CAPSTONE COMPANIES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

This Item 7, "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," and similar terms.
Forward-looking statements are not guarantees of future performance and
Company'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 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's fiscal year 2021 results. Unless otherwise
stated, references to particular years or quarters refer to the CAPC'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
resulted in a dramatic increase in unemployment, particularly in the U.S. The
extent to which COVID-19 will continue to impact the company'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.
In order to further reduce overseas expenses, the Company decided to make
dormant in 2022, the CIHK operation entirely but retaining two key employees as
independent contractors.



The impact of COVID-19 has resulted in an unprecedented decline in our revenue
and earnings for the year ended December 31, 2021, including goodwill impairment
charges in 2020.



Total net revenue for the year ended December 31, 2021 decreased 75.2% to
approximately $686 thousand as compared to $2.8 million in the same period of
last year. The net loss was approximately $2.0 million for the year 2021
compared to a net loss of $2.4 million in 2020. The Company had an estimated net
tax provision 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") 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" or "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'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"), 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", allowing it to
expand the Company'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's Connected Surfaces.



The Company's focus through 2017 has been in the integration of LEDs into most
commonly used consumer lighting products in today's home. Over the last few
years there has been significant LED price erosion, which has commoditized LED
consumer products. The LED category has matured and is no longer the innovative
"must have" consumer product as in previous years.



Capstone's success has been in its ability to identify emerging product
categories where Capstone's management experience can be fully leveraged. Over
the past decade, the Company'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'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 2022
appeals to a much larger audience than our traditional LED lighting product
line. The new portfolio is designed to tap into consumer'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 $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'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'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'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'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'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 Company 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 in
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 Q1 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 manage the overseas supply chain requirements of our 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 Qs, 2022.



We believe the COVID-19 virus will continue to impact retail markets through the
first half of 2022 but as we focus our channel strategy toward e-commerce.
Disruption to our business in 2021 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'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'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 2021 represented 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 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" above in Item 1A.



Operating Expenses



Operating expenses include sales and marketing expenses, consisting of social
media advertising, sales representatives' commissions, advertising, show expense
and costs related to employee'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, 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, 2021 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, 2021, net
revenues were approximately $686 thousand, a decrease of approximately $2.0
million or 75.2% from $2.8 million in fiscal 2020. The decrease in 2021 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's initiatives to maximize sales of the
Company's products on the retail floor or to assist in developing consumer
product awareness, by providing marketing und 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 $8.0 thousand and
$341.2 thousand for the years ended December 31, 2021 and 2020 respectively.

For the years ended December 31, 2021 and 2020, international sales were approximately $341 thousand or 50% of revenue and $704 thousand or 25 % of revenue, respectively.

                                      38

The following table disaggregates net revenue by major source:

                                       For the Year Ended                            For the Year Ended
                                        December 31, 2021                             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, 2021, was approximately $47
thousand, or 6.9% of net revenues, as compared to $504 thousand or 18.2% of net
revenues, for fiscal 2020. For the years ended December 31, 2021 and 2020, cost
of sales were approximately $639 thousand and $2.3 million, respectively, a
decrease of $1.6 million or 71.8% from the previous year. This reduction was the
direct result of the reduced revenue in the year. Costs represented 93.1% and
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 vessels arriving from overseas.



Operating Expenses



Sales and Marketing Expenses



In fiscal 2021 and 2020, sales and marketing expenses were approximately $29
thousand and $300 thousand respectively, a decrease of $271 thousand or 90.3%.
As a percent to revenue 2021 expenses were 4.2% as compared to 10.9% in 2020.
Social Media expense in 2021 was $20.5 thousand, a decrease of $9.8 thousand or
32.3% from $30.3 thousand in 2020.With the resulting delays of the Connected
Surfaces program we continued our Social Media marketing presence in preparation
for the launch of the Smart Mirror 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, a reduction of $32.4 thousand or 93.4% due to the reduced
retail promotional activities during 2021. Trade Show expense was $0.5 thousand
in 2021 as compared to $149 thousand in 2020 , a reduction of $148.5 thousand or
99.7% due to cancellation of CES trade show resulted from the COVID19
pandemic.$8.0 thousand and $341.2 thousand for the years ended December 31,

2021
and 2020 respectively.



Compensation Expenses



For the years ended December 31, 2021 and 2020 compensation expenses were
approximately $1.3 million and $1.5 million, respectively, a reduction of $240
thousand or 15.8%. As a percent of net revenues 2021 expenses were 186.0% as
compared to 54.7% in 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 2021, professional fees were approximately $368 thousand compared to
$423 thousand in 2020, a decrease of $55 thousand or 13.0 %. As a percent of net
revenue 2021 expenses were 53.6% as compared to 15.3% in 2020. In 2021,
consulting fees were approximately $165 thousand the same amount as incurred in
2020. Accounting, legal and other expenses were $203 thousand, a decrease of $55
thousand from $258 thousand in the prior year.

