CAPC 10-K
Capstone Companies, Inc. (CAPC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
For the fiscal year ended
or
For the transition period from _______ to _______
Commission File Number
(Exact name of small business issuer as specified in its charter)
| (State or Other Jurisdiction of Incorporation) | (I.R.S. Employer No.) |
(Address of principal executive offices) (Zip Code)
(Small business issuer’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class Trading | Name of each exchange on which registered | Symbol(s) |
| None | N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.0001 PAR VALUE
Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate by
check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
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Indicate by check mark whether the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, emerging growth company or a smaller reporting company. See definitions of “large, accelerated filer”, “accelerated filer”, “emerging growth company” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer ☐ Accelerated filer ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by
check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes☐
As of June 30, 2023,
the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of our common
stock issued and outstanding, other than shares held by persons who may be deemed affiliates of the registrant, computed by reference
to the closing sales price for the common stock on June 30, 2023, as reported on the OTC QB Venture Market, was $
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Number of estimated shares outstanding of the Registrant’s Common Stock as of March 29, 2024 is .
None
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TABLE OF CONTENTS
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DEFINITIONS:
As used in this Annual Report on Form 10-K, the following terms have the stated meaning or meanings:
| (1) | “Capstone International Hong Kong Ltd” or “CIHK” is a wholly owned subsidiary of Capstone Companies, Inc. and a Hong Kong registered Company. |
| (2) | “Capstone Industries, Inc., a Florida corporation and a wholly owned subsidiary of CAPC, may also be referred to as “CAPI” or “Capstone”. |
| (3) | “Capstone Companies, Inc.,” a Florida corporation, may also be referred to as “we,” “us” “our,” “Company,” or “CAPC”. Unless the context indicates otherwise, “Company” includes in its meaning all of Capstone Companies, Inc. Subsidiaries. |
| (4) | “China” means People’s Republic of China. |
| (5) | References to “33 Act” or “Securities Act” means the Securities Act of 1933, as amended. |
| (6) | References to “34 Act” or “Exchange Act” means the Securities Exchange Act of 1934, as amended. |
| (7) | “SEC” or “Commission” means the U.S. Securities and Exchange Commission. |
| (9) | “Subsidiaries” means Capstone Industries, Inc. (“CAPI”), Capstone International H.K Ltd., (“CIHK”). |
| (10) | Any reference to fiscal year in this Annual Report on Form 10-K means our fiscal year, ending December 31st. |
| (11) | “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. |
| (12) | “OEM” means “original equipment manufacturer.” |
| (13) | “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. | |
| (14) | “GMS” means Google Mobile Service |
We may use “FY” to mean “fiscal year” and “Q or QTR” to mean fiscal quarter in this Report.
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FORWARD LOOKING STATEMENTS
This Form 10-K report contains “forward-looking statements”. Those statements appear in a number of places in this Form 10-K report and include, without limitation, statements regarding the intent, belief and current expectations of the Company, its directors or its officers, with respect to: Company’s future business and financial prospects and ability to sustain operations; the development and commercialization of new products; the Company’s policies regarding investments, dispositions, financings, conflicts of interest and other matters; and trends affecting the Company’s financial condition or results of operations. Forward looking statements include words like “expect,” “anticipate,” “hope,” “project,” “may,” “should,” “could,” or similar words or variants thereof. Any forward-looking statement is not a guarantee of future performance and involves several risks and uncertainties. Actual results may differ materially from those results implied in the forward-looking statement as a result of various factors, some factors being beyond the Company’s control or ability to foresee. Among the factors that could cause plans, actions and results to differ materially from current expectations are, without limitation: disruption from natural or human causes, including severe weather, accidents, fires, earthquakes, terrorist acts and epidemic or pandemic diseases, such as the COVID-19 pandemic. The accompanying information contained in this Form 10-K report, including the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Risk Factors” identifies other important factors that could cause such differences. With respect to any forward-looking statement that includes a statement of its underlying assumptions or bases, the Company cautions that, while it believes such assumptions or bases to be reasonable and has formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be significant or “material” depending on the circumstances. When, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. Further, the Company is a “penny stock” company with no primary market makers and limited trading activity. Such a status makes highly risky any investment in the Company securities. See “Risk Factors” below. The forward-looking statements in this Form 10-K report are made as of the date hereof, and, unless required by law or regulation, we do not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof.
You should read this Form 10-K report and the documents that we may reference in this Form 10-K report and have filed with the SEC, with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
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PART I
Item 1. Business
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 designer, manufacturer and marketer of consumer products that are designed to simplify daily living through technology.
As of the date of the filing of this Form 10-K report, the Company does not have a current product that is being actively produced or is in production. The Company’s former product line, LED consumer lighting products, matured in 2022 and is no longer in production. The Company’s efforts to develop Connected Surface consumer products, specifically a Smart Mirror for residential use, as a new product line did not succeed in attracting sufficient revenues to be a sustainable product line. The inability of the Smart Mirrors to become a viable revenue source was due, in part, to delays in production and launch due to COVID 19 pandemic, changes in consumer preferences in the smart mirror market in the U.S., unwillingness of brick-and-mortar retailers that purchased the LED products in bulk to purchase the Smart Mirrors, and established competition in the smart mirror market from companies with greater brand recognition and marketing resources than the Company. The e-commerce initiatives of the Company did not spur significant sales of the Smart Mirror products and all inventory was written off as expensed as of December 31, 2023.
During 2023, the Company developed a Connected Surface Chef kitchen utility tablet, the “Connected Chef”. The Connected Chef, a purpose-built kitchen tablet with an accessory platform to accommodate food prep accessories such as a cutting board. The Connected Chef has Google mobile service allowing for pre-installation of specific Google applications including Playstore, voice assistant and YouTube to name those highly recognized. The Connected Chef was ready for formal introduction in quarter four of 2023, and Management is actively marketing the Connected Chef tablet to appliance manufacturers and distributors, but the product has no purchase commitments from retailers as of the date of this Form 10-K report. Further, the Company will have to raise funding to fund production costs, which funding may not be available to the Company.
The Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding Internet of Things, wireless connected lifestyles prevalent today. The “Connected Chef”, is a purpose-built tablet form factor with an integrated platform for cooking accessories, being a cutting board, and designed to safely deliver and access content on mobile and web based platforms. The Company received Google Mobile Service (“GMS”) approval during 2023 which allows the tablet integrated in the Connected Chef to operate the Android Operating System and pre install Google’s proprietary applications such as Chrome, Drive, Gmail, Playstore, Youtube directly through the Connected Chef tablet. Youtube food videos have generated nearly 51 billion views. Rather than using and sharing recipes on one’s smartphone in the kitchen, recipes can be looked up directly using the users preferred search engine (for example, Chrome). Access to content online with millions of cooking and food related websites and videos as well as tutorials and cooking classes all in one device. Connected Chef™ becomes a digital recipe bookshelf. The Connected Chef™ also provides a cleaner and safer appliance in the cooking area. A smartphone is covered in germs as it is carried everywhere throughout the day, a smartphone has 25,127 bacteria per square inch. Smartphones harbor more than 3 times the number of germs than doorknobs, 8643 bacteria per sq inch. The Connected Chef is designed to become an anchor in the digital kitchen. Tastefully styled and excellent quality are obvious to the discerning eye while maintaining affordability for mainstream use.
The Connected Chef is not in production and has not received any pre-production orders. The Company is actively seeking potential pre-production orders for the Connected Chef as well as funding for its production and extensive marketing if pre-production orders are received. While there has been some interest in the Connected Surface cutting board from a few potential retail buyers, there have been no orders and the marketing of this product is limited by the Company’s lack of adequate working capital.
Without a product line that can produce sufficient revenues to sustain corporate operations, the Company has relied on funding primarily from Stewart Wallach, Company’s Chief Executive Officer and a Company director, in 2023 and into 2024, to sustain operations. Operations and general overhead of the Company have been reduced in 2023, in response to the lack of significant revenues from product sales and limited working capital. There can be no assurance that funding from Mr. Wallach or other sources will be available in the amounts, or when needed, to adequately fund Company operations or the development of another new product line, or production of any new product line. Since December 2023, the Company has also endeavored to find a new business line capable of generating revenues to adequately fund the Company and to locate funding sources for development, marketing and production of a new product line. The effort to find a new business line includes seeking a possible merger and acquisition opportunities amongst private operating companies and possible sources of working capital funding for existing and possible new business line development. As of the date of the filing of this Form 10-K, the Company has not secured working capital funding or entered into any legally binding agreement for a merger or acquisition of a new business line.
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The Company will require third party funding to cover operating overhead and to resume efforts to fund its marketing and product launch campaigns. The future growth will be directly impacted by the level of exposure, messaging and distribution capabilities. Certain members of the Company’s management (“Corporate Insiders and Directors”) have provided short-term funding from time to time to support the Company’s basic operational funding needs, but there is no guarantee that this funding will continue or be adequate to fund operations or Connected Surfaces program production, marketing and inventory needs and, if a new product is launched, to also fund possible enhancements in functions demanded by the consumers. The Company will require third party funding to sustain basic operations and continue efforts to market any Connected Chef product launch.
As of the filing of this Form 10-K, all of the Company’s retail sales are made on an order-by-order basis, rather than through long-term sales contracts. As such, the nature of the Company’s business did not provide visibility of material forward-looking information from its customers and suppliers beyond a few months.
