaces Smart Mirror product lineline.
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 fully fund the projected financial needs for the initial phase of the product launch, which initial phase is deemed critical to the prospects of the product launch. The Connected Surfaces Smart Mirror product line is deemed critical to replacement of the existing LED lighting product line as the Company's operating revenue source.
Other adverse consequences could include:
● | a significant portion of our cash from operations could be dedicated to the payment of interest and principal on future debt, which could reduce the funds available for operations. |
● | the level of our future debt could leave us vulnerable in a period of significant economic downturn; and |
● | we may not be financially able to withstand significant and sustained competitive pressures. |
Since we are transitioning our product focus
to Connected Surfaces products and considering the impact of the COVID-19 pandemic on our LED product sales through brick and mortar retailers,
past financial performance is not indicative of any future growth or future financial performance. We will have to establish our Connected
Surfaces product line in the face of extensive competition.competition as an entirely new segment within the Smart Home category.
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Currency fluctuations may significantly increase our expenses and affect the results of operations, especially where the currency is subject to intense political and other outside pressure.
All our sales in 2020 were2021were transacted in
U.S. dollars. The weakening of the U.S. dollar relative to foreign currencies can negatively impact our operating profits, through higher
unit costs. However, as the Company volumes increase, the leveraged buying power has enabled the Company to minimize the impact on costs.
The last economic crisis revealed that exchange rates can be highly volatile. Changes in currency exchange rates may also affect the relative
prices at which we and our competitors sell products in the same market. There can be no assurance that the U.S. dollar foreign exchange
rates will be stable in the future or that fluctuations in such rates will not have a material adverse effect on our business, results
of operations, or financial condition.
If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations. If our internal control over financial reporting is not effective, it may adversely affect investor confidence in us and the price of our common stock.
As a public company we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal control over financial reporting. If we identify material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, or if we are unable to comply with the requirements of the Sarbanes-Oxley Act in a timely manner, then, we may be late with the filing of our periodic reports, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected.
Risk Factors for our Common Stock
Penny Stock and Volatile Market Price.
After the announcement of the $750,000 working capital
credit line by two Company directors and announcement of the new Connected Surfaces Smart Mirror product launch, the market price of our
common stock rose significantly in first fiscal quarter of 2021. The Company is not promoting its common stock and has not retained any third party to promote the common stock. The Company has no intention of conducting any stock promotional activities in the foreseeable future as of the date of the filing of this Form 10-K report. As a matter of policy, the Company never recommends any investment in
its common stock to public investors.
Due to the factors described below, the Company common stock’s
Common Stock is subject to possible volatile trading, including rapid increases and decreases in market price due to trading in the open
market. The Company common stock’s Common Stock lacks the primary market makers and institutional investors who can protect the market price
from volatility in trading and market price. Further, the Company does not have any research analyst issuing recommendations (with exception of an unsolicited March 2021 rating by Smart Score).recommendations. The common stock is also
a “penny stock”“penny stock” under SEC rules and suffers the limitations and burdens in trading of penny stocks. This lack of market support
and penny stock status means that trading, especially by day traders, can cause a rapid increase or decrease in market price of the common
stock and makes any investment in the common stock extremely risky and unsuitable for investors who cannot withstand the loss of their
entire investment and requires liquidity in the investment. An investment in the Common Stock remains an extremely risky investment that
is not suitable for investors who cannot afford the loss of investment and can withstand or tolerate a lack of liquidity.
In March 2021, our Common Stock was approved for DWAC/Fast electronic transfer, which will enhance trading of our Common Stock, but will not eliminate the issues imposed by the lack of market support for the Common Stock or the “penny stock” status of our Common Stock and, as such, will not lessen the volatility in trading and market price of our Common Stock. Further, restricted stock cannot be DWAC/Fast transferred. Many brokerage houses do not want or readily accept “penny stocks” in trading accounts.
We are also a former shell company under current SEC rules and interpretations thereof. As such, our stock transfer agent requires a legal opinion as well as other paperwork to lift restrictive legends from stock certificates for non-affiliated as well as affiliated shareholders. The restrictive legends can only be lifted for at most a 90-day period for sales under Rule 144 for affiliated and non-affiliated shareholders. Further, our stock transfer agent will not permanently remove restrictive legends on stock certificates held by shareholders. absent registration of the shareholder’s shares of common stock under the Securities Act. This status may make our common stock even more unappealing to investors and potential purchasers and more difficult to sell or trade. “Affiliated shareholders” are generally Company officers, directors, and holders of more than 10% of the issued shares of the Common Stock.
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No Dividends.
We have not paid, and we do not intend to pay dividends on our Common Stock in the foreseeable future. We currently intend to retain all future earnings, if any, to finance our current and proposed business activities. We may also incur indebtedness in the future that may further prohibit or effectively restrict the payment of cash dividends on our Common Stock.
Our common stock is “penny stock”“penny stock”
under SEC rules and we are a former shell company for resale purposes under rule 144 –– which makes our stock difficult to sell or
trade.
Our common stock is currently traded on the OTCQB
(Symbol: CAPC) and is subject to the "penny“penny stock rules"rules” adopted pursuant to Section 15(g) of the Exchange Act. The penny
stock rules apply to OTC-quoted companies whose common stock trades at less than $5.00 per share and such rules require, among other things,
that brokers who trade "penny stock"“penny stock” to persons other than "established customers"“established customers” complete certain documentation,
make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a
risk disclosure document and quote information under certain circumstances. Penny stocks sold in violation of the applicable rules may
entitle the buyer of the stock to rescind the sale and receive a full refund from the broker. Many brokers have decided not to accept
for deposit or trade "penny stock"“penny stock” stocks because of the burdensome administrative requirements of the penny stock rules and
perceived greater liability exposure from handling penny stocks, and as a result, the number of broker-dealers willing to act as market
makers in such securities is limited. In the event that we remain subject to the "penny“penny stock rules"rules” for any significant period,
there may develop an adverse impact on the market, if any, for our securities. Because our common stock is subject to the "penny“penny
stock rules,"” investors will find it more difficult to dispose of our common stock. As a “penny stock”“penny stock” company, brokerage
firms cannot recommend our Common Stock to investors or accept orders for our Common Stock without completing special paperwork.
In March 2021, our common stock was approved for DWAC/Fast
electronic transfer, which will enhance trading of our common stock, but will not eliminate the issues imposed by the lack of market support
for the common stock or the “penny stock”“penny stock” status of our common stock and, as such, will not lessen the volatility in trading
and market price of our common stock.
We are also a former shell company under
current SEC rules and interpretations thereof. As such, our stock transfer agent requires a legal opinion as well as other paperwork to
lift restrictive legends from stock certificates for non-affiliated as well as affiliated shareholders. Further, our stock transfer agent
will not permanently remove restrictive legends on stock certificates held by affiliated shareholders. This status may make our common
stock even more unappealing to investors and potential purchasers and more difficult to sell or trade. “Affiliated shareholders”“Affiliated shareholders”
are generally Company officers, directors and holders of more than 10% of the issued shares of the common stock.
Our controlling stockholders may take actions that conflict with your interests.
Certain of our officers and directors beneficially own approximately 40% of our outstanding common stock as of the date hereof. Assuming support from public shareholders with a sufficient voting power, then our officers and directors will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions, and they will have significant control over our management and policies. The directors elected by these stockholders will be able to influence decisions affecting our capital structure significantly. This control may have the effect of delaying or preventing changes in control or changes in management or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interest. For example, our controlling stockholders will be able to control the sale or other disposition of our operating businesses and subsidiaries to another entity.
General Risk Factors
Consumer shopping preferences and shifts in distribution channels continue to evolve and could negatively impact our results of operations or our future growth.
Consumer preferences regarding the shopping experience continue to rapidly evolve. We sell our products through a variety of channels, including through wholesale customers and we are launching our own direct to consumer business consisting of our brand and e-commerce platform. If we or our wholesale customers do not provide consumers with an attractive in-store experience, our brand image and results of operations could be negatively impacted. In addition, as part of our strategy to grow our e-commerce revenue, we are investing significantly in enhancing our platform capabilities and implementing systems to drive higher engagement with our consumers. If we do not successfully execute this strategy or continue to provide an engaging and user-friendly digital commerce platform that attracts consumers, our brand image and results of operations could be negatively impacted as well as our opportunities for future growth. In addition, we cannot predict whether and how the COVID-19 pandemic will impact consumer preferences regarding the shopping experience in the long-term and how quickly and effectively we will adapt to those preferences. We have commenced our Social Media/e-commerce marketing initiative in response to current trends in consumer purchasing habits and in case the traditional brick-and-mortar retail continues to suffer and decline under the assault from the COVID-19 pandemic as well as a growing trend towards e-commerce shopping by consumers that pre-dates the COVID-19 pandemic.
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The Company’sCompany’s operations could be
disrupted by natural or human causes beyond its control.
The Company’sCompany’s operations are subject to
disruption from natural or human causes beyond its control, including physical risks from hurricanes, severe storms, floods and other
forms of severe weather, accidents, fires, earthquakes, terrorist acts and epidemic or pandemic diseases such as the COVID-19, any of
which could result in suspension of operations or harm to people or the environment. While all of the Company’sCompany’s corporate operations
are located in the United States, the Company participates in a Chinese and Thailand product supply chain, and if a disease spreads sufficiently
to cause a pandemic (or to cause the fear of a pandemic to rise) or governments regulate or restrict the flow of labor or products or
impede the travel of Company personnel, the Company’sCompany’s ability to conduct normal business operations could be impacted which could
adversely affect the Company’sCompany’s results of operations and liquidity. Most of the Company products are sourced and made in China and
Thailand and an increased or prolonged disruption of either economy by COVID-19 could substantially and adversely impact the Company’sCompany’s
production of products. Currently, the Company’sCompany’s Chinese and Thailand suppliers have reopened and building to full production capabilities.
We may not successfully execute our long-term strategies, which may negatively impact our results of operations.
Our ability to execute on our long-term strategies depends, in part, on successfully executing on strategic growth initiatives in key areas, such as our new Connected Surfaces category, LED lighting and our new online direct to consumer sales channel. Our growth in these areas depends on our ability to continue to successfully market these new products to existing customers, grow our e-commerce and mobile application offerings in the U.S. market and continue to successfully increase our product offerings in the Connected Surfaces category. Our ability to invest in these growth initiatives on the timeline and at the scale we expect will be negatively impacted if we continue to experience significant market disruption due to COVID-19 or other significant events, particularly in the U.S. market and in declining sales. In addition, our long-term strategy depends on our ability to successfully drive expansion of our gross margins, manage our cost structure and drive return on our investments. If we cannot effectively execute our long-term growth strategies while managing costs effectively, our business could be negatively impacted, and we may not achieve our expected results of operations.
If we fail to adequately protect intellectual property rights, competitors may manufacture and market similar products, which could adversely affect our market share and results of operations.
We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. Our trademarks are of material importance to our business and are among our most important assets. In 2020, substantially all of our total revenues were from products bearing proprietary trademarks and brand names. Accordingly, our future success may depend, in part, upon the goodwill associated with our trademarks and brand names. We own a number of patents; patent applications and other technology which we believe are significant to our business.
Our products are made in China and Thailand. We face risks that our proprietary information may not be afforded the same protection in China as it is in countries with well-developed intellectual property laws, and local laws may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights in China, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. We cannot be sure that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect, or maintain our own intellectual property rights or, where appropriate, license intellectual property rights necessary to support new product introductions. We cannot be certain that these rights, if obtained, will not be invalidated, circumvented or challenged in the future, and we could incur significant costs in connection with legal actions to defend our intellectual property rights.
Even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold do not protect intellectual property rights to the same extent as the laws of the United States. If other parties infringe our intellectual property rights, they may dilute the value of our brands in the marketplace, which could diminish the value that consumers associate with our brands and harm our sales. The failure to perfect or successfully assert our intellectual property rights could make us less competitive and could have a material adverse effect on our business, operating results, and financial condition.
There may be emerging, or new technologies patented by others. These new technologies may be critical to competing in a product niche, especially one like the emerging smart mirrors in smart home industry. We may be unable to license or affordably license new technologies owned by others and critical to competing in the product niche.
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Our results of operations and financial condition could be seriously impacted by security breaches, including cybersecurity incidents.
Failure to effectively prevent, detect and recover from security breaches, including attacks on information technology and infrastructure by hackers; viruses; breaches due to employee error or actions; or other disruptions could result in misuse of our assets, business disruptions, loss of property, and confidential business information. Such attacks could result in unauthorized parties gaining access to at least certain confidential business information. However, to date, we have not experienced any financial impact, changes in the competitive environment or business operations that we attribute to such attacks. Although management does not believe that we have experienced any security breaches or cybersecurity incidents, there can be no assurance that we will not suffer such attacks in the future. We actively manage the risks within our control that could lead to business disruptions and security breaches and have expended significant resources to enhance our control environment, processes, practices and other protective measures. Despite these efforts, as these threats continue to evolve, particularly around cybersecurity, such events could adversely affect our business, financial condition or results of operations.
We expect our results of operations to fluctuate on a quarterly and annual basis.
Company’s revenue and results of operations could vary significantly from period to period and may fail to match expectations because of a variety of factors, some of which are outside of our control. As a result of the potential variations in our revenue and results of operations, period-to-period comparisons may not be meaningful and the results of any one period should not be relied on as an indication of future performance. In addition, our results of operations may not meet the expectations of investors or public market analysts who follow us, which may adversely affect our stock price. Since the Connected Surfaces products are a new product line, we lack the operational experience to determine if Connected Surface products have seasonal sales cycles.
Item 1B. Unresolved SEC Staff Letters.
None for the fiscal year ended December
31, 2020.
Item 2. Properties.
The Company has an operating lease agreementsagreement
for offices in Deerfield Beach, Florida and in Hong Kong SAR, expiring at varying dates. Neither.Neither the Company nor its operating subsidiaries own any real properties or facilities. CAPC
and Capstone share principal executive offices and operating facilities. The Company’sCompany’s principal executive offices is located at
431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441.
Effective November 1, 2019, the Company
entered into a new prime operating lease with the landlord “431“431 Fairway Associates, LLC”LLC” ending June 30, 2023, for the Company’sCompany’s
executive offices located on the second floor of 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, Capstone is also responsible for a portion of common area maintenance charges in the leased premises
which has been estimated at $12.00 per square foot on an annualized basis of which the premises is approximately 4,694 square feet.
Capstone International Hong Kong Ltd, (CIHK), entered into a lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong. The original agreement which was effective from February 17, 2014 has been extended various times. On August 17, 2019, the lease was further extended with a base monthly rate of $5,100 for six months until February 16, 2020. The Company decided not to renew and allowed this lease to expire.
CIHK entered into a six (6) month rental agreement effective from December 1, 2016 for a showroom
and storage space at 3F, Wing Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. This agreement has been extended
various times. The lease with a base monthly rent of $1,290 expired August 16, 2019 and was further renewed for (6) months expiring on February 16, 2020. Effective February 17, 2020, the Company entered into a new six month lease expiring on September 30, 2020, with a base rate of $1,285 per month. To further
reduce costs, effective September 30, 2020 the Company reduced its space requirements and entered a three-month lease expiringwhich expired
on December 31, 2020, with a base rate of $516 per month. The Company decided not to renew and allowed this lease to expire.
The rent expense for the year ended December
31, 20202021 and 20192020 amounted to $148,207 and $165,706, and $100,616 , respectively. The rent increase in the year ended December 31, 2020 as compared to the previous year, resulted mainly from the expiry of a $8,383 monthly rent incentive that ended January 31, 2020. At the commencement date of the new office lease, the Company recorded
a right-of-use asset and lease liability under ASU 2016-02, Topic 842.
We believe that the facilities are well maintained, in compliance with environmental laws and regulations, and adequately covered by insurance. We also believe these leased facilities are not unique and could be replaced, if necessary, at the end of the term of the existing leases.
The Company has two short storage rentals with durations of less than twelve months.
Item 3. Legal Proceedings.
We are not a party to any material pending legal proceedings and, to the best our knowledge, no such action by or against us has been threatened. From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of 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 our financial position, results of operations or cash flows.
Other Legal Matters
To the best of our knowledge, none of our directors, officers or owner 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 4. Mine Safety Disclosures (Not Applicable).
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PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
The Company'sCompany’s Common Stock is quoted
on The OTC Markets Group, Inc.'s’s QB Venture Market Tier under the trading symbol "CAPC”“CAPC”.
As of March 1, 20212022 there were approximately 1,820 holders of record (excluding
OBO/Street Name accounts) of our Common Stock and estimated 46,296,36448,893,031 outstanding shares of the Common Stock.
Dividend Policy
We have not declared or paid any cash or other dividends on shares of our Common Stock in the last six years, and we presently have no intention of paying any cash dividends on shares of our Common Stock. We do not currently anticipate, based on existing financial performance, to be declaring or paying dividends on any series of our preferred stock in the foreseeable future. Our current policy is to retain earnings, if any, to finance the expansion and development of our business. The future payment of dividends on shares of our Common Stock are at the sole discretion of our board of directors.
Recent Sales of Unregistered Securities
There were no unregistered securities
sold or issued during the year ended December 31, 2020.2021, except: (1) On August 6, 2020, Company granted: stock options to Mr. Guzy and
Mr. Postal, who are directors of the Company, each received 100,000 stock option grants for participating in the Audit and Nomination
and Compensation Committees for the year 2020-2021: and (2) a stock option to Aimee Brown, Secretary of the Company, for 10,000 stock
option grants. The stock options were issued under an exemption from registration under Section 4(a)(2) of the Securities Act and Rule
506(b) of Regulation D under that act.
On January 4, 2021, the Company entered
a Loan Agreement with Directors Stewart Wallach and Jeff Postal as joint lenders (the “Lenders”“Lenders”) whereby Lenders will makemade a maximum
of Seven Hundred and Fifty Thousand Dollars and No Cents ($750,000) (principal) available as a credit line to the Company for working
capital purposes.
The term of the loan starts January 4, 2021
and endsended June 30, 2021 (“Initial Period’).2021. The Company may extendcould have extended the Initial Periodloan for an additional six consecutive months, ending December 31, 2021,
under the same terms and conditions of the Initial Period.
In consideration for the Lenders providing
the loan under this Agreement for the Initial Period and agreeing to a below market rate of interest, and as payment of a finance fee
for the loan on an unsecured basis, the Company issued to the Lenders the following securities 7,500 shares of the Company’sCompany’s Series B-1 Convertible Preferred
Stock (“(“Preferred Shares”Shares”) issued to each Lender.. The Preferred Shares shall have the appropriate restrictive legends. Each Preferred Share converts
into 66.66 shares of Common Stock at the option of Lender.
Unregistered Sales of Equity Securities and Use of Proceeds.
On July 15, 2021, Jeffrey Guzy a Company director,
exercised a previously granted non-qualified stock option and purchased 100,000 shares of Company common stock for an aggregate purchase
price of $43,500 or a per share price of $.435. The shares are restricted shares under federal securities laws and were acquired by independent
Director Guzy. The proceeds will be used by the Company electsfor general working capital to extendsupport the Initial Period for a further 6 consecutive months,rollout of the Smart Mirror product
line.
All securities issued and described above were issued in reliance on an exemption from registration under the Securities Act contained in Rule 506(b) of Regulation D and Section 4(a)(2).
Company must issue to the Lenders, 500,000did not repurchase any shares of Common
Stock during 2021 under the Company’s common stock, $0.0001 par value per share, issued to each Lender. The Company will cause a stock certificate to be issued to each Lender with the appropriate restrictive legends.Rule 10b5-1 Purchase Plan.
33
Adoption of Stock Repurchase Plan
On December 19, 2018, Company entered
into a Rule 10b5-1 Purchase Plan with Wilson Davis && Co., Inc., a registered broker-dealer, (the "Purchase Plan"“Purchase Plan”), which
Purchase Plan is made pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, with respect to shares of common
stock of the Company. As previously reported, the use of a Rule 10b5-1 purchase plan was authorized by the Company'sCompany’s Board of Directors
on August 29, 2018. Under the Purchase Plan, Wilson Davis && Co., Inc., a registered broker dealer, will make periodic purchases of up to an aggregate of 750,000 shares at prevailing market prices, subject toin
accordance with the terms and conditions of the Purchase Plan.Plan and instructions of the Company. This description of the Purchase Plan does
not purport to be complete and is qualified in its entirety by the text of the Purchase Plan, a copy of which is attached as Exhibit 99.1
to the Current Report on Form 8-K, as filed with the Commission on December 24, 2018 and as dated December 18, 2018.
On May 31, 2019, the Company’sCompany’s Board of
Directors approved a further extension of the Company’sCompany’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 September 23, 2019 the Company signed a revised stock Purchase Plan to reflect an extension of the plan to repurchase up to an aggregate of 750,000 shares at prevailing market prices, subject to the terms of the Purchase Plan.
On March 30, 2020, Wilson Davis && CO.,
Inc., advised the Company that 750,000 of the Company’sCompany’s Common Stock had been repurchased to complete the authorized Purchase Plan.
On June 10, 2020, the Company’sCompany’s
Board of Directors approved a further extension of the Company’sCompany’s stock repurchase plan through August 31, 2021. Since the Board
of Director approval there have been no further repurchase of the Company’sCompany’s Common Stock during 20202021 and further Stock repurchases
have been placed on hold in order to conserve cash during the COVID-19 pandemic.
As of December 31, 2020,2021, a total of 750,000
of the Company’sCompany’s Common Stock has been repurchased to date, at a total cost of $107,740.
For the year ended December 31, 2021 and 2020
respectively, 0 and 2019 respectively, 283,383 and 466,617 Common shares were repurchased at a cost of $0 in 2021 and $36,333 in 2020 and $71,407 in 2019.
The following summarizes any purchases
of the Common Stock under the stock purchase program in fiscal years 2021 and 2020 and 2019 :
Fiscal Period | Number of Shares Repurchased | Aggregate Purchase Price | ||||||
FY 2020 | 283,383 | $ | 36,333 | |||||
FY 2019 | 466,617 | 71,407 | ||||||
Total | 750,000 | $ | 107,740 |
Fiscal Period | Number of Shares Repurchased | Aggregate Purchase Price | |||||||
FY 2021 | — | $ | — | ||||||
FY 2020 | 283,383 | 36,333 | |||||||
Total | 283,383 | $ | 36,333 |
Item 6. Selected Financial Data. (Not Applicable)
Item 7. Management'sManagement’s Discussion and Analysis of Financial
Condition and Results of Operations
This Item 7, "Management's“Management’s Discussion
and Analysis of Financial Condition and Results of Operations,"” and other parts of this Report contain forward-looking statements,
that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions
and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified
by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may,"“future,” “anticipates,” “believes,” “estimates,” “expects,”
“intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,”
“may,” and similar terms. Forward-looking statements are not guarantees of future performance and Company’sCompany’s actual results
may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed in this Report under the heading "Risk“Risk Factors,"” which are incorporated herein by
reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included
in this Report. All information presented herein is based on CAPC'sCAPC’s fiscal year 20202021 results. Unless otherwise stated, references
to particular years or quarters refer to the CAPC'sCAPC’s fiscal years ended in December and the associated quarters of those fiscal years.
Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
34
Executive Summary
In December 2019, COVID-19 emerged and spread worldwide. The World Health Organization declared COVID-19 a pandemic in March 2020, resulting in federal, state and local governments and private entities mandating various restrictions, including the closure of non-essential businesses, travel restrictions, restrictions on public gatherings, stay-at-home orders and advisories and quarantining of people who may have been exposed to the virus. After closely monitoring and taking into consideration the guidance from federal, state and local governments, in March 2020, we temporarily closed our corporate offices in the U.S until May 2020, when the Corporate office was reopened daily but with staff working on a rotating schedule.
COVID-19 has caused substantial disruption
to travel, business activities, and global supply chains, significant volatility in global financial markets, and has resulted in a dramatic
increase in unemployment, particularly in the U.S. The extent to which COVID-19 will continue to impact the company’scompany’s results will
depend primarily on future developments, including the severity and duration of the crisis, the speed and effectiveness of the national
vaccine inoculation programs, potential mutations of COVID-19, and the impact of actions taken and that will be taken to contain COVID-19
or treat its impact. These future developments are highly uncertain and cannot be predicted with confidence.
This pandemic has had and may continue to have a material impact on our business, results of operations, financial position and cash flow. In response to the COVID-19 pandemic, we took precautionary measures to maintain adequate liquidity by suspending share repurchases, temporarily deferring salaries of our executives by 50%, significantly scaling back on non-essential operating expenses, and downsizing our Hong Kong operation, as we transferred manufacturing to Thailand. Our goal was to preserve cash but to continue to invest where needed to support the relaunch of the Connected Surfaces program.
The impact of COVID-19 has resulted in an
unprecedented decline in our revenue and earnings for the year ended December 31, 2020,2021, including goodwill impairment charges in the period.
Total net revenue for the year ended December
31, 20202021 decreased 77.7%75.2% to approximately $2.8 million$686 thousand as compared to $12.4$2.8 million in the same period of last year. The net loss was
approximately $2.4$2.0 million for the year 20202021 compared to a net loss of $892 thousand$2.4 million in 2019.2020. The Company had an estimated net tax benefitprovision
in 2021 of $15.1 thousand and in 2020 a benefit of $612 thousand due to the tax benefit from the CARES Act which was enacted into law
on March 27, 2020. The CARES Act eliminated the taxable income limit for certain net operating losses (“NOLs”(“NOLs”) and allow businesses
to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years. The Company was able to carryback the NOL to 2017 tax
years and generate an estimated refund of previously paid income taxes at an approximate 34% federal tax rate.
