CAPSTONE COMPANIES, INC. This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2021 Annual Report.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q Report contains forward-looking statements that are contained principally in the sections describing our business as well as in "Risk Factors," and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. All statements other than statements of historical facts contained, or incorporated by reference, in this Form 10-Q Report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects, actions taken or strategies being considered with respect to our liquidity position, valuation and appraisals of our assets and objectives of management for future operations, our ability to weather the impacts of the COVID-19 pandemic (including variant viruses), financing opportunities, and future cost mitigation and cash conservation efforts and efforts to reduce operating expenses and capital expenditures are forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" in our latest 2021 Annual Report. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions (including the negative and variants of such words). Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to various risks and uncertainties. Given these uncertainties, a reader of this Form 10-Q Report should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this Form 10-Q Report are made as of the date of filing this Form 10-Q Report. You should not rely upon forward-looking statements as predictions of future events. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited, to the impact of:
? COVID-19 pandemic and new emerging variants of the virus on our financial
condition and operations, which could adversely affect our ability to obtain
acceptable financing in an amount equal to the resulting reduction in cash
from operations, and the current, and uncertain future, other impacts of the
COVID-19 pandemic outbreak, including its effect on the retail market place
and the closure of retail stores and its effect on consumer confidence and
on the ability or desire of consumers to purchase nonessential goods, which
are expected to continue to adversely impact our results, operations,
outlook, plans, goals, growth, cash flows, liquidity, demand for consumer
products and share price.
? our success in reducing operating expenses and the impact of any such
reductions.
? our ability to work with a banking institution to provide a new credit
facility and maintain sufficient collateral.
? adverse general economic and related factors, such as fluctuating or
increasing levels of unemployment, declines in the securities and real
estate markets, and perceptions of these conditions that decrease the level
of disposable income of consumers or consumer confidence.
? the spread of epidemics, pandemics, and viral outbreaks.
? our anticipated need for additional financing, which may not be available on
favorable terms, or at all, and may be dilutive to existing shareholders.
? our ability to raise sufficient capital and/or take other actions to improve
our liquidity position or otherwise meet our liquidity requirements that are
sufficient to eliminate the substantial doubt about our ability to continue
as a going concern.
? an impairment of our goodwill, in future reporting periods.
? the risks and increased costs associated with operating internationally.
? fluctuations in foreign currency exchange rates.
? our expansion into and investments in new product categories.
? our inability to obtain adequate insurance coverage.
? volatility and disruptions in the credit and financial markets, which may
adversely affect our ability to borrow.
? our inability to recruit or retain qualified personnel or the loss of key
personnel.
? our inability to keep pace with developments in technology.
? other factors are set forth under "Risk Factors" in our 2021 Annual Report.
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Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic outbreak and emergence of new variant viruses. It is not possible to predict or identify all such risks. There may be additional risks that we consider immaterial, or which are unknown.
The challenge facing the Company is to establish a new profitable product line, the Connected Surfaces, before the poor performance of Company's traditional LED product line and economic disruptions imposed by COVID-19 pandemic and variant viruses and cost of marketing and penetrating a new product market company impose unsustainable financial burdens and losses on the Company.
The Company is a "penny stock" company under Commission rules and the public
stock market price for our common stock is impacted by the lack of significant
institutional investor and primary market maker support. Investment in our
common stock is highly risky and should only be considered by investors who can
afford to lose their investment and do not require on demand liquidity.
Potential investors should carefully consider risk factors in our
The Company's common stock lacks the primary market maker and institutional investor support to protect the public market from being unpredictable and volatile.
The above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we expect to operate in the future. These forward-looking statements speak only as of the date made. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard thereto or any change of events, conditions, or circumstances on which any such statement was based, except as required by law.
Use of Certain Defined Terms. Except as otherwise indicated by the context, the following terms have the stated meanings.
(1) "
subsidiary of Capstone Companies, Inc.