Our Current Strategy
The Company’s looking forward strategy is focused on developing a new Connected Surfaces product, the Connected Chef, that can generate sufficient revenues to sustain the Company’s operations or alternatively, locate a new business line that can accomplish sustainability of operations. These efforts will depend on having adequate working capital from funding to establish a new product line or business line and adequate cash flow from product sales. We may be unable to achieve sufficient working capital when and, in the amounts, required to meet operational needs and overhead or to pursue or establish a new product lines or a new business line or new business line. We have not achieved adequate funding as of the date of the filing of this Form 10-K report and we may be unable to achieve sufficient working capital when and, in the amounts, required to meet operational needs and overhead. The lack of adequate, timely and affordable funding may undermine the efforts of the Company to establish a revenue stream from the Connected Chef product line and efforts to sustain Company operations.
As a consumer product company, the Company competes in competitive consumer market channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence and preferences, employment levels, new technologies, credit availability, costs and barriers of producing products from foreign original equipment manufacturers (“OEMs”) and commodity costs. Demand for the Company’s products is highly dependent on economic drivers such as consumer spending and discretionary income. The Company faces competition from numerous competitors in the consumer product industry, foreign and domestic, and some of those competitors have substantially greater market share, brand recognition, distribution and financial and technical resources than the Company. The Company’s strategy has been to develop well designed and made products that appeal to a niche market. The Company also relies on the production and engineering resources and technical expertise of its contract manufacturers to compensate for a lack of those resources internally. The lack of working capital hinders the ability of the Company to leverage the development, design and production capabilities of OEMs.
Due to working capital constraints, and results from prior e-commerce marketing efforts, the Company is not investing any significant funds in e-commerce marketing and promotion efforts and is re-evaluating the potential of e-commerce efforts to generate significant revenues. The Company is intending to focus on direct sales or a licensing agreement with appliance manufacturers and distributors with the Connected Chef product line.
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Subject to adequate funding and favorable cash flow from Connected Surfaces products, which has not been achieved, the Company is exploring various potential initiatives to execute its traditional organic growth strategy, which is designed to enhance its market presence, expand its customer base and maintain its recognition as an industry leader in new product development, and also alternative business lines and new product lines. Key elements of our traditional organic growth strategy include:
Connected Surfaces. While consistently launching successful lighting programs in years prior to 2022, the Company determined that it needed to develop a new product line with greater profit margin potential than LED Lighting and as a replacement revenue generating source. The Company refocused its development and marketing initiatives and is focused on developing the Connected Surfaces products as its primary business line to replace the LED lighting business, which is no longer being actively promoted by the Company. The discontinuance of the LED lighting product line was due to gross margin reductions as a result of increased tariffs.
The Company’s existing product roadmap outlines a plan for an additional product launch in Q2 of 2024, branded the “Connected Chef”, a kitchen appliance item, which is a purpose-built tablet integrated into a multi-purpose cutting board and designed to safely deliver and access content on mobile and web based platforms a kitchen utility item. The Company received Google Mobile Service (“GMS”) approval during 2023 which allows the tablet integrated in the Connected Chef to operate the Android Operating System and pre install Google’s proprietary applications such as Chrome, Drive, Gmail, Playstore, Youtube directly through the Connected Chef tablet (“Google” is a trademark of Google LLC, a subsidiary of Alphabet, Inc., a SEC reporting company). Youtube food videos have generated nearly 51 billion views. Rather than using and sharing recipes on one’s smartphone in the kitchen, recipes can be looked up directly using the users preferred search engine (like, Chrome). With access to content online with millions of cooking and food related websites and videos as well as tutorials and cooking classes all in one place the Connected chef™ becomes a digital recipe bookshelf. The Connected Chef™ also provides a cleaner and safer appliance in the cooking area. A smartphone is covered in germs as it is carried everywhere throughout the day, a smartphone has 25,127 bacteria per square inch. Smartphones harbor more than 3 times the number of germs than doorknobs, 8643 bacteria per sq inch. The Connected Chef is designed to become an anchor in the digital kitchen. The design is aimed at tastefully styled and coupled with excellent quality in order to appeal to the discerning eye while maintaining affordability for mainstream use.
The Company believes the Connected Chef program could leverage existing relationships with its traditional retail partners and collectively contribute organic growth for the Company, as well as serving as a basis for partnering with appliance manufacturers and distributors. The ability of the Company to promote any of its Connected Surface products and any new, related “connected” consumer products will depend on securing adequate, affordable and timely funding from lenders and investors. As of the date of the filing of this Form 10-K report, the Company has not secured that funding. Chief Executive Officer and Director Stewart Wallach has been providing interim financing of basic operations while the Company pursues other financing options for new product development and marketing.
Perceived or Essential Strengths
Prior to the maturing of the LED product line in 2021-2022, Capstone believes that the following competitive strengths have traditionally served to support its business strategies:
In North America, the Company has been recognized for more than a decade as an innovator and highly efficient, low-cost manufacturer in several product niches. Capstone believes that its insight into the needs of retail programming and its proven execution track record with noted retailers globally positions it well for future growth.
The Company’s chief executive officer has over three decades and has successfully built and managed other consumer product companies.
In the past, the 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: With prior product lines, the Company has achieved high quality in product’s design and utility through a combination of sourcing quality components, stringent manufacturing quality control and conducting rigorous third-party testing. To deliver cost-competitive products without compromising quality standards, we leveraged purchasing volume and capitalize on strategic vendor relationships. If the Company can obtain the necessary funding to launch the Connected Chef product line, the Company believes that its traditional operating strengths will continue to benefit a new product line based on past performance. This assumption may prove misplaced when and if the Company achieves sufficient working capital to extensively market and produce the Connected Chef. The Company has no marketing studies to support an assumption about the appeal to consumers of the Connected Chef as a viable product line. Positive responses to the concept of the Connected Chef have come from a limited number of potential retail purchasers and strategic partners.
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Perceived Weaknesses
The Company lacks a product line generating revenues sufficient to sustain operations. The Company’s lack of a product line generating sufficient revenue to support operations and lack of sufficient working capital funding have delayed the marketing of its new product line, The Connected Chef.
When the Company had a product line generating sufficient revenues and adequate working capital, the Company did not possess the business, marketing, technical and financial resources of larger or mid-sized competitors or the brand recognition, distribution channels or domestic and international markets of some of the larger competitors. The Company will face that same disadvantage with any new product line or new business line. The declining financial performance of the Company due to discontinuation of the LED lighting product line and failure of the Connected Surface Smart Mirrors to replace the LED lighting product line as a viable revenue source has placed the Company in a seriously weakened financial position, which in turn increases the need for working capital funding from investors or lenders. The Company lacks a credit line for long-term general working capital or growth. The Company lacks the hard assets for affordable, sufficient debt financing and the low market price of its Common Stock makes equity funding difficult in terms of finding suitable investors who will provide adequate, affordable, timely working capital funding.
In the past and with any new product line or new business line, the Company’s products will face the risk of new technologies or functionalities shifting consumer demand away from the products produced by the Company. The Company may lack the financial resources or ability to license or acquire new technologies or functionalities in demand by consumers, which failure may undermine the commercial viability of Company’s product line.
The product launch of the Smart Mirrors did not meet projected revenue goals for 2023. The Company’s investment in e-commerce marketing did not produce desired sales or market penetration for Connected Surfaces Smart Mirror. These factors coupled with a lack of bulk orders from Big Box retailers left the Company without a viable product line and a revenue generating source sufficient to sustain the Company.
Any 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 prototyping, engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred for a period before revenues occur.
Even with revenue sources sufficient to sustain Company operations and support a new product line, the Company lacks the large internal research and development capability of its larger competitors. Even with sufficient working capital, Capstone operates with a small 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. The weakened financial condition of the Company further undermines the ability of the Company to add essential personnel for any effort to re-establish a viable product line or new business line.
As a smaller reporting company, and with any new product line, we were and 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.
Capstone’s international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies. Should the increased U.S. tariffs imposed on Chinese manufactured goods remain it may increase the cost of electronic components used in our products.
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While we have established new production capacity in Thailand, there is no final resolution of the U.S. / China trade dispute from which specific components are sourced. Developing a new, efficient OEM relationship in a new country takes time and effort to reach acceptable production efficiencies. We have only a short operational experience with Thai OEM’s and cannot predict long term effectiveness of the relationship. Without working capital funding, we will be unable to fully exploit foreign OEM capabilities or resolve the need for alternative foreign sources of critical components for Connected Surface products.
Like many companies, the Company conducts periodic strategic reviews where the feasibility of significant corporate transactions are considered, including mergers, asset purchases or sales and diversification or change in business lines. The financial condition of the Company has prompted an enhance consideration and search for a significant corporate transaction, including, without limitation, a possible merger and acquisition transaction or reorganization to sustain operations or to acquire a new business line that can support company operations. The Company lacks the financial resources of larger companies to withstand adverse, significant and sustained changes in business and financial condition. This vulnerability necessitates an ongoing consideration of alternatives to current operations. Due to the decline in financial performance of the Company since 2021, and the Company being in transition from a declining product line and not yet establishing a profitable product line, as well as the Company having its shares of Common Stock quoted on The OTC Markets Group, Inc. QB Venture Market and being a “penny stock”, the Company may be unable to consummate a significant corporate transaction that sustains operations or creates a new viable product line or business line.
Products and Customers
Current product lines under development as of this Form 10-K report are as follows: https://www.connected-chef.com/
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Connected Surfaces – Connected Chef, a purpose-built kitchen appliance tablet, which is a unique form factor with Google GMS operating system, with an integrated platform for cooking accessories, i.e.: cutting board. |
The following product lines that are discontinued for manufacturing, but available for sale as of the date of this Form 10-K report are as follows:
Connected Surfaces – Smart Mirrors
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Wardrobe/Fitness Mirror
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LED Lighting : Discontinued in 2023
The plan to expand the Company’s product portfolio through Connected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits. Expense categories including prototyping, engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred before shipments and related revenues occur. Promotion of the Connected Surfaces product line was hampered in 2023 by the lack of adequate, long-term funding and declining revenues from product sales and a lack of bulk orders from brick-and-mortar retailers and e-commerce resellers for a discretionary purchase item like the Smart Mirrors.