The following discussion is designed to provide a better understanding of our audited consolidated financial statements and notes thereto, including a brief overview of our business and products, key factors that impacted our performance and a summary of operating results.
Overview
Capstone Companies, Inc. (“Company”(“Company”
or “CAPC”“CAPC”) is a public holding company organized under the laws of the State of Florida. The Company is a leading designer,
manufacturer and marketer of consumer inspired products that simplify daily living through technology. Over the past decade, the Company’sCompany’s
various product lines have been distributed globally including consumer markets in Australia, Japan, Korea, North America, South America,
and the United Kingdom. The primary operating subsidiary is Capstone Industries, Inc. (“CAPI”(“CAPI”), a Florida corporation located
at the principal executive offices of the Company. To oversee and manage business activities in the Pacific Rim, the Company established
Capstone International Hong Kong, Ltd., or "CIHK"“CIHK”, allowing it to expand the Company'sCompany’s product development, engineering,
and factory resource capabilities. The Company has a history of exploiting technologies in areas of induction charging, power failure
control, security and home LED lighting products and most recently has entered the electronics market with its introduction of Capstone’sCapstone’s
Connected Surfaces.
The Company'sCompany’s focus through 2017 has
been in the integration of LEDs into most commonly used consumer lighting products in today'stoday’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”“must have” consumer product as in previous years.
Capstone’s success has been in its
ability to identify emerging product categories where Capstone’sCapstone’s management experience can be fully leveraged. Over the past decade,
the Company’sCompany’s consistent low-cost manufacturing and operations have provided an advantage in delivering quality products at very
competitive prices.
In late 2017, as management recognized that
the LED category was maturing, it sought a business opportunity that would transition the Company’sCompany’s revenue streams to an emerging
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 Smart Mirrors, is believed to be essential for sustaining or growing revenues.
35
Our expectation is that the new Connected Surfaces
portfolio advancing in 20212022 appeals to a much larger audience than our traditional LED lighting product line. The new portfolio is designed
to tap into consumer’sconsumer’s 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 retails to start at $699.00$899.00 per unit, with the goal to deliver consumer value to mainstream
America. Whereas, during the day your smartphone/tablet keeps you connected, whether it is work or personal, now when entering your home,
Capstone’sCapstone’s new Connected Surfaces products will enable users the same level of connectivity in a more relaxed manner that does not
require being tethered to these devices.
The company'sCompany’s financial initiatives are driven
by its entry to new distribution channels and calls for an increased emphasis on an e-commerce business model. As a result of the pandemic,
retail foot traffic has been diminished substantially and e-commerce platforms have advanced with consumers across all product lines.
The Connected Surfaces category should find its way to retail shelves after it has been established through its direct-to-consumer effort.
The Company’sCompany’s marketing strategy will shift its historic reliance on Big Box while delivering more profitable business. The gross
margins generated by the e-commerce model will be substantially greater than in the past and should provide strong cash flows. The Company
will require additional funding to build its marketing effort, inventory levels and service levels once the initial marketing phase validates
the Company’sCompany’s strategic initiatives. The future growth will be directly impacted by the level of exposure, messaging and distribution
capabilities. For the short term, Corporate Insiders and Directors have pledged to continue supporting the Company’sCompany’s needs.
By working diligently overseas with alternate manufacturers located outside China, particularly in Thailand, we anticipate minimal impact to our selling prices and related margins of profit that could otherwise be impacted by an ongoing trade dispute between the United States and China.
The Company began its foray into the electronic industry in 2019 with its Connected Surfaces initiative. We entered the market as we identified the smart home category to be emerging with strong long term growth potential .This strategy would require the company to adopt a different business model short term as a way of building awareness and revenues .The business model is consumer direct through e-commerce marketing including a company webstore as well as Amazon, Wayfair and other recognized ecommerce platforms. This is a costly business as it requires the buildup of inventory domestically to support the demand. The ecommerce platform will not only build product awareness ,but it will also allow the company to exploit the brick-and-mortar environment as retailers recognize the categories business potential. The company’s original assumptions about the category and what it could mean for the company have been validated over the past 2 years. The Company is assessing various organic and digital paid advertising campaigns to define its long term marketing strategy.
On March 10, 2020, the World Health Organization declared the outbreak of the COVID-19 coronavirus to be a pandemic. COVID-19 caused substantial disruption to travel, business activities, and global supply chains, significant volatility in global financial markets, and resulted in a dramatic increase in unemployment, particularly in the U.S.
While the products we haveCompany announced the plan to
launch its ecommerce initiative in March 2021, that effort was continually delayed because of COVID-19 forced closures overseas and inventories
planned for Q3, 2021 sales were only shipped onin December 2021,which will facilitate January 2022 sales planning. It is unclear as of the
date of the filing of this Form 10-K report if our direct import business model typically requiresQ1 2022 e-commerce activity will compensate for loss of Smart Mirror revenues planned
for Q 3 and 4, 2021.
During the year, the Company also experienced
limitations in employee resources resulting from travel restrictions and “stay at home” orders. Despite these restrictions,
the Company continues to 4 months lead time,manage the overseas supply chain requirements of our revenue in 2020 was significantly impacted by the uncertainty of reduced consumer foot traffic in the stores during the pandemic. This uncertainty caused retail buyers to delay or postpone promotional events. customers.
During recent months as consumer confidence
has increased and the public has become more accustomed and feel safer about visiting stores, in store foot traffic has increased, particularly
in the Warehouse Clubs that we sell in. The promotional activities both domestically and internationally in the Club channel have gradually
increased as compared to previous quarters. We believe retail buying confidence will continue to improve and expect that promotional opportunities
will begin to normalize for the 3rd and 4th quarters 2021.
We believe the COVID-19 virus will continue to impact
retail markets through the first half of 20212022 but as we focus our channel strategy toward e-commerce, disruptione-commerce. Disruption to our business in 2021
should be moderate.was significant. Consumer confidence will rise commensurately with increased job opportunities and income recovery. The extent to which
COVID-19 will continue to impact the company’scompany’s results will depend primarily on future developments, including the severity and
duration of the crisis, the speed and effectiveness of the national vaccine inoculation program, potential mutations of COVID-19, and
the impact of future actions that will be taken to contain COVID-19 pandemic or treat its impact. These future developments are highly
uncertain and cannot be predicted with confidence.
36
Principal Factors Affecting Our Financial Performance
There are a number of industry factors that affect our financial performance which include, among others:
● | Overall Demand for Products and Applications. Our potential for growth depends on the successful introduction and consumer acceptance of the Connected Surfaces portfolio. The Company’s products are characterized as non-essential and economic conditions, especially consumer uncertainty or worries over economic conditions and growth, affect consumer demand. Uncertainty over global economic conditions that may affect the U.S. economy is not conducive to consumer purchases of our category of consumer products. These uncertainties make demand difficult to forecast for us and our customers. |
● | Strong and Constantly Evolving Competitive Environment. While we have demonstrated our abilities to compete successfully in the retail channels since our inception, competition in the marketplace we serve is strong. Many companies have made significant investments in product development, production equipment and product marketing. Product pricing pressures exist as market participants often initiate pricing strategies to gain or protect market share. To remain competitive, market participants must continuously increase product performance or functionality, reduce costs and develop improved ways to support their customers. To address these competitive measures, we invest in research and development activities to support new product development, sustain low product costs and deliver higher levels of performance and product functionality to differentiate our products in the market. |
● | Profit Margins. The Company’s product planning strategies are driven by the need to deliver sustainable profit margins. This, in conjunction with close management of related marketing costs, are required to sustain or grow the Company’s market presence. |
● | Technological Innovation and Advancement. Innovation and advancements in consumer electronic categories continue to create expanded channel opportunities. The smart home category is expected to grow to $139.8 billion by 2023, a CAGR of 18.2% since 2018. Household penetration of smart homes is expected to grow to 19.5% by 2022. Smart phone users in the United States exceeds 269 million and is projected to be 290 million by 2024. Through the Company’s continual research and development activities, differentiation of its smart home products and their related value to the consumer, a consistent market share expansion is anticipated. |
● | Affordable Funding. The Company needs to secure affordable funding resources to support ongoing product development and new market penetration. |
Intellectual Property Issues
. Market participants rely on patented and non-patented proprietary information relating to product development and other core competencies of their business. Protection of intellectual property is important. Therefore, steps such as patent applications, confidentiality and non-disclosure agreements, as well as other security measures are generally taken. The Company has not created a litigation reserve for intellectual property rights litigation. As a business judgment, the Company does not patent or copyright or trademark all intellectual property due to a combination of factors, including, in part, the cost of registration and maintenance of registration, odds and cost of successful defense of the registration and commercial value of the intellectual property rights. To enforce or protect intellectual property rights, litigation or threatened litigation is common. The Company has not sued any third parties over intellectual property rights.
Results of operations.
Net Revenues
Revenue is derived from sales of our residential
lighting products. These products are directed towards consumer home LED lighting for both indoor and outdoor applications. Revenue is
subject to both quarterly and annual fluctuations and is impacted by the timing of individually large orders as well as delays or sometimes
advancements to the timing of shipments or deliveries. 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’ssale’s contractual
arrangements. Each contract on acceptance will have a fixed unit price. Most of our sales are to the U.S. market which in 20202021 represented
75%50% of revenues and we expect in the future that region to continue to be the major source of revenue for the Company. We also derived
25%50% of our revenue from overseas sales. Net revenue also includes the cost of instant rebate coupons, and product support allowances provided
to retailers to promote certain products. All of our revenue is denominated in U.S. dollars.
37
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 include reserves for potential warranty claims and freight allowances. We source our manufactured products based on customer 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 cost fluctuations in the cost of our purchased components. See “Risk Factors” “Risk Factors” above in Item 1A.
Operating Expenses
Operating expenses include sales and marketing expenses,
consisting of social media advertising, sales representatives’representatives’ commissions, advertising, show expense and costs related to employee'semployee’s
compensation. In addition, operating expense includes charges relating to product development, office and warehousing, accounting, legal,
insurance and stock-based compensation.
CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 | ||||||||||||||||
(In Thousands) | ||||||||||||||||
December 31, 2020 | December 31, 2019 | |||||||||||||||
Dollars | % of Revenue | Dollars | % of Revenue | |||||||||||||
Revenue, Net | $ | 2,770 | 100.0 | % | $ | 12,404 | 100.0 | % | ||||||||
Cost of sales | 2,266 | 81.8 | % | 9,972 | 80.4 | % | ||||||||||
Gross Profit | 504 | 18.2 | % | 2,432 | 19.6 | % | ||||||||||
Operating Expenses: | ||||||||||||||||
Sales and marketing | 300 | 10.8 | % | 379 | 3.1 | % | ||||||||||
Compensation | 1,516 | 54.7 | % | 1,554 | 12.5 | % | ||||||||||
Professional fees | 423 | 15.3 | % | 435 | 3.5 | % | ||||||||||
Product development | 250 | 9.0 | % | 349 | 2.8 | % | ||||||||||
Other general and administrative | 477 | 17.2 | % | 648 | 5.2 | % | ||||||||||
Goodwill impairment charge | 624 | 22.5 | % | - | - | % | ||||||||||
Total Operating Expenses | 3,590 | 129.6 | % | 3,365 | 27.1 | % | ||||||||||
Operating Loss | (3,086 | ) | (111.4 | )% | (933 | ) | (7.5 | )% | ||||||||
Other Income (Expenses) | ||||||||||||||||
Miscellaneous Income (Expense), net | 90 | 3.2 | % | 29 | 0.2 | % | ||||||||||
Interest expense | - | - | % | (3 | ) | - | % | |||||||||
Total Other Income (Expense) | 90 | 3.2 | % | 26 | 0.2 | % | ||||||||||
Loss Before Tax Benefit | (2,996 | ) | (108.2 | )% | (907 | ) | (7.3 | )% | ||||||||
Benefit for Income Tax | (612 | ) | (22.1 | )% | (15 | ) | (.1 | )% | ||||||||
Net Loss | $ | (2,384 | ) | (86.1 | )% | $ | (892 | ) | (7.2 | )% |
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020 | ||||||||||||||||
(In Thousands) | ||||||||||||||||
December 31, 2021 | December 31, 2020 | |||||||||||||||
Dollars | % of Revenue | Dollars | % of Revenue | |||||||||||||
Revenue, Net | $ | 686 | 100.0 | % | $ | 2,770 | 100.0 | % | ||||||||
Cost of sales | 639 | 93.1 | % | 2266 | 81.8 | % | ||||||||||
Gross Profit | 47 | 6.9 | % | 504 | 18.2 | % | ||||||||||
Operating Expenses: | ||||||||||||||||
Sales and marketing | 29 | 4.2 | % | 300 | 10.8 | % | ||||||||||
Compensation | 1,276 | 186.0 | % | 1,516 | 54.7 | % | ||||||||||
Professional fees | 368 | 53.6 | % | 423 | 15.3 | % | ||||||||||
Product development | 309 | 45.0 | % | 250 | 9.0 | % | ||||||||||
Other general and administrative | 421 | 61.4 | % | 477 | 17.2 | % | ||||||||||
Goodwill impairment charge | — | — | % | 624 | 22.5 | % | ||||||||||
Total Operating Expenses | 2403 | 350.3 | % | 3,590 | 129.6 | % | ||||||||||
Operating Loss | (2,356 | ) | (343.4 | )% | (3,086 | ) | (111.4 | )% | ||||||||
Other Income (Expenses) | ||||||||||||||||
Miscellaneous Income (Expense), net | 456 | 66.4 | % | 90 | 3.2 | % | ||||||||||
Interest expense, net | (49 | ) | (7.1 | )% | — | — | % | |||||||||
Total Other Income (Expense) | 407 | 59.3 | % | 90 | 3.2 | % | ||||||||||
Loss Before Tax Benefit | (1,949 | ) | (284.1 | )% | (2,996 | ) | (108.2 | )% | ||||||||
Income Tax Expense (Benefit) | 15 | 2.2 | % | (612 | ) | (22.1 | )% | |||||||||
Net Loss | $ | (1,964 | ) | (286.3 | )% | $ | (2,384 | ) | (86.1 | )% |
Net Revenues
Our business operations and financial performance
for the year ended December 31, 20202021 was adversely impacted by the economic effects of the COVID-19 pandemic to the U.S. and global economy.
For the year ended December 31, 2020,2021, net revenues were approximately $2.8 million,$686 thousand, a decrease of approximately $9.6$2.0 million or 77.7%75.2%
from $12.4$2.8 million in fiscal 2019.2020. The decrease in 20202021 net revenue was driven by the uncertainty felt by retailers, as to the short and
long-term impact on the U.S. retail market of COVID-19 resulting from the reduction of consumer foot traffic in brick and mortar stores.
Overseas, the impact of COVID19 created substantial logistic delays from components, product testing and certification, manufacturing
and ocean freight. This uncertainty resulted in the postponement of many promotional opportunities during the year.
The Company selectively supports retailer’sretailer’s
initiatives to maximize sales of the Company’sCompany’s products on the retail floor or to assist in developing consumer product awareness,
by providing marketing fundund allowances to the customer. Sales reductions for anticipated discounts, allowances and other deductions are
recognized during the period the related revenue is recorded. The reduction of accrued allowances is included in net revenues and amounted
to $341.2$8.0 thousand and $1.18 million$341.2 thousand for the years ended December 31, 2021 and 2020 and 2019, respectively.
For the years ended December 31, 20202021
and 2019,2020, international sales were approximately $341 thousand or 50% of revenue and $704 thousand or 25% of revenue and $1.2 million or 1025 % of revenue, respectively.
38
The following table disaggregates net revenue by major source:
For the Year Ended December 31, 2020 | For the Year Ended December 31, 2019 | |||||||||||||||
Capstone Brand | % of Revenue | Capstone Brand | % of Revenue | |||||||||||||
Lighting Products- U.S. | $ | 2,066,519 | 75 | % | $ | 11,218,714 | 90 | % | ||||||||
Lighting Products-International | 703,839 | 25 | % | 1,185,731 | 10 | % | ||||||||||
Total Revenue | $ | 2,770,358 | 100 | % | $ | 12,404,445 | 100 | % |
For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | |||||||||||||||
Capstone Brand | % of Revenue | Capstone Brand | % of Revenue | |||||||||||||
Lighting Products- U.S. | $ | 340,896 | 49 | % | $ | 2,066,519 | 75 | % | ||||||||
Smart Mirror Products- U.S. | 3,795 | 1 | % | — | — | |||||||||||
Lighting Products-International | 341,163 | 50 | % | 703,839 | 25 | % | ||||||||||
Total Revenue | $ | 685,854 | 100 | % | $ | 2770,358 | 100 | % |
Gross Profit and Cost of Sales
Gross profit for the year ended December 31, 2020,2021,
was approximately $504$47 thousand, or 18.2 %6.9% of net revenues, as compared to $2.4 million$504 thousand or 19.6%18.2% of net revenues, for fiscal 2019.2020. For the
years ended December 31, 20202021 and 2019,2020, cost of sales were approximately $2.3 million$639 thousand and $10.0$2.3 million, respectively, a decrease of $7.7$1.6
million or 77%71.8% from the previous year. This reduction was the direct result of the reduced revenue in the year. Costs represented 81.8%93.1%
and 80.4%81.8% of net revenues for 2021 and 2020, respectively. This increased cost was partially due to the higher ocean freight-logistics
costs associated with the shortage of containers and 2019, respectively. Overall product costs overseas remained stable during the year.
Operating Expenses
Sales and Marketing Expenses
In fiscal 20202021 and 2019,2020, sales and marketing
expenses were approximately $300$29 thousand and $379$300 thousand respectively, a decrease of $79$271 thousand or 20.8%90.3%. As a percent to revenue
20202021 expenses were 10.9%4.2% as compared to 3.1%10.9% in 2019.2020. Social Media expense in 20202021 was $20.5 thousand, a decrease of $9.8 thousand or
32.3% from $30.3 thousand an increasein 2020.With the resulting delays of $13.8 thousand or 83.6% from $16.5 thousand in 2019, asthe Connected Surfaces program we further developedcontinued our Social Media marketing
presence in preparation for the launch of the Smart Mirror program.program, but as inventory was not available the advertising program was not
as intense as originally planned. Advertising and promotional expenses were $2.2 thousand in 2021 as compared to $34.7 thousand in 2020,
as compared to $85.6 thousand in 2019, a reduction of $50.9$32.4 thousand or 59.5%93.4% due to the reduced retail promotional activities during 2020.
Compensation Expenses
For the years ended December 31, 20202021 and
20192020 compensation expenses were approximately $1.5$1.3 million and $1.6$1.5 million, respectively, a reduction of $39$240 thousand or 2.5%15.8%. As a
percent of net revenues 20202021 expenses were 54.7%186.0% as compared to 12.5%54.7% in 2019.2020. With the reduced revenue and the transition of production
into Thailand, the Company eliminated 2 positions during 2021 and 4 positions in the Hong Kong office during 2020.
Professional Fees
For fiscal 2020,2021, professional fees were approximately
$423$368 thousand compared to $435$423 thousand in 2019,2020, a decrease of $12.2$55 thousand or 2.8%.13.0 %. As a percent of net revenue 20202021 expenses were
15.3%53.6% as compared to 3.5%15.3% in 2019.2020. In 2020,2021, consulting fees were approximately $165 thousand the same amount as incurred in 2019.2020. Accounting,
legal and other expenses were $257$203 thousand, a decrease of $12$55 thousand from $270$258 thousand in the prior year.
Product Development Expenses
For the years ended December 31, 20202021 and 2019,2020, product
development expenses were approximately $250$309 and $349$250 thousand, respectively, a decreasean increase of $98.9$59 thousand or 28.4%23.6%. In 2020,2021, the Company
invested $182$237 thousand in the Smart Mirror development compared to $207$182 thousand in 2019,2020, a reductionincrease of $25$55 thousand or 7.4%30.2%. In 2021,
Smart Mirror FCC & ETL and other certification fees of approximately $98K were incurred as compared to $0 in prior year. With the
reduced revenue, quality control expenses in 20202021 were $44$1 thousand compared to $98$44 thousand in 2019,2020, a reduction of $54$43 thousand or 55.1%97.7%.
Other expenses such as prototype, chargessample and courier charges were also reducedincreased by $20approximately $51 thousand from $44$7 thousand in 20192020 to
$24$58 thousand in 2020.2021. As a percent of revenue, 20202021 expenses were 9.0%45.0% as compared to 2.8%9.0% in 2019.2020. We have continued to invest in new
product design, software development, product prototyping and testing and related to the Smart Mirror project.
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Other General and Administrative Expenses
For fiscal 20202021 and 2019,2020, other general
and administration expenses were approximately $477$421 thousand and $648$477 thousand, respectively, a decrease of $171$56 thousand or 26.3%11.7%. As
a percent to revenue 20202021 expenses were 17.2%61.4% as compared to 5.2%17.2% in 2019.2020. In 20202021 the Company’sCompany’s rent expense was $166$148 thousand
compared to $99$166 thousand in 2019, an increase2020, a decrease of $67$18 thousand or 67.6%10.6%. The Directors insurance also increased in 20202021 from $57$71 thousand
in 20192020 up to $71$100 thousand a $14$29 thousand or 24.6%40.8% increase. Despite these increases, as part of an expense mitigation plan in response
to the impact of COVID19, the Company reduced discretionary expenses which included auto, office and computer supplies, courier services,
travel and hotel expenses, telephone and bank charges, which resulted in a net expense reduction of $171$70 thousand or 26.3%14.7% as compared
to the same period in 2019.2020. These discretionary expenses are included in the other general and administrative expenses.
Goodwill Impairment Charge
As a result of the economic uncertainties caused by
the COVID-19 pandemic during the year ended December 31, 2020,2021, management determined sufficient indicators existed to trigger the performance
of interim goodwill impairment analyses for each reporting quarter. The total impairment charge for the years ended December 31, 20202021
and 20192020 was approximately $0 and $624 thousand, respectively. The interim analysis concluded that the Company’s fair value of its
single reporting unit exceeded the carrying value and $0, respectively. Thisa goodwill impairment charge equated to 22.5% of net revenue in 2020.
Total Operating Expenses
For the years ended December 31, 20202021 and
2019,2020, total operating expenses were $3.6$2.4 million and $3.4$3.6 million, respectively. This represents a $223 thousand$1.2 million or 6.6% increase33.1% decrease over
fiscal 2019. The $624 thousand impairment charge was the main reason for the expense increase. If we eliminate the effect of the impairment charge,year 2020. A decrease in total operating expenses inof $1.2 million for the year ending December 31, 2021, represents reduction of
selling and marking expense of approximately $272 thousand, compensation expense of $240 thousand and goodwill impairment charge of $624
thousand over expense level from fiscal year 2020 would have been $3.0 million, a reduction of approximately $400 thousand or 11.8% from 2019 expense level.
Operating Loss
For the year ended December 31, 20202021 the
operating loss was approximately $3.1$2.4 million as compared to $933 thousand loss$3.1 million in 2019,2020, a loss increasedecrease of $2.2 million$730 thousand over 2019.
Other Income (Expense)
For fiscal 20202021 other income was approximately
$90$456 thousand compared to a $26$90 thousand in 2019.2020, an increase of $366 thousand over 2020. The other income for the year ended December
31, 2021 resulted mainly from reversal of approximately $340 thousand accrued marketing and promotional allowances against previous sales
that is no longer required as of December 31, 2021. Marketing allowances include the forgivenesscost of underwriting an in store instant rebate coupon
or a targeted markdown allowance on specific products. The Company accrues and retains these allowances for a period of 3 to 5 years in
the event the customer chargeback a promotional allowance against future open invoices or submits to us an invoice. These allowances are
also evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer. We evaluated
certain allowances and were satisfied that these allowances were no longer required based on the age of the $90 thousand loan received as partallowance and sale of the
Small Business Administration’s Paycheck Protection Program. The Company through a combination of efficient cash flow management, favorable payment terms with our overseas suppliers and a strong cash position was ableproducts for which these allowances relate being significantly reduced. These allowances were charged to eliminateother income during the need for increased borrowing or purchase order funding which resulted in $0 interest expense in 2020 and $3.2 thousand expense in 2019.
For the years ended December 31, 2020 and 20192021 the
net benefitexpense for income tax was estimated at $612$15 thousand compared to $15a net benefit of $612 thousand in the same period 2019.2020. The benefit
isin 2020 was a result of the CARES Act which eliminated the taxable income limit for certain net operating losses (“NOLs”(“NOLs”)
and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years. The Company was able to carryback
the 2018 and the 2019 NOLs to 2017 tax year and generate an estimated refund of previously paid income taxes at an approximate 34% federal
tax rate.
The effective tax rate for the years ended
December 31, 20202021 and 2019,2020, respectively, was 20.43%-0.77%%, and 1.60%20.43% and the statutory tax rate was 23.7% in 2021 and 24.46% in 2020 and 24.40% in 2019.2020.