Product Development Expenses

For the years ended December 31, 2021 and 2020, product development expenses
were approximately $309 and $250 thousand, respectively, an increase of $59
thousand or 23.6%. In 2021, the Company invested $237 thousand in the Smart
Mirror development compared to $182 thousand in 2020, a increase of $55 thousand
or 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 2021 were $1 thousand compared to
$44 thousand in 2020, a reduction of $43 thousand or 97.7%. Other expenses such
as prototype, sample and courier charges were increased by approximately $51
thousand from $7 thousand in 2020 to $58 thousand in 2021. As a percent of
revenue, 2021 expenses were 45.0% as compared to 9.0% in 2020. We have continued
to invest in new product design, software development, product prototyping and
testing and related to the Smart Mirror project.



                                      39

Other General and Administrative Expenses

For fiscal 2021 and 2020, other general and administration expenses were
approximately $421 thousand and $477 thousand, respectively, a decrease of $56
thousand or 11.7%. As a percent to revenue 2021 expenses were 61.4% as compared
to 17.2% in 2020. In 2021 the Company's rent expense was $148 thousand compared
to $166 thousand in 2020, a decrease of $18 thousand or 10.6%. The Directors
insurance also increased in 2021 from $71 thousand in 2020 up to $100 thousand a
$29 thousand or 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 $70 thousand or 14.7% as compared to the
same period in 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, 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, 2021 and 2020 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 a goodwill impairment charge for the year
ending December 31, 2021, was not required.



Total Operating Expenses



For the years ended December 31, 2021 and 2020, total operating expenses were
$2.4 million and $3.6 million, respectively. This represents a $1.2 million or
33.1% decrease over fiscal year 2020. A decrease in total operating expenses of
$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.



Operating Loss



For the year ended December 31, 2021 the operating loss was approximately $2.4
million as compared to $3.1 million in 2020, a loss decrease of $730 thousand
over 2020.



Other Income (Expense)

For fiscal 2021 other income was approximately $456 thousand compared to a $90
thousand in 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 cost 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 allowance and sale of the products for which
these allowances relate being significantly reduced. These allowances were
charged to other income during the year ended December 31, 2021 .



For the years ended December 31, 2021 the net expense for income tax was
estimated at $15 thousand compared to a net benefit of $612 thousand in the same
period 2020. The benefit in 2020 was a result of the CARES Act which eliminated
the taxable income limit for certain net operating losses ("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, 2021 and 2020, respectively, was -0.77%%, and 20.43% and the statutory tax rate was 23.7% in 2021 and 24.46% in 2020.

                                      40





Net Loss

For fiscal 2021 and 2020 net loss was approximately $2.0 million and $2.4 million respectively, a net loss decrease of approximately $420 thousand over the previous year.

RESULTS OF OPERATIONS AND BUSINESS OUTLOOK

In 2021, the impact of COVID-19 resulted in an unprecedented decline in our revenue and earnings for the year ended December 31, 2021, which resulted in goodwill impairment assessment for each quarter in 2021, but there was no impairment charges required based on our assessment.

Our expectation is that the new portfolio advancing in 2022 appeals to a much
larger audience than our traditional LED lighting product line. Management
believes that the execution of the Company's strategy and development of the
Connected Surfaces category will provide attractive opportunities for profitable
growth over the long-term



The Company'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'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 is
anticipated to be 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'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. Other factors, like
inflation and its impact on consumer confidence and willingness to purchase
discretionary purchases like our Smart Mirrors, may impact selling prices and
related margins of profit.



As the products we have shipped on our direct import business model typically
requires 3 to 4 months lead time, our revenue in 2021 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 in 2022.

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 2021 we were able to complete the above priorities and are now preparing
for the launch of the Smart Mirror program in 2022. Logistical problems
affecting Asian-U.S. commerce and shipment of products to the U.S. may adversely
impact our ability to establish the Smart Mirror product line as a viable
revenue source in 2022.



Contractual Obligations



The following table represents contractual obligations as of December 31, 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 $ - $ -

                                      41

Notes to Contractual Obligations Table

Purchase Obligations - Purchase obligations are comprised of the Company's liability for goods and services in the normal course of business.

Short Term Debt - None.

Long Term Debt - Note payable related parties.