Over the past ten years, the Company has established product distribution relationships with numerous leading international, national and regional retailers, including but not limited to: Amazon, Costco Wholesale, Sam’s Club-Walmart, the Container Store and Firefly Buys. These distribution channels may sell the Company’s products through the internet as well as through retail storefronts and catalogs/mail order. The Company is actively marketing the Connected Chef to appliance manufacturers and distributors, though no letter of intent or deal terms have been executed as of the date of this Form 10-K filing. The Company believes it has developed the scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche product opportunities in our largest consumer domestic and international markets. The Company may have to pursue a different market segment if it cannot secure adequate orders from these traditional distribution channels. With the growth of e-commerce, the Company lacks an effective e-commerce capability. Reliance on sales to brick-and-mortar retailers may not produce sufficient orders to allow the Company to become profitable or sustain operations, especially if the Company’s product line is deemed by retailers to be not appealing or in demand with consumers. The Company has a very limited product line and lacks different product lines to offer in lieu of unsuccessful, existing product lines to retailers.
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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 and weakness.
Tariffs. The President Trump administration implemented certain tariffs that directly affected the Company’s competitiveness. While all companies in certain industries are affected equally, the appeal for these products to consumers was negatively impacted when retail prices increased due to higher duty rates. The Company has seen promotional schedules cut back and retailers have requested pricing adjustments that would not be known to them in advance to products being shipped. The Company’s previous business model insulates the Company from paying duties as its retail partners are the importers of record. The obvious unknown is the final impact of tariffs to the landed costs. Accordingly, retailers have demonstrated caution in their promotional planning schedules and will continue to do so until the administration has clarified its position enabling importers to calculate estimated landed costs.
Tariffs and trade restrictions imposed by the previous U.S. administration provoked trade and tariff retaliation by other countries. A “trade dispute” of this nature or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our businesses. As of the date of this report, the current U.S. administration is currently reviewing its position on this issue and there has not been a resolution of the Chinese-American trade dispute.
Sales and Marketing
We use direct sales by our Chief Executive Officer and sales agents to sell our products, which effort includes direct sales to home-goods chain retailers. Company’s e-commerce initiatives have not provided significant sales during 2023.
Our sales within the U.S. are primarily made by our in-house sales team and our independent sales agencies. Our independent sales agencies are paid a commission based upon sales made in their respective territories. Our sales agencies are recruited, trained and monitored by us directly. We will utilize an agency as needed to help us provide service to our retail customers as required. The sales agency agreements are generally one (1) year agreements, which automatically renew on an annual basis, unless terminated by either party on 30 days’ prior notice. Our international sales to divisions of U.S. based retailers are made by our in-house sales team.
The Company has historically promoted its products to retailers and distributors at North American trade shows, such as the Consumer Electronics Show (“CES”) or the International Hardware Show, but also relies on the retail sales channels to advertise its products directly to the end user consumers through various promotional activities. Subject to adequate working capital, this marketing effort will continue as a complement to the social media and e-commerce initiatives.
Direct Import Sales. We currently ship finished products directly to our retail customer from Thailand and China. The sales transaction and title of goods are completed by delivering products to the customers overseas shipping point. The customer takes title of the goods at that point and is responsible for inbound ocean freight and import duties. Direct import sales are made in larger quantities (generally container sized lots) to customers worldwide.
Domestic Sales. The strategy of selling products from a U.S. domestic warehouse enables the Company to provide timely delivery and serve as a domestic supplier of imported goods. With this model the Company imports goods from overseas and is responsible for all related costs including ocean freight, insurance, customs clearance, duties, storage, and distribution charges related to such products and therefore such sales command higher sales prices than direct sales. Domestic orders are for a much smaller size and could be as low as a single unit directly to the end consumer if ordered through an online website. To support an effective e-commerce business model, we were required to warehouse adequate inventory levels enabling the Company to ship orders directly to the end consumer expediently. Due to the poor performance of the Smart Mirrors, the Company wrote off all inventory on hand as of December 31, 2023 and is currently attempting to liquidate the remaining stock.
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We have utilized social media platforms and online advertising campaigns to further grow the Company’s online presence. In addition to Facebook, Instagram, Pinterest and LinkedIn, The Company has launched a You Tube channel to host Smart Mirror videos and established a Twitter account. Our Social Media marketing has not resulted in any significant sales of products. We have not been and may not be able to effectively compete in e-commerce and Social Media marketing and sales. The Company has a Social Media presence on the following Social Media platforms, however the Company is not emphasizing Social Media marketing in 2024:
FACEBOOK1: https://www.facebook.com/capstoneindustries and https://www.facebook.com/capstoneconnected
INSTAGRAM2: https://www.instagram.com/capstoneconnected
PINTEREST3: https://www.pinterest.com/capstoneconnected/
LINKEDIN4: https://www.linkedin.com/company/6251882
TWITTER5 https://twitter.com/CAPC_Capstone
YOUTUBE6 https://www.youtube.com/channel/UCMX5W8PV0Q59qoAdMxKcAig
1 Facebook is a registered trademark of Facebook, Inc.
2 Instagram is a registered trademark of Instagram.
3 Pinterest is a registered trademark of Pinterest.
4 LinkedIn is a registered trademark of LinkedIn Corporation.
5 Twitter is a registered trademark of Twitter Corporation.
6YouTube is a registered trademark of YouTube Corporation.
Competitive Conditions
In terms of the consumer product industry, the Company operates in a highly competitive environment, both in the United States and internationally, in the former LED lighting product segment and in the new Connected Surfaces internet of things product segments. The Company’s consumer products compete with products made by large multinationals with global operations as well as numerous other smaller, specialized national or regional competitors who generally focus on narrower markets, products, or particular categories. Competitors include Gentex Corporation, Seura Solutions, Inc., Magna International, Inc. and Samsung Electronics Co. Ltd. The competitiveness and changes in consumer tastes in smart mirror market is evidenced by lululemon athletica, inc. acquiring a smart mirror company for $500 million in 2020 and then discontinuing the sale of its smart mirror product line in December 2023.
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. The Connected Chef and other Connected Surface products are an emerging industry. The Company’s product line is innovative. The Connected Chef received GMS approval from Google third party testing labs, which allows the Connected Chef to utilize the Google operating system in the tablet. Company may be unable to develop or license emerging new technologies that are dominant and demanded by consumers, retailers, distributors and resellers. Consumer tastes and preferences change and timing the product line with consumer demand is important in establishing a market for the product line.
Research, Product Development, and Manufacturing Activities
The Company’s research and development operations based in Florida and Thailand have designed and engineered many of the Company’s products, with collaboration from its third-party manufacturing partners, software developers and Capstone U.S. engineering advisers. The Company outsources the manufacture and assembly of our products to a select group of OEM manufacturers overseas. With no product line in production, the Company’s research and development efforts have been limited to the Connected Chef. Our research and development focus includes efforts to:
| ● | Establish Capstone Connected Surfaces portfolio as an innovator in the smart home segment. |
| ● | Develop product with increasing technology and functionality with enhanced quality and performance, and at a very competitive cost; and |
| ● | Solidify new manufacturing relationships with contract manufacturers in Thailand. |
The Company establishes strict engineering specifications and product testing protocols with the Company’s contract manufacturers and ensure that their factories adhere to all Regional Labor and Social Compliance Laws. These contract manufacturers purchase components that we specify and provide the necessary facilities and labor to manufacture our products. We leverage the strength of the contract manufacturers and allocate the manufacturing of specific products to the contract manufacturer best suited to the task. Quality control and product testing is conducted at the contract manufacturers facility and at their 3rd party testing laboratories overseas.
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Capstone uses its proprietary manufacturing expertise by maintaining control over all outsourced production and critical production molds. To ensure the quality and consistency of the Company’s products manufactured overseas, Capstone uses globally recognized certified testing laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all products are designed and tested to adhere to each country’s individual regulatory standards. The Company also hires quality control inspectors who examine and test products to Capstone’s specification(s) before shipments are released.
To successfully implement Capstone’s business strategy, the Company must continually improve its current products and develop new product segments with innovative imbedded technologies to meet consumer’s growing expectations. The Connected Surfaces product development is our current effort to achieve those expectations. The continuation of Company’s declining business and financial performance may significantly hinder or undermine efforts to establish a profitable Connected Surface product line capable of sustaining operations. Establishing the Connected Surfaces product line as a viable revenue source is essential to sustaining the Company as a consumer product company. The Company will need adequate funding to sustain that business line and operations.
Investments in technical and product development are expensed when incurred and are included in the operating expenses.
Raw Materials
The principal raw materials currently used by Capstone are sourced in Thailand and China, as the Company orders product exclusively through contract manufacturers in the region. These contract manufacturers purchase components based on the Company’s specifications and provide the necessary facilities and labor to manufacture the Company’s products. Capstone allocates the production of specific products to the contract manufacturer the Company believes is more experienced to produce the specific product and whose facility is located in the country that most benefits from the U.S. Tariff regulations. To ensure the consistent quality of Capstone’s products, quality control procedures have been incorporated at each stage of the manufacturing process, ranging from the inspection of raw materials through production and delivery to the customer. These procedures are additional to the manufacturers’ internal quality control procedures and performed by Quality Assurance personnel.
| ● | Raw Materials – Components and supplies are subject to sample inspections upon arrival at the contract manufacturer, to ensure the correct specified components are being used in production. |
| ● | Work in Process – Our quality control inspectors conduct quality control tests at different points during the product stages of our manufacturing process to ensure that quality integrity is maintained. |
| ● | Finished Goods – Our inspectors perform tests on finished and packaged products to assess product safety, integrity and package compliance. |
Raw materials used in manufacturing include plastic resin, copper, LED bulbs, batteries, and corrugated paper. Prices of materials have remained competitive in the last year. The Company believes that adequate supplies of raw materials required for its operations are available at the present time. The Company cannot predict the future availability or prices of such materials. These raw materials are generally available from a number of different sources, and the prices of those raw materials are susceptible to currency fluctuations and price fluctuations due to transportation, government regulations, price controls, economic climate, or other unforeseen circumstances. In the past, the Company has not experienced any significant interruption in availability of raw materials. We believe we have extensive experience in manufacturing and have taken positions to assure supply and to protect margins on anticipated sales volume.