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Net Loss
For fiscal 20202021 and 20192020 net loss was approximately
$2.0 million and $2.4 million and $892 thousand,respectively, a net loss increasedecrease of approximately $1.5 million$420 thousand over the previous year.
RESULTS OF OPERATIONS AND BUSINESS OUTLOOK
In 2020,2021, the impact of COVID-19 resulted
in an unprecedented decline in our revenue and earnings for the year ended December 31, 2020,2021, which also resulted in a goodwill impairment assessment
for each quarter in 2021, but there was no impairment charges in the period, however even under these difficult circumstances we have been able to move the Company closer torequired based on our long-term objectives.
Our expectation is that the new portfolio
advancing in 20212022 appeals to a much larger audience than our traditional LED lighting product line. Management believes that the execution
of the Company’sCompany’s strategy and development of the Connected Surfaces category will provide attractive opportunities for profitable
growth over the long-term
The company'sCompany’s financial initiatives are driven
by its entry to new distribution channels and calls for an increased emphasis on an e-commerce business model. Online platforms have advanced
with consumers across all product lines. The Connected Surfaces category should find its way to retail shelves after it has been established
through its direct-to-consumer effort. The Company’sCompany’s marketing strategy will shift its historic reliance on Big Box while delivering
more profitable business. The gross margins generated by the e-commerce model willis anticipated to be substantially greater than in the past and should
provide strong cash flows. The Company will require additional funding to build its marketing effort, inventory levels and service levels
once the initial marketing phase validates the Company’sCompany’s strategic initiatives. The future growth will be directly impacted by the
level of exposure, messaging and distribution capabilities.
By working diligently overseas with alternate manufacturers located outside China, particularly in Thailand, we anticipate minimal impact to our selling prices and related margins of profit that could otherwise be impacted by an ongoing trade dispute between the United States and China.
As the products we have shipped on our direct
import business model typically requires 3 to 4 months lead time, our revenue in 20202021 was significantly impacted by the uncertainty of
reduced consumer foot traffic in the stores during the pandemic. This uncertainty caused retail buyers to delay or postpone promotional
events. During recent months as consumer confidence has increased and the public has become more accustomed and feel safer about visiting
stores, in store foot traffic has increased, particularly in the Warehouse Clubs that we sell in. The promotional activities both domestically
and internationally in the Club channel have gradually increased as compared to previous quarters. We believe retail buying confidence
will continue to improve and expect that promotional opportunities will begin to normalize for the 3rd and 4th quarters 2021.
With the impact of COVID-19 Management was even more focused on the following priorities:
● | to protect the safety and wellbeing of the Capstone team. |
● | to expedite the transition of the Company’s marketing presence from brick and mortar retail to online retail. |
● | to expand the Company’s social media platforms and online visibility. |
● | to revamp the Company’s website to support online business. |
● | to build the logistics and fulfilment structure to support online orders. |
● | to transfer Smart Mirror production capability to Thailand from China. |
● | to design, enhance and build the Smart Mirror product portfolio. |
During 20202021 we have beenwere able to complete the above priorities
and are now preparing for the launch of the Smart Mirror program in 2021.
Contractual Obligations
The following table represents contractual obligations as of December
31, 2020.2021.
Payments Due by Period | ||||||||||||||||||||
Total | 2022 | 2023 | 2024 | After 2025 | ||||||||||||||||
Purchase Obligations | $ | 538,551 | $ | 538,551 | $ | — | $ | — | $ | — | ||||||||||
Short-Term Debt | — | — | — | — | — | |||||||||||||||
Long-Term Debt – related parties | 1,030,340 | — | 1,030,340 | — | — | |||||||||||||||
Operating and Short Term Leases | 107,690 | 70,157 | 37,533 | — | — | |||||||||||||||
Total Contractual Obligations | $ | 1,676,581 | $ | 608,708 | $ | 1,067,873 | $ | — | $ | — |
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Payments Due by Period | |||||||||||||||
Total | 2021 | 2022 | 2023 | After 2024 | |||||||||||
(In thousands) | |||||||||||||||
Purchase Obligations | $ | 825,690 | $ | 825,690 | $ | - | $ | - | $ | - | |||||
Short-Term Debt | - | - | - | - | - | ||||||||||
Long-Term Debt | - | - | - | - | - | ||||||||||
Operating and Short Term Leases | 170,997 | 63,307 | 70,157 | 37,533 | - | ||||||||||
Total Contractual Obligations | $ | 996,687 | $ | 888,997 | $ | 70,157 | $ | 37,533 | $ | - |
Notes to Contractual Obligations Table
Purchase Obligations —— Purchase obligations
are comprised of the Company'sCompany’s liability for goods and services in the normal course of business.
Short Term Debt —— None.
Long Term Debt — None.
Operating Leases —— Operating lease obligations
are related to facility leases for our operations in the U.S. and in Hong Kong.
LIQUIDITY AND CAPITAL RESOURCES
The COVID-19 pandemic has significantly affected
U.S. consumer shopping patterns and caused the health of the U.S. economy to deteriorate. We cannot foresee when the COVID-19 pandemic will be effectively contained, nor can we predict the severity and duration of its impact on our business and our financial results. If the variants of COVID-19 are not effectively
and timely controlled, our business operations, financial condition, and liquidity may be materially and adversely affected because of
prolonged disruptions in consumer spending.
Operational cashflow is significantly influenced by the timing and launch of new products as well as favorable payment terms negotiated with overseas suppliers. With our Hong Kong and Thailand operational presence, we have built an operational structure that, through relationships with factory-suppliers both in Thailand and China combined with our expertise, that under normal operating circumstances, can develop and release quality, innovative products to the marketplace substantially quicker than in previous years.
Our ability to generate cash from operations has been one of our fundamental strengths and has provided us with flexibility in meeting our operating, financing and investing needs in the past.
During the year ended December 31, 2020,2021,
the Company used cash in operations of approximately $1.9$2.4 million and generated net operating losses of $2.4$1.96 million. As of December
31, 2020,2021, the Company hashad working capital of approximately $1.4$1.9 million and an accumulated deficit of $4.5$6.4 million. The Company’sCompany’s
cash balance droppedincreased by approximately $1.9 million$54 thousand from $3.1$1.223 million as of December 31, 20192020 to $1.2$1.277 million as of December 31,
2020.2021. With the reduced revenues in 20202021 and to conserve cash, the Company initiated an expense mitigation plan that reduced discretionary
spending including travel, lodging and trade show expenses, deferred executive management compensation, and significantly reduced the
cost of the Hong Kong operation.
The Company has a recent history of losses and negative cash from operations. The uncertainty and the continuing negative impact that this COVID-19 disruption could negatively impact the demand for our products or delay future planned promotional opportunities. However, with a successful launch of the Smart Mirror portfolio using the online retail platform, the Company will also require an inventory credit facility to support increased U.S. domestic inventory to facilitate revenue growth in the online business.
On January 4, 2021, the Company entered
a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The term of the loan started January 4, 2021 and endsshort-term facility ended June 30, 2021
(“(“Initial Period’Period’). The Company mayhad the option to extend the Initial Period for an additional six consecutive months, ending
December 31, 2021, but decided not to renew.
On April 5, 2021, the Company entered into five
separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares of
Common Stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement”). The
five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited
investors” (under Rule 501(a) of Regulation D under the sameSecurities Act of 1933, as amended, (“Securities Act”). The
$1,498,000 in proceeds from the Private Placement was used mostly to purchase start up inventory for the Company’s new Smart Mirror
product line, for a major online e-commerce fulfilment company, and the remainder for advertising and working capital.
On July 2, 2021, the Board of Directors (“Board”)
resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror
business. The Board resolved that certain Directors could negotiate the terms and conditions of the Initial Period. The Company may borrow under the agreementa Purchase Order Funding Agreement for up to $750,000$1,020,000
with Directors S. Wallach and prepay wholly or partiallyJ. Postal and E. Fleisig, a natural person. This agreement has finalized, and the unpaid principal amount at any time.
The Company has an income tax refundable as
of December 31, 20202021 of approximately $861$285 thousand of which approximately $576 thousand was refunded on February 3, 2021.we expect to receive in 2022.
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The Company for both years ending’s ability to maintain
sufficient working capital is highly dependent upon achieving expected operating results. Failure to achieve expected operating results
could have a material adverse effect on the Company’s working capital, ability to obtain financing, and its operations in the future.
The Company as of December 31, 2021, and
2020 has note payable due to related parties, including accrued interest, of $1,030,340 and 2019 has remained debt free.
In addition, we may seek alternative sources
of liquidity, including but not limited to accessing the capital markets, or the Company may be able to raise the required additional
capital through debt and or equity financing. However, instability in, or tightening of the capital markets, could adversely affect our
ability to access the capital markets on terms acceptable to us. The Company can make no assurances that it will be able to raise the
required capital, on acceptable terms or at all. Management believes that with the cash on hand, and our availability under the $750,000 working capital line of credit, the operational funding will be adequate
to meet the Company’sCompany’s cash needs for daily operations for the short-term period, however the Company does not have sufficient cash
on hand to finance its plan of operations for the next 12 months from the filing of this report and will need to seek additional capital
through debt and/or equity financing. These factors raise substantial doubt about the Company’sCompany’s ability to continue as a going concern.
Summary of Cash Flows
Years ended December 31, | ||||||
2020 | 2019 | |||||
(In thousands) | ||||||
Net cash provided by (used in): | ||||||
Operating Activities | $ | (1,858 | ) | $ | (586 | ) |
Investing Activities | (13 | ) | (34 | ) | ||
Financing Activities | (36 | ) | (71 | ) | ||
Net (decrease) in cash and cash equivalents | $ | (1,907 | ) | $ | (691 | ) |
Years ended December 31, | ||||||||
2021 | 2020 | |||||||
(In thousands) | ||||||||
Net cash provided by (used in): | ||||||||
Operating Activities | $ | (2,371 | ) | $ | (1,858 | ) | ||
Investing Activities | (32 | ) | (13 | ) | ||||
Financing Activities | 2,457 | (36 | ) | |||||
Net increase (decrease) in cash and cash equivalents | $ | 54 | $ | (1,907 | ) |
As of December 31, 20202021 the Company’sCompany’s working capital
was approximately $1.4$2.0 million of which $1.2 million was cash. Current liabilities were $889$609 thousand and include:
● | Accounts payable of approximately $126 thousand for amounts due vendors and service providers. |
● | Accrued expenses of approximately $367 thousand for marketing allowances, wages, and customer deposits. |
● | Warranty provision for estimated defective returns in the amount of approximately $46 thousand. |
● | Operating lease- current portion of approximately $70 thousand. |
Cash Flows provided by (used in) Operating Activities
Cash used in operating activities was approximately
$2.4 million in 2021 compared with approximately $1.86 million in 2020 compared with approximately $586 thousand in 2019.2020. The cash used in operating activities in 20202021 included the negative
cash impact of the net loss, which was approximately $2.38$1.96 million, an income tax refundableincrease in inventories of approximately $500 thousand, an increase
of $641prepaid expenses of $425 thousand whichand decrease in accounts payable of $287 thousand. This was partially offset by the goodwill impairment chargean income tax refund
of approximately $624$576 thousand $260and $119 thousand increase in deferred tax liabilities $174 thousand increasedecrease in accounts receivable and prepaid expenses and a $106 thousand from several other accounts.
Cash Flows used in Investing Activities
Cash used in investing activities in 20202021
was approximately $13$32 thousand compared to $34$13 thousand in 2019.2020. The Company continued to invest in new product molds and tooling. With
the further product expansion into Smart Home lighting and Smart Mirror categories, the Company'sCompany’s future capital requirements will increase
to fund future mold and tooling as the Company expands the Connected Surfaces portfolio.
Cash Flows used in Financing Activities
Cash received and used in financing activities for
the years ended December 31, 20202021 and 2019,2020, was approximately $2.457 million and $36 thousand, respectively. The Company received approximately
$1.4 million from sales of common stock and $71, respectively.approximately $1.0 million purchase order funding received from related party note payable
during the year 2021. The Company repurchased 283,383 of common shares during the year 2020 at a cost of $36 thousand.
The Company has negotiated beneficial payment terms with our main overseas manufacturers including the new supplier in Thailand, which has resulted in reduced funding requirements to produce newly launched products.
43
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 20202021 the
average exchange rate between the U.S. Dollar and Chinese Yuan have been relatively stable approximately RMB 6.90 to U.S. $1.00.
The average exchange rate between the U.S. Dollar and Thai Baht has been relatively stable at approximately Baht 31.25 to U.S. $1.00.
Operating expenses of the Hong Kong office are paid in either Hong Kong dollars or U.S. dollars. The exchange rate of the Hong Kong dollar to the U.S. dollar has been very stable at approximately HK $7.80 to U.S. $1.00 since 1983 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. 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.
Off Balance Sheet Arrangements
We do not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.
DIVIDENDS
We have not declared or paid any cash or other dividends on shares of our Common Stock in the last seven years and we presently have no intention of paying any cash dividends on shares of our Common Stock.
RELATED-PARTY TRANSACTIONS
See Note 4 of the Consolidated Financial Statements at Item 15 of this Report.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Consolidated Financial Statements at Item 15 of this Report.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America ("(“U.S. GAAP"GAAP”) requires management
to make certain estimates and assumptions regarding matters that are inherently uncertain and that ultimately affect the reported amounts
of assets, liabilities, revenues and expense, and the disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates its estimates and judgments, including those related to revenue recognition; inventory valuation; depreciation; amortization
and the recovery of long-lived assets; including goodwill and intangible assets; shared base-based payment expense; product warranty;
and other reserves and assumptions based on management'smanagement’s experience and understanding of current facts and circumstances, historical
experience and other relevant factors. These estimates may differ from actual results. Certain of our accounting policies are considered
critical as they are both important to reflect our financial position and results of operations and require significant or complex judgement
on the part of management. The following is a summary of certain accounting policies considered critical by management.
Revenue Recognition
The Company generates revenue from developing,
marketing and selling consumer lighting products through national and regional retailers. The Company'sCompany’s products are targeted for
applications such as home indoor and outdoor lighting and will have different functionalities. Capstone currently operates in the consumer
lighting products category in the Unites States and in specific overseas markets. These products may be offered either under the Capstone
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'customers’ orders has been previously negotiated and agreed
to including any applicable discount prior to receiving the customer'scustomer’s purchase order. The stated unit price in the customer'scustomer’s
order has already been determined and is fixed at the time of invoicing.
44
The Company recognizes product revenue when
the Company'sCompany’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 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.
The Company may enter into a licensing agreement with globally recognized companies, that allows the Company to market products under a licensed brand to retailers for a designated period of time, and whereby the Company will pay a royalty fee, typically a percentage of licensed product revenue to the licensor in order to market the licensed product.
The Company may also enter into a private label agreement, whereby the Company produces and ships product to a customer that has been packaged and will be marketed under the customers own private label.
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.
We provide our customers with limited rights of return for non-conforming product warranty claims. As a policy, the Company does not accept product returns from retail customers, however occasionally as part of a customers in store test for new product, we may receive back residual inventory.
Customer orders received are not long-term orders and are typically shipped within six months of the order receipt, but certainly within a one-year period.
Our payment terms may vary by the type of
customer, the customer'scustomer’s credit standing, the location where the product will be picked up from and for international customers,
which country their corporate office is located. The term between invoicing date and when payment is due may vary between 30 days and
90 days depending on the customer type. In order to ensure there are no payment issues, overseas customers or new customers may be required
to provide a deposit or full payment before the order is delivered to the customer.
The Company selectively supports retailer'sretailer’s
initiatives to maximize sales of the Company'sCompany’s products on the retail floor or to assist in developing consumer awareness of new
products launches, by providing marketing fund allowances to the customer. The Company recognizes these incentives at the time they are
offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to
cost of sales, or marketing expenses depending on the type of sales incentives.
Sales reductions for anticipated discounts,
promotional and marketing allowances, defective warranty claims, and other deductions are recognized during the period the related revenue
is recorded. The Company may be subject to chargebacks from customers for negotiated promotional allowances, that are deducted from open
invoices and reduce collectability of open invoices. For the years ended December 31, 20202021 and 2019,2020, the Company had processed approximately
$341.2$8.0 thousand and $1.18 million,$341.2 thousand, respectively for such allowances.
Accounts Receivable
For product revenue, the Company invoices
its customers at the time of shipment for the sales value of the product shipped. Accounts receivablereceivables are recognized at the amount expected
to be collected and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure
related to any of its customers. Previously in the factoring agreement with Sterling National Bank, accounts receivable served as collateral
when the Company borrowed against the credit facility. As of December 31, 2020, with the termination of the factoring agreement, the accounts
receivables are fully unencumbered.
Allowance for Doubtful Accounts
The Company evaluates the collectability
of accounts receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair a
specific customer'scustomer’s ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance
against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected.
For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past
due and consideration of other factors such as industry conditions, the current business environment and the Company'sCompany’s historical
payment experience. An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for
bad debts charged to earnings. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions
as more information becomes available.
As of both Decembers 31, 20202021 and 2019,2020,
management determined that the accounts receivable is fully collectible. As such, management has not recorded an allowance for doubtful
accounts.
45
The following table summarizes the components of Accounts Receivable, net:
December 31, | December 31, | |||||
2020 | 2019 | |||||
Trade Accounts Receivables at period end | $ | 197,166 | $ | 276,551 | ||
Reserve for estimated marketing allowances, cash discounts and other incentives | (77,102 | ) | (263,092 | ) | ||
Total Accounts Receivable, net | $ | 120,064 | $ | 13,459 |
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Trade Accounts Receivables at period end | $ | 1,481 | $ | 197,166 | ||||
Reserve for estimated marketing allowances, cash discounts and other incentives | — | (77,102 | ) | |||||
Total Accounts Receivable, net | $ | 1,481 | $ | 120,064 |
Goodwill
On September 13, 2006, the Company entered
into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (“Capstone”(“Capstone”). 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 Capstone’sCapstone’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.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment, which requires an entity to perform a one-step quantitative impairment test, whereby
a goodwill impairment loss will be measured as the excess of a reporting unit’sunit’s carrying amount over its fair value (not to exceed
the total goodwill allocated to that reporting unit). ASU 2017-04 was effective for the Company’sCompany’s fiscal year ended December 31,
2019. The adoption of ASU 2017-04 did not have a material effect on the Company’sCompany’s consolidated financial statements.
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'sCompany’s market capitalization.
As a result of the economic uncertainties
caused by the COVID-19 pandemic during the year ended December 31, 2020,2021 management determined sufficient indicators existed to trigger
the performance of interim goodwill impairment analyses for each reporting quarter. The total impairment charge for the year ended December
31, 2021 and 2020 was approximately$0 and $623.5 thousand.
The following table summarizes the changes
in the Company’sCompany’s goodwill asset which is included in the total assets in the accompanying consolidated balance sheets:
December 31, | December 31, | |||||
2020 | 2019 | |||||
Balance at the beginning of the period | $ | 1,936,020 | $ | 1,936,020 | ||
Impairment charges - net | (623,538 | ) | - | |||
Balance at December 31, 2020 | $ | 1,312,482 | $ | 1,936,020 |
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Balance at the beginning of the period | $ | 1,312,482 | $ | 1,936,020 | ||||
Impairment charges - net | — | (623,538 | ) | |||||
Balance at December 31, 2021 | $ | 1,312,482 | $ | 1,312,482 |
With the continuing economic uncertainties
caused by the COVID-19 pandemic, the capital markets may have a downturn and adversely affect the Company’sCompany’s stock price which will
require the Company to test its goodwill for impairment in future reporting periods. The Company’sCompany’s stock is deemed a “penny stock”“penny
stock” under Commission rules.
Accrued Liabilities
Accrued liabilities contained in the accompanying consolidated balance sheets include accruals for estimated amounts of credits to be issued in future years based on potential product warranties, compensation, benefits, marketing allowances and other liabilities.
46
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 Financial Accounting Standards Board (“FASB”(“FASB”) Accounting Standard Codification (“ASC”(“ASC”) 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.
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.
As of December 31, 2020,2021, the Company had
federal and state net operating loss carry forwards of approximately $1,044,000$2,687,000 and $3,500,000,$5,073,000, respectively. The federal net operating
loss is available to the Company indefinitely and available to offset up to 80% of future taxable income each year. The net deferred tax
liability as of December 31, 2021 and 2020 was $274,000 and 2019 was $260,000, and $0, respectively, and is reflected in long-term liabilities in the accompanying
consolidated balance sheets.
On March 27, 2020, the CARES Act was enacted
into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic.
The CARES Act includes several significant income and other business tax provisions that, among other things, would eliminate the taxable
income limit for certain net operating losses (“NOLs”(“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and
2020 to the five prior tax years. The Company was able to carryback the 2018 and the 2019 NOLs to 2017 tax year and generate an estimated
refund of previously paid income taxes at an approximate 34% federal tax rate. This resulted in a net benefit of $575,645 which was recorded
in the first quarter 2020.
The Company expects to carryback a portion
of its 2020 NOL, for which it recorded a further net benefit of $286,433. In the third quarter 2020, the Company recorded a $21,222 net
tax benefit for deferred tax liability adjustment related to goodwill impairment. For the year ended December 31, 2021 and 2020, the Company
has recorded $861,318 ina net tax benefits.
The Company received approximately $576 thousand of the income tax refundable and $10.3 thousand of interest on February 3, 2021.
The effective tax rate for the years ended
December 31, 2021and 2020, respectively, was -0.77% and 2019 was 20.43% and 1.60% and the statutory tax rate was 24.46%23.70% in 20202021 and 24.40%24. 46% in 2019.
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.
Deferred tax assets are to be reduced
by a valuation allowance if it is more likely than not that some portion or all of the deferred assets will not be realized. The Company
has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered
the Company'sCompany’s history of cumulative net losses incurred and has concluded that it is more likely than not that the Company will
not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred
tax assets as of December 31, 20202021 and 2019.2020. Since indefinite-lived assets cannot be used as a source of taxable income to support the
realization of deferred tax asset, a valuation allowance was recorded against the deferred tax assets, and a net deferred tax liability
or naked credit of approximately $260,000 is presented on the company’scompany’s balance sheet. The Company'sCompany’s valuation allowance increased
by approximately $345,397.
The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes.
As of December 31, 2020, the Company had an income tax refundable of approximately $861 thousand of which approximately $576 thousand income tax and $10.4 thousand of interest was refunded on February 3, 2021. As of December 31, 2021, the Company has a remaining tax refund of $285 thousand.
47
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. (Not Applicable)
Item 8. Financial Statements and Supplementary Data.
The financial statements and financial statement schedules of CAPC as well as supplementary data are listed in Item 15 below and are included after the signature page to this Report.
Item 9
. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Evaluation of disclosure controlsDisclosure Controls and
procedures
Management’s Annual Report on Internal
Control over Financial Reporting
● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company. |
● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because the Company is a smaller reporting company,
this annualForm 10-K report does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting. Management'sManagement’s report was not subject to attestation by our independent registered public accounting firm.
Management, including the Company’sCompany’s
Chief Executive Officer and Chief Financial Officer, does not expect that the Company’sCompany’s internal controls will prevent or detect
all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have
been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls
may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Changes in internal controlsInternal Control over financial reporting.
There were no changes in Company’sthe Company’s internal control
over financial reporting during the fourth quarter of 2021, 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, Company’sthe Company’s internal control over
financial reporting.
The Chairman of our Audit Committee has
reviewed the internal control reports in detail and has spoken to the external auditors in depth about the audit, the internal controls
and the auditors'auditors’ findings. The Chairman has had detailed discussions with the auditors about these matters, prior to, during, and
on completion of the audit.
The certifications of our Chief Executive
Officer and Chief Financial Officer attached as Exhibits 31 and 32 and to this Report include information concerning our disclosure controls
and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information incorporated
by reference to our annual report on Form 10-K for the fiscal year ended December 31, 2020,2021, for a more complete understanding of the matters
covered by such certifications.
Item 9B. Other Information. None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection. Not applicable.
48
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
CURRENT BOARD OF DIRECTORS
The incumbent and current members of the Board of Directors are:
1. | Stewart Wallach. Mr. Wallach has been a Director since April 2007. |
2. | Gerry McClinton. Mr. McClinton has been a Director since February 2008. |
3. | Jeffrey Postal. Mr. Postal has been a Director since January 2004. |
4. | Jeffrey Guzy. Mr. Guzy was appointed as a Director on May 3, 2007. Mr. Guzy is deemed an “Independent
Director” under applicable standards. |
5. | Larry Sloven. Mr. Sloven was appointed as a Director on May 3, 2007. |
6. | George Wolf was appointed as a Director on January 13, 2022. |
Each Director’sDirector’s term is for one year. Company
Directors have typically been elected in the past by written consent of stockholders holding more than 50% of the then current voting
power. The Company uses the written consent because a small number of shareholders have sufficient voting power to decide the election
of Directors and approval or denial of any other corporate resolution and the cost of conducting an annual stockholders'stockholders’ meeting
is significant for a small reporting company. The Company conducts regular stockholder-investor conference calls to allow stockholders
to interact with Company senior management and to ask questions of that management.
Further, stockholders may make inquiries
in writing by sending their inquiries to Aimee Gaudet, Secretary, Capstone Companies, Inc., 431 Fairway Drive, Suite 200, Deerfield Beach,
Florida 33441. The information required in Part III of this ReportForm 10-K report is set forth in the information statement filed for the written
consent approval of nominee slates of Directors and the requirements for stockholders to submit proposed resolutions and Director nominees
is set forth in this Report.Form 10-K report.