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 significantly affected U.S. consumer shopping patterns and
caused the health of the U.S. economy to deteriorate. 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, 2021, the Company used cash in operations of
approximately $2.4 million and generated net operating losses of $1.96 million.
As of December 31, 2021, the Company had working capital of approximately $1.9
million and an accumulated deficit of $6.4 million. The Company's cash balance
increased by approximately $54 thousand from $1.223 million as of December 31,
2020 to $1.277 million as of December 31, 2021. With the reduced revenues in
2021 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 short-term
facility ended June 30, 2021 ("Initial Period'). The Company had the option to
extend the Initial Period for an additional six consecutive months, ending
December 31, 2021, but decided not to renew.



On April 5, 2021, the Company entered into five separate securities purchase
agreements ("SPAs") whereby the Company privately placed an aggregate of
2,496,667 shares of Common Stock for an aggregate purchase price $1,498,000
(transactions being referred to as the "Private Placement"). The five investors
in the Private Placement consisted of four private equity funds and one
individual - all being "accredited investors" (under Rule 501(a) of Regulation D
under the Securities Act of 1933, as amended, ("Securities Act"). The $1,498,000
in proceeds from the Private Placement was used mostly to purchase start up
inventory for the Company's new Smart Mirror product line, for a major online
e-commerce fulfilment company, and the remainder for advertising and working
capital.

On July 2, 2021, the Board of Directors ("Board") resolved that the Company
required a purchase order funding facility to procure additional inventory to
support the online Smart Mirror 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 has finalized, and the Company received the $1,020,000
funding under this agreement on October 18, 2021. As of December 31, 2021, the
Company had an outstanding balance on the Purchase Order Funding Agreement of
$1,030,340 which includes accrued interest of $10,340.

The Company has an income tax refundable as of December 31, 2021 of approximately $285 thousand which we expect to receive in 2022.

                                      42





The Company's ability to maintain sufficient working capital is highly dependent
upon achieving expected operating results. Failure to achieve expected operating
results could have a material adverse effect on the Company's working capital,
ability to obtain financing, and its operations in the future.

The Company as of December 31, 2021, and 2020 has note payable due to related parties, including accrued interest, of $1,030,340 and $0, respectively.

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 will be adequate to meet the Company'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's ability to continue as a going concern.



Summary of Cash Flows



                                                          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, 2021 the Company's working capital was approximately $2.0
million of which $1.2 million was cash. Current liabilities were $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. The cash used in operating
activities in 2021 included the negative cash impact of the net loss, which was
approximately $1.96 million, an increase in inventories of approximately $500
thousand, an increase of prepaid expenses of $425 thousand and decrease in
accounts payable of $287 thousand. This was partially offset by an income tax
refund of $576 thousand and $119 thousand decrease in accounts receivables.

Cash Flows used in Investing Activities

Cash used in investing activities in 2021 was approximately $32 thousand
compared to $13 thousand in 2020. The Company continued to invest in new product
molds and tooling. With further product expansion into Smart Home lighting and
Smart Mirror categories, the Company'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,
2021 and 2020, was approximately $2.457 million and $36 thousand, respectively.
The Company received approximately $1.4 million from sales of common stock and
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 2021 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") 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'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'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' orders has been previously negotiated and agreed
to including any applicable discount prior to receiving the customer's purchase
order. The stated unit price in the customer's order has already been determined
and is fixed at the time of invoicing.



                                      44





The Company recognizes product revenue when the Company's performance
obligations as per the terms in the customers purchase order have been fully
satisfied, specifically, when the specified product and quantity ordered has
been manufactured and shipped pursuant to the customers requested ship window,
when the sales price as detailed in the purchase order is fixed, when the
product title and risk of loss for that order has passed to the customer, and
collection of the invoice is reasonably assured. This means that the product
ordered and to be shipped has gone through quality assurance inspection, customs
and commercial documentation preparation, the goods 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'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's initiatives to maximize sales of the
Company'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, 2021 and 2020, the Company had processed approximately
$8.0 thousand and $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 receivables 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'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'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, 2021 and 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,
                                                      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 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'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'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's fiscal year ended December 31, 2019. The adoption of ASU
2017-04 did not have a material effect on the Company'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's market capitalization.



As a result of the economic uncertainties caused by the COVID-19 pandemic during
the year ended December 31, 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 $0 and $623.5 thousand, respectively.

The following table summarizes the changes in the Company's goodwill asset which is included in the total assets in the accompanying consolidated balance sheets:

                                          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's stock
price which will require the Company to test its goodwill for impairment in
future reporting periods. The Company's stock is deemed a "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") Accounting Standard Codification ("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, 2021, the Company had federal and state net operating loss
carry forwards of approximately $2,687,000 and $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
$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") 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 a net tax benefits $284,873 and $861,318, respectively.

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 20.43% and the statutory tax rate was 23.70% in 2021 and 24. 46% in 2020.

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'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, 2021 and 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's balance
sheet. The Company's 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.



                                      47

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