Section 1502 of Title XV of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires SEC-reporting companies to disclose annually whether any conflict minerals are necessary to the functionality or production of a product. Based on our inquiries to our manufacturers, we do not believe as of the date of such inquiries that any conflict minerals are used in making our products.
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Distribution and Fulfillment
Since January 2015, the Company has outsourced its U.S. domestic warehousing and distribution needs to a third-party warehousing facility situated in Anaheim, California. The warehouse operator provides full inventory storage, packaging and logistics services including direct to store and direct to consumer shipping capabilities that electronically interface to our existing operations software. The warehouse operator provides full ERP (Enterprise Resource Planning), Inventory Control and Warehouse Management Systems.
These fulfillment services can be expanded to the east coast in Charleston, South Carolina, if the Company needed to establish an east coast distribution point. This relationship, if required, will allow us to fully expand our U.S. distribution capabilities and services. As the Company moved into the e-commerce and direct to consumer marketplace, the Company developed a new website with full shopping cart capabilities. The Company has negotiated contracts for secured credit card processing capability, state sales tax compliance services and order fulfillment and logistics services, at a very competitive rate.
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.
We do not have sufficient operational experience with Connected Surfaces to predict the seasonality of Connected Surfaces.
Intellectual Property
CAPC owns a number of patents and trademarks as denoted below:
| Patent / Trademark Serial Number | Patent / Trademark Name | Status / Issue Date | Patent / Trademark Expiration Date | Country | Description |
| 97365117 | Connected Chef | Pending | N/A | USA | Trademark on name |
| 90758255 | Capstone Connected | Pending | N/A | USA | Trademark on name and logo |
| 90286667 | Thin Cast | Pending | N/A | USA | Trademark on name and logo |
| 10,203,262 | Apparatus and method for switch state detection and controlling electrical power | 03/12/2019 | 03/12/2039 | USA | apparatus and method for switch state detection and controlling electrical power |
| D779,109 S | Lamp simulating a UFO | 02/14/2017 | 02/14/2032 | USA | Design patent – lamp simulating UFO |
While the Company may license third party technologies for its products, or may rely on other companies, especially OEMs, for design, engineering and testing, the Company believes that its oversight of design and function of its products and its marketing capabilities are significant factors in the ability of the Company to sell its products.
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Value of Patents
The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Issued patents or patents based on pending patent applications or any future patent applications may not exclude competitors or may not provide a competitive advantage to us. In addition, patents issued or licensed to us may not be held valid if subsequently challenged and others may claim rights in or ownership of such patents. The validity and breadth of claims in technology patents involve complex legal and factual questions and, therefore, the extent of their enforceability and protection is highly uncertain.
Reverse engineering, unauthorized copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without paying us. We cannot assure shareholders that our competitors have not developed or will not develop similar products, will not duplicate our products, or will not design around any patents issued to or licensed by us. We will assess any loss of these rights and determine whether to litigate to protect our intellectual property rights on a case by case basis.
We rely on trademark, trade secret, patent, and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license intellectual property rights from others to support new product introductions. There can be no assurance that we can acquire licenses under patents belonging to others for technology potentially useful or necessary to us and there can be no assurance that such licenses will be available to us, if at all, on terms acceptable to us. Moreover, there can be no assurance that any patent issued to or licensed by us will not be infringed or circumvented by others or will not be successfully challenged by others in lawsuits. We do not have a reserve for litigation costs associated with intellectual property matters. The cost of litigating intellectual property rights claims may be beyond our financial ability to fund.
As is customary in the retail industry, many of our customer agreements require us to indemnify our customers for third-party intellectual property infringement claims. Such claims could harm our relationships with customers and might deter future customers from doing business with us. With respect to any intellectual property rights claims against us or our customers, we may be required to cease manufacture of the infringing product, pay damages and expend significant Company resources to defend against the claim and or seek a license.
Information Technology
The efficient operation of our business is dependent on our information technology systems. We rely on those systems to manage our daily operations, communicate with our customers and maintain our financial and accounting records. In the normal course of business, we receive information regarding customers, associates, and vendors. Since we do not collect significant amounts of valuable personal data or sensitive business data from others, our internal computer systems are under a light to moderate level of risk from hackers or other individuals with malicious intent to gain unauthorized access to our computer systems. Cyberattacks are growing in number and sophistication and are an ongoing threat to business computer systems, which are used to operate the business on a day to day basis. Our computer systems could be vulnerable to security breaches, computer viruses, or other events. The failure of our information technology systems, our inability to successfully maintain our information or any compromise of the integrity or security of the data we generate from our systems or an event resulting in the unauthorized disclosure of confidential information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors, results of operations, product development and make us unable or limit our ability to respond to customers’ demands.
We have incorporated into our data network various on and off-site data backup processes which should allow us to mitigate any data loss events, however our information technology systems are vulnerable to damage or interruption from:
| ● | hurricanes, fire, flood and other natural disasters |
| ● | power outage |
| ● | internet, computer system, telecommunications or data network failure Hacking as well as malware, computer viruses, ransomware and similar malicious software code |
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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 2023, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.
Climate Change. With no products in ongoing production in 2023 from OEMs, and only limited sales of product from existing inventory in 2023, the Company did not experience any direct, material impact on business and financial condition in 2023 from pending or existing climate-change related legislation, regulations, and international accords in the U.S., the physical impacts of climate change, or perceived indirect material impact from business trends. On March 6, 2024, the Commission adopted final rules to require registrants to disclose certain climate-related information in registration statements and Form 10-K annual reports. The Company is uncertain as of the date of the filing of this Form 10-K on the impact of these new rules on the Company. On March 15, 2024, the U.S. Fifth Circuit Court of Appeals granted an administrative stay of the Commission’s new climate change disclosure rules. This judicial stay was lifted on March 22, 2024, due to court challenges to Commission’s new climate change disclosure rules being consolidated in the Eighth Circuit court.
Employees
As of December 31, 2023, we employed 5 employees and consultants: 2 in our U.S. office and 3 individual consultants, 2 of which resided in Hong Kong, formerly employees of our Hong Kong operation. We consider our relations with our employees to be good. None of our employees are covered by a collective bargaining agreement. We believe that our staff is adequate to handle the current operations, but we recognize that the new product line and social media marketing may require additional personnel. Our ability to hire additional personnel is subject to adequate revenue flow and funding.
The following table sets forth the number of individuals by function:
| Employee Function | Number of Employees | |||
| Executive | 1 | |||
| Sales/Customer Service/Distribution | 1 | |||
| Research & Development/Technology/Product Development | 2 | |||
| Administrative | 1 | |||
| TOTAL | 5 | |||
Corporate Information
Our principal executive offices are located at #144-V, 10 Fairway Drive Suite 100, Deerfield Beach, Florida USA 33441. Our telephone number is (954)570-8889 and our website is at URL: www.capstonecompaniesinc.com. Our U.S. subsidiaries operate out of our principal executive offices.
We file our financial information and other materials required under the Exchange Act electronically with the SEC. These materials can be accessed electronically via the Internet at www.sec.gov. Such materials and other information about the Company are also available through our corporate website: https://www.capstonecompanies.com. Any URL referenced in this Form 10-K report does not incorporate by reference or otherwise the contents of the website pages accessed through the referenced URL.
Government Regulation
Our operations are subject to regulation by federal and state securities authorities as well as various federal, state, foreign and local laws and regulations governing a consumer products company and a for-profit business. We are not subject to any U.S. federal, state or local regulation that poses, in our opinion, any special or unusual burden or obstacle to conducting our business and financial affairs. Our main concern, although greatly diminished in terms of government regulation is the changing regulatory environment in China and greater Asia and its impact on our ability to access manufacturing sources and obtain our specific consumer products. Despite some political uncertainty, Thailand continues to encourage foreign direct investment as a means of promoting economic development, employment, and technology transfer. We established Thailand as an alternative to China. While the general trend in China has to be conducive to trade and commerce in terms of U.S. companies conducting business with domestic companies, China is a still a single-party nation-state in which the central government has the power to dramatically and immediately change its trade and commercial policies and laws.
The Company’s Hong Kong SAR subsidiary is dormant and the Company does not have a corporate presence in Hong Kong as of 2023. Hong Kong and China remain a possible source for research and development for products and product production in the future. As such, Chinese and Hong Kong legal developments remain a potential, pertinent issue for the Company.