DIRECTOR PROFILES
Stewart Wallach, Age 70, Chief Executive Officer and Chairman of the Board of Directors since April 23, 2007, a director of the Company since September 22, 2006, and the founder and Chief Executive Officer and Chairman of the Board of Directors of Capstone Industries, Inc., a wholly owned subsidiary, and principal operating subsidiary of the Company since September 20, 2006. Mr. Wallach is an American entrepreneur and has founded and operated a number of successful businesses over his 35-year career. Over the past 15 years, Mr. Wallach has been focused on technology-based companies in addition to consumer product businesses, the field in which he has spent most of his career. Prior to founding Capstone Industries, Inc., he sold Systematic Marketing, Inc., which designed, manufactured, and marketed automotive consumer products to mass markets, to Sagaz Industries, Inc., a leader in these categories. He served as President of Sagaz Industries, Inc. for 10 years before forming Capstone Industries, Inc. In 1998, Mr. Wallach co-founded Examsoft Worldwide, Inc. (“Examsoft”), which developed and delivered software technology solving security challenges of laptop-based examinations for major educational institutions and state bar examiners. Mr. Wallach remained chairman of Examsoft until it was acquired in late 2009. Mr. Wallach has designed and patented a number of innovations over the span of his career and has been traveling to China establishing manufacturing and joint venture relationships since the early 1980s.
James “Gerry” McClinton, Age 66, Chief Financial Officer and Director. Mr. McClinton was appointed as a director of the Company on February 5, 2008. He is the Chief Financial Officer and Chief Operating Officer of the Company and its Capstone Industries, Inc. subsidiary. His prior work experience is: (a) President of Capstone Industries, Inc. (2005 -2007); (b) General Manager of Capstone Industries, Inc. (2000-2005); (c) Held senior officer positions with Sagaz Industries, Inc. (1990-2000); and (d) Chief Financial Officer, Firedoor Corporation, a national manufacturer of security and fire doors to the construction industry (1980-1990). Mr. McClinton received a designation from The Royal Institute of Cost and Management Accountants (“I.C.M.A.”), University of Northern Ireland, Belfast, United Kingdom.
49
Dr. Jeffrey Postal, Age 64. Director. He has served as a director of the Company since January of 2004. Dr. Postal presently is a businessman and entrepreneur in the Miami, Florida region. Dr. Postal owns, founded or funded numerous successful businesses over the last few years, including but not limited to: Sportacular Art, a company that was licensed by the National Football League, Major League Baseball and National Hockey League to design and manufacture sports memorabilia for retail distribution in the U.S; Co-Owner of Natures Sleep, LLC, a major distributor of Visco Memory Foam mattresses, both nationally and internationally; Dr. Postal is a Partner in Social Extract, LLC, a Social Media company offering consulting services to many major companies in the U.S.; Dr. Postal is the principal investor of Postal Capital Funding, LLC, a private investment fund whose mission is to find undervalued/under capitalized companies and extend funding to them in exchange for equity and/or capital consideration; and Dr. Postal is the founder of Datastream Card Services, a company that provides innovative billing solutions to companies conducting business on the internet.
Jeffrey Guzy, Age 63. Director. He was appointed to the Company’s Board of Directors on May 3, 2007. He serves as Chairman and Chief Executive Officer of CoJax Oil and Gas Corporation, an SEC reporting company. Mr. Guzy is an outside director of Leatt Corporation, an SEC reporting company (OTCQB: LEAT). Mr. Guzy served, from October 2007 to August 2010 as President of Leatt Corporation. Mr. Guzy has a MBA in Strategic Planning and Management from The Wharton School of the University of Pennsylvania; a M.S. in Systems Engineering from the University of Pennsylvania; a B.S. in Electrical Engineering from Penn State University; and a Certificate in Theology from Georgetown University. Mr. Guzy has served as an executive manager or consultant for business development, sales, customer service and management in the telecommunications industry, specifically, with IBM Corp., Sprint International, Bell Atlantic Video Services, Loral CyberStar and FaciliCom International. Mr. Guzy has also started his own telecommunications company providing Internet services in Western Africa. He serves as an independent director and chairman of the audit committee of Purebase Corporation (OTC: PUBC) a public company.
LARRY SLOVEN, Age 71. Mr. Sloven was appointed as a director on May 3, 2007. A U.S. Citizen, Mr. Sloven resided in Hong Kong or other parts of Southeast Asia for over 18 years. He is a member of the American Chamber of Commerce in Hong Kong. He just finished a five-year term as a Director of the American Club in Hong Kong and chaired the Development Committee which was responsible for re-engineering five major multi-million-dollar re-development projects for the premier club in Asia. Mr. Sloven’s company was a product development and purchasing agent for Capstone Companies, Inc., and was the purchasing agent for Dick’s Sporting Goods, Inc. chain. He also helped develop private label hardware and accessory line for now defunct Circuit City, Inc. and a camcorder and cellular phone battery line for Spectrum Brands, Inc. (formerly, “Rayovac Corp.”). In 1993, Mr. Sloven helped set up a joint venture factory producing cellular battery packs for AT&T along with the first cellular alkaline battery pack for Duracell. He participated in the outsourcing of the production of the one-hour NMH-fast charger for the Duracell Corporation. In the mid 1990’s, he helped set up a joint venture with Rayovac Corp. and the largest alkaline consumer battery factory in China. Mr. Sloven also assisted in the outsourcing of video games for Atari, Inc., and arranging for Chinese manufacture of The Stanley Works’ garage door motors and products.
GEORGE WOLF, Age 68. Mr. Wolf has provided sales and business development consulting services to the Company since 2014. Prior to Mr. Wolf providing these consulting services, he served as President and Chief Executive Officer of Systematic Development Group, LLC from 2010 into 2014, President and Chief Executive Officer of ExamSoft Worldwide, Inc. (1998 – 2009) and as Executive Vice President of Sagaz Industries, Inc. (1986 – 1997).
Set forth below is a tabular disclosure summarizing some of the specific qualifications, attributes, skills and experiences of our directors.
Name | Title | Qualifications | ||
Stewart Wallach | Chairman of the Board and Chief Executive Officer | He has extensive experience in executive management of companies. He has experience in growing operations and merger and acquisition transactions. He has extensive experience in arranging the design, development and production of products in foreign nations for shipment and sale in the U.S. and conducting business abroad. His experience provides insight for the implementation of effective operational, financial and strategic leadership of the Company. | ||
James McClinton | Chief Financial Officer and Director | He has a degree in accounting. He has prior practical experience in corporate accounting. He has executive operational experience, including acting as a chief financial officer. His invaluable experience in finance and accounting provides insight for the implementation of effective operational, financial and strategic leadership of the Company. | ||
Jeffrey Postal | Director | He has extensive experience in investing in companies. He has extensive experience in management and business, He has experience growing a company and mergers and acquisitions. | ||
Larry Sloven | Director | He has extensive experience in conducting business in foreign nations and international business, especially China and Southeast Asia, and he brings this valuable experience to the Board. | ||
Jeffrey Guzy | Director | Through his MBA in Strategic Planning & Management and his knowledge of U.S. capital markets, Mr. Guzy provides invaluable guidance and perspective to the Board. He serves and has served as an officer and director of public companies and worked for large corporations in business development. He brings this experience to the Board. | ||
George Wolf | Director | He has extensive experience in sales and business development and has prior management experience. He is familiar with the Company’s sales and business development strategies and operations and has worked closely with executive officers of the Company in sales and business development. |
50
POLICY REGARDING BOARD ATTENDANCE
Company Directors are expected to attend
all annual and special board meetings per Company policy. An attendance rate of less than 75% over any 12-month period is grounds for
removal from the Board of Directors. In fiscal year 2020,2021, all Directors attended the (5) five(3) three board meetings.
ROLE OF THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCE
The Board of Directors is responsible for overseeing the Chief Executive Officer and other senior management in order to assure that such officers are competent and ethical in running the Company on a day-to-day basis and to assure that the long-term interests of the stockholders are being served by such management. The Directors must take a pro-active focus and approach to their obligation in order to set and enforce standards to ensure that the Company is committed to business success through maintenance of the highest standards of responsibility and ethics. The Company has adopted a Code of Ethics, which is posted on http://capstonecompaniesinc.com. The contents of the Company Website are not incorporated herein by reference and that Website provided in this Report is intended to be an inactive textual reference only.
AUDIT COMMITTEE
The Audit Committee was established in accordance
with Section 3(a)(58) (A) of the Exchange Act. It is primarily responsible for overseeing the services performed by the Company'sCompany’s
Independent Registered Public Accounting Firm, evaluating the Company'sCompany’s accounting policies and its system of internal controls
and reviewing significant financial transactions. The members of the Audit Committee in fiscal year 20202021 were Jeffrey Guzy and Jeffrey
Postal. The Company believes that Mr. Guzy is an Independent Director under SEC and NASDAQ applicable standards. The Board of Directors
has determined that Mr. Guzy qualifies as an "Audit“Audit Committee Financial Expert"Expert” as defined under applicable SEC rules and
also meets the additional criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee is responsible for
providing oversight to Company'sCompany’s accounting and financial reporting processes and the audit of the Company'sCompany’s financial statements.
The Audit Committee monitors the Company'sCompany’s external audit process, including auditor independence matters, the scope and fees related
to audits, and the extent to which the Independent Registered Public Accounting Firm may be retained to perform non-audit services. The
Audit Committee also reviews the results of the external audit with regard to the adequacy and appropriateness of our financial, accounting
and internal controls over financial reporting. It also generally oversees the Company'sCompany’s internal compliance programs. The function
of the Audit Committee is not intended to duplicate or to certify the activities of the management and the Independent Registered Public
Accounting Firm, nor can the Audit Committee certify that the independent registered public accounting firm is "independent"“independent”
under applicable rules. The Audit Committee members are not professional accountants or auditors. Under its Charter, the Audit Committee
has authority to retain outside legal, accounting or other advisors as it deems necessary to carry out its duties and to require the Company
to pay for such expenditures.
The Audit Committee provides counsel, advice and direction to management and the Independent Registered Public Accounting Firm on matters for which it is responsible, based on the information it receives from management and the independent registered public accounting firm and the experience of its members in business, financial and accounting matters.
The Company'sCompany’s management is responsible
for the preparation and integrity of its financial statements, accounting and financial reporting principles, and internal controls and
procedures designed to ensure compliance with accounting standards, applicable laws and regulations.
51
In this context, the Audit Committee hereby reports as follows:
1) |
2) | The Audit Committee has received written disclosures and a letter from the Independent Registered Public
Accounting Firm, D. Brooks |
3) | Based on the review and discussion referred to above, the Audit Committee recommended to the board, and
the board has approved, that the audited financial statements be included in 2022. |
The foregoing report is provided by the undersigned Chairman of the Audit Committee.
/s/Jeffrey Guzy
Jeffrey Guzy, Chairman of Audit Committee
COMPENSATION AND NOMINATION COMMITTEE
(“(“Compensation and Nomination Committee”Committee”)
Company’s Compensation and Nomination
Committee is currently composed of two members (both Company directors): Mr. Jeffrey Guzy and Mr. Jeffrey Postal. Only Mr. Guzy, who serves
as Chairman of the Compensation and Nomination Committee, is “independent”“independent” within the meaning of the NASDAQ Marketplace Rules.
Company’s Compensation and Nomination
Committee assists the Company Board of Directors in reviewing and approving the compensation structure of executive officers, including
all forms of compensation to be provided to the executive officers. The chief executive officer and chief financial officer may not be
present at any Compensation and Nomination Committee meeting during which the executive'sexecutive’s compensation is discussed and deliberated.
The Compensation and Nomination Committee is responsible for, among other customary duties, the following:
● | Reviewing, overseeing and approving the compensation of Company’s executive officers; and |
● | Periodically reviewing and making recommendations to the Company Board of Directors about incentive compensation, stock or equity compensation plans, annual bonus programs and grants, any employee pension or welfare benefit plans and any similar forms of benefit plans; and |
● | Periodically reviewing and approving corporate performance and corporate performance goals that are applicable to compensation of Company’s chief executive officer and chief financial officer, evaluating the performance of those executives in light of corporate performance and corporate performance goals; and determining the compensation for the Company’s chief executive officer and chief financial officer. |
CODE OF ETHICS
The Company has a code of ethics that
applies to all of the Company'sCompany’s employees, including its principal executive officer, and principal financial officer, and its Board.
A copy of this code is available on http://www.capstonecompaniesinc.com. The Company intends to disclose any changes in or waivers from
its code of ethics by posting such information on its website or by filing a Form 8-K Report.
DIRECTOR MEETINGS IN FISCAL YEAR 2020
The Board of Directors had (5) five(3) three official
meetings in year 2020.2021. During 2020,2021, all of the Directors attended 75% or more of the Board meeting, which were held during the period
of time that such person served on the Board or such committee.
Board Leadership Structure and Board'sBoard’s
Role in Risk Oversight
The Company'sCompany’s Board of Directors endorses
the view that one of its primary functions is to protect stockholders'stockholders’ interests by providing independent oversight of management,
including the Chief Executive Officer and Chief Operating Officer (who also holds the Chief Financial Officer position). The Chief Financial
Officer is allowed and encouraged to address the Board of Directors on any issues affecting the Company or its stockholders. The Company
also allows outside counsel to participate in some of the board meetings in order to provide legal counsel and an outside perspective
on corporate governance and risk issues.
52
Board Structure.
The Company believes that the Chief Executive Officer or
The CEO is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board of Directors provides guidance to senior management and sets the agenda for Board of Directors meetings and presides over meetings of the full Board of Directors.
Our CEO serves on our Board of Directors,
which we believe helps the CEO serve as a bridge between management and the Board of Directors, ensuring that both groups act with a common
purpose. We believe that the CEO'sCEO’s presence on the Board of Directors enhances his ability to provide insight and direction on important
strategic initiatives to both management and the independent directors and, at the same time, ensures that the appropriate level of independent
oversight is applied to all decisions by the Board of Directors.
The Chairman of the Board has no greater nor lesser vote on matters considered by the Board than any other director, and neither the Chairman nor any other director votes on any related party transaction. All directors of the Company, including the Chairman, are bound by fiduciary obligations, imposed by law, to serve the best interests of the stockholders. Accordingly, separating the offices of Chairman and Chief Executive Officer would not serve to enhance or diminish the fiduciary duties of any director of the Company.
Board of Director – 2020– 2021 Compensation
Table
Name (1) | Audit Committee | Nomination and Compensation Committees | Total Awards | |||||||||
Stewart Wallach (2) | - | - | - | |||||||||
Gerry McClinton (2) | - | - | - | |||||||||
Jeff Guzy (3), (4),(5)(6) | $ | 6,682 | 6,683 | 13,365 | ||||||||
Jeff Postal (3), (4),(5)(6) | $ | 6,682 | 6,683 | 13,365 | ||||||||
Larry Sloven (2) | - | - | - |
Name (1) | Audit Committee | Nomination and Compensation Committees | Total Awards | |||||||||
Stewart Wallach (2) | — | — | — | |||||||||
Gerry McClinton (2) | — | — | — | |||||||||
Jeff Guzy (3), (4),(5)(6) | $ | 6,682 | 6,683 | 13,365 | ||||||||
Jeff Postal (3), (4),(5)(6) | $ | 6,682 | 6,683 | 13,365 | ||||||||
Larry Sloven | — | — | — |
(1) | The individuals listed were appointed to the Board of Directors for 2020-2021. |
(2) | Mr. Wallach, Mr. McClinton and Mr. Sloven as Company Employees did not receive compensation for participating
as a Director on the Board. |
(3) | On August 6, 2017, Mr. Guzy and Mr. Postal each received 100,000 stock option grants for participating
in the Audit and Nomination and Compensation Committees for the year 2017-2018. The market value using the Binomial Lattice pricing model
for each grant was $55,000. As the grant period covered 2017-2018, the cost impact in 2017 was $22,212 for each grant. |
(4) | On August 6, 2018, Mr. Guzy and Mr. Postal each received 100,000 stock option grants for participating
in the Audit and Nomination and Compensation Committees for the year 2018-2019. The market value using the Binomial Lattice pricing model
for each grant was $21,000. As the grant period covered 2018-2019 the cost impact in 2018 was $8,481 for each grant. |
(5) | On August 6, 2019, Mr. Guzy and Mr. Postal each received 100,000 stock option grants for participating
in the Audit and Nomination and Compensation Committees for the year 2019-2020. The market value using the Binomial Lattice pricing model
for each grant was $17,000. As the grant period covered 2019-2020 the cost impact in 2019 was $6,865 for each grant. |
(6) | On August 6, 2020, Mr. Guzy and Mr. Postal each received 100,000 stock option grants for
participating in the Audit and Nomination and Compensation Committees for the year 2020-2021. The market value using the Binomial
Lattice pricing model |
53
On May 6, 2021, the Company approved the following basic compensation arrangement for independent directors of the Company, effective August 6, 2021 and ending August 5, 2022: A total compensation value of $15,000 per annum, payable $750 monthly cash compensation or $9,000 or (60% of total value) and remainder $6,000 payable in non-qualified stock options issuable as of August 6, 2022 and with an exercise price equal to market price of common stock as of August 6, 2021, less 20% (discount).
George Wolf, who was appointed as a director on January 13, 2022, waived any compensation as a director for 2022.
On May 31, 2019, the Company approved that effective on June 1, 2019, each independent director, namely Jeffrey Guzy and Jeffrey Postal, would each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation would be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee.
On May 31, 2019, the Company also approved
that the independent directors would be offered effective from June 1, 2019, the opportunity to participate as a non-employee in the Company’sCompany’s
Health Benefit Plan, subject to compliance with all plan participation requirements and on acceptance into the plan the director will
be responsible to pay 100% of their plan’splan’s participation cost.
On June 10, 2020, the Company approved that effective on August 1, 2020 until August 1, 2021, each independent director, namely Jeffrey Guzy and Jeffrey Postal, would each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation would be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee. For both years ended December 31, 2020 and 2019 both directors each received $5,250 each as Form 1099 compensation.
Independent Directors.
The Board of the Company is
Our senior officers are responsible for the day-to-day
management of risks the Company faces, while the Board, as a whole and through its committees, has responsibility for the oversight of
risk management. In its risk oversight role, the Board of Directors has the responsibility to satisfy itself that the risk management
processes designed and implemented by management are adequate and functioning as designed. To do this, the Chairman of the Board and other
non-officer directors met quarterly on average with management to discuss strategy and the risks facing the Company. Senior management,
each member being also a director, attends the Board meetings and is available to address any questions or concerns raised by the Board
on risk management and any other matters. The Chairman of the Board and members of the Board work together to provide strong, independent
oversight of the Company'sCompany’s management and affairs through its standing committees and, when necessary, special meetings of directors.
Since most of the directors live in the same area, informal meetings between directors and officers also occur to discuss business risk
and appropriate responses.
Director - Minimum Qualifications
. The Compensation and Nominating Committee has adopted a set of criteria that it considers when it selects individuals not currently on the Board of Directors to be nominated for election to the Board of Directors. A candidate must meet the eligibility requirements set forth in the
● | contributions to the range of talent, skill and expertise appropriate for the Board. |
● | financial, regulatory and business experience, knowledge of the operations of public companies and ability to read and understand financial statements. |
● | familiarity with the Company’s market. |
● | personal and professional integrity, honesty and reputation. |
● | the ability to represent the best interests of the shareholders of the Company and the best interests of the institution. |
● | the ability to devote sufficient time and energy to the performance of his or her duties; and |
● | independence under applicable Commission and listing definitions. |
The Compensation and Nominating Committee
will also consider any other factors it deems relevant. With respect to nominating an existing director for re-election to the Board of
Directors, the Compensation and Nominating Committee will consider and review an existing director'sdirector’s Board and committee attendance
and performance; length of Board service; experience, skills and contributions that the existing director brings to the Board; and independence.
54
Director Nomination Process
. The process that the Compensation and Nominating Committee follows when it identifies and evaluates individuals to be nominated for election to the Board of Directors is as follows:
For purposes of identifying nominees for the Board of Directors, the Compensation and Nominating Committee relies on personal contacts of the committee members and other members of the Board of Directors and will consider director candidates recommended by stockholders in accordance with the policy and procedures set forth above. The Compensation and Nominating Committee has not used an independent search firm to identify nominees.
In evaluating potential nominees, the Compensation
and Nominating Committee determines whether the candidate is eligible and qualified for service on the Board of Directors by evaluating
the candidate under the selection criteria, which are discussed in more detail below. If such individual fulfills these criteria, the
Compensation and Nominating Committee will conduct a check of the individual'sindividual’s background and interview the candidate to further
assess the qualities of the prospective nominee and the contributions he or she would make to the Board of Directors.
Consideration of Recommendation by Stockholders.
It is the policy of the Compensation and Nomination Committee of the Board of Directors of the Company to consider director candidates recommended by stockholders who appear to be qualified to serve on the
Stockholder Proposal Procedures.
To submit a recommendation of a director candidate to the Compensation and Nomination Committee, a stockholder should submit the following information in writing, addressed to the Chairperson of the Compensation and Nomination Committee, care of the Corporate Secretary, at the main office of the Company:
1. | The name of the person recommended as a director candidate. |
2. | All information relating to such person that is required to be disclosed in solicitations of proxies for
election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934. |
3. | The written consent of the person being recommended as a director candidate to being named in the proxy
statement as a nominee and to serving as a director if elected. |
4. | The name and address of the stockholder making the recommendation, as they appear on the |
5. | A statement disclosing whether such stockholder is acting with or on behalf of any other person and, if
applicable, the identity |
In order for a director candidate to be considered
for nomination at the Company'sCompany’s annual meeting of stockholders, when and if one is held, or to be considered prior to a written
consent vote on director nominees, the recommendation must be received by the Compensation and Nominating Committee at least 30 days before
the date of the annual meeting or, in the case of an information statement and no shareholder meeting being held, prior to April 1st.
MANAGEMENT OF THE COMPANY
CURRENT OFFICERS. The current officers of the Company are:
1. | Stewart Wallach, age |
2. | Gerry McClinton, age |
3. | Aimee Gaudet, age the Company. |
FAMILY RELATIONSHIP
: There is no family relationship between members of Company management.
Delinquent Section 16(a) Reports.
The Board of Directors approved the annual grant of stock options to Jeffrey Guzy and Jeffrey Postal, both directors of Company, and
Aimee Gaudet Brown, an officer of the Company. For each of the stock options: the grant date is August 5, 2020,2021, the exercise period is
August 6, 2020 to August 5, 2021 and the exercise price is $0.435 per share. The Form 5’s5’s for these option grants were filed March
10, 2021 instead of February 14, 2021.
55
Item 11. Executive Compensation.
Role of Management
The Company believes that it is important
to have our Chief Executive Officer'sOfficer’s input in the design of compensation programs for his direct reports. The Chief Executive Officer
reviews his direct reports'reports’ compensation programs annually with the Committee, evaluating the adequacy relative to the marketplace,
inflation, internal equity, external competitiveness, business and motivational challenges and opportunities facing the Company and its
executives. In particular, he considers base salary a critical component of compensation to remain competitive and retain his executives.
All final decisions regarding compensation for the Chief Executive Officer'sOfficer’s direct reports listed in the Summary Compensation Table
are made by the Compensation Committee. The Chief Executive Officer does not make recommendations with regard to his own compensation.
Role of the Compensation Consultant
While we may consult industry sources on compensation for executives, we have not engaged a consultant to analyze our compensation levels.
For 2020,2021, the principal components of compensation for each
officer were:
● | base salary. |
● | annual incentive. |
● | long-term incentive compensation (restricted stock awards); and |
● | perquisites and other benefits. |
Our Company endeavors to strike an appropriate balance between long-term and current cash compensation. The current executives are key to the ability of the Company to conduct its business because of their individual experience and relationships in our current business line. Their compensation reflects their individual value to the ability of the Company to conduct its current business.
EXECUTIVE COMPENSATION
Name & Principal Position | Year | Salary $ | Bonus $ | Stock Awards $ | Non-Equity Incentives $ | All Others $ | TOTAL | ||||||||||||||||||
Stewart Wallach, | 2020 | $ | 301,521 | $ | - | $ | - | $ | - | $ | - | $ | 301,521 | ||||||||||||
Chief Executive | 2019 | $ | 301,521 | $ | - | $ | - | $ | - | $ | - | $ | 301,521 | ||||||||||||
Officer (1,2,3,7,8,9,10) | 2018 | $ | 301,521 | $ | - | $ | - | $ | - | $ | - | $ | 301,521 | ||||||||||||
James G. McClinton, | 2020 | $ | 191,442 | $ | - | $ | - | $ | - | $ | - | $ | 191,442 | ||||||||||||
Chief Financial | 2019 | $ | 191,442 | $ | - | $ | - | $ | - | $ | - | $ | 191,442 | ||||||||||||
Officer & COO (4,5,6,7,8,9,10) | 2018 | $ | 191,442 | $ | -- | $ | - | $ | - | $ | - | $ | 191,442 |
Name & Principal Position | Year | Salary $ | Bonus $ | Stock Awards $ | Non-Equity Incentives $ | All Others $ | TOTAL | |||||||||||||||||||||
Stewart Wallach, | 2021 | $ | 301,521 | $ | — | $ | — | $ | — | $ | — | $ | 301,521 | |||||||||||||||
Chief Executive | 2020 | $ | 301,521 | $ | — | $ | — | $ | — | $ | — | $ | 301,521 | |||||||||||||||
Officer (1,2,3,7,8,9,10) | 2019 | $ | 301,521 | $ | — | $ | — | $ | — | $ | — | $ | 301,521 | |||||||||||||||
James G. McClinton, | 2021 | $ | 191,442 | $ | — | $ | — | $ | — | $ | — | $ | 191,442 | |||||||||||||||
Chief Financial | 2020 | $ | 191,442 | $ | — | $ | — | $ | — | $ | — | $ | 191,442 | |||||||||||||||
Officer & COO (4,5,6,7,8,9,10) | 2019 | $ | 191,442 | $ | — | $ | — | $ | — | $ | — | $ | 191,442 |
Footnotes:
(1) On February 5, 2020, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum.