(2) "Capstone International Hong Kong Ltd " or "CIHK" is a wholly owned
subsidiary of
subsidiary of CAPC, may also be referred to as "CAPI" or "Capstone".
(4) "
as "we," "us" "our," "Company," or "CAPC". Unless the context indicates
otherwise, "Company" includes in its meaning all of
Subsidiaries.
(5) "China" meansPeople's Republic of China . (6) "W" means watts. (7) References to "33 Act" or "Securities Act" means the Securities Act of 1933, as amended. (8) References to "34 Act" or "Exchange Act" means the Securities Exchange Act
of 1934, as amended.
(9) "SEC" or "Commission" means the
International H.
("CLTL").
(11) Any reference to fiscal year in this Annual Report on Form 10-K means our
fiscal year, ending December 31st.2020.
(12) "LED" or "LED's" means a light-emitting diode component(s) which can be
assembled into light bulbs or can be used in lighting fixtures. (13) "OEM" means "original equipment manufacturer." (14) "Connected Surfaces" or "Connected Products" means smart home devices with
embedded sensors that provide communication and data transfer between the
Connected Surface and internet-enabled systems of the Company or associated
third parties. Connected Surfaces may permit internet access for defined
functions.
We may use "FY" to mean "fiscal year" and "Q" to mean fiscal quarter in this Report.
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Overview of Our Business
In late 2017, as management recognized that the LED category was maturing, it sought a business opportunity that would transition the Company's revenue streams to an emerging new product category. While we currently continue to supply LED products on a limited basis, our strategic plan to develop and launch new innovative product lines, like Connected Surfaces' Smart Mirrors, is believed to be essential for sustaining or growing revenues.
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
The Company's financial initiatives are driven by its entry into new distribution channels and calls for an increased emphasis on an e-commerce business model. As a result of the COVID-19 pandemic, retail foot traffic has diminished 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 e-commerce platform. The Company does not have prior experience in operating and promoting its own e-commerce website. The Company's e-commerce marketing and sales strategy will shift its historic reliance on 'Big Box," brick and mortar retailers 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 greater than LED consumer lighting products. The Company will require additional funding to build its marketing effort, inventory levels and service levels, which funding must be timely and affordable to fund the desired marketing and product launch. The future growth will be directly impacted by the level of exposure, messaging and distribution capabilities. Certain members of the Company's management ("Corporate Insiders and Directors") have provided short-term funding from time to time to support the Company's basic operational funding needs, but there is no guarantee that this funding will continue or be adequate to fund operations or Smart Mirror program marketing and inventory as well as possible enhancements in functions demanded by the consumers.
Effects of COVID-19
During the three months ended
In response to the COVID-19 and various state and local orders, the Company
instituted the following actions in
? Placed restrictions on business travel for our employees. ? Closed our Corporate offices both in theU.S. and inHong Kong . ? Modified our corporate and division office functions to allow all employees to work remotely. 27
As of the filing of this Form 10-Q Report, the Company continues to adhere to
the same practices. With government mandated lockdowns in
Our business operations and financial performance for the period ended
During the three months ended
The Company has been building its infrastructure to transition into the online retail business by developing an e-commerce website and has invested in developing a social media presence over the last year and these systems are ready to launch and ship its Smart Mirror product.
During the quarter the Company introduced the Smart Mirror on its Capstone Connected website. Prior to 2021, the Company's wholesale business 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. As the Company focuses its effort on social media driven e-commerce, the Company's online strategy is projected to deliver future growth and reduce reliance on Big Box retail. The Company believes that the gross margin is more favorable on the e-commerce business which then should translates to better returns on lower revenues. The Company does not have operational experience in running its own e-commerce site for Connected Surfaces products to substantiate this expectation of better returns on lower revenues. If the Company cannot operate an effective e-commerce site or effectively market in the e-commerce marketplace, the launch of the Connected Surfaces product line may not be successful.