The Chinese government has also imposed its laws, policies and directives in Hong Kong SAR, which has created uncertainty about whether Hong Kong SAR will continue to encourage and enable foreign companies to conduct business in Hong Kong SAR without undue interference from the Chinese government. Chinese government intervention in Hong Kong’s political and legal affairs since 2020, which has taken the form of unilaterally imposing Chinese laws and policies in Hong Kong, create a heightened threat of Hong Kong’s traditional pro-foreign business policies, regulation and economic environment being altered to suit national security concerns and international objectives of the Chinese government and becoming untenable for foreign businesses, especially U.S. companies conducting business in Hong Kong in light of growing U.S.-Chinese tensions in international affairs and global economic competition. Chinese government’s imposition of the National Security Law in Hong King on June 30, 2020, undermined Hong Kong’s autonomy and introduced heightened uncertainty for foreign and local firms operating in Hong Kong. On March 5, 2022, Chinese Premier Li Keqiang asserted that Beijing intends to exercise “overall jurisdiction over the two SARs,” referring to Hong Kong and Macau. Political or military conflict between the United States and China, who are rivals for power and influence in Asia and to an increasing extent all along the Pacific Rim as well as being diametrically opposed to one another over the status of Taiwan, could provoke an even more strident, anti-U.S. change in Chinese trade or commercial laws and regulation, including Hong Kong trade and commercial laws, that makes it more difficult or expensive for us to obtain consumer products.
New Hong Kong Security Law. On March 19, 2024, effective March 23, 2024, Hong Kong Legislative Council unanimously passed the Safeguarding National Security Ordinance under Article 23 of the Basic Law ("NSO Act"). The NSO Act greatly expands the authority of the Hong Kong government to respond to and govern: treason, insurrection, sedition, theft of state secrets, espionage, sabotage and foreign interference in Hong Kong political affairs. As of the filing of this Form 10-K, the Company is uncertain on the impact of the 212-page NSO Act on the Company's business and financial condition and impact of regulation thereon. Many aspects of the NSO Act, in terms of enforcement and implementing rules and policy, are unclear or not in existence as of the filing of this Form 10-K.
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While Thailand has experienced a degree of political instability for decades, due to the influence and intervention of the Thai military in political affairs, the trade and commercial environment in Thailand has been generally receptive to and encouraging foreign commerce in Thailand. U.S. State Department 2023 assessment of Thailand concluded that Thailand remains encouraging to foreign investment and commerce. Due to uncertainties associated with conducting business in China and Hong Kong, the Company established manufacturing capabilities in Thailand through a local contract manufacturing concern in order to reduce reliance on China and Hong Kong for products and engineering.
Working Capital Requirements and Financing
In order to successfully launch the online Connected Surfaces business, the Company was required to maintain sufficient on hand available inventory levels, to allow for immediate fulfilment of an online order. This required additional investment combined with investments in new product expansion of Connected Surfaces, new product molds, product testing and outside certifications, package design work, and further expansion of its capabilities in Thailand, the Company may require additional working capital.
On April 5, 2021, the Company entered into five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares of Common Stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement”). The five investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, (“Securities Act”). The $1,498,000 in proceeds from the Private Placement was used mostly to purchase start up inventory for the Company’s new Smart Mirror product line, for a major online e-commerce fulfilment company, and the remainder for advertising and working capital.
On July 2, 2021, the Board of Directors (“Board”) resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror product. The Board resolved that certain Directors could negotiate the terms of a Purchase Order Funding Agreement for up to $1,020,000 with Directors Stewart Wallach and J. Postal and E. Fleisig, a natural person. On October 18, 2021 the Company received the $1,020,000 funding under this agreement. The note payable is due on September 13, 2024. These loans may be prepaid in full or partially without any penalty.
On May 1, 2022, the Company negotiated three $200,000 working capital funding agreements, to provide $600,000 in funding for daily operations. The Board resolved that certain Directors could negotiate the terms of a Working Capital Funding Agreement for up to a total of $600,000, with Directors S. Wallach (through Group Nexus, a company controlled by Mr. Wallach), J. Postal and Mouhaned Khoury, a natural person. Under these agreements the interest terms are 5% based on a 365-day year, maturing May 1, 2024. These loans may be prepaid in full or partially without any penalty.
On October 13, 2022, the Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations (the “Working Capital Funding Agreement”). The term of this agreement is 18 months and principal accrues simple interest at a rate of 5 percent per annum. The loan may be prepaid in full or partially without any penalty.
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On December 1, 2022, the Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations (the “Working Capital Funding Agreement”). The term of this agreement is 18 months and principal accrues simple interest at a rate of 5 percent per annum, maturing June 1, 2024. The loan may be prepaid in full or partially without any penalty.
On January 3, 2023, the Company negotiated a $40,000 Working Capital Funding agreement with Director S. Wallach (through Group Nexus, a company controlled by Mr. Wallach), to provide funding for daily operations. Principal accrues simple interest at a rate of 5 percent per annum, maturing June 15, 2024. The loan may be prepaid in full or partially without any penalty.
On March 27, 2023, the Company negotiated a Working Capital Funding agreement with Director S. Wallach to provide funding for daily operations. Total funding under the agreement amounted to $592,500 as of December 31, 2023. Principal accrues simple interest at a rate of 5 percent per annum, maturing June 15, 2024. The loan may be prepaid in full or partially without any penalty.
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.
In addition, we intend to seek alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us. An economic recession or a slow recovery could adversely affect our business and liquidity.
The Company’s liquidity and cash requirements are discussed more fully in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Item 1A. Risk Factors.
Described below and throughout this Form 10-K report are certain factors and risks that the Company’s management believes are applicable to the Company’s business and the industries in which it operates. If any of the described events occur, the Company’s business, results of operations, financial condition, liquidity, or access to funding could be materially adversely affected. When stated below that a risk or factor may have a material adverse effect on the Company business, it means that such risk may have one or more of these effects. There may be additional risks that are not presently material or known. There are also risks within the economy, the industry, and the capital markets that could have a material adverse effect on the Company, including those associated with an economic recession, inflation, a global economic slowdown, political instability, government regulation (including tax regulation), employee attraction and retention, and customers’ inability or refusal to pay for the products and services provided by the company. There are also risks associated with the occurrence of extraordinary events, such as terrorist attacks or natural disasters (such as tsunamis, hurricanes, tornadoes, and floods) and pandemics or epidemics. These risks and factors affect businesses generally, including the Company, its customers and suppliers and, as a result, are not discussed in detail below, but are applicable to the Company. As a “penny stock” without primary market maker support, any investment in our Common Stock is highly risky and should only be considered by investors who can afford to lose their entire investment and do not require immediate liquidity. These risk factors are not the only risks that we or our subsidiaries may face. Additional risks and uncertainties not presently known to us or not currently believed to be important also may adversely affect our business.
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Business and Operational Risks
Our auditors have issued a going concern opinion, and we will not be able to achieve our objectives and will have to cease operations if we cannot adequately fund our operations.
Our public auditors issued a going concern opinion in connection with the audit of our annual financial statements for the fiscal year ended December 31, 2023. A going concern opinion means that there is substantial doubt that the company can continue as an ongoing business for the next 12 months. If we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. In addition, the inclusion of an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern and our lack of cash resources may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties. There is no assurance that we will be able to adequately fund our operations in the future.
The declining revenues in 2023 and 2022 of our primary business line of LED lighting products ceasing to be a revenue source in 2023, and the Connected Surfaces product line not becoming a replacement revenue source have resulted in significant operating losses and imposed a need to sustain operations with outside funding of working capital. If the Company cannot obtain adequate, affordable funding, whether equity or debt, as needed, the Company will have difficulty sustaining the Company as a going concern.
Cash flow from operations was and is not sufficient to sustain operations and support optimal marketing efforts of Connected Surfaces Smart Mirror product line as a primary revenue source. In order to attempt to secure adequate working capital in 2023, we took the actions detailed below. These actions are not deemed sufficient to meet all expected working capital needs for 2024 for a full implementation of our plan to establish the Connected Surfaces product lines as viable product lines and to meet general operating overhead needs. We anticipate the need to raise working capital funding to meet our funding needs in 2024 and supplement any cash flow from operations. Because of the low market price and liquidity of our Common Stock, our declining financial performance, lack of hard assets required for asset based loans, and our transition from a declining product line and primary source to a new, unproven product line, we may be unable to raise necessary, affordable and timely working capital in 2024 and that failure could be fatal to our ability to sustain the Company as an operating company.
During the year ended December 31, 2023, the Company used cash in operations of approximately $614,527 and generated net operating losses of approximately $1,634,000. As of December 31, 2023, the Company has working capital deficit of $3,279,303 and an accumulated deficit of $10,797,216. The Company’s cash balance decreased approximately $25,000 from $61,463 as of December 31, 2022 to $36,466 as of December 31, 2023. Although we have cash on hand, the Company does not have sufficient cash on hand to finance its plan of operations for the next 12 months from the filing of this report and we will need to seek additional capital through debt and/or equity financing to fully fund operational overhead and fully fund the effort to launch the Connected Chef product line as the primary revenue source in 2024. While certain directors have provided working capital funding to the Company in the past, including 2023, there is no guarantee, and none can be given that these insiders will do so when and as required by the Company in 2024.
The Company does not have an alternative product line to replace the Connected Chef product line in 2024. If the Connected Chef product line does not become a viable revenue source in 2024, the Company will need funding to sustain operations and efforts to establish the Connected Chef product line as a viable revenue source. The Company has not received pre-production orders for the Connected Chef product line and the Company lacks the working capital to extensively market the Connected Chef, which is not in production.