(2) On February 5, 2018, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach would be paid $301,521 per annum.
(3) On February 5, 2016, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach would be paid $301,521 per annum.
(4) On February 5, 2020, the Company entered into a new Employment Agreement with James McClinton, , whereby Mr. McClinton would be paid $191,442 per annum.
(5) On February 5, 2018, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton would be paid $191,442 per annum.
(6) On February 5, 2016, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton would be paid $191,442 per annum.
(7) The Company has no non-equity incentive plans.
(8) The Company has no established bonus plan. Any bonus payments are made ad hoc upon recommendation of the Compensation Committee. Bonuses are only paid on a performance basis.
(9) On September 1, 2020, fifty percent of
both Mr. Wallach and Mr. McClinton’sMcClinton’s salary for the period September 1, 2020 through December 31, 2020 was accrued and deferred
for payment until 2021.
(10) On January 1, 2021, fifty percent of both
Mr. Wallach and Mr. McClinton’sMcClinton’s salary for the period January 1, 2021 through March 31, 2021 was deferred for payment until later
in 2021.
56
EMPLOYMENT AGREEMENTS
Stewart Wallach, Chief Executive Officer and President.
On February 5, 2020, the Company entered
into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach would be paid $301,521 per annum. The term of this new agreement
began February 5, 2020 and ends February 5, 2023. The parties may extend the employment period of this agreement by mutual consent with
approval of the Company'sCompany’s Board of Directors, but the extension may not exceed two years in length.
The February 5, 2020 Employment Agreement with Mr. Wallach was filed by the Company as an exhibit to Report Form 10-K for fiscal year ended December 31, 2019 - (as filed by the Company with the Commission on March 30, 2020).
Gerry McClinton, Chief Operating Officer and Chief Financial Officer.
On February 5, 2020, the Company entered
an Employment Agreement with James McClinton, whereby Mr. McClinton would be paid $191,442 per annum. The term of this new agreement began
February 5, 2020 and ends February 5, 2022. The parties may extend the employment period of this agreement by mutual consent with approval
of the Company'sCompany’s Board of Directors, but the extension may not exceed one year in length.
The February 5, 2020 Employment Agreement with Mr. McClinton was filed by the Company as an exhibit to Report Form 10-K for fiscal year ended December 31, 2019 (as filed by the Company with the Commission on March 30, 2020).
Effective September 1, 2020 through December
31, 2020, payments equivalent to fifty percent of both Mr. Wallach and Mr. McClinton’sMcClinton’s salary or approximately $48,707 and $30,925,
respectively, will be deferred until 2021.
Effective January 1, 2021 through March
31, 2021, further payments equivalent to fifty percent of both Mr. Wallach and Mr. McClinton’sMcClinton’s salary or approximately $40,589 and
$25,771, respectively, will be deferred until later in 2021.
Common Provisions in both new Employment Agreements:
The following provisions are contained in
each of the above employment agreements: If the officer'sofficer’s employment is terminated by death or disability or without cause, the
Company is obligated to pay to the officer'sofficer’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 (a) the sum of twelve
(12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of "merit"“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'sExecutive’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'sExecutive’s severance package. The employment agreements
have an anti-competition provision for 18 months after the end of employment.
The above summary of the employment agreements is qualified by reference to the actual employment agreements, which were filed as exhibits to the Form 10-K by the Company for fiscal year ended December 31, 2019 (as filed by the Company with the Commission on March 30, 2020).
57
These amended agreements supersede any existing employment agreements and are the only employment agreements with Company officers:
SUMMARY TABLE OF OPTION GRANTS TO OFFICERS OF COMPANY
As of December 31, 2020
Name | No. of Shares Underlying | % of Total Options Granted Employees in | Expiration Date | Restricted Stock Grants | No. Shares underlying Options Options Granted in | |||||||||||||||
Stewart Wallach | — | — | — | |||||||||||||||||
Gerry McClinton | — | — | — |
OTHER COMPENSATION
(1)
NAME/POSITION | YEAR | SEVERANCE PACKAGE | CAR ALLOWANCE | CO. PAID SERVICES | TRAVEL LODGING | TOTAL ($) | ||||||||||||||||||
Stewart Wallach | — | — | — | — | ||||||||||||||||||||
Chief Executive | — | — | — | — | ||||||||||||||||||||
Officer | — | — | — | — | ||||||||||||||||||||
Gerry McClinton | 2021 | — | — | — | — | — | ||||||||||||||||||
Chief Operating | 2020 | — | — | — | — | — | ||||||||||||||||||
Officer & Chief | 2019 | — | — | — | — | — | ||||||||||||||||||
Financial Officer |
Footnotes:
(1) | There were no 401(k) matching contributions by the Company and no medical supplemental payments by the
Company in any of the years specified. |
OUTSTANDING EQUITY AWARDS FOR YEAR END 20202021 TABLE
OPTIONS(1)
NAME | Securities Underlying Unexercised Options | Option Exercise Price | Option Expiration Date | |||||||||
Stewart Wallach | — | — | ||||||||||
Gerry McClinton | — | — |
Footnotes:
(1) | The Company does not have any stock awards for the years specified for the above named senior officers. |
2021 OPTION EXERCISES AND VESTED OPTIONS
Name | Number of Shares Acquired on Exercise | Value Realized on Exercise | ||||||
Stewart Wallach | — | |||||||
Gerry McClinton | — |
POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT
SALARY SEVERANCE | BONUS SEVERANCE | GROSS UP TAXES | BENEFIT COMPENSATION | GRAND TOTAL TOTAL | ||||||||||||||||
Stewart Wallach | $ | 301,521 | $ | - | $ | 12,600 | $ | 6,600 | $ | 320,721 | ||||||||||
Gerry McClinton | $ | 191,442 | $ | - | $ | 11,000 | $ | 6,600 | $ | 209,042 |
SALARY SEVERANCE | BONUS SEVERANCE | GROSS UP TAXES | BENEFIT COMPENSATION | GRAND TOTAL TOTAL | ||||||||||||||||
Stewart Wallach | $ | 301,521 | $ | — | $ | 12,600 | $ | 6,600 | $ | 320,721 | ||||||||||
Gerry McClinton | $ | 191,442 | $ | — | $ | 11,000 | $ | 6,600 | $ | 209,042 |
Indemnification.
The Company maintains directors and officer'sofficer’s
liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not
been material. Further, the Company’sCompany’s articles of incorporation and bylaws provide for indemnification of directors and officers.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The sole class of voting Common Stock of the
Company as of March 01, 2021,11, 2022, that are issued and outstanding is the Common Stock, $0.0001 par value per share, or "Common Stock"“Common Stock”.
The table below sets forth, as of March 01, 2021, ("11, 2022, (“Record Date"Date”), certain information $0.0001 par value per share, or "Common Stock"“Common
Stock” information with respect to the Common Stock beneficially owned by (i) each Director, nominee and executive officer
of the Company; (ii) each person who owns beneficially more than 5% of the Common Stock; and (iii) all Directors, nominees and executive
officers as a group. There were 46,296,36448,893,031 shares of Common Stock outstanding on the Record Date of March 01, 2021.11, 2022.
58
NAME, ADDRESS & TITLE | STOCK OWNERSHIP | % OF STOCK OWNERSHIP | SHARES - COMMON STOCK ISSUABLE UPON CONVERSION | STOCK OWNERSHIP AFTER CONVERSION -ALL OPTIONS, WARRANTS & THOSE EXERCISEABLE WITHIN NEXT 60 DAYS | % OF STOCK OWNED AFTER CONVERSION – OPTIONS, WARRANTS INCLUDES EXERCISEABLE WITHIN THE 60 DAYS | OPTIONS & WARRANTS VESTED | OPTIONS & WARRANTS EXPIRED | OPTIONS, WARRANTS NOT VESTED |
Stewart Wallach, CEO, 431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441 | 9,831,745 | 21.2% | 499,950 | 9,831,745 | 20.9% | - | - | - |
Gerry McClinton, CFO, & Director, 431 Fairway Drive Suite 200, Deerfield Beach, FL 33441 | 33,664 | 0.1% | - | 33,664 | 0.1% | - | - | - |
Jeff Postal, Director, 431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441 | 9,034,120 | 19.5% | 499,950 | 9,334,120 | 19.8% | 300,000 | - | 100,000 |
Aimee C. Brown (Gaudet), Secretary, 431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441 | - | -% | - | 70,000 | 0.1% | 70,000 | - | 10,000 |
Jeff Guzy, Director, 3130 19th Street North, Arlington, VA 22201 | 52,800 | 0.1% | - | 452,800 | 1.0% | 400,000 | 200,000 | 100,000 |
Larry Sloven, Director, 431 Fairway Drive Suite 200, Deerfield Beach, FL 33441 | 52,800 | 0.1% | - | 52,800 | 0.1% | - | - | - |
ALL OFFICERS & DIRECTORS AS A GROUP | 19,005,129 | 41.0% | 999,900 | 19,775,129 | 42.0% | 770,000 | 200,000 | 210,000 |
Total | 46,296,364 | 100.0% | 999,900 | 47,076,364 | 100.0% | 780,000 | 200,000 | 210,000 |
NAME, ADDRESS & TITLE | STOCK OWNERSHIP | % OF STOCK OWNERSHIP | SHARES - COMMON STOCK ISSUABLE UPON CONVERSION | STOCK OWNERSHIP AFTER CONVERSION -ALL OPTIONS, WARRANTS & THOSE EXERCISEABLE WITHIN NEXT 60 DAYS | % OF STOCK OWNED AFTER CONVERSION – OPTIONS, WARRANTS INCLUDES EXERCISEABLE WITHIN THE 60 DAYS | OPTIONS & WARRANTS VESTED | OPTIONS & WARRANTS EXPIRED | OPTIONS, WARRANTS NOT VESTED | ||||||||||||||||||||||||
Stewart Wallach, CEO, 431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441 | 9,831,745 | 20.1 | % | 499,950 | 9,831,745 | 19.8 | % | — | — | — | ||||||||||||||||||||||
Gerry McClinton, CFO, & Director, 431 Fairway Drive Suite 200, Deerfield Beach, FL 33441 | 33,664 | 0.1 | % | — | 33,664 | 0.1 | % | — | — | — | ||||||||||||||||||||||
Jeff Postal, Director, 431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441 | 9,034,120 | 19.5 | % | 499,950 | 9,334,120 | 18.8 | % | 400,000 | — | — | ||||||||||||||||||||||
Aimee C. Brown (Gaudet), Secretary, 431 Fairway Drive, Suite 200, Deerfield Beach, FL 33441 | — | — | % | — | 80,000 | 0.2 | % | 80,000 | — | — | ||||||||||||||||||||||
Jeff Guzy, Director, 3130 19th Street North, Arlington, VA 22201 | 152,800 | 0.3 | % | — | 452,800 | 0.9 | % | 400,000 | 200,000 | — | ||||||||||||||||||||||
Larry Sloven, Director, 431 Fairway Drive Suite 200, Deerfield Beach, FL 33441 | 52,800 | 0.1 | % | — | 52,800 | 0.1 | % | — | — | — | ||||||||||||||||||||||
ALL OFFICERS & DIRECTORS AS A GROUP | 19,105,129 | 39.1 | % | 999,900 | 19,785,129 | 39.8 | % | 880,000 | 200,000 | — | ||||||||||||||||||||||
Total | 48,893,031 | 100.0 | % | 999,900 | 49,773,031 | 100.0 | % | 880,000 | 200,000 | — |
Notes to Table.
(1) | Unless otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. |
(2) | Mr. |
(3) | Mr. |
59
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Company is a "controlled company"“controlled company”
under typical stock exchange corporate governance rules, that is a company where 50% or more of the voting power is owned by a person
or a group and does not currently have to meet requirements for a board of directors with a majority of "independent“independent directors."”
Currently, only Jeffrey Guzy qualifies as an "independent director"“independent director” under the listing standards of most stock exchanges or
quotation systems. No other director qualifies as an "independent director"“independent director” under those rules because they are officers of
the Company or have business relationships with the Company.
A "related-person transaction"“related-person transaction”
will be a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we
and any "related person"“related person” are participants involving an amount that exceeds $120,000. Transactions involving compensation for
services provided to us as an employee, director, consultant or similar capacity by a related person will not be covered by this policy.
A related person will be any executive officer, director or a holder of more than five percent of our common stock, including any of their
immediate family members and any entity owned or controlled by such persons.
The policy provides that the Audit Committee reviews transactions subject to the policy and determines whether to approve or ratify those transactions. The Audit Committee considers, among other factors it deems appropriate, the following factors:
● | Benefits derived by the related person from the transaction versus the benefits derived by the Company. |
● | Total value of the transaction. |
● | Whether the transaction was undertaken in the ordinary course of business of the Company; and |
● | Were the terms and conditions of the transaction usual and customary and commercially reasonable. |
The Audit Committee does not have any policies on expedited or pre-approval of certain routine related person transactions.
From time to time, the Company borrows working capital on a short-term basis, usually with maturity dates of less than a year, from Company directors and officers. The Company believes that these working capital loans are commercially reasonable, especially in light of the inability of the Company to obtain such short-term financing from traditional funding sources. As of December 31, 2020 the Company had no related party loans or outstanding balances.
On May 31, 2019, the Board of Directors
approved that the Company’sCompany’s outstanding loan balance as of December 31, 2018 of $904,109, owed to Capstone Industries, Inc., a Florida
corporation and a wholly owned subsidiary of the Company, would be offset as a dividend distribution from Capstone Industries, Inc to
the Company as of December 31, 2018.
On May 31, 2019, the disinterested directors of the Board of Directors approved the use of up to $900,000 dividend distribution, to be completed by December 31, 2019, from Capstone Industries, Inc., a Florida corporation and a wholly owned subsidiary of the Company, to the Company to provide working capital. As of December 31, 2019, the authorized distribution had been fully completed.
On February 4, 2020, the Board of Directors
approved that the Company’sCompany’s outstanding loan balance as of December 31, 2019 of $380,967, owed to Capstone Industries, Inc., a Florida
corporation and a wholly owned subsidiary of the Company, would be offset as a dividend distribution from Capstone Industries, Inc to
the Company as of December 31, 2019.
On February 4, 2020, the disinterested directors of the Board of Directors of the Company approved the use of up to an aggregate of $1,000,000 profit distribution, to be completed by December 31, 2020, from Capstone Industries, Inc., a Florida corporation and a wholly owned subsidiary of the Company, to the Company to provide working capital. As of December 31, 2020, $350,000 of the authorized distribution had been completed.
Process for Identifying Related Person Transactions.
To identify related-person transactions in advance, we are expected to rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related-person transactions, our board of directors will take into account the relevant available facts and circumstances including, but not limited to:
● | the risks, costs and benefits to us. |
● | the impact on a director’s independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated. |
● | the terms of the transaction. |
● | the availability of other sources for comparable services or products; and |
● | the terms available to or from, as the case may be, unrelated third parties or to or from our employees generally. |
Promoters and Certain Control Persons
We did not have any promoters at any time during the past five fiscal years.
60
Director Independence
Our Board of Directors has determined that our director, Mr.
Jeffery Guzy, is an independent director, as the term "independent"“independent” is defined by the rules of the Nasdaq Stock Market. The
Company was not successful in recruiting additional, qualified and interested independent directors in fiscal year 2020.
Item 14. Principal Accountant Fees && Services
The following is a summary of the fees billed
to date by D. Brooks && Associates CPA’s,CPA’s, P.A., for professional services rendered for the years ended December 31, 20202021 and
2019:
2020 | 2019 | |||||||
Audit Fees | $ | 13,050 | $ | - | ||||
Tax Fees | - | - | ||||||
Total | $ | 13,050 | $ | - |
2021 | 2020 | |||||||
Audit Fees | $ | 64,700 | $ | 13,050 | ||||
Tax Fees | — | — | ||||||
Total | $ | 64,700 | $ | 13,050 |
The following is a summary of the fees billed
to us by Kaufman, Rossin && Co., for professional services rendered for the years ended December 31, 20202021 and 2019:
2020 | 2019 | |||||||
Audit Fees | $ | 122,250 | $ | 140,500 | ||||
Tax Fees | 10,900 | 7,900 | ||||||
Total | $ | 133,150 | $ | 148,400 |
2021 | 2020 | |||||||
Audit Fees | $ | 19,000 | $ | 122,250 | ||||
Tax Fees | 20,500 | 10,900 | ||||||
Total | $ | 39,500 | $ | 133,150 |
The following is a summary of the fees paid by us
to CBIZ and Mayer Hoffman McCann P.C., the Company’sCompany’s former Independent Registered Public Accounting Firm, for the years ended December
31, 20202021 and 2019:
2020 | 2019 | |||||||
Audit Fees | $ | 3,500 | $ | 15,000 | ||||
Tax Fees | 14,050 | 8,750 | ||||||
Total | $ | 17,550 | $ | 23,750 |
2021 | 2020 | |||||||
Audit Fees | $ | — | $ | 3,500 | ||||
Tax Fees | — | 14,050 | ||||||
Total | $ | — | $ | 17,550 |
Audit Fees.
Consists of fees billed for professional services rendered for the audits of our consolidated financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the Commission and related comfort letters and other services that are normally provided by the Independent Registered firm in connection with statutory and regulatory filings or engagements.
Tax Fees.
Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The Audit Committee is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services as allowed by law or regulation. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specifically approved amount. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval and the fees incurred to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
The Audit Committee pre-approved 100% of the Company's 2020Company’s
2021 audit fees, audit-related fees, tax fees, and all other fees to the extent the services occurred after the effective date of the
SEC'sSEC’s final pre-approval rules.
61
Part IV
Item 15. Exhibits, and Financial Statement Schedules Reports
(a) The following documents are filed as part of this Report.
1. FINANCIAL STATEMENTS
F-1 Report of Independent Registered Public Accountants for the Years Ended December 31, 2021
F-3 Report of Independent Registered Public Accountants for the Years Ended December 31, 2020
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.
3. EXHIBITS
Exhibits Required by Item 601 of Regulation S-K. Pursuant to the Instructions to Exhibits, certain instruments defining the rights of holders of long-term debt securities of the Company and its consolidated subsidiaries are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. A copy of such instrument will be furnished to the Securities and Exchange Commission upon request.
3.1.1 | ||
3.1.1.1 | ||
4.6 | ||
10.08 | ||
14 | ||
21.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Note: CHDT Corp. is a prior name of Capstone Companies, Inc.
^ Filed Herein.
62
Item 16. Form 10-K Summary. None.
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Capstone Companies, Inc. has caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Broward County, Florida on this 31st day of March 2021.
CAPSTONE COMPANIES, INC.
Dated:
March 31, 2021
By: /s/ Stewart Wallach
Stewart Wallach
Chief Executive Officer and Director
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of Capstone Companies, Inc. and in the capacities and on the dates indicated.
/s/ Stewart Wallach
Stewart Wallach
Principal Executive Officer
Director and Chief Executive Officer
March
31, 2021
/s/ Gerry McClinton
Gerry McClinton
Chief Financial Officer
Chief Operating Officer and Director
March
31, 2021
/s/ Jeffrey Guzy
Jeffrey Guzy
Director
March
31, 2021
/s/ Jeffrey Postal
Jeffrey Postal
Director
March
31, 2021
/s/ Larry Sloven
Larry Sloven
Director
March
31, 2021.2022
/s/ George Wolf
George Wolf
Director
March 31, 2022
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Capstone Companies, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance
sheetsheets of Capstone Companies, Inc. and Subsidiaries (the Company) as of December 31, 2021 and 2020, and the related consolidated statement
of operations, stockholders’stockholders’ equity, and cash flows for the yearyears ended December 31, 2021 and 2020, and the related notes to the
consolidated financial statements (collectively referred to as the consolidated financial statements).
In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its
operations and its cash flows for the yearyears ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted
in the United States of America.
Substantial Doubt Regarding Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements,
the Company has incurred operating losses, has incurred negative cash flows from operations and has an accumulated deficit. These and
other factors raise substantial doubt about the Company’sCompany’s ability to continue as a going concern. Management’sManagement’s plan regarding
these matters is also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility
of the Company’sCompany’s management. Our responsibility is to express an opinion on the Company’sCompany’s consolidated financial statements
based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards
of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audit,audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit providesaudits provide
a reasonable basis for our opinion.
F-1
Critical Audit Matter
The critical audit matter communicated below
is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and
(2) involved especially challenging, subjective, or complex judgments. The communication ofWe determined that there were no critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
D. Brooks and Associates CPAs, P.A.
We have served as the |
Palm Beach Gardens, Florida
PCAOB Firm ID: 4048
March 31, 202125, 2022
F-2
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Assets: | ||||||||
Current Assets: | ||||||||
Cash | $ | 1,277,492 | $ | 1,223,770 | ||||
Accounts receivable, net | 1,481 | 120,064 | ||||||
Inventories | 508,920 | 8,775 | ||||||
Prepaid expenses | 500,748 | 75,622 | ||||||
Income tax refundable | 284,873 | 861,318 | ||||||
Total Current Assets | 2,573,514 | 2,289,549 | ||||||
Property and equipment, net | 76,928 | 54,852 | ||||||
Operating lease - right of use asset, net | 98,651 | 158,504 | ||||||
Deposit | 11,148 | 25,560 | ||||||
Goodwill | 1,312,482 | 1,312,482 | ||||||
Total Assets | $ | 4,072,723 | $ | 3,840,947 | ||||
Liabilities and Stockholders’ Equity: | ||||||||
Current Liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 538,551 | $ | 825,690 | ||||
Operating lease - current portion | 70,157 | 63,307 | ||||||
Total Current Liabilities | 608,708 | 888,997 | ||||||
Long-Term Liabilities: | ||||||||
Operating lease-long- term portion | 37,533 | 107,690 | ||||||
Note payable related parties and accrued interest | 1,030,340 | |||||||
Deferred tax liabilities-long-term | 273,954 | 259,699 | ||||||
Total Long-Term Liabilities | 1,341,827 | 367,389 | ||||||
Total Liabilities | 1,950,535 | 1,256,386 | ||||||
Commitments and Contingencies (Note 5) | ||||||||
Stockholders' Equity: | ||||||||
Preferred Stock, Series A, par value $ | per share, authorized shares, issued - - shares||||||||
Preferred Stock, Series B-1, par value $ | per share, authorized shares, issued and outstanding - - shares at December 31, 2021, nil at December 31, 2020 (Liquidation Preference $15,000)2 | |||||||
Preferred Stock, Series C, par value $ | per share, authorized shares, issued - - shares||||||||
Common Stock, par value $ | per share, authorized shares, outstanding shares at December 31, 2021 and shares at December 31, 20204,892 | 4,630 | ||||||
Additional paid-in capital | 8,554,320 | 7,053,328 | ||||||
Accumulated deficit | (6,437,026 | ) | (4,473,397 | ) | ||||
Total Stockholders' Equity | 2,122,188 | 2,584,561 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 4,072,723 | $ | 3,840,947 |
The
accompanying notes are an integral part of Directors andStockholders of Capstone Companies, Inc.