Further reliance on brick-and-mortar retailers may not provide the necessary
financial benefits to address the Company's current financial problems. COVID-19
pandemic may have substantially altered the consumer product distribution
environment. The extent to which COVID-19 pandemic will continue to impact the
Company's results will depend primarily on future developments, including the
severity and duration of the crisis, the acceptance 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 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. The Delta variant of COVID-19
for the last few months had a major surge in
As a result of the continuing economic uncertainties caused by the COVID-19
pandemic and the reduced revenue during the period, Management determined
sufficient indicators existed to trigger the performance of an interim goodwill
impairment analysis as of
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On
Despite the operation obstacles and delays that the COVID 19 pandemic has caused, we are progressing in our goals and intend to execute our organic growth strategy, which is designed to enhance our market presence and expand our consumer customer base.
Goodwill Impairment
As a result of the economic uncertainties caused by the resurgence of the
COVID-19 pandemic, management determined sufficient indicators existed to
trigger the performance of interim goodwill impairment analysis for the three
months ended
With the continuing economic uncertainties caused by the COVID-19 pandemic including variant viruses, 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.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
The uncertainty and the continuing negative impact that the COVID-19 disruption
could have on the future retail business and 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 launch of the Smart Mirror
portfolio using the online retail platform, the Company will need a purchase
order credit line to support increased
During the three months ended
As discussed above, the overall impact of the COVID-19 pandemic to our business,
financial condition, cash flow and results of operations remains uncertain. If
any of our major wholesale customers fail to maintain normal operations or the
Connected Surfaces program is not accepted by consumers, then the revenue could
further decline, which could have a material adverse effect on our business,
financial condition, results of operations and liquidity. Management believes
that with the ongoing national distribution of vaccines, the economic impact of
the COVID-19 pandemic in the
We will seek alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us. An economic recession or a slow recovery could adversely affect our business and liquidity. The ongoing impact of the COVID-19 pandemic on the Company's business and financial performance may also affect the Company's ability to obtain funding.
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The Company has been in discussions with alternate funding sources that offer
programs that are more in line with the Company's future business model,
particularly a facility that provides funding options that are more suitable for
the e-commerce business. 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. Based on past performances and current expectations,
Management believes that with the recent
? The Company has outstanding note payable due to related parties of
approximately $1.0 million . The Company has working capital of
approximately $1.5 million consisting mostly of cash of $624 thousand and
inventory of $1.0 million .
? The Company had an estimated income tax refundable of approximately $54
thousand and ERTC refundable under Cares Act 2020-2021 of approximately
$152 thousand as of March 31, 2022 .
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
The COVID-19 pandemic resurgence in many states or emergence of new vaccine-resistant strains of the virus could have a continuing negative impact on the brick-and-mortar retail sector, with consumers' unwilling to visit retail stores, causing reduced consumer foot traffic and consumer spending. However, with a successful relaunch of the Smart Mirror portfolio using the online retail platform, the Company will not be as dependent on Big Box retailers for our revenue streams as in previous years.
On
On
With the global resurgence of the Delta variant of COVID-19, the Company's
manufacturers both in
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As part of its traditional strategic planning, the Company reviews alternatives to its current business approach, including, without limitation, development of a new product line, sale of the public company or merger of the Company with a private operating company and other common strategic alternatives to a company facing business and financial challenges and uncertainties.
Management is closely monitoring its operations, liquidity, and capital resources and is actively working to minimize the current and future impact of this unprecedented situation. Those efforts may not successfully remediate or combat in all instances the adverse impact of COVID-19 pandemic and the affected efforts to launch the Connected Surfaces product line.
Our Growth Strategy
The Company's looking forward strategy requires continued expansion of its product development and engineering, manufacturing base marketing and distribution of a broadened portfolio of consumer electronic products. The Company will pursue new revenue opportunities through the introduction and expansion of its "Connected Surfaces" portfolio into alternate distribution channels including e-commerce and others that the Company has not previously focused on. The Company also intends to leverage its existing valuable customer base and strong relationships to achieve organic growth initiatives within this new category.