The Company does not have an alternative product line to the Connected Surfaces Connected Chef product line and would be unable to develop an alternative in 2024 due to a lack of adequate working capital. The financial condition of the Company has caused the Company to seek to effect an extraordinary corporate transaction to protect shareholder value and sustain the Company as an operating company. This effort is being pursued in conjunction with efforts to secure pre-production orders for the Connected Chef. An extraordinary corporate transaction could include a merger or sale of the Company or reorganization of the Company under bankruptcy protection or otherwise or could result in the liquidation of the current business and efforts to fund a new business line in 2024 if adequate, affordable funding is available. The Company may be unable to effect, if necessary, an extraordinary corporate transaction or obtain significant funding for a new product line in 2024 to sustain the Company as an operating company. Reorganization under the protection of the bankruptcy code is one possible extraordinary corporate transaction if the Connected Chef product lines does not become a viable revenue source and other extraordinary corporate transactions are not possible. While the Company is continuing efforts to establish the Connected Chef product line as a viable revenue source, the Company is exploring possible alternative new business lines, which alternative business lines could be internally developed with sufficient funding or acquired in a merger or asset acquisition. If the Company receives a pre-production bulk order for the Connected Chef, the Company would have to raise working capital to fund production and the Company may be unable to raise that funding on affordable terms or at all.
Our operating results and sustainability as an operating company are substantially dependent on the acceptance of new products or finding a new business line.
If the Company does not located a new business line capable for sustaining the Company as an operating company, then the Connected Chef product line is the only available product line to replace the matured LED product line and the success of the Connected Chef product line is critical to our continued operation as a consumer product company. Even if the Connected Chef receives pre-production orders, there can be no assurance that the Connected Chef would generate sufficient sales or continued sales to fund ongoing operations of the Company. Our future success depends on our ability to deliver innovative, higher performing and lower cost solutions for existing and new markets and for customers to accept those solutions. As a small company, innovation is critical to our ability to compete with larger competitors. We must introduce new products in a timely and cost-effective manner, and we must secure production orders for those products from our customers. The development of new products is a highly complex process, and we have in some instances experienced delays in completing the development and introduction of new products. Our research and development efforts are aimed at solving increasingly complex problems, and we do not expect that all our projects will be successful. The successful development, introduction and acceptance of new products depend on a number of factors, including the following:
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| ● | Having adequate, affordable, timely working capital funding. |
| ● | achievement of technology solutions required to make commercially viable products. |
| ● | the accuracy of our predictions for market requirements. |
| ● | our ability to predict, influence and / or reach evolving consumer and technical standards. |
| ● | our timely completion of product designs and development. |
| ● | our ability to effectively transfer increasingly complex products and technology from development to manufacturing; and |
| ● | market acceptance of our new product by retailers and consumers and availability of adequate inventory to timely meet demands of retailers and customers. |
If any of these or other similar factors becomes problematic, we may not be able to deliver and introduce new products in a timely or cost-effective manner and be unable to effectively compete in the product market segment.
Our operations depend on a small number of personnel and the loss of key personnel or the inability to replace or add key personnel could have a significant impact on our ability to grow or sustain operations.
We operate the executive operations with a relatively small number of personnel. Company has not developed personnel to readily replace key personnel. The loss of key personnel, being Stewart Wallach, Company’s Chief Executive Officer, would severely harm the business. As of December 31, 2022, James McClinton, our Chief Financial Officer for over 30 years, elected to retire. The Company hired Dana Eschenburg Perez, as an external consultant as of January 1, 2023 to perform the functions of Chief Financial Officer. We do not have key man life insurance.
Our personnel are focused on executive management or marketing. Our marketing is supplemented by contractor sales agencies, and we have a relatively small research and development capability overseas. We rely on OEMs for certain technical development and design, and we have no current plans to develop an in-house technical development staff. The loss of an OEM would disrupt our business operations if we could not find a suitable replacement in short order. Company evaluates potential OEM’s from time to time to identify possible alternative production and technical development resources. If our operations grow, we may have to increase the number of our personnel in the future to handle any growth or expansion of product lines or product categories. Our ability to find and retain qualified personnel when needed by our growth or existing operations will be an important factor in determining our success in coping with any growth or efficiently handling existing operational burdens.
During a downturn in the economy, or periods of increased inflation, consumer purchases of discretionary items are usually affected, which could materially harm our sales, profitability and financial condition and our prospects for growth. Historic inflation in 2022 has created uncertainty about consumer confidence and its impact on demand for our products in 2023.
Many of our products may be considered discretionary items for consumers, including the Connected Chef. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, unemployment, the hyper-inflation affecting the U.S. in 2023, the availability of consumer credit and consumer confidence in future economic conditions. Uncertainty in U.S. economic conditions continues, particularly considering the impacts rising inflation, and trends in consumer discretionary spending remain unpredictable. Historically, consumer purchases of discretionary items tend to decline during recessionary periods periods of high inflation, when disposable income is lower or during other periods of economic instability or uncertainty, which may lead to declines in sales and slow our long-term growth expectations. Any near or long-term downturn in the U.S. market in which we sell most of our products, or other key markets, may materially harm our sales, profitability and financial condition and our prospects for growth. The “Big Box” retailers that are the traditional buyers of our products would be less inclined to purchase our products, including the Connected Chef, if economic concerns (including inflation concerns) are predicted to reduce consumer purchases of discretionary items. Continued inflationary pressure on essentials, like food prices, will reduce consumer purchases of discretionary items.
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If we are unable to effectively develop, manage and expand our marketing programs and sales channels for our products, our operating results may suffer.
When we actively market a product line in production, or for a new product line like Connected Chef, then developing, maintaining and expanding marketing programs and sales channel will be a significant challenge and risk factor for the Company. Since we typically seek to target niche markets for a product line, then effective marketing and use of sales channels becomes critical to the successful launch of a new product line, especially with limited working capital. We do not have an extensive staff devoted to e-commerce and social media promotions and we have not retained outside firms to assist on a regular basis in this effort. The Company is seeking funding to support the promotion of the Connected Chef product line. Attaining affordable funding of the marketing effort may be critical to success of the marketing and promotion of the Connected Chef. The cost and difficulty of establishing a new product line is difficult to estimate and difficult to fund by a small company like the Company, especially when that effort is faced with the inherent difficulties of penetrating a new product segment like smart devices, which has a growing number of competitors and has an ongoing, evolving need to meet changing consumer expectations and demands for enhanced or new technologies and functions; and against numerous competitors with significantly greater financial and technology resources, brand recognition and brand loyalty by consumers and logistical and marketing capabilities than our company.
The markets in which we operate are highly competitive and have evolving technical or consumer requirements.
In the consumer lighting market, which is a maturing market for us, we compete with companies that manufacture and sell traditional lighting products and we compete with companies that make smart mirrors for residential use, we compete with companies that have greater market share, name recognition and technical resources than we do. Competitors continue to offer new products with aggressive pricing. Aggressive pricing actions by our competitors in our businesses could reduce margins if we are not able to reduce costs at an equal or greater rate than the sales price decline.
With the increased demand for consumer smart products, including the Connected Surfaces, which is the focus of our business, we will continue to face increased competition in the future across our businesses. If the investment in capacity exceeds the growth in demand the electronic consumer market is likely to become more competitive with additional pricing pressures. With the emerging and evolving smart mirror market, we face growing competition and rapidly changing product technology and functionalities.
As competition increases in smart products, including connected surfaces, we need to continue to develop new products that meet or exceed the needs of our customers. Adequate, affordable and available funding is key to our ability to compete in the smart mirror markets. Competitors may also try to align with some of our strategic customers. This could lead to lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs. Any of these developments could have an adverse effect on our business, results of operations or financial condition.
As is true in any consumer product industry, the ability of a company to respond to changing consumer tastes and purchasing habits is key to success in consumer products. Introduction of new products brings the risk of increased development, production and marketing costs as well as that investment failing to produce revenues or profits that justify the investment in new products.
If our products fail to perform or fail to meet customer requirements or expectations, we could incur significant additional costs, including costs associated with the recall of those items.
The manufacturing of our products involves complex processes. We do not have sufficient consumer experience with our products to determine the extent of any customer service problems or product returns and defects and those factors impact on revenues. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases, our products may contain undetected defects that only become evident after shipment and used by consumers. Even if our products meet standard specifications, our customers may attempt to use our products in applications for which they were not designed resulting in product failures and creating customer satisfaction issues. For a small company, identifying and meeting consumer demand and product quality standards are critical to our business and financial performance.
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If failures or defects occur, they could result in significant losses or product recalls due to:
| ● | costs associated with the removal, collection and destruction of the product. |
| ● | payments made to replace product. |
| ● | costs associated with repairing the product. |
| ● | the write-down or destruction of existing inventory. |
| ● | insurance recoveries that fail to cover the full costs associated with product recalls. |
| ● | lost sales due to the unavailability of product for a period. |
| ● | delays, cancellations or rescheduling of order for our products; or |
| ● | increased product returns. |
For any products being sold and purchased by consumers, a significant product recall could also result in adverse publicity, damage to our reputation and a loss of customer or consumer confidence in our products and could substantially undermine or delay any success in the critical Connected Surfaces product launch. Further, while we believe that product liability for consumer electronic products is not significant or widespread, we could face product liability lawsuits or regulatory proceedings by the Consumer Product Safety Commission (CPSC) and could suffer losses from a significant product liability judgment or adverse CPSC finding against us if the use of our products at issue is determined to have caused injury or contained a substantial product hazard to the public. We provide warranty periods of 1 year on our products. Although we believe our warranty reserves are appropriate, we are making projections about the future reliability of new products and technologies, and we may experience increased variability in warranty claims. Increased warranty claims could result in significant losses due to a rise in warranty expense and costs associated with customer support.
Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
If we do not accurately predict consumer demand for products, we may be unable to produce products that are in demand and our financial performance will suffer.
To ensure adequate inventory supply for the new product categories and to support e-commerce, we must forecast inventory needs and place orders with our manufacturers before firm orders are placed by our customers. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products to deliver to our online customers. With the logistical problems referenced above, the forecast of inventory needs is even more crucial to our business and financial performance and efforts to establish a viable Connected Chef product line and revenue source. We could accurately predict inventory needs and timely place orders for products and then have logistical problems delay delivering of products and result in a lack of inventory to fill orders. The ability to timely fill orders for the Connected Chef is an important achievement in the effort to establish the product line as a viable revenue source.