F-3
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
For the Years Ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Revenues, net | $ | 685,854 | $ | 2,770,358 | ||||
Cost of sales | (638,644 | ) | (2,266,592 | ) | ||||
Gross Profit | 47,210 | 503,766 | ||||||
Operating Expenses: | ||||||||
Sales and marketing | 28,568 | 300,420 | ||||||
Compensation | 1,276,503 | 1,515,522 | ||||||
Professional fees | 368,229 | 422,820 | ||||||
Product development | 308,823 | 249,879 | ||||||
Other general and administrative | 420,962 | 477,121 | ||||||
Goodwill impairment charge | 623,538 | |||||||
Total Operating Expenses | 2,403,085 | 3,589,300 | ||||||
Operating Loss | (2,355,875 | ) | (3,085,534 | ) | ||||
Other Income (Expenses): | ||||||||
Other Income, net | 456,275 | 89,600 | ||||||
Interest Income (Expense), net | (48,974 | ) | 179 | |||||
Total Other Income, net | 407,301 | 89,779 | ||||||
Loss Before Tax Benefit | (1,948,574 | ) | (2,995,755 | ) | ||||
Income Tax Expense (Benefit) | 15,055 | (611,939 | ) | |||||
Net Loss | $ | (1,963,629 | ) | $ | (2,383,816 | ) | ||
Net Loss per Common Share: | ||||||||
Basic and Diluted | $ | (.04 | ) | $ | (.05 | ) | ||
Weighted Average Shares Outstanding: | ||||||||
Basic and Diluted | 48,196,903 | 46,337,198 | ||||||
The accompanying notes are an integral part of these consolidated financial statements. |
F-4
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
YEARS ENDED DECEMBER 31, 2021 AND 2020 |
Preferred Stock Series A | Preferred Stock Series B | Preferred Stock Series C | Common Stock | Additional Paid-In | Accumulated | Total | ||||||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | 46,579,747 | $ | 4,658 | $ | 7,061,565 | $ | (2,089,581 | ) | $ | 4,976,642 | |||||||||||||||||||||||||||||||
Stock options for compensation | — | — | — | — | 28,068 | 28,068 | ||||||||||||||||||||||||||||||||||||||
Repurchase of shares | — | — | — | (283,383 | ) | (28 | ) | (36,305 | ) | (36,333 | ) | |||||||||||||||||||||||||||||||||
Net Loss | — | — | — | — | (2,383,816 | ) | (2,383,816 | ) | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 46,296,364 | 4,630 | 7,053,328 | (4,473,397 | ) | 2,584,561 | ||||||||||||||||||||||||||||||||||||||
Stock options for compensation | — | — | — | — | 15,619 | 15,619 | ||||||||||||||||||||||||||||||||||||||
Stock issued to Directors for loan | — | 15,000 | 2 | — | — | 48,994 | 48,966 | |||||||||||||||||||||||||||||||||||||
Stock option exercised | — | — | — | 100,000 | 10 | 43,490 | 43,500 | |||||||||||||||||||||||||||||||||||||
Common stock for cash, net of fees | — | — | — | 2,496,667 | 252 | 1,392,889 | 1,393,141 | |||||||||||||||||||||||||||||||||||||
Net Loss | — | — | — | — | (1,963,629 | ) | (1,963,629 | ) | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | 15,000 | 2 | $ | 48,893,031 | 4,892 | $ | 8,554,320 | (6,437,026 | ) | $ | 2,122,188 |
The
accompanying notes are an integral part of the Company as of December 31, 2019 , and the results of its operations and its cash flows for the year then ended , in conformity with accounting principles generally accepted in the United States of America.
F-5
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
For the Years Ended | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Los | $ | (1,963,629 | ) | $ | (2,383,816 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 9,852 | 24,297 | ||||||
Stock based compensation expense | 15,619 | 28,068 | ||||||
Noncash lease expense | 59,853 | 55,698 | ||||||
Goodwill impairment charge | 623,538 | |||||||
Stock issued to directors for loan | 48,996 | |||||||
Accrued interest added to note payable related parties | 10,340 | |||||||
Increase in deferred income tax liabilities-long-term | 14,255 | 259,699 | ||||||
Noncash accounts receivable allowance | 173,426 | |||||||
(Increase) decrease in accounts receivable, net | 118,583 | (106,605 | ) | |||||
(increase) decrease in inventories | (500,145 | ) | 16,043 | |||||
(Increase) decrease in prepaid expenses | (425,126 | ) | 107,160 | |||||
Decrease in deposits | 14,412 | 20,461 | ||||||
(Decrease) increase in accounts payable and accrued liabilities | (287,139 | ) | 16,671 | |||||
(Increase) decrease in income tax refundable | 576,445 | (641,111 | ) | |||||
Decrease in operating lease liabilities | (63,307 | ) | (51,175 | ) | ||||
Net cash used in operating activities | (2,370,991 | ) | (1,857,646 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (31,928 | ) | (13,500 | ) | ||||
Net cash used in investing activities | (31,928 | ) | (13,500 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from sale of common stock and stock option exercise, net of costs | 1,436,641 | |||||||
Proceeds from note payable related parties | 1,020,000 | |||||||
Repurchase of shares | (36,333 | ) | ||||||
Net cash provided (used) in financing activities | 2,456,641 | (36,333 | ) | |||||
Net Increase (Decrease) in Cash | 53,722 | (1,907,479 | ) | |||||
Cash at Beginning of Year | 1,223,770 | 3,131,249 | ||||||
Cash at End of Year | $ | 1,277,492 | $ | 1,223,770 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Stocks issued to directors for loan fee | $ | 48,996 | $ | |||||
Interest accrued note payable related party | $ | 10,340 | $ |
The
accompanying notes are an integral part of accounting for leases due to the adoption of Accounting Standards Update 2016-02, Leases.
F-6
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
Assets: | ||||||||
Current Assets: | ||||||||
Cash | $ | 1,223,770 | $ | 3,131,249 | ||||
Accounts receivable, net | 120,064 | 13,459 | ||||||
Inventories | 8,775 | 24,818 | ||||||
Prepaid expenses | 75,622 | 182,782 | ||||||
Income tax refundable | 861,318 | 220,207 | ||||||
Total Current Assets | 2,289,549 | 3,572,515 | ||||||
Property and equipment, net | 54,852 | 65,649 | ||||||
Operating lease - right of use asset | 158,504 | 214,202 | ||||||
Deposit | 25,560 | 46,021 | ||||||
Goodwill | 1,312,482 | 1,936,020 | ||||||
Total Assets | $ | 3,840,947 | $ | 5,834,407 | ||||
Liabilities and Stockholders’ Equity: | ||||||||
Current Liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 825,690 | $ | 635,593 | ||||
Operating lease - current portion | 63,307 | 51,174 | ||||||
Total Current Liabilities | 888,997 | 686,767 | ||||||
Long-Term Liabilities: | ||||||||
Operating lease-long- term portion | 107,690 | 170,998 | ||||||
Deferred tax liabilities-long-term | 259,699 | - | ||||||
Total Long-Term Liabilities | 367,389 | 170,998 | ||||||
Total Liabilities | 1,256,386 | 857,765 | ||||||
Commitments and Contingencies (Note 5) | ||||||||
Stockholders' Equity: | ||||||||
Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares | - | - | ||||||
Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued -0- shares | - | - | ||||||
Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued -0- shares | - | - | ||||||
Common Stock, par value $.0001 per share, authorized 56,666,667 shares, outstanding 46,296,364 shares at December 31, 2020 and 46,579,747 shares at December 31, 2019 | 4,630 | 4,658 | ||||||
Additional paid-in capital | 7,053,328 | 7,061,565 | ||||||
Accumulated deficit | (4,473,397 | ) | (2,089,581 | ) | ||||
Total Stockholders' Equity | 2,584,561 | 4,976,642 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 3,840,947 | $ | 5,834,407 | ||||
The accompanying notes are an integral part of these consolidated financial statements. |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
For the Years Ended | ||||||||
December 31, | ||||||||
2020 | 2019 | |||||||
Revenues, net | $ | 2,770,358 | $ | 12,404,445 | ||||
Cost of sales | (2,266,592 | ) | (9,972,871 | ) | ||||
Gross Profit | 503,766 | 2,431,574 | ||||||
Operating Expenses: | ||||||||
Sales and marketing | 300,420 | 378,605 | ||||||
Compensation | 1,515,522 | 1,554,286 | ||||||
Professional fees | 422,820 | 435,143 | ||||||
Product development | 249,879 | 348,745 | ||||||
Other general and administrative | 477,121 | 647,696 | ||||||
Goodwill impairment charge | 623,538 | - | ||||||
Total Operating Expenses | 3,589,300 | 3,364,475 | ||||||
Operating Loss | (3,085,534 | ) | (932,901 | ) | ||||
Other Income (Expenses): | ||||||||
Other Income, net | 89,600 | 29,505 | ||||||
Interest Income (Expense) | 179 | (3,206 | ) | |||||
Total Other Income, net | 89,779 | 26,299 | ||||||
Loss Before Tax Benefit | (2,995,755 | ) | (906,602 | ) | ||||
Benefit for Income Tax | (611,939 | ) | (14,933 | ) | ||||
Net Loss | $ | (2,383,816 | ) | $ | (891,669 | ) | ||
Net Loss per Common Share: | ||||||||
Basic and Diluted | $ | (0.05 | ) | $ | (0.02 | ) | ||
Weighted Average Shares Outstanding: | ||||||||
Basic and Diluted | 46,337,198 | 46,863,467 | ||||||
The accompanying notes are an integral part of these consolidated financial statements. |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||
YEARS ENDED DECEMBER 31, 2020 AND 2019 | ||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | - | $ | - | - | $ | - | - | $ | - | 47,046,364 | $ | 4,704 | $ | 7,092,219 | $ | (1,197,912 | ) | $ | 5,899,011 | |||||||||||||||||||||||||
Stock options for compensation | - | - | - | - | - | - | - | - | 40,707 | - | 40,707 | |||||||||||||||||||||||||||||||||
Repurchase of shares | - | - | - | - | - | - | (466,617 | ) | (46 | ) | (71,361 | ) | - | (71,407 | ) | |||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | - | - | - | (891,669 | ) | (891,669 | ) | |||||||||||||||||||||||||||||||
Balance at December 31, 2019 | - | - | - | - | - | - | 46,579,747 | 4,658 | 7,061,565 | (2,089,581 | ) | 4,976,642 | ||||||||||||||||||||||||||||||||
Stock options for compensation | - | - | - | - | - | - | - | - | 28,068 | - | 28,068 | |||||||||||||||||||||||||||||||||
Repurchase of shares | - | - | - | - | - | - | (283,383 | ) | (28 | ) | (36,305 | ) | - | (36,333 | ) | |||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | - | - | - | (2,383,816 | ) | (2,383,816 | ) | |||||||||||||||||||||||||||||||
Balance at December 31, 2020 | - | $ | - | - | $ | - | - | $ | - | 46,296,364 | $ | 4,630 | $ | 7,053,328 | $ | (4,473,397 | ) | $ | 2,584,561 | |||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
For the Years Ended | ||||||||
December 31, | ||||||||
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Loss | $ | (2,383,816 | ) | $ | (891,669 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 24,297 | 44,194 | ||||||
Stock based compensation expense | 28,068 | 40,707 | ||||||
Noncash lease expense | 55,698 | 20,248 | ||||||
Goodwill impairment charge | 623,538 | - | ||||||
Deferred income tax benefit | - | (12,000 | ) | |||||
Increase in deferred income tax liabilities-long-term | 259,699 | - | ||||||
Noncash accounts receivable allowance | 173,426 | - | ||||||
(Increase) decrease in accounts receivable, net | (106,605 | ) | 51,052 | |||||
Decrease in inventories | 16,043 | 2,679 | ||||||
Increase in prepaid expenses | 107,160 | 61,094 | ||||||
Decrease in deposits | 20,461 | 56,784 | ||||||
Increase in accounts payable and accrued liabilities | 16,671 | 174,147 | ||||||
Decrease in deferred rent incentive | - | (108,844 | ) | |||||
Decrease in income tax payable | - | (11,694 | ) | |||||
Increase in income tax refundable | (641,111 | ) | - | |||||
Decrease in operating lease liabilities | (51,175 | ) | (12,278 | ) | ||||
Net cash used in operating activities | (1,857,646 | ) | (585,580 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (13,500 | ) | (34,123 | ) | ||||
Net cash used in investing activities | (13,500 | ) | (34,123 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repurchase of shares | (36,333 | ) | (71,407 | ) | ||||
Net cash used in financing activities | (36,333 | ) | (71,407 | ) | ||||
Net Decrease in Cash | (1,907,479 | ) | (691,110 | ) | ||||
Cash at Beginning of Year | 3,131,249 | 3,822,359 | ||||||
Cash at End of Year | $ | 1,223,770 | $ | 3,131,249 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | - | $ | 3,206 | ||||
NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||
Operating lease – right-of-use asset at commencement | $ | - | $ | 224,550 | ||||
Operating lease liabilities at commencement | $ | - | $ | 234,450 | ||||
The accompanying notes are an integral part of these consolidated financial statements. |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for
the years ended December 31, 20202021 and 20192020 include the accounts of the parent entity and its wholly-owned subsidiaries. All material intra-entity
transactions and balances have been eliminated in consolidation.
This summary of accounting policies for
Capstone Companies, Inc. (“CAPC”(CAPC), a Florida corporation (formerly, “CHDT Corporation”CHDT Corporation) and its wholly-owned subsidiaries
(collectively referred to as the “Company”Company, “we”we, “our”our or “us”us), is presented to assist
in understanding the Company'sCompanys consolidated financial statements. The accounting policies conform to accounting principles generally
accepted in the United States of America (“(U.S. GAAP”GAAP) and have been consistently applied in the preparation of the consolidated
financial statements.
Organization and Nature of Business
Capstone Companies, Inc. is headquartered
in Deerfield Beach, Florida.
On April 13, 2012, the Company established
a wholly owned subsidiary in Hong Kong, named Capstone International Hong Kong Ltd (“CIHK”(CIHK) which provides support services
such as engineering, new product development, product sourcing, factory certification and compliance, product price negotiating, product
testing and quality control and ocean freight logistics for the Company’sCompanys other subsidiaries. CIHK is also engaged in selling the
Company’sCompanys products internationally.
Since the beginning of fiscal year 2007,
the Company through CAPICapstone Industries has been primarily engaged in the business of developing, marketing, and selling home LED products
(“(Lighting Products”Products) through national and regional retailers in North America and in certain overseas markets. The Company’sCompanys
products are targeted for applications such as home indoor and outdoor lighting and have different functionalities to meet consumer’sconsumers
needs. The Company has developed a smart interactive mirror for residential use as a variant line for its lighting products, which was
launched at the Consumer Electronics Show in early 2020 but its release to the retail market has beenwas delayed due to product development delays
at ourthe Companys suppliers, resulting from the impact of COVID-19. The development of the smart interactive mirror or “Smart Mirrors”Smart
Mirrors is part of the Company’sCompanys strategic effort to find new product lines to replace or supplement existing 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.
The Company’sCompanys products are typically manufactured
in Thailand and China by contract manufacturing companies. As of the date of these consolidated financial statements, the Company’sCompanys
future product development effort is focused on the Smart Mirrors category because the Company believes, based on Company’sCompanys management
understanding of the industry, the Smart Mirrors have the potential for greater profit margin than the Company’sCompanys historical LED
consumer products. Technological developments and changes in consumer tastes could alter the perceived potential and future viability
of Smart Mirrors as a primary product. The Company may change its product development strategies and plans as economic conditions and
consumer tastes change, which condition and changes may be unforeseeable by the Company or may be beyond the ability of the Company to
timely or at all adjust its strategic and product development plans.
The Company’sCompanys operations in 2021 consist of one reportable segment
for financial reporting purposes: Lighting Products.
Effects of COVID-19
During the year ended December 31, 2020,2021, the outbreak
and global spread of COVID-19 pandemic caused significant economic volatility, uncertainty and disruption in our operating environment.
We began 2020 in an environment exhibiting strong economic conditions combined with the successful launch of our new product category,
the Smart Mirror at the 2020 CES Show. However, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic,
and the various containment and mitigation measures adopted by governments and institutions globally and in the U.S. began to have a severe
economic impact, including causing the U.S. to enter an economic recession.
In response to the COVID-19 and various state and local orders, the Company instituted the following actions in March 2020:
● | Placed restrictions on business travel for our employees. |
● | Closed our Corporate offices both in the U.S. and in Hong Kong. |
● | Modified our corporate and division office functions to allow all employees to work remotely. |
F-7
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
During the months of February and March
2020, the Company’sCompanys Chinese suppliers were impacted by the closedown of facilities by local and regional authorities in their efforts
to combat the spread of COVID-19. The factory closures delayed shipment of certain orders from the first quarter of 2020 until the second
and third quarter 2020. During the end of March 2020, the Company’sCompanys Chinese suppliers that had been previously closed started to
gradually reopen their factories. Company orders that had been previously delayed because of the close started to ship. These factories
are fully functioning, and orders are being produced both in Thailand and in China. CIHK staff have continued to work remotely from home.
On March 20, 2020, the Company’sCompanys U.S.
staff started to work remotely from their homes. With the State of Florida lifting its “StayStay at Home”Home requirement on May 20,
2020, the Corporate office reopened with staff working on a rotating schedule between the office and remotely from home.
Our business operations and financial
performance for the year ended December 31, 20202021 was adversely impacted by the developments discussed above, The Company reported a
decrease in net revenue from $12.4$2.7
million in 20192020 to $2.7 million$686 thousand in
2020,2021, a reduction of approximately $9.7$2.1 million. The net loss for the period ended December 31, 20202021 was approximately $2.4$2.0
million as compared to approximately $891.7 thousand$2.4
million in 2019.2020. With these recurring losses, the cash generated from operations was negatively impacted and the Company utilized
approximately $1.9$2.4
million of cash during the year ended December 31, 2020.
The decrease in net sales for the year was driven
by the uncertainty felt by retail buyers as to the continuing impact on the retail market of COVID-19 and its overall long-term negative
impact on the U.S. economy. However, the Warehouse Club channel, which includes our customers Costco Wholesale and Sam’sSams Club, has
seen a substantial increase in foot traffic because of the changed buying trend of consumers during the pandemic, which has recently resulted
in the resumption of some promotional opportunities. Management believes that with the national distribution of vaccines now occurring,
the impact of the pandemic on the general brick and mortar retail market will carry through to mid-2021.
As a result of the economic uncertainties caused by
the COVID-19 pandemic, during the year ended December 31, 2020, management determined sufficient indicators existed to trigger quarterly
goodwill impairment analyses. The total impairment charge for the year ended December 31, 2020 was approximately $623.5 $623.5 thousand.
On March 27, 2020, the Coronavirus Aid, Relief and
Economic Security Act, which we refer to as the “CARESCARES Act.” was enacted into law. The CARES Act is a tax and spending package
intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income
and other business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses
(“NOLs”(NOLs) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years. The Company
was able to carryback the 2018 and the 2019 NOLs to 2017 tax year and generate an estimated refund of previously paid income taxes at
an approximate 34% federal tax rate. This resulted in a net benefit of $575,645 which was recorded in the first quarter 2020.
The Company expects to carryback a portion of its
2020 NOL, for which it recorded a further net benefit of $286,433. In the third quarter 2020, the Company recorded a $21,222 net tax benefit
for deferred tax liability adjustment related to goodwill impairment. For the year ended December 31, 2020, the Company has recorded $862,078$861,318
in net tax benefits.
The CARES Act also provided for the Paycheck Protection
Program (“PPP”(PPP). On May 11, 2020, the Company received a $89.6 thousand loan under PPP which was processed through Sterling
National Bank. The Company filed SBA Form 3508, Paycheck Protection Program Loan Forgiveness Application. On October 30, 2020, the SBA
notified the Company that the PPP loan principal of $89,600 and $428 of accumulated interest had been fully forgiven. This forgiveness
has been reflected in Other Income on the consolidated statements of operations.operations
F-8
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Liquidity and Going Concern
The accompanying 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.
The uncertainty and the continuing negative impact
that the COVID-19 disruption could have on the future retail business and consumers’consumers willingness to visit retail stores, causing
reduced consumer foot traffic and consumer spending, could negatively impact the demand for our products or delay future planned promotional
opportunities. However, with a successful relaunch of the Smart Mirror portfolio using the online retail platform, the Company may need
a purchase order credit line to support increased U.S. domestic inventory to facilitate revenue growth in that category.
During the year ended December 31, 2020,2021, the
Company used cash in operations of approximately $1.9$2.4
million and generated net operating losses of $2.4approximately $2.0
million. As of December 31, 2020,2021, the Company has working capital of approximately $1.4 $2.0 million
and an accumulated deficit of $4.5$6.4 million. The Company’sCompanys cash balance droppedincreased by approximately $1.9 million$54 thousand from $3.1$1,223
million as of December 31, 20192020 to $1.2$1,277 million as of December 31, 2020.2021. As of December 31, 2020,2021, the Company does not have
sufficient cash on hand to finance its plan of operations and will need to seek additional capital through debt and/or equity
financing. These factors raise substantial doubt about the Company’sCompanys 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. For example, if any of our major
wholesale customers fail to maintain normal operations, our revenue could further decline, which could have a material adverse effect
on our business, financial condition, results of operations and liquidity. Management believes that with the ongoing national distribution
of vaccines, the economic impact of the COVID-19 pandemic in the U.S. will continue through to mid-2021, but ultimately should not impact
the Company’sCompanys long-term strategy and initiatives.
On July 31, 2020, the Company terminated its factoring
agreement with Sterling National Bank. The Company has been in discussions with alternate funding sources that offer extensive programs
that are more in line with the Company’sCompanys future business model, particularly a facility that provides funding options that are suitable
for the e-commerce business that the Company is transitioning into. The borrowing costs associated with such financing are dependent upon
market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our
cost of borrowing in the future.
In addition, we could seek alternative sources of
liquidity, including but not limited to accessing the capital markets, or other alternative financing measures. However, instability in,
or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us. An economic
recession or a slow recovery could adversely affect our business and liquidity. The ongoing impact of the COVID-19 pandemic on the Company’sCompanys
business and financial performance may also affect the Company’sCompanys ability to obtain funding.
The Company may be able to raise the required additional
capital through debt or equity financing. However, the Company can make no assurances that it will be able to raise the required capital,
on acceptable terms or at all. Unless the Company succeeds in raising additional capital or successfully increases cash generated from
operations, management believes there is substantial doubt about the Company’sCompanys ability to continue as a going concern and meet its
obligations over the next twelve months from the filing date of this report. However, there are compensating factors and actions that
are being and have been taken to address these uncertainties, including the following:
● | The Company has outstanding note payable due to related parties of approximately $1.0 million. The Company has working capital of approximately $2.0 million consisting mostly of cash of $1.3 million. |
● | The Company had an estimated income tax refundable as of December 31, 2020 of approximately $861 thousand of which approximately $576 thousand and $10.3 thousand of interest was received on February 3, 2021, (see Note 8). |
● | On July 31, 2020 with the termination of the Sterling National Bank factoring agreement, the Company has been in discussions with alternate funding sources that offers varying programs that are more in line with the Companys future business model, particularly a facility that provides funding options that are more suitable for the e-commerce business that the Company is transitioning into. |
F-9
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
● | The Company has entered a $750,000 working capital loan agreement effective January 4, 2021 that was ended June 30, 2021. fo(see Note 4). |
● | The Companys plan is to sell direct to consumers. The funding and cashflow requirements for this business model will require e-commerce funding. The Company has been in discussions with a funding source that provides this option. |
● | The Company has in place a mitigation plan that reduces discretionary expenses, executive managements compensation, and significantly reduces the cost of the Hong Kong operation and also reduces future travel, lodging and show expenses. |
● | Since September 1, 2020, through December 31, 2020 in order to conserve operating cashflow, the Companys executive management deferred 50% of their compensation until later in 2021. The compensation deferral was further extended until 2022. |
Accounts Receivable
For product revenue, the Company invoices its customers
at the time of shipment for the sales value of the product shipped. Accounts receivablereceivables are recognized at the amount expected to be collected
and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any
of its customers. Previously in the factoring agreement with Sterling National Bank, accounts receivable served as collateral when the
Company borrowed against its credit facilities. With the termination of the Sterling National Bank factoring agreement, the accounts receivables
are unencumbered.
As of December 31, 2020,2021, accounts receivable has not
been collateralized against debt. As of December 31, 2019, accounts receivable served as collateral when the Company borrowed against its credit facility at that time.
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts
receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair a specific customer’scustomers
ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance against amounts due,
and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers,
the Company recognizes an allowance for doubtful accounts
based on the length of time the receivables are past
due and consideration of other factors such as industry conditions, the current business environment and the Company’sCompanys historical
payment experience. An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for
bad debts charged to earnings. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions
as more information becomes available.
As of both Decembers 31, 20202021 and 2019,2020, management
determined that accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.
The following table summarizes the components of Accounts Receivable, net:
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
Trade Accounts Receivables at year end | $ | 197,166 | $ | 276,551 | ||||
Reserve for estimated marketing allowances, cash discounts and other incentives | (77,102 | ) | (263,092 | ) | ||||
Total Accounts Receivable, net | $ | 120,064 | $ | 13,459 |
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Trade Accounts Receivables at year end | $ | 1,481 | $ | 197,166 | ||||
Reserve for estimated marketing allowances, cash discounts and other incentives | (77,102 | ) | ||||||
Total Accounts Receivable, net | $ | 1,481 | $ | 120,064 |
The following table summarizes the changes in the
Company’sCompanys reserve for marketing allowances, cash discounts and other incentives which is included in net accounts receivable:
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Balance at beginning of the year | $ | (77,102 | )) | $ | (263,092 | ) | ||
Accrued allowances | ||||||||
Reclassification of allowance from accounts receivable to accounts payable and accrued liabilities | 77,102 | 173,426 | ||||||
Expenditures | 12,564 | |||||||
Balance at year-end | $ | $ | (77,102 | ) |
F-10
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
Balance at beginning of the year | $ | (263,092 | ) | $ | (364,894 | ) | ||
Accrued allowances | - | ( 89,668 | ) | |||||
Reclassification of allowance from accounts receivable to accounts payable and accrued liabilities | 173,426 | - | ||||||
Expenditures | 12,564 | 191,468 | ||||||
Balance at year-end | $ | (77,102 | ) | $ | (263,092 | ) |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Marketing allowances include the cost of underwriting
an in storein-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. During 2020,the year ended December 31, 2021, the Company reclassified anreversed into other income
approximately $340,000 of previously accrued allowance from accounts receivablemarketing and promotional allowances for previous product sales that are deemed highly unlikely
for the customer to accounts payable and accrued liabilitieschargeback the Company due to the decline in revenuesage of the allowance and accounts receivable to offset these credits. the sales of the specific item ceasing.