Capstone's past success has been in its ability to identify emerging product categories where Capstone's management experience can be fully leveraged. We demonstrated this when the Company entered the LED lighting category. Our branding and product strategies delivered the Company to a well-respected market position. The Company's low-cost manufacturing and operations have typically, in the past, provided an advantage in delivering great products affordably.
Our expectation is that the new product portfolio appeals to a much larger
audience than our traditional LED lighting product line. The new Connected
Surfaces portfolio is designed to tap into 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 MSRP retail to start at
The Company competes in emerging, highly competitive consumer market channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence, employment levels, credit availability and commodity costs. Demand for the Company's products is highly dependent on economic drivers such as consumer spending and discretionary income.
Although the overseas factories have previously been fully functioning, a
resurgence of the Delta variant of COVID-19 has caused sporadic regional
lockdowns with certain overseas factories that could delay shipments of products
from
Last year, the Company expanded its investment and commitment in social media marketing. With our Company's plan to shift its focus to on-line commerce in the first half of 2022 and thereafter, its social media presence will be key to the Company's growth initiatives. The analytics derived from testing various messaging on social media platforms (i.e., Facebook Ads, Google Ads) has validated consumer interest in the Smart Mirror program. Based on the results from the Smart Mirrors product rollout, the Company's social media marketing efforts may be revised or expanded. Additional capital may be required to fully exploit an effective social media and e-commerce effort to support the company-critical Smart Mirrors product launch. As stated, the Company is new to social media and ecommerce marketing on the current contemplated scale and no assurances can be given, due to the lack of operational experience, on the success of those efforts, which are critical to our future financial performance and condition.
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Organic Growth Strategy
Subject to adequate funding, the Company intends to pursue various initiatives to execute its organic growth strategy, which is designed to enhance its market presence, expand its customer base and maintain its recognition as an industry leader in new product development. Key elements of our organic growth strategy include:
Connected Surfaces. Historically LED lighting products have been our core
business. The Capstone Lighting and Hoover Home LED brands combined, have sold
millions of LED lighting products over the recent years and consequently the
Company holds a well-respected position in the retail lighting category. While
consistently launching successful lighting programs, the Company has determined
that it needs to diversify and expand its core focus in order to continue to
meet revenue growth initiatives. The Company has refocused its development and
marketing initiatives and is determined to build on its success with a broader
product portfolio beyond lighting products only. The new category "Connected
Surfaces" was officially launched in
The Company acknowledges that smart homes will become more mainstream over the next several years and will present significant growth opportunities for the Company and its Connected Surfaces portfolio.
While our focus of Connected Surface products is the smart home market, smart
mirrors are being employed by retailers like
Perceived or Essential Strengths
Capstone believes that the following competitive strengths serve to support its business strategies.
In
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's experience in hardline product manufacturing has prepared the Company for successful entries into various consumer product markets, especially its experience in using foreign OEMs to provide capabilities not possessed internally by our company.
Product Quality: Through a combination of sourcing quality components, stringent manufacturing quality control and conducting rigorous third-party testing, product 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.
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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 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 and is not deemed as sufficient to sustain the Company as a revenue source through 2022 and into 2023.
The Company does not have the large internal research and development capability of its larger competitors. Capstone operates with a limited number of employees whose functions are dedicated to executive management, sales and marketing or administrative support. The limited number of employees may hinder or delay the ability of the Company to identify or respond to consumer preferences or new technology developments in a product line. Hiring may be required with any growth and qualified personnel may not be readily available. We cannot match the compensation packages to prospective employees that many larger competitors may offer, and we lack the funding and other resources to change our operational model and its reliance on contractors for many functions and capabilities, including development, production, shipping, warehousing and distribution of products.