Factors that could affect our ability to accurately forecast demand for our products include:
| ● | an increase or decrease in consumer demand for our products. |
| ● | our failure to accurately forecast consumer acceptance for our new products. |
| ● | product introductions by competitors. |
| ● | unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders or at-once orders placed by retailers. |
| ● | weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products; and |
| ● | terrorism or acts of war, or the threat thereof, political or labor instability or unrest or public health concerns and disease epidemics, such as the COVID-19 pandemic, which could adversely affect consumer confidence and spending or interrupt production and distribution of product and raw materials. |
| ● | constraints on marketing and sales efforts and analysis due to limited financial resources. |
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Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices or in less preferred distribution channels, which could have an adverse effect on gross margin. In addition, if we underestimate the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to recognize revenue, lost sales, as well as damage to our reputation and retailer and distributor relationships.
The consumer electronics industry is subject to significant pricing pressure caused by many factors, including technological advancements, intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer demand.
Fluctuations in the cost of products could negatively affect our operating results.
The components used by our suppliers and manufacturers are made of raw materials that may be subject to significant price fluctuations or shortages that could materially adversely affect our cost of goods sold. In addition, certain of our manufacturers are subject to government regulations related to wage rates, and therefore the labor costs to produce our products may fluctuate. The cost of transporting our products for distribution and sale is also subject to fluctuation. Because our products are manufactured abroad, our products must be transported by third parties over large geographical distances, increased demand for freight services at a time of reduced ocean freight capacity, can significantly increase costs. Manufacturing delays or unexpected transportation delays, can also cause us to rely more heavily on airfreight to achieve timely delivery to our customers, which significantly increases freight costs. Any of these fluctuations may increase our cost of products and have an adverse effect on our profit margins, results of operations and financial condition.
Regulatory and Legal Risks
Our business may be impaired by claims that we infringe the intellectual property rights of others.
Litigation between competitors over intellectual property rights can be a common business practice in an industry as a means to protect or gain market share. Litigation to determine the validity of patents or claims by third parties of infringement of patents or other intellectual property rights could result in significant legal expense and divert the efforts of our technical personnel and management, even if the litigation results in a determination favorable to us. In the event of an adverse result in such litigation, we could be required to:
| ● | pay substantial damages. |
| ● | indemnify our customers. |
| ● | stop the manufacture, use and sale of products found to be infringing. |
| ● | discontinue the use of processes found to be infringing. |
| ● | expend significant resources to develop non-infringing products or processes; or |
| ● | obtain a license to use third party technology. |
The risk of infringement claims may be greater in emerging products and technologies like smart devices.
There can be no assurance that third parties will not attempt to assert infringement claims against us with respect to our products. Additionally, if an infringement claim against the Company or its customers is successful, the Company may be required to pay damages or seek royalty or license arrangements, which may not be available on commercially reasonable terms. The payment of any such damages or royalties may significantly increase the Company’s operating expenses and materially harm the company’s operating results and financial condition. Further, royalty or license arrangements may not be available at all, which would then require the company to stop selling certain products or using certain technologies, which could negatively affect the company’s ability to compete effectively. We do not have reserves for litigation or insurance for infringement litigation costs. This kind of litigation is typically very expensive to litigate, and we may lack the funds to aggressively litigate infringement claims against us or against competitors, which could lead to a materially adverse impact on our business.
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Our operations in foreign countries expose us to certain risks inherent in doing business internationally, which may adversely affect our business, results of operations or financial condition.
We have revenue, operations and contract manufacturing arrangements in overseas that expose us to certain risks. Fluctuations in exchange rates may affect our revenue, expenses and results of operations as well as the value of our assets and liabilities as reflected in our financial statements. We are also subject to other types of risks, including the following:
| ● | Delays in shipping or production of products or increased costs in production and shipping of products from international sources, including delays in unloading shipped products in U.S. ports. |
| ● | protection of intellectual property and trade secrets. |
| ● | tariffs, customs, trade sanctions, trade embargoes and other barriers to importing/exporting materials and products in a cost effective and timely manner, or changes in applicable tariffs or custom rules. |
| ● | rising labor costs or labor unrest. |
| ● | the burden of complying with foreign and international laws. |
| ● | adverse tax consequences. |
| ● | the risk that because our brand names may not be locally or nationally recognized, we must spend significant amounts of time and money to build brand recognition without certainty that we will be successful. |
| ● | political conflict or trade wars affecting our efforts to conduct business abroad. |
Changes in regulatory, geopolitical, social, economic, or monetary policies and other factors may have a material adverse effect on our business in the future or may require us to significantly modify our current business practices. Abrupt political change, terrorist activity and armed conflict pose a risk of general economic disruption in affected countries, which could also result in an adverse effect on our business and results of operations.
We do not have extensive prior experience in conducting business in Thailand, which is the location of our product development and production (supplemented by contractors in China). This lack of experience may delay accomplishing our business milestones for development or production of product from our Thailand OEM’s.
Our financial results and ability to grow our business may be negatively impacted by economic, regulatory and political risks beyond our control.
All of our manufacturers are located outside of the United States in 2023. As a result, we are subject to risks associated with doing business abroad, including:
| ● | political or labor unrest, terrorism, public health crises, disease epidemics and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured. |
| ● | currency exchange fluctuations or requirements to transact in specific currencies. |
| ● | the imposition of new laws and regulations or government-imposed protective or preventative measures, including those relating to labor conditions, quality and safety standards and disease epidemics or other public health concerns, as well as rules and regulations regarding climate change. |
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| ● | actions of foreign or U.S. governmental authorities impacting trade and foreign investment, particularly during periods of heightened tension between U.S. and foreign governments, including the imposition of new import limitations, duties, anti-dumping penalties, trade restrictions or restrictions on the transfer of funds. |
| ● | reduced protection for intellectual property rights in some countries. |
| ● | disruptions or delays in shipments. |
| ● | changes in local economic conditions in countries where our customers, manufacturers and suppliers are located. |
These risks could negatively affect the ability of our manufacturers to produce or deliver our products or procure materials and increase our cost of doing business generally, any of which could have an adverse effect on our results of operations, cash flows and financial condition. If one or more of these factors, make it undesirable or impractical for us to conduct business in a particular country our business could be adversely affected.
Additional Financial Risk Factors
Our inadequate or expensive funding and financing alternatives.
Our current short-term debt level as of December 31, 2023 and 2022 was $2,540,476 and $620,137, respectively.
The Company will need additional outside working capital funding in fiscal year 2024 to support the Company’s operations and develop and market the Connected Chef product line.
Cash flow from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers.
Other adverse consequences could include:
| ● | a significant portion of our cash from operations could be dedicated to the payment of interest and principal on future debt, which could reduce the funds available for operations. |
| ● | the level of our future debt could leave us vulnerable in a period of significant economic downturn; and |
| ● | we may not be financially able to withstand significant and sustained competitive pressures. |
Since we are transitioning our product focus to Connected Surfaces products past financial performance is not indicative of any future growth or future financial performance. We will have to establish our Connected Surfaces product line in the face of extensive competition as an entirely new segment within the Smart Home category.
Currency fluctuations may significantly increase our expenses and affect the results of operations, especially where the currency is subject to intense political and other outside pressure.
All our sales in 2023 were transacted in U.S. dollars. The weakening of the U.S. dollar relative to foreign currencies can negatively impact our operating profits, through higher unit costs. However, as the Company volumes increase, the leveraged buying power has enabled the Company to minimize the impact on costs. Changes in currency exchange rates may also affect the relative prices at which we and our competitors sell products in the same market. There can be no assurance that the U.S. dollar foreign exchange rates will be stable in the future or that fluctuations in such rates will not have a material adverse effect on our business, results of operations, or financial condition.
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If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations. If our internal control over financial reporting is not effective, it may adversely affect investor confidence in us and the price of our common stock.
As a public company we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal control over financial reporting. If we identify material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, or if we are unable to comply with the requirements of the Sarbanes-Oxley Act in a timely manner, then, we may be late with the filing of our periodic reports, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected.
Risk Factors for our Common Stock
Penny Stock and Volatile Market Price.
The Company’s Common Stock is subject to possible volatile trading, including rapid increases and decreases in market price due to trading in the open market. Company’s declining business and financial condition has depressed the already low market price and trading of the Company’s Common Stock in 2023. The Company’s Common Stock lacks the primary market makers and institutional investors who can protect the market price from volatility in trading and market price. Company does not have any research analyst issuing recommendations. The common stock is also a “penny stock” under SEC rules and suffers the limitations and burdens in trading of penny stocks. This lack of market support and penny stock status means that trading, especially by day traders, can cause a rapid increase or decrease in market price of the common stock and makes any investment in the common stock extremely risky and unsuitable for investors who cannot withstand the loss of their entire investment and requires liquidity in the investment. An investment in the Common Stock remains an extremely risky investment that is not suitable for investors who cannot afford the loss of investment and can withstand or tolerate a lack of liquidity.
We are also a former shell company under current SEC rules and interpretations thereof. As such, our stock transfer agent requires a legal opinion as well as other paperwork to lift restrictive legends from stock certificates for non-affiliated as well as affiliated shareholders. The restrictive legends can only be lifted for at most a 90-day period for sales under Rule 144 for affiliated and non-affiliated shareholders. Further, our stock transfer agent will not permanently remove restrictive legends on stock certificates held by shareholders. absent registration of the shareholder’s shares of common stock under the Securities Act. This status may make our common stock even more unappealing to investors and potential purchasers and more difficult to sell or trade. “Affiliated shareholders” are generally Company officers, directors, and holders of more than 10% of the issued shares of the Common Stock.