Inventory
The Company could have to pay cash to settle certain marketing allowances and other incentives issued to customers with no outstanding accounts receivable.
Prepaid Expenses
The Company’sCompanys prepaid expenses consist primarily
of deposits on inventory purchases for future orders as well as prepaid insurance, trade show and subscription expense. As of December
31, 20202021 and 2019,2020, respectively, prepaid expenses were $75,622$500,748 and $182,782,$75,622, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated economic useful lives of the related assets as follows:
Useful Life | December 31, 2020 | December 31, 2019 | |||||||
Computer equipment and software | 3-7 years | $ | 53,819 | $ | 53,819 | ||||
Machinery and equipment | 3-7 years | 119,323 | 157,267 | ||||||
Furniture and fixtures | 3-7 years | 6,828 | 6,828 | ||||||
Less: Accumulated depreciation | (125,118 | ) | (152,265 | ) | |||||
Property and Equipment, Net | $ | 54,852 | $ | 65,649 |
Useful Life | December 31, 2021 | December 31, 2020 | ||||||||
Computer equipment and software | 3-7 years | $ | 53,819 | $ | 53,819 | |||||
Machinery and equipment | 3-7 years | 151,251 | 119,323 | |||||||
Furniture and fixtures | 3-7 years | 6,828 | 6,828 | |||||||
Less: Accumulated depreciation | (134,970 | ) | (125,118 | ) | ||||||
Property and Equipment, Net | $ | 76,928 | $ | 54,852 |
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses
on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported
at the lower of carrying amount or fair value less cost to sell. No impairment losses were recognized by the Company during 2020 or 2019.
Major overhauls and betterments are capitalized and depreciated over their estimated economic useful lives.
Depreciation and amortization expense was $24,297$9,852 and
$44,194$24,297 for the years ended December 31, 2021 and 2020, and 2019, respectively.
Leases
The Company accounts for leases under ASU no 2016-02 “Leases (Topic 842),” which requires leases
with durations greater than twelve months to be recognized on the balance sheet and disclose key information about the leasing arrangements.
The Company adoptedOperating leases are included in operating lease right-of-use (ROU) assets and operating lease liabilities on the new standard with an effective date of January 1, 2019 on a modified retrospective approach. The Company has elected to take the practical expedient to separate lease and non-lease components for its operating lease. consolidated
balance sheets.
See Note 5 “Operating Leases”Operating Leases for additional
disclosures as required by the new standard.
F-11
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
On September 13, 2006, the Company entered into a
Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (“Capstone”(Capstone). 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 Capstone’sCapstones 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.
As a result of the economic uncertainties caused by
the COVID-19 pandemic during the year ended December 31, 2021 and 2020, management determined sufficient indicators existed to trigger
the performance of interim goodwill impairment analyses for each reporting quarter. The total impairment chargecharges for the year ended December
31, 2021 and 2020 was approximately $623.5 thousand.
The following table summarizes the changes in the
Company’sCompanys goodwill asset which is included in the total assets in the accompanying consolidated balance sheets:
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
Balance at the beginning of the period | $ | 1,936,020 | $ | 1,936,020 | ||||
Impairment charges | (623,538 | ) | - | |||||
Balance at December 31, 2020 | $ | 1,312,482 | $ | 1,936,020 |
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Balance at the beginning of the period | $ | 1,312,482 | $ | 1,936,020 | ||||
Impairment charges | (623,538 | ) | ||||||
Balance at December 31, 2021 | $ | 1,312,482 | $ | 1,312,482 |
With the continuing economic uncertainties caused
by the COVID-19 pandemic, the capital markets may continue to have a downturn and adversely affect the Company’sCompanys stock price which
will require the Company to test its goodwill for impairment in future reporting periods. The Company’sCompanys stock is deemed a “penny stock”penny
stock under Commission rules.
The Company estimates the fair value of its single
reporting unit relative to the Company’sCompanys market capitalization.
Fair Value Measurement
The accounting guidance under Financial Accounting
Standards Board (“FASB”(FASB) Accounting Standards Codification (“ASC”(ASC), “FairFair Value Measurements and Disclosures”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.
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 December 31, 2020 and 2019.2021and 2020. 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 December 31,
20202021 and 2019,2020, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation
was 888,288 options and 199,733 warrants and 990,000 and 1,000,000,options, respectively.
F-12
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basic weighted average shares outstanding is reconciled to diluted share outstanding as follows:
Year Ended December 31, 2020 | Year Ended December 31, 2019 | |
Basic and Diluted weighted average shares outstanding | 46,337,198 | 46,863,467 |
Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||
Basic and Diluted weighted average shares outstanding | 48,196,903 | 46,337,198 |
Revenue Recognition
The Company generates revenue from developing, marketing
and selling consumer lighting products through national and regional retailers. The Company’sCompanys products are targeted for applications
such as home indoor and outdoor lighting and have different functionalitiesfunctionalities. Capstone currently operates in the consumer lighting products
category and is expanding into the Smart Mirror category in the United States and in certain overseas markets. These products may be offered
either under the Capstone brand or licensed brands.
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 Company recognizes lighting product revenue when
the Company’sCompanys 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.
As the Company launches the Smart Mirror program ,these orders will be sold through e-commerce. The Company will only bill the customer and recognize revenue upon the customer obtaining control of the Smart Mirror which will generally occur upon delivery.
The Company may enter into a licensing agreement with globally recognized companies, that allows the Company to market products under a licensed brand to retailers for a designated period of time, and whereby the Company will pay a royalty fee, typically a percentage of licensed product revenue to the licensor in order to market the licensed product.
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:
For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | |||||||||||||||
Capstone Brand | % of Revenue | Capstone Brand | % of Revenue | |||||||||||||
Lighting Products- U.S. | $ | 340,896 | 49 | % | $ | 2,066,519 | 75 | % | ||||||||
Smart Mirror Products- U.S. | 3,795 | 1 | % | |||||||||||||
Lighting Products-International | 341,163 | 50 | % | 703,839 | 25 | % | ||||||||||
Total Revenue | $ | 685,854 | 100 | % | $ | 2,770,358 | 100 | % |
F-13
For the Year Ended December 31, 2020 | For the Year Ended December 31, 2019 | ||||||||||||||
Capstone Brand | % of Revenue | Capstone Brand | % of Revenue | ||||||||||||
Lighting Products- U.S. | $ | 2,066,519 | 75 | % | $ | 11,218,714 | 90 | % | |||||||
Lighting Products-International | 703,839 | 25 | % | 1,185,731 | 10 | % | |||||||||
Total Revenue | $ | 2,770,358 | 100 | % | $ | 12,404,445 | 100 | % |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
We provide our 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.
Customer orders received are not long-term orders and are typically shipped within six months of the order receipt, but certainly within a one-year period.
Our payment terms may vary by the type of customer,
the customer’scustomers credit standing, the location where the product will be picked up from and for international customers and which
country their corporate office is located. The time between invoicing date and when payment is due may vary between 30 days and 90 days
depending on the customer type. To ensure there are no payment issues, overseas customers or new customers may be required to provide
a deposit or full payment before the order is delivered to the customer.
The Company selectively supports retailer’sretailers
initiatives to maximize sales of the Company’sCompanys products on the retail floor or to assist in developing consumer awareness of new
products launches, by providing marketing fund allowances to the customer. The Company recognizes these incentives at the time they are
offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to
cost of sales, or marketing expenses depending on the type of sales incentives. Sales reductions for anticipated discounts, allowances
and other deductions are recognized during the period the related revenue is recorded. The reduction of accrued allowances is included
in net revenues and amounted to $341.2$8.0 thousand and $1.18 million$341.2 thousand for the years ended December 31, 2021 and 2020, and 2019, respectively.
Warranties
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 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.
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. Capstone 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, Capstone at its discretion, will repair or replace the defective parts of the product, or the product itself.
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.
The following table summarizes the changes in the
Company’sCompanys product warranty liabilities which are included in accounts payable and accrued liabilities in the accompanying December
31, 20202021 and 20192020 balance sheets:
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Balance at the beginning of the year | $ | 56,465 | $ | 247,850 | ||||
Amount accrued | 46,322 | |||||||
Payments and credits | (10,142 | ) | (237,707 | ) | ||||
Balance at year-end | $ | 46,322 | $ | 56,465 |
F-14
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
Balance at the beginning of the year | $ | 247,850 | $ | 212,495 | ||||
Amount accrued | 46,322 | 180,797 | ||||||
Payments and credits | (237,707 | ) | (145,442 | ) | ||||
Balance at year-end | $ | 56,465 | $ | 247,850 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $214,856$23,425 and $254,283 $214,856 for the years ended December 31, 2021 and 2020, and 2019, respectively.
Product Development
Our research and development team located in Hong KongThailand
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 year ended December 31, 20202021 and 2019,2020, product
development expenses were $308,823 and $249,879, respectively, and $348,745, respectively.
Shipping and Handling
The Company’sCompanys shipping and handling costs are
included in sales and marketing expenses and are recognized as an expense during the period in which they are incurred and amounted to
$16,870$1,237 and $25,730$16,870 for the years ended December 31, 2021 and 2020, and 2019, respectively.
Accounts Payable and Accrued Liabilities
The following table summarizes the components of accounts
payable and accrued liabilities at December 31, 20202021 and 2019, respectively:
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
Accounts payable | $ | 246,158 | $ | 273,606 | ||||
Accrued warranty reserve | 56,465 | 247,850 | ||||||
Accrued compensation and deferred wages, marketing allowances, customer deposits and other liabilities | 523,067 | 114,137 | ||||||
Total accrued liabilities | 579,532 | 361,987 | ||||||
Total | $ | 825,690 | $ | 635,593 |
December 31, | December 31, | |||||||
2021 | 2020 | |||||||
Accounts payable | $ | 126,281 | $ | 246,158 | ||||
Accrued warranty reserve | 46,322 | 56,465 | ||||||
Accrued compensation and deferred wages, marketing allowances, customer deposits and other liabilities | 365,948 | 523,067 | ||||||
Total | $ | 538,551 | $ | 825,690 |
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.
On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax
F-15
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
provisions that, among other things, would eliminate
the taxable income limit for certain net operating losses (“NOLs”(NOLs) and allow businesses to carry back NOLs arising in 2018,
2019, and 2020 to the five prior tax years.
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.
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. SC 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’sCompanys 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 years ended December 31, 2021 and 2020 was $2019 was $28,068 and $40,707,$ , respectively.
Use of Estimates
The preparation of 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, product warranty obligations and marketing allowances, valuation of inventories, impairments,
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’sCompanys
financial statements. However, circumstances could change, and actual results could differ materially from those estimates.
Recent Accounting Standards
To be Adopted in a Future Period
In June 2016, the FASB issued Accounting Standards
Update (“ASU”(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 theexistingthe 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 is in the process of determining the potential
impact of adopting this guidance on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income
Taxes (Topic (Topic 740)”. The amendments in ASU 2019-12 seek to simplify the accounting for income taxes by removing certain
exceptions to the general principles in Topic 740. The amendments also improve
consistent application and simplify GAAP in other
areas of Topic 740. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal
years. The Company is currently evaluating the impact ASU 2019-12 may have on the Company’sCompanys consolidated financial statements.
F-16
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Adoption of New Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Simplifying
the Test for Goodwill Impairment, which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill
impairment loss will be measured as the excess of a reporting unit’sunits carrying amount over its fair value (not to exceed the total
goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill
impairment loss is measured by comparing the implied fair value of a reporting unit’sunits goodwill with the carrying amount of that
goodwill. ASU 2017-04 was effective for the Company’sCompanys fiscal year ended December 31, 2019. During 2020, the Company applied this
guidance when determining the amount of goodwill that was impaired.
In August 2018, the FASB issued ASU No. 2018-13, Fair
Value Measurement (Topic 820): Disclosure Framework – “ Changes to the Disclosure Requirements for Fair Value Measurement.”
This new guidance removes certain disclosure requirements related to the fair value hierarchy modifies existing disclosure requirements
related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes
in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held
at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair
value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. The adoption of ASU 2018-03 did not have
a material effect on the Company’sCompanys consolidated financial statements.
The Company continually assesses any new accounting
pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the
Company’sCompanys financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements
and assures that there are proper controls in place to ascertain that the Company’sCompanys financials properly reflect the change.
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 ("FIDC"(FIDC) 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 December
31, 2020,2021, the Company has approximately $431.3$471.6 thousand in excess of FIDC insurance limits.
Accounts Receivable
The Company grants credit to its customers, substantially
all of whom are retail establishments located throughout the United States and their international locations. The Company typically does
not require collateral from customers. Credit risk is limited due to the financial strength of the customers comprising the Company’sCompanys
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.
Major Customers
The Company had two customers who comprised 63%50% and
26%37% of net revenue during the year ended December 31, 2020,2021, and 83%63% and 15%26% of net revenue during the year ended December 31, 2019,2020, respectively.
The loss of these customers would adversely impact the business of the Company.
F-17
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
For the years ended December 31, 2021 and 2020, and 2019, approximately
25%50% and 10% 25% respectively, of the Company’sCompanys net revenue resulted from international sales.
As of December 31, 2021, and 2020, and 2019, approximately $120.1 thousand or 100%$0
and approximately $13.5$120.1 thousand or 100% of accounts receivable, respectively, was
from one customer.
As the Company increases its ecommerce business, rather than have hundreds of individual consumer customers we will have those companies that we have selected to process our orders such as Stripe, Amazon or Wayfair.
Major Customers
Net Revenue % | Net Accounts Receivable | |||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Customer A | 63 | % | 15 | % | $ | - | $ | - | ||||||||
Customer B | 26 | % | 83 | % | 120,064 | 13,459 | ||||||||||
Total | 89 | % | 98 | % | $ | 120,064 | $ | 13,459 |
Net Revenue % | Net Accounts Receivable | |||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Customer A | 50 | % | 63 | % | $ | $ | ||||||||||
Customer B | 37 | % | 26 | % | 120,064 | |||||||||||
Total | 87 | % | 89 | % | $ | 120,064 |
Major Vendors
The Company had two vendors from which it purchased
68%59%, and 23%23% , respectively, of merchandise sold during the year ended December 31, 2020,2021, and one vendor from which it purchased 97%68%, and 23%, respectively of merchandise
sold during the year ended December 31, 2019.2020. The loss of this supplier could adversely impact the business of the Company.
As of December 31, 2021, and 2020 , approximately
73% and 2019, approximately 47% and 37%47%, respectively, of accounts payable were due to one vendor.
Purchases % | Accounts Payable | |||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Vendor A | 68 | % | 97 | % | $ | - | $ | 100,705 | ||||||||
Vendor B | 23 | % | - | % | 114,870 | - | ||||||||||
Total | 91 | % | 97 | % | $ | 114,870 | $ | 100,705 |
Purchases % | Accounts Payable | |||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Vendor A | 59 | % | 68 | % | $ | 92,761 | $ | |||||||||
Vendor B | 23 | % | 23 | % | 114,870 | |||||||||||
Total | 82 | % | 91 | % | $ | 92,761 | $ | 114,870 |
NOTE 3 – NOTES PAYABLE
Sterling National Bank
The credit facility at Sterling National Bank was
up for renewal. On July 16, 2020, the Company received a Termination of Factoring Agreement letter advising that the Factoring Agreement
would be terminated effective September 30, 2020. The bank advised that as the existing facility had not been used in recent years and
with the uncertainties associated with the resurgence of the COVID-19 pandemic and its potential impact on the retail sector, the bank
decided not to renew the Factoring Agreement. The Company requested to terminate the Agreement on July 31, 2020 which was agreed to by
the bank. The Company has retained its cash operating accounts at Sterling National Bank. The amount due to Sterling National Bank was
zero at December 31, 2019.
The Company has been in discussions with alternate sources of funding, that could provide funding options that are more suitable to the e-commerce business model that the Company is transitioning into. The borrowing costs associated with such financing, are dependent upon market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future or that we will secure affordable funding.
F-18
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 NOTES PAYABLE (continued)
proceeds for eligible purposes, including
payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. On May 11, 2020, the Company received loan proceeds in the amount
of $89,600.The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months.$89,600. The Company used the proceeds for purposes consistent with the PPP forgiveness rules. Under the Small Business Administration
(“SBA”(SBA) and U.S. Treasury Department guidelines issued in May 2020, a borrower could apply for the forgiveness of the loans
by filing SBA Form 3508, Paycheck Protection Program Loan Forgiveness Application which the Company submitted to Sterling National Bank
on September 16, 2020, which was accepted by the bank and processed to the SBA for final review and approval. On October 30, 2020, the
SBA notified the Company that the PPP loan principal of $89,600 and $428 of accumulated interest had been fully forgiven and has been
recorded in Other Income on the Consolidated Statement of Operations for the year ended December 31, 2020.
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES
Notes Payable to Officers, Directors and Related Parties
On January 4, 2021, the Company had $0 notes payable to officers, directors and related parties.
In consideration for the Lenders providing the loan under this Agreement for the Initial Period and agreeing to a below market rate of interest, and as payment of a finance fee for the loan on an unsecured basis, the Company issued to the Lenders the following securities 7,500 shares of the Companys Series B-1 Convertible Preferred Stock (Preferred Shares) issued to each Lender. The Preferred Shares shall have the appropriate restrictive legends. 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 Preferred Shares have no further rights, preferences, or privileges. The fair value of the Preferred Shares was determined to be $48,996 based on the number of shares of Common Stock to be issued upon conversion and the market price of the Common Stock on the date the working capital loan agreement was executed. The Company amortized the $48,996 Finance Fee into interest expense over the six months of the agreement. The Finance Fee was recognized as expense and included in interest expense on the consolidated statements of operations (see Note 6).
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 as joint lenders (the “Lenders”) whereby Lenders will makeand E. Fleisig, a maximumnatural person who is not affiliated with the
Company. This agreement has been finalized on October 18, 2021, and the Company has received the funding of Seven Hundred and Fifty Thousand Dollars and No Cents ($750,000) (principal) available$1,020,000 on October 18,
2021 which is due 18 months from receipt of the funds. Under this agreement the interest terms are 5% based on a 365- day year. This agreement
shall continue in full force for 18 months from the start date. At December 31, 2021, the note payable of $1,030,340 includes an accrued
interest of $10,340.
Management believes that without additional
capital or increased cash generated from operations, there is substantial doubt about the Companys ability to continue as a credit line togoing
concern and meet its obligations over the Company for working capital purposes (see Note 8).
NOTE 5– 5 COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company hashad operating lease agreements for offices
in Fort Lauderdale, Florida and in Hong Kong, expiring at varying dates.June 2023. The Company’sCompanys principal executive office is located at 431 Fairway Drive, Suite
200, Deerfield Beach, Florida 33441.
Effective November 1, 2019, the Company entered a
new prime operating lease with the landlord “431431 Fairway Associates, LLC”LLC ending June 30, 2023, for the Company’sCompanys executive
offices located on the second floor of 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, Capstone is also responsible for approximately 4,694 square feet of common area maintenance charges in the leased
premises which has been estimated at $12.00 per square foot or approximately $56,000 on an annualized basis.
The Company'sCompanys rent expense is recorded
on a straight-line basis over the term of the lease. The rent expense for the yearyears ended December 31, 20202021 and 20192020 amounted to $165,706$144,916
and $100,616, respectively. The rent increase in$165,706, including short-term lease expense discussed below, respectively, including the year ended December 31, 2020 resulted from the Company entering a new lease as the prime lessor with the base rent much higher than the previous landlord’s lease agreement.common area maintenance charges. At the
commencement date of the new office lease, the Company recorded a right-of-use asset and lease liability under ASU 2016-02, Topic 842.
F-19
Supplemental balance sheet information related to leases as of December 31, 2020 is as follows: | ||||
Assets | ||||
Operating lease - right-of-use asset | $ | 158,504 | ||
Liabilities | ||||
Current | ||||
Current portion of operating lease | $ | 63,307 | ||
Noncurrent | ||||
Operating lease liability, net of current portion | $ | 107,690 |
Supplemental statement of operations information related to leases for the year ended December 31, 2020 is as follows: | ||||
Operating lease expense as a component of other general and administrative expenses | $ | 69,837 |
Supplemental cash flow information related to leases for the year ended December 31, 2020 is as follows: | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flow paid for operating lease | $ | 128,760 | ||
Lease term and Discount Rate | ||||
Weighted average remaining lease term (months) | ||||
Operating lease | 30 | |||
Weighted average Discount Rate | ||||
Operating lease | 7 | % |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5–5 COMMITMENTS AND CONTINGENCIES (continued)
Supplemental balance sheet information related to leases as of December 31, 2021 is as follows: | ||||
Assets | ||||
Operating lease - right-of-use asset | $ | 98,651 | ||
Liabilities | ||||
Current | ||||
Current portion of operating lease | $ | 70,157 | ||
Noncurrent | ||||
Operating lease liability, net of current portion | $ | 37,533 |
Lease term and Discount Rate | ||||
Weighted average remaining lease term (months) | ||||
Operating lease | 18 | |||
Weighted average Discount Rate | ||||
Operating lease | 7 | % |
Scheduled maturities of operating lease liabilities
outstanding as of December 31, 20202021 are as follows:
Year | Operating Lease | |||
2021 | $ | 73,290 | ||
2022 | 75,492 | |||
2023 | 38,304 | |||
Total Minimum Future Payments | 187,086 | |||
Less: Imputed Interest | 16,089 | |||
Present Value of Lease Liabilities | $ | 170,997 |
Year | Operating Lease | ||||
2022 | 75,492 | ||||
2023 | 38,304 | ||||
Total Minimum Future Payments | 113,796 | ||||
Less: Imputed Interest | 6,106 | ||||
Present Value of Lease Liabilities | $ | 107,690 |
The Company has two shortshort-term storage rentals with
durations of less than twelve months.
Capstone International Hong Kong Ltd, (CIHK), entered into a lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong. The original agreement which was effective from February 17, 2014 has been extended various times. On August 17, 2019, the lease was further extended with a base monthly rate of $5,100 for six months until February 16, 2020. As the premises was no longer required as the employees were working remotely from their homes, the Company decided not to renew and allowed this lease to expire.
CIHK entered into a six-month rental agreement effective from December 1, 2016 for a showroom space at 3F, Wing Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. This agreement has been extended various times. The lease with a base monthly rent of $1,290 expired August 16, 2019 and was further renewed for six-months expiring on February 16, 2020. Effective February 17, 2020, the Company entered a six-month lease expiring on September 30, 2020, with a base rate of $1,285 per month. To further reduce costs, effective September 30, 2020 the Company reduced its space requirements and entered a three-month lease expiring on December 31, 2020, with a base rate of $516 per month. The Company decided not to renew and allowed this lease to expire.
Consulting Agreements
On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf was paid $10,500 per month through December 31, 2015 increasing to $12,500 per month from January 1, 2016 through December 31, 2017.
On January 1, 2018, the agreement was further amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2018 through December 31, 2018.
On January 1, 2019, the agreement was further amended,
whereby Mr. Wolf was paid $13,750 per month from January 1, 2019 through December 31, 2020.2021.
F-20
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 COMMITMENTS AND CONTINGENCIES (continued)
On January 1, 2021, the sales operations consulting agreement with George Wolf, was further extended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 2021 through December 31, 2021.
Effective September 1, 2020 through DecemberMarch 31, 2020,2021,
payment for fifty percent or $6,875 of the monthly consulting fee or approximately $27,500$48,125 for the effective period, was deferred until
2021. 2022
The consulting agreement can be terminated upon 30
days'days notice by either party. The Company may, in its sole discretion at any time convert Mr. Wolf to a full-time Executive status.
The annual salary and term of employment would be equal to that outlined in the consulting agreement.
Employment Agreements
On February 5, 2020, 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, 2020 and ends February 5, 2023. The parties may extend the employment period of this agreement by mutual consent with
approval of the Company'sCompanys Board of Directors, but the extension may not exceed two years in length.
On February 5, 2020, the Company entered into a newan Employment
Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. The term of this new agreement began February 5, 2020 and
endsended February 5, 2022.
Effective September 1, 2020 through DecemberMarch 31, 2020,2021,
payments equivalent to fifty percent of both Mr. Wallach and Mr. McClinton’sMcClintons salary orof approximately $48,707 and $30,925, respectively
will befor a total of $76,932 as of 12-31-20 and $86,977 and $20,616, respectively for 2021 and have been deferred until 2021.
There is a common provision in both Mr. Wallach and
Mr. McClinton'sMcClintons employment agreements, if the officer'sofficers employment is terminated by death or disability or without cause,
the Company is obligated to pay to the officer'sofficers 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
(a) | the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination
and (b) the sum of |
The following table summarizes 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 | ||||||||||
Gerry McClinton | $ | 191,442 | $ | - | $ | 11,000 | $ | 6,600 | $ | 209,042 |
Salary
Severance | Bonus
Severance | Gross
up Taxes | Benefit
Compensation | Grand Total | ||||||||||||||||
Stewart Wallach | $ | 301,521 | $ | $ | 12,600 | $ | 6,600 | $ | 320,721 | |||||||||||
Gerry McClinton | $ | 191,442 | $ | $ | 11,000 | $ | 6,600 | $ | 209,042 |
Directors Compensation
On May 31, 2019, the Company approved that effective on June 1, 2019, each independent director, namely Jeffrey Guzy and Jeffrey Postal, would each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation would be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee.