As a smaller reporting company, we are more vulnerable to events like COVID-19 pandemic, production and shipping delays, travel and operational disruptions and restrictions and an accelerated shift to e-commerce from reliance on brick-and-mortar retail sales. We lack, the staff, money, internal capabilities and resources and operational experience to significantly or timely respond to significant challenges and adverse changes in business and financial requirements.
COVID-19 pandemic closures of companies and shipping-distribution channels
produced a delay in shipping and receipt of products from abroad and in
Capstone's international purchases can become more expensive if the
Should the increased
While we have established new production capacity in
If the COVID-19 pandemic 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. Due to the decline in financial performance of the Company since 2021, and the Company being in transition from a declining product line and not yet establishing a profitable product line, as well as the Company having its shares of Common Stock quoted on The OTC Markets Group, Inc. QB Venture Market, the Company may be unable to consummate a corporate transaction that sustains operations.
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Products and Customers
While the Company is expanding its product portfolio through the introduction of
the Capstone Connected Surfaces program, it still develops and offers a select
number of LED lighting products under the "Capstone Lighting" brand for both the
Connected Surfaces - Smart Mirrors
Standard Rectangular Wardrobe/Fitness Mirror LED Puck Lights LED Undercabinet Light Bars LED Motion Sensor Lights
The plan to expand the Company's product portfolio through Connected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits.. Expense categories including molds, prototyping, engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred for a period before revenues occur.
Over the past ten years, the Company has established product distribution
relationships with numerous leading international, national and regional
retailers, including but not limited to: Amazon, Costco Wholesale, Sam's
Club-Walmart, the Container Store and Firefly Buys. These distribution channels
may sell the Company's products through the internet as well as through retail
storefronts and catalogs/mail order. In a post-COVID-19 pandemic environment,
these distribution channels may be less valuable as distribution channels,
especially for the Smart Mirrors product line and if our e-commerce initiative
succeeds and expands. The effective development of an e-commerce-based approach
to distribution of products may be critical to the future performance of the
Company. The Company believes it has developed the scale, manufacturing
efficiencies, and design expertise that serves as the foundation for aggressive
pursuit of niche product opportunities in our largest consumer domestic and
international markets. While Capstone has traditionally generated the majority
of its sales in the U.S. market, urbanization, rising family incomes and
increased living standards abroad have spurred a perceived demand for small
consumer appliances internationally. To capture this market opportunity, the
Company has continued its international sales by leveraging relationships with
our existing global retailers and by strengthening our international product
offerings. The Company sold Capstone brand products to markets outside the
The Company's products are subject to general economic conditions that impact discretionary consumer spending on non-essential items. Such continued progress depends on a number of assumptions and factors, including ones mentioned in "Risk Factors" below. Critical to growth are economic conditions in the markets that foster greater consumer spending as well as success in the Company's initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new technology or features. The Company's ability to fund the pursuit of our goals remains a constant, significant factor.
With the 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 strategy to offer consumers with an array of innovative connected products and quickly introduce additional products to continue to allow Capstone to further penetrate this developing market.
Tariffs. The previous
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Tariffs and trade restrictions imposed by the previous
Sales and Marketing
Our LED products are sold nationally and internationally through a direct sales force. The sales force markets the Company's LED 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 import sales" made directly to the retail customer. However, we also offer "domestic sales" programs which will be expanded in the future as a result of the Capstone Connected Surfaces program becomes available. As we shift to Connected Surfaces products, the LED products will become a secondary product line.
Direct Import Sales. We ship finished products directly to our retail customer
from
Domestic Sales. The strategy of selling products from a
To the extent permitted by our current financial condition, 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
The Company actively promotes its products to retailers and distributors at North American trade shows, such as the Consumer Electronics Show ("CES") or the International Hardware Show, but also relies on the retail sales channels to advertise its products directly to the end user consumers through various promotional activities. This marketing effort will continue as a complement to the social media and e-commerce initiatives.