Further, our common stock is quoted on The OTC Markets Group, Inc. QB venture market. Many brokerage houses will not accept OTC stocks for deposit or for trading due to the compliance burdens and reduced financial benefits of trading in OTC stocks. Some shareholders may hold paper stock certificates and experience difficulty in finding a broker who will accept such stock or experience difficulty in meeting the requirements for deposit of such stock in a brokerage account. These difficulties further decreases the appeal of our common stock to investors.
No Dividends.
We have not paid, and we do not intend to pay dividends on our Common Stock in the foreseeable future. We currently intend to retain all future earnings, if any, to finance our current and proposed business activities. We may also incur indebtedness in the future that may further prohibit or effectively restrict the payment of cash dividends on our Common Stock.
Our controlling stockholders may take actions that conflict with your interests.
Certain of our officers and directors beneficially own approximately 40% of our outstanding common stock as of the date hereof. Assuming support from public shareholders with a sufficient voting power, then our officers and directors will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions, and they will have significant control over our management and policies. The directors elected by these stockholders will be able to influence decisions affecting our capital structure significantly. This control may have the effect of delaying or preventing changes in control or changes in management or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interest. For example, our controlling stockholders will be able to control the sale or other disposition of our operating businesses and subsidiaries to another entity.
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General Risk Factors
Consumer shopping preferences and shifts in distribution channels continue to evolve and could negatively impact our results of operations or our future growth.
Consumer preferences regarding the shopping experience continue to rapidly evolve. If we or our wholesale customers do not provide consumers with an attractive shopping experience, our brand image and results of operations could be negatively impacted. If we do not successfully execute this strategy or continue to provide an engaging and user-friendly digital commerce platform that attracts consumers, our brand image and results of operations could be negatively impacted as well as our opportunities for future growth.
The Company’s operations could be disrupted by natural or human causes beyond its control.
The Company’s operations are subject to disruption from natural or human causes beyond its control, including physical risks from hurricanes, severe storms, floods and other forms of severe weather, accidents, fires, earthquakes, terrorist acts and epidemic or pandemic diseases such as the COVID-19 or variants of that virus, any of which could result in suspension of operations or harm to people or the environment. While all of the Company’s corporate operations are located in the United States, the Company participates in a Chinese and Thailand product supply chain, and if a disease spreads sufficiently to cause a pandemic (or to cause the fear of a pandemic to rise) or governments regulate or restrict the flow of labor or products or impede the travel of Company personnel, the Company’s ability to conduct normal business operations could be impacted which could adversely affect the Company’s results of operations and liquidity. Most of the Company products are sourced and made in China and Thailand and an increased or prolonged disruption could substantially and adversely impact the Company’s production of products. Currently, the Company’s Chinese and Thailand suppliers have reopened and building to full production capabilities.
We may not successfully execute our long-term strategies, which may negatively impact our results of operations.
Our ability to execute on our long-term strategies depends, in part, on successfully executing on strategic growth initiatives in key areas, such as our new Connected Chef product. Our growth in these areas depends on our ability to continue to successfully market these new products to existing customers, grow our e-commerce and mobile application offerings in the U.S. market and continue to successfully increase our product offerings in the Connected Surfaces category. Our long-term strategy depends on our ability to successfully drive expansion of our gross margins, manage our cost structure and drive return on our investments. If we cannot effectively execute our long-term growth strategies while managing costs effectively, our business could be negatively impacted, and we may not achieve our expected results of operations.
If we fail to adequately protect intellectual property rights, competitors may manufacture and market similar products, which could adversely affect our market share and results of operations.
We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. Our trademarks are of material importance to our business and are among our most important assets. Accordingly, our future success may depend, in part, upon the goodwill associated with our trademarks and brand names. We own a number of patents; patent applications and other technology which we believe are significant to our business.
Our products are made in China and Thailand. We face risks that our proprietary information may not be afforded the same protection in China as it is in countries with well-developed intellectual property laws, and local laws may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights in China, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. We cannot be sure that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect, or maintain our own intellectual property rights or, where appropriate, license intellectual property rights necessary to support new product introductions. We cannot be certain that these rights, if obtained, will not be invalidated, circumvented or challenged in the future, and we could incur significant costs in connection with legal actions to defend our intellectual property rights.
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Even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold do not protect intellectual property rights to the same extent as the laws of the United States. If other parties infringe our intellectual property rights, they may dilute the value of our brands in the marketplace, which could diminish the value that consumers associate with our brands and harm our sales. The failure to perfect or successfully assert our intellectual property rights could make us less competitive and could have a material adverse effect on our business, operating results, and financial condition.
There may be emerging, or new technologies patented by others. These new technologies may be critical to competing in a product niche, especially one like the emerging smart devices in smart home industry. We may be unable to license or affordably license new technologies owned by others and critical to competing in the product niche.
Our results of operations and financial condition could be seriously impacted by security breaches, including cybersecurity incidents.
Failure to effectively prevent, detect and recover from security breaches, including attacks on information technology and infrastructure by hackers; viruses; breaches due to employee error or actions; or other disruptions could result in misuse of our assets, business disruptions, loss of property, and confidential business information. Such attacks could result in unauthorized parties gaining access to at least certain confidential business information. However, to date, we have not experienced any financial impact, changes in the competitive environment or business operations that we attribute to such attacks. Although management does not believe that we have experienced any security breaches or cybersecurity incidents, there can be no assurance that we will not suffer such attacks in the future. We actively manage the risks within our control that could lead to business disruptions and security breaches and have expended significant resources to enhance our control environment, processes, practices and other protective measures. Despite these efforts, as these threats continue to evolve, particularly around cybersecurity, such events could adversely affect our business, financial condition or results of operations.
We expect our results of operations to fluctuate on a quarterly and annual basis.
Company’s revenue and results of operations could vary significantly from period to period and may fail to match expectations because of a variety of factors, some of which are outside of our control. As a result of the potential variations in our revenue and results of operations, period-to-period comparisons may not be meaningful and the results of any one period should not be relied on as an indication of future performance. In addition, our results of operations may not meet the expectations of investors or public market analysts who follow us, which may adversely affect our stock price. Since the Connected Chef is a new product line, we lack the operational experience to determine if Connected Chef has seasonal sales cycles.
Item 1B. Unresolved SEC Staff Letters.
None for the fiscal year ended December 31, 2023.
Item 2. Properties.
The Company had operating lease agreements for its principal executive offices in Fort Lauderdale, Florida that expired June 30, 2023. The Company’s principal executive office were located at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441. The Company did not renew the expiring operating lease.
On July 1, 2023, the Company commenced an office space license to use designated office space at #144-V, 10 Fairway Drive, Suite 1000, Deerfield Beach, Florida 33441. The short-term lease is a month-to-month agreement for professional office space for a monthly fee of $75 with a security deposit of $75. The agreement may be terminated by the Company or the licensor of the office space upon a written notice provided thirty (30) days in advance.
The Company has one short storage rental in effect as of 2023 with a duration of less than twelve months.
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Item 1C. Cybersecurity.
Our information systems consist of computer systems used by the Company’s Chief Executive Officer and chief financial officer. They actively monitor our threat environment for cybersecurity threats using various methods, including automated detection tools, scans of the threat environment, investigations of potential threats they discover or that are reported to them, and reports and services that identify threats. They monitor our information systems for vulnerabilities using internal and third-party penetration testing, intelligence feeds, and vulnerability databases.
Company’s computer systems involve the use of third-party technology or service providers, or vendors, such as hosting platforms, open-source software, and application providers. Employees are provided specific guidance to mitigate the risk of a cybersecurity attack. This guidance includes safeguards over confidential data, being aware of suspicious emails, choosing passwords, protection of Company issued and use of personal devices, managing large data transfers. Employees are directed to immediately contact the Chief Executive Officer if they encounter any suspicious activity.
If a cybersecurity risk is identified, Company’s policy is to use vendors to assist the Company to identify, assess, and manage material risks from cybersecurity threats to corporate systems, which consulting firms may include consulting firms, external legal counsel, incident response vendors, auditors, monitoring technology, and cybersecurity data providers.
The Company’s Chief Executive Officer is tasked with reporting on cybersecurity measures and issues to the entire board of directors. In the event of a cybersecurity incident, Company policy is for the Company Chief Executive Officer to report the cybersecurity incident to the Company’s board of directors and take remedial actions to mitigate and remediate cybersecurity incidents.
As of and for the year ended December 31, 2023, there have been no cybersecurity incidents that have materially affected the Company’s business strategy, results of operations, or financial condition.
Item 3. Legal Proceedings.
We are not a party to any material pending legal proceedings and, to the best our knowledge, no such action by or against us has been threatened. From time to time, we may be subject to legal proceedings and claims that arise in the ordinary course of business. Although occasional adverse decisions or settlements may occur in such routine lawsuits, we believe that the final disposition of such routine lawsuits will not have material adverse effect on our financial position, results of operations or cash flows.
Other Legal Matters
To the best of our knowledge, none of our directors, officers or owner of record of more than five percent (5%) of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us in reference to pending litigation.
Item 4. Mine Safety Disclosures (Not Applicable).
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
The Company’s Common Stock is quoted on The OTC Markets Group, Inc.’s QB Venture Market Tier under the trading symbol “CAPC”.
As of March 18, 2024, there were 240 approximately holders of record (excluding OBO/Street Name accounts) of our Common Stock and estimated 48,826,864 outstanding shares of the Common Stock.
Dividend Policy
We have not declared or paid any cash or other dividends on shares of our Common Stock in the last seven years, and we presently have no