F-21
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 COMMITMENTS AND CONTINGENCIES (continued)
On May 31, 2019, the Company also approved that
the independent directors would be offered effective from June 1, 2019, the opportunity to participate as a non-employee in the Company’sCompanys
Health Benefit Plan, subject to compliance with all plan participation requirements and on acceptance into the plan the director will
be responsible to pay 100% of their plan’splans participation cost.
On June 10, 2020, the Company approved that effective on August 1, 2020, until August 1, 2021, each independent director, namely Jeffrey Guzy and Jeffrey Postal, would each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation would be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee.
On May 6, 2021, the Company approved the following basic compensation arrangement for independent directors of the Company, effective August 6, 2021 and ending August 5, 2022: A total compensation value of $15,000 per annum, payable $750 monthly cash
compensation or $9,000 or (60% of total value) and remainder $6,000 payable in non-qualified stock options vesting as of August 6, 2022 and with an exercise price equal to market price of common stock as of August 6, 2021, less 20% (discount). See Note 6 Stock Transactions for further disclosures.
Licensing Agreements
Under a February 4, 2015 Licensing Agreement with a floorcare company, Company markets home lighting products under the licensed brand of the floorcare company, to discount retailers, warehouse clubs, home centers, on-line retailers and other retail distribution channels in the U.S., Canada and Mexico. The initial term of the agreement was for 3 years. The Licensing Agreement did not have a guaranteed royalty stipulation.
Royalty expense related to this Licensing Agreement
for the years ended December 31, 2021 and 2020, and 2019, was $0.
Public Relations Agreement
On September 27, 2018, the Company executed
a public relations services agreement with Max Borges Agency, (“MBA”(MBA), a full – service public relations and communications
agency with offices in Miami and San Francisco. The Company entered into the Agreement to obtain assistance from a nationally recognized
firm, specializing in the development of product branding, marketing, and launching of technology products. The agreement was effective
on October 1, 2018, with an initial 180-day term, which either party can cancel with 60 days advanced notice in writing on or after the
120th day of the effective date. MBA would receive a monthly fee of $11,250 and $476 subscription fee due on the first of each
month.
Legal Matters
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.
NOTE 6 - 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 mostly to purchase start up inventory for the Companys new Smart Mirror product line, and the remainder for advertising and working capital. Under the SPA,
F-22
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEME
NOTE 6 - STOCK TRANSACTIONS
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 investors own account. No individual investor owns more than 2% of the issued and outstanding shares of common stock.
The Private Placement was required to raise needed working capital to purchase U.S. domestic inventory, to support the Companys new Smart Mirror product line that initially was to be sold online in the second quarter 2021. The Company engaged Wilmington Capital Securities, LLC, a FINRA and SEC registered broker to act as a placement agent to assist to raise capital through a private placement
from one or more accredited investors. As compensation for their services Wilmington was paid 7% of the gross proceeds or $104,860 as a placement fee. The placement fee was offset against the $1,498,000 proceeds and the net amount of $1,393,140. This increased the Companys additional paid in capital as presented on the accompanying condensed consolidated statement of stockholders equity statement as of December 31, 2021. In addition, the Company issued to Wilmington as consideration for their placement fee services, warrants equal to 8% of the shares issued or 199,733 warrants. The warrants can be exercised for five years from date of issuance, exercisable at a price per share equal to 110% or $0.66 of the price per share paid by the investors.
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 Companys 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. The estimated fair value of these warrants since issued as issuance costs, had no impact on the Companys consolidated financial statements as of December 31, 2021.
As of December 31, 2021, and 2020, the Company had 199,733 and 0 warrants outstanding.
Series B-1 Preferred Stock
In 2009, the Company authorized 2,108,313 shares of Series 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 June 7, 2016, the Company authorized 3,333,333 of the B-1 preferred stock. The B-1 shares have a liquidation preference of $1.0 per share or $15,000 as of September 30, 2021.
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 seven thousand five hundred shares of Companys Series B-1 Convertible Preferred Stock, $0.0001 par value per share, (Preferred Shares) 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 (See Note 4).
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.
On May 2, 2017, the Company’sCompanys Board of
Directors amended the Company’sCompanys 2005 Equity Incentive Plan to extend the Plan’sPlans expiration date from December 31, 2016 to
December 31, 2021.
F-23
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEME
NOTE 6 - STOCK TRANSACTIONS (continued)
On May 31, 2019, the Company granted 100,000
stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation
Committee, and 10,000 stock options to the Company Secretary. The Director options have a strike price of $.435 with an effective date
of August 6, 2019 and will vest on August 5, 2020 and have a term of 5 years. The Company Secretary options have a strike price of $.435
with an effective date of August 6, 2019 and will vestvested on August 5, 2020 and have a term of 10 years.
On June 10, 2020, the Company granted 100,000
stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation
Committee, and 10,000 stock options to the Company Secretary.
The Director options have a strike price
of $.435 with an effective date of August 6, 2020 and will vest on August 5, 2021 and have a term of 5 years. The Company Secretary options
have a strike price of $.435 with an effective date of August 6, 2020 and will vestvested on August 5, 2021 and have a term of 10 years.
On May 6, 2021, the Company approved the following basic compensation arrangement for independent directors of the Company, effective August 6, 2021 and ending August 5, 2022: A total compensation value of $15,000 per annum, payable $750 monthly cash compensation or $9,000 or (60% of total value) and remainder $6,000 payable in non- qualified stock options vesting as of August 6, 2022 and with an exercise price equal to $1.4448 per share and exercisable for a period of five years.
On July 15, 2021, Jeffrey Guzy a Company director, exercised a previously granted non-qualified stock option and purchased 100,000 shares of Company common stock for an aggregate purchase price of $43,500 or a per share price of $.435. The shares are restricted shares under federal securities laws and were acquired by independent Director Guzy. The proceeds will be used by the Company for general working capital to support the rollout of the Smart Mirror product line.
As of December 31,
2020,2021, there were 990,000 stock options outstanding and 780,000 stock options vested. The stock options have a weighted average expenseexercise price of $0.435.
Stock options were issued under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act of 1933.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the stock options granted. The following weighted average assumptions were used in the fair value calculations during the year ended December 31, 2020:
Risk free interest rate – 0.21% – 0.55%
Expected term – to years
Expected volatility of stock – 500%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple –
2.0
Number of Steps –
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the stock options granted. The following weighted average assumptions were used in the fair value calculations during the year ended December 31, 2021:
Risk free interest rate
% %Expected term
yearsExpected volatility of stock
%Expected dividend yield
%Suboptimal Exercise Behavior Multiple 2.0
Number of Steps
The risk-free interest rate is based on
rates of treasury securities with the same expected term as the options. The Company uses the expected term of employee and director stock-based
options. The Company is utilizing an expected volatility based on a review of the Company’sCompanys historical volatility, over a period
of time, equivalent to the expected life of the instrument being valued.
F-24
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS (continued)
The expected dividend yield is based upon the fact that the Company has not historically paid dividends and does not expect to pay dividends in the near future.
For the years ended December 31, 20202021
and 2019,2020, the Company recognized stock-based compensation expense of $28,068$15,619 and $40,707,$28,068, respectively, related to these stock options.
Such amounts are included in compensation expense in the accompanying consolidated statements of income. A further compensation expense
expected to be $10,015approximately $13 thousand will be recognized for these options in 2021.
The following table sets forth the Company’sCompanys
stock options outstanding as of December 31, 20202021 and 20192020 and activity for the years then ended.
Shares | Weighted Average Exercise Price | Weighted Average Fair Value | Weighted Average Remaining Contractual Term (Years) | Intrinsic Value | ||||||||||||||||
Outstanding, January 1, 2019 | 970,001 | $ | 0.435 | $ | 0.308 | 2.77 | $ | (272,570 | ) | |||||||||||
Granted | 210,000 | 0.435 | 0.210 | 4.84 | (64,050 | ) | ||||||||||||||
Exercised | - | - | - | - | - | |||||||||||||||
Forfeited/expired | (180,001 | ) | 0.435 | 0.283 | - | 54,900 | ||||||||||||||
Outstanding,December 31, 2019 | 1,000,000 | 0.435 | 0.284 | 2.88 | (305,000 | ) | ||||||||||||||
Granted | 210,000 | 0.435 | 0.080 | 6.27 | - | |||||||||||||||
Exercised | - | - | - | - | - | |||||||||||||||
Forfeited/expired | (220,000 | ) | 0.435 | 0.179 | - | 83,820 | ||||||||||||||
Outstanding,December 31, 2020 | 990,000 | $ | 0.435 | $ | 0.264 | 3.07 | - | |||||||||||||
Vested/exercisable at December 31, 2019 | 790,000 | $ | 0.435 | $ | 0.314 | 2.36 | $ | (240,950 | ) | |||||||||||
Vested/exercisable at December 31, 2020 | 780,000 | $ | 0.435 | $ | 0.314 | 2.60 | $ | - |
Shares | Weighted Average Exercise Price | Weighted Average Fair Value | Weighted Average Remaining Contractual Term (Years) | Intrinsic Value | |||||||||||||||||
Outstanding, January 1, 2020 | 1,000,000 | 0.435 | 0.284 | 2.88 | (305,000 | ) | |||||||||||||||
Granted | 210,000 | 0.435 | 0.080 | 6.27 | |||||||||||||||||
Exercised | | ||||||||||||||||||||
Forfeited/expired | (220,000 | ) | 0.435 | 0.179 | | 83,820 | |||||||||||||||
Outstanding, December 31, 2020 | 990,000 | 0.435 | 0.264 | 3.07 | (377,190 | ) | |||||||||||||||
Granted | 8,288 | 1.448 | 1.620 | 4.60 | (7,940 | ) | |||||||||||||||
Exercised | (100,000 | ) | 0.390 | 1.40 | |||||||||||||||||
Forfeited/expired | (10,000 | ) | 0.435 | 0.150 | | ||||||||||||||||
Outstanding, December 31, 2021 | 888,288 | 0.444 | 0.249 | 2.40 | 48,856 | ||||||||||||||||
Vested/exercisable at December 31, 2020 | 780,000 | 0.435 | 0.264 | 2.60 | (300,990 | ) | |||||||||||||||
Vested/exercisable at December 31, 2021 | 888,288 | 0.444 | 0.251 | 2.38 | 48,856 |
The following table summarizes the information with respect to options granted, outstanding and exercisable under the 2005 Plan:
Exercise Price | Options Outstanding | Remaining Contractual Life in Years | Average Exercise Price | Number of Options Currently Exercisable | ||||||||||||||
$ | .435 | 10,000 | $ | .435 | 10,000 | |||||||||||||
$ | .435 | 10,000 | $ | .435 | 10,000 | |||||||||||||
$ | .435 | 10,000 | $ | .435 | 10,000 | |||||||||||||
$ | .435 | 10,000 | $ | .435 | 10,000 | |||||||||||||
$ | .435 | 200,000 | $ | .435 | 200,000 | |||||||||||||
$ | .435 | 10,000 | $ | .435 | 10,000 | |||||||||||||
$ | .435 | 200,000 | $ | .435 | 200,000 | |||||||||||||
$ | .435 | 10,000 | $ | .435 | 10,000 | |||||||||||||
$ | .435 | 200,000 | $ | .435 | 200,000 | |||||||||||||
$ | .435 | 10,000 | $ | .435 | 10,000 | |||||||||||||
$ | .435 | 200,000 | $ | .435 | 200,000 | |||||||||||||
$ | .435 | 10,000 | $ | .435 | 10,000 | |||||||||||||
$ | 1.448 | 4,144 | $ | 1.448 | ||||||||||||||
$ | 1.448 | 4,144 | $ | 1.448 |
F-25
Exercise Price | Options Outstanding | Remaining Contractual Life in Years | Average Exercise Price | Number of Options Currently Exercisable | ||||||||||||||
$ | .435 | 10,000 | 0.50 | $ | .435 | 10,000 | ||||||||||||
$ | .435 | 10,000 | 3.00 | $ | .435 | 10,000 | ||||||||||||
$ | .435 | 10,000 | 4.50 | $ | .435 | 10,000 | ||||||||||||
$ | .435 | 10,000 | 4.60 | $ | .435 | 10,000 | ||||||||||||
$ | .435 | 100,000 | 0.60 | $ | .435 | 100,000 | ||||||||||||
$ | .435 | 10,000 | 5.60 | $ | .435 | 10,000 | ||||||||||||
$ | .435 | 200,000 | 1.60 | $ | .435 | 200,000 | ||||||||||||
$ | .435 | 10,000 | 6.60 | $ | .435 | 10,000 | ||||||||||||
$ | .435 | 200,000 | 2.60 | $ | .435 | 200,000 | ||||||||||||
$ | .435 | 10,000 | 7.60 | $ | .435 | 10,000 | ||||||||||||
$ | .435 | 200,000 | 3.60 | $ | .435 | 200,000 | ||||||||||||
$ | .435 | 10,000 | 8.60 | $ | .435 | 10,000 | ||||||||||||
$ | .435 | 200,000 | 4.60 | $ | .435 | - | ||||||||||||
$ | .435 | 10,000 | 9.60 | $ | .435 | - |
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS (continued)
Adoption of Stock Repurchase Plan
On August 23, 2016, the Company'sCompanys Board
of Directors authorized the Company to implement a stock repurchase plan for up to $750,000 worth of shares of the Company'sCompanys 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'sCompanys
common stock, market conditions, corporate developments, and the Company'sCompanys financial condition. The repurchase plan may be discontinued
at any time at the Company'sCompanys discretion.
On February 13, 2017, as authorized under the
Company'sCompanys stock repurchase plan, the Company repurchased 1,000,000 shares of Company common stock from Involve, LLC., under the
Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.
On May 1, 2017, as authorized under the Company'sCompanys
stock repurchase plan, the Company repurchased 666,667 shares of Company common stock from Involve, LLC., under the Option Agreement dated
June 27, 2016, at an exercise price of $.15 per share.
On May 2, 2017, the Company'sCompanys Board of
Directors authorized at the Company'sCompanys discretion to either retain repurchased shares in the treasury or to retire the repurchased
shares and these shares were retired on June 1, 2017.
On December 15, 2017, the Company'sCompanys Board
of Directors approved an extension of the Company'sCompanys stock repurchase plan for up to $750,000 through June 30, 2018.
On December 19, 2018, Company entered a Purchase
Plan pursuant to Rule 10b5-1 under the Exchange Act, with Wilson Davis & Co., AND SUBSIDIARIES
On August 29, 2018,June 10, 2020, the Company’sCompanys Board
of Directors approved a further extension of the Company’sCompanys stock repurchase plan through August 31, 2021. Since the Board of Director
approval there have been no further repurchase of the Companys common stock during 2020 and further Stock repurchases have been
placed on hold in order to conserve cash during the COVID-19 pandemic.
On May 6, 2021, the Companys Board of Directors approved a further extension of Rule 10b-5, the Companys stock purchase agreement with Wilson-Davis & Company, Inc. through August 31, 2022. The cap on shares of common stock eligible for purchase under the agreement is set at 750,000 shares. Since the Board of Director approval last year, there have been no further repurchase of
the Companys common stock during 2020-2021. Further Stock repurchases will be dependent on the Company future liquidity position.
As of December 31, 2021, and December 31, 2020, a total of 750,000 of the Companys common stock has been repurchased since the p On August 29, 2018, the Companys Board of Directors approved a further extension of the Companys stock repurchase plan through August 31, 2019. The Board of Directors also approved an increase of the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program from $750,000 to $1,000,000 during the renewal period.
On August 29, 2018, the Company’sCompanys Board
authorized and directed the Company’sCompanys management to establish a trading account at a brokerage firm for the Company to conduct open
market purchases of the Company’sCompanys Common Stock in accordance with the terms and conditions of the Company’sCompanys current stock
repurchase program and to fund said account from available cash of the Company but not to exceed such amount that would cause the Company
to be unable to pay its bona fide debts.
On December 19, 2018, Company entered into 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 up to an aggregate of 750,000 shares at prevailing market prices,
subject to the terms of the Purchase Plan.
On May 31, 2019, the Company’sCompanys Board of
Directors approved a further extension of the Company’sCompanys 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 September 23, 2019, the Company signed a revised stock Purchase Plan to reflect an extension of the plan to repurchase up to an aggregate of 750,000 shares at prevailing market prices, subject to the terms of the Purchase Plan.
F-26
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCK TRANSACTIONS (continued)
On March 30, 2020, Wilson Davis && CO., Inc.,
advised the Company that 750,000 of the Company’sCompanys Common Stock had been repurchased to complete the authorized Purchase Plan.
On June 10, 2020, the Company’sCompanys Board
of Directors approved a further extension of the Company’sCompanys stock repurchase plan through August 31, 2021. Since the Board of Director
approval there have been no further repurchase of the Company’sCompanys Common Stock during 2020 and further Stock repurchases have been
placed on hold in order to conserve cash during the COVID-19 pandemic.
As of December 31, 20202021 a total of of
the Company’sCompanys Common Stock has been repurchased at a total cost of $107,740.
For the year ended December 31, 2021 and 2020
respectively, 0 and 2019 respectively, 283,383 and 466,617 Common shares were repurchased at a cost of $0 in 2021 and $36,333 in 2020 and $71,407 in 2019.
NOTE 7 - INCOME TAXES
As of December 31, 2020,2021, the Company had federal
and state net operating loss carry forwards of approximately $1,044,000$2,687,000 and $3,500,000,$5,073,000, respectively. The federal net operating loss is
available to the Company indefinitely and available to offset up to 80% of future taxable income each year. The net deferred tax liability
as of December 31, 2021 and 2020 was $274,000and 2019 was $260,000 and $0,$260,000, respectively, and is reflected in long-term liabilities in the accompanying
consolidated balance sheets.
On March 27, 2020, the CARES Act was enacted
into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic.
The CARES Act includes several significant income and other business tax provisions that, among other things, would eliminate the taxable
income limit for certain net operating losses (“NOLs”(NOLs) and allow businesses to carry back NOLs arising in 2018, 2019, and
2020 to the five prior tax years. The Company was able to carryback the 2018 and the 2019 NOLs to 2017 tax year and generate an estimated
refund of previously paid income taxes at an approximate 34% federal tax rate. This resulted in a net benefit of $575,645 which was recorded
in the first quarter 2020. The Company expectswas also able to carryback a portion of its 2020 NOL, for which it recorded a further net benefit
of $286,433. In the third quarter 2020, the Company recorded a $21,222 net tax benefit for deferred tax liability adjustment related to goodwill impairment. For the year ended December 31, 2020, the Company has recorded $861,318$2,320 in net tax benefits.
Tax benefit for income taxes differs from the amount computed using the federal US statutory income tax rate as follows:
Year Ended December 31, | ||||||||
2020 | 2019 | |||||||
Tax benefit at U.S. statutory rate | $ | (629,108 | ) | $ | (88,547 | ) | ||
State income taxes, net of federal benefit | (86,744 | ) | (13,260 | ) | ||||
Tax effect of foreign operations | 119,558 | (3,801 | ) | |||||
Non-deductible items | 57 | 792 | ||||||
NOL carryback rate difference | (329,618 | ) | - | |||||
Valuation allowance | 345,397 | 89.959 | ||||||
Other | (31,520 | ) | (76 | ) | ||||
Income tax benefit | $ | (611,978 | ) | $ | (14,933 | ) |
Years Ended December 31, | ||||||||
2021 | 2020 | |||||||
Tax benefit at U.S. statutory rate | $ | (409,203 | ) | $ | (629,108 | ) | ||
State income taxes, net of federal benefit | (25,607 | ) | (86,744 | ) | ||||
Tax effect of foreign operations | 47,428 | 119,558 | ||||||
Non-deductible items | 5 | 57 | ||||||
NOL carryback rate difference | (329,618 | ) | ||||||
Valuation allowance | 420,570 | 345,397 | ||||||
Other | (18,138 | ) | (31,481 | ) | ||||
Income Tax Expense (Benefit) | $ | 15,055 | $ | (611,939 | ) |
The effective tax rate for the years ended December
31, 20202021 and 2019,2020, respectively, was 20.43%-0.77% and 1.60%20.43% and the statutory tax rate was 24.46%23.70% in 20202021 and 24.40%24.46% in 2019.
The income tax benefit for the years ended December
31, 20202021 and 20192020 consists of:
2021 | 2020 | |||||||
Current: | ||||||||
Federal | $ | $ | (873,278 | ) | ||||
State | 823 | 1,600 | ||||||
Foreign | ||||||||
Deferred: | ||||||||
Federal | 18,070 | 230,562 | ||||||
State | (3,838 | ) | 29,177 | |||||
Income Tax Expense (Benefit) | $ | 15,055 | $ | (611,939 | ) |
F-27
2020 | 2019 | |||||||
Current: | ||||||||
Federal | $ | (874,000 | ) | $ | - | |||
State | 2,000 | 1,000 | ||||||
Foreign | - | (4,000 | ) | |||||
Deferred: | ||||||||
Federal | 231,000 | (11,000 | ) | |||||
State | 29,000 | (1,000 | ) | |||||
Income Tax Benefit | $ | (612,000 | ) | $ | (15,000 | ) |
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES (continued)
2020 | 2019 | |||||||
Deferred tax assets: | ||||||||
Net operating loss | $ | 343,000 | $ | 416,000 | ||||
Liabilities and reserves | 28,000 | 25,000 | ||||||
Property and equipment and inventory | (1,000 | ) | 6,000 | |||||
Stock options | 62,000 | 85,000 | ||||||
Business interest expense limitation | 1,000 | - | ||||||
Right of use asset | 3,000 | - | ||||||
436,000 | 532,000 | |||||||
Deferred tax liabilities: | ||||||||
Gain/loss on disposal | (9,000 | ) | (9,000 | ) | ||||
Intangible assets | (251,000 | ) | (433,000 | ) | ||||
Valuation allowance | (436,000 | ) | (90,000 | ) | ||||
(696,000 | ) | (532,000 | ) | |||||
Net deferred tax assets and liabilities | $ | (260,000 | ) | $ | - |
Deferred tax assets are to be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred assets will not be realized. The Company has evaluated
the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company'sCompanys
history of cumulative net losses incurred and has concluded that it is more likely than not that the Company will not realize the benefits
of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December
31, 20202021 and 2019.2020. Since indefinite-lived assets cannot be used as a source of taxable income to support the realization of deferred tax
asset, a valuation allowance was recorded against the deferred tax assets, and a net deferred tax liability or naked credit of approximately
$274,000 and $260,000 is presented on the company’scompanys balance sheet. The Company'sCompanys valuation allowance increased by $345,397.
The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes that it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes.
As of December 31, 2020, the Company had an income tax refundable of approximately $861 thousand of which approximately $576 thousand income tax and $10.4 thousand of interest was refunded on February 3, 2021. As of December 31, 2021, the Company has a remaining tax refund of $285 thousand.
NOTE 8 - SUBSEQUENT EVENTS
Employment Agreements
On February 6, 2022, the Company entered into an
Employment Agreement with James McClinton (Chief Financial Officer and Related Parties
With the pending closure of the CIHK operation, on
March 4, 2021,2022, the Company entered a Loan Agreementconsulting agreement with Directors Stewart WallachFayyyaz Fakhruddin Bootwala (Frank),who previously was a direct employee
as the Business Development and Jeff PostalProduct Manager. Frank will continue to perform similar duties but as joint lenders (the “Lenders”) whereby Lendersan independent contractor. The agreement
will make a maximum of Seven Hundredend February 28, 2023, which term maybe extended by mutual agreement between the consultant and Fifty Thousand Dollars and No Cents ($750,000) (principal) available as a credit line toCompany on an agreed upon schedule
with prior written notice. Notwithstanding the Company for working capital purposes. As requested by the Company, funds will be advanced by the Lenders in tranches which must be at least for an amount of $25,000.
With the endpending closure of the Initial Period or expiration ofCIHK operation, on
March 4, 2022, the Company entered a consulting agreement with Yee Moi Choi (Johnny),who previously was a direct employee as the Logistics
Manager. Johnny will continue to perform similar duties but as an independent contractor. The agreement will end February 28, 2023, which
term maybe extended date, being December 31, 2021 (the “Maturity Date”)by mutual agreement between the consultant and Company on an agreed upon schedule with prior written notice. Notwithstanding
the foregoing , the Agreement may be terminated by either party at any time after the initial 60 day term, upon 30 days prior written
notice. The consulting fee in a single lump sum balloon payment. The Company may unilaterally extend the Maturity Dateconsideration for sixty days upon written notice delivered to Lenders on or prior to the Maturity Date.
Consulting Agreements
On January 1, 2021,2022, the sales operations consulting
agreement with George Wolf, was further extended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 20212022 through December
31, 2021.
Director Appointment
George Wolf, who was appointed as a director on January
1, 2021 through March 31, 2021, payment13, 2022, waived any compensation as a director for fifty percent or $6,875 of the monthly consulting fee or approximately $20,625 for the effective period, will be deferred until later in 2021.
F-29