In the three months ended
The Company has been focused on establishing an on-line e-commerce presence to support the introduction of the "Connected Surfaces" program and deliver direct to consumer.
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In 2021, we utilized social media platforms and online advertising campaigns to further grow the Company's online presence. In addition to Facebook, Instagram, Pinterest and LinkedIn, Capstone has launched a You Tube channel to host Smart Mirror videos and established a Twitter account. The Company has a social media presence on the following social media platforms:
FACEBOOK1: https://www.facebook.com/capstoneindustries and https://www.facebook.com/capstoneconnected
INSTAGRAM2: https://www.instagram.com/capstoneconnected
PINTEREST3: https://www.pinterest.com/capstoneconnected/
LINKEDIN4: https://www.linkedin.com/company/6251882
TWITTER5https://twitter.com/capc capstone
YOUTUBE6 https://www.youtube.com/channel/UCMX5W8PV0Q59qoAdMxKcAig
1 Facebook is a registered trademark of Facebook, Inc.
2 Instagram is a registered trademark of Instagram.
3 Pinterest is a registered trademark of Pinterest.
4 LinkedIn is a registered trademark of
5 Twitter is a registered trademark of
6YouTube is a registered trademark of
Competitive Conditions
The Company operates in a highly competitive environment, both in
Competition is influenced by technological innovation, brand perceptions,
product quality, value perception, customer service and price. Over the past
several years while the Company's focus has been on LED lighting, principal
competitors include Energizer,
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, as well as service and support provided by the distributor to the customer. Smart mirrors and other connected surface products are an emerging industry, and the Company may be unable to develop or license emerging new technologies that are dominant.
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 started our social media marketing. Many competitors have more established, widespread and effective e-commerce and social media campaigns than we do. 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-Q report.
With trends and technology continually evolving, and subject to adequate and affordable funding, Capstone will continue 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. Subject to adequate and affordable funding, absence of unexpected competition or technological developments in connected surface devices, and a curbing of the impact of the COVID-19 pandemic, the Company believes that it can effectively pursue and exploit product market niches because of management's proven track record in delivering innovation to the market and cost-effective and timely manner.
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Research, Product Development, and Manufacturing Activities
The Company's research and development operations based in
? 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'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 3rdparty 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's products manufactured overseas, Capstone uses globally recognized certified testing laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all products are designed and tested to adhere to each country's individual regulatory standards. The Company also hires quality control inspectors who examine and test products to Capstone's specification(s) before shipments are released.
To successfully implement Capstone's business strategy, the Company must continually improve its current products and develop new product segments with innovative imbedded technologies to meet consumer's growing expectations. The Connected Surfaces product development is our current effort to achieve those expectations.
Investments in technical and product development are expensed when incurred and are included in the operating expenses.
Raw Materials
The principal raw materials currently used by Capstone are sourced in
? 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.
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Raw materials used in manufacturing include plastic resin, copper, led bulbs, batteries, and corrugated paper. Prices of materials have remained competitive in the last year. CAPC believes that adequate supplies of raw materials required for its operations are available at the present time. CAPC, cannot predict the future availability or prices of such materials. These raw materials are generally available from a number of different sources, and the prices of those raw materials are susceptible to currency fluctuations and price fluctuations due to transportation, government regulations, price controls, economic climate, or other unforeseen circumstances. In the past, CAPC has not experienced any significant interruption in availability of raw materials. We believe we have extensive experience in manufacturing and have taken positions to assure supply and to protect margins on anticipated sales volume.
Section 1502 of Title XV of the Dodd-Frank Wall Street Reform and Consumer
Protection Act requires
Distribution and Fulfillment
Since
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
We do not have sufficient operational experience with Connected Surfaces to predict the seasonality of Connected Surfaces.
Intellectual Property
CAPC subsidiary,
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While the Company may license third party technologies for its products, or may rely on other companies, especially OEMs, for design, engineering and testing, the Company believes that its oversight of design and function of its products and its marketing capabilities are significant factors in the ability of the Company to sell its products.
Value of Patents.
The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Issued patents or patents based on pending patent applications or any future patent applications may not exclude competitors or may not provide a competitive advantage to us. In addition, patents issued or licensed to us may not be held valid if subsequently challenged and others may claim rights in or ownership of such patents. The validity and breadth of claims in technology patents involve complex legal and factual questions and, therefore, the extent of their enforceability and protection is highly uncertain.
Reverse engineering, unauthorized copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without paying us. We cannot assure shareholders that our competitors have not developed or will not develop similar products, will not duplicate our products, or will not design around any patents issued to or licensed by us. We will assess any loss of these rights and determine whether to litigate to protect our intellectual property rights on a case by case basis.
We rely on trademark, trade secret, patent, and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license intellectual property rights from others to support new product introductions. There can be no assurance that we can acquire licenses under patents belonging to others for technology potentially useful or necessary to us and there can be no assurance that such licenses will be available to us, if at all, on terms acceptable to us. Moreover, there can be no assurance that any patent issued to or licensed by us will not be infringed or circumvented by others or will not be successfully challenged by others in lawsuits. We do not have a reserve for litigation costs associated with intellectual property matters. The cost of litigating intellectual property rights claims may be beyond our financial ability to fund.
As is customary in the retail industry, many of our customer agreements requires us to indemnify our customers for third-party intellectual property infringement claims. Such claims could harm our relationships with customers and might deter future customers from doing business with us. With respect to any intellectual property rights claims against us or our customers, we may be required to cease manufacture of the infringing product, pay damages and expend significant Company resources to defend against the claim and or seek a license.
Information Technology
The efficient operation of our business is dependent on our information technology systems. We rely on those systems to manage our daily operations, communicate with our customers and maintain our financial and accounting records. In the normal course of business, we receive information regarding customers, associates, and vendors. Since we do not collect significant amounts of valuable personal data or sensitive business data from others, our internal computer systems are under a light to moderate level of risk from hackers or other individuals with malicious intent to gain unauthorized access to our computer systems. Cyberattacks are growing in number and sophistication and are an ongoing threat to business computer systems, which are used to operate the business on a day to day basis. Our computer systems could be vulnerable to security breaches, computer viruses, or other events. The failure of our information technology systems, our inability to successfully maintain our information or any compromise of the integrity or security of the data we generate from our systems or an event resulting in the unauthorized disclosure of confidential information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors, results of operations, product development and make us unable or limit our ability to respond to customers' demands.
We have incorporated into our data network various on and off-site data backup processes which should allow us to mitigate any data loss events, however our information technology systems are vulnerable to damage or interruption from:
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? 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.
The Company is not aware of any national, state or local environmental laws or regulations that will materially affect our earnings or competitive position or result in material capital expenditures. However, the Company cannot predict the effect on our operations due to possible future environmental legislation or regulations. During the first fiscal quarter of 2022, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.
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.
Critical Accounting Policies
We believe that there have been no significant changes to our critical
accounting policies during the three months ended
CONSOLIDATED OVERVIEW OF RESULTS OF OPERATIONS
Results of operations.
Net Revenues
Revenue is currently mainly 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 the first quarter ended
Cost of Goods Sold
Our cost of goods sold consists primarily of purchased products from contract manufacturers, associated duties and inbound freight. In addition, our cost of goods sold also include inventory adjustments, warranty claims/reserves and freight allowances. We source our manufactured products based on customer orders.
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Gross Profit
Our gross profit has and will continue to be affected by a variety of factors, including average sales price for our products, product mix, promotional allowances, our ability to reduce product costs and fluctuations in the cost of our purchased components.
Operating Expenses
Operating expenses include sales and marketing expenses, consisting of sales representatives' commissions, advertising and trade show expense and costs related to employee's compensation. In addition, operating expense include charges relating to accounting, legal, insurance and stock-based compensation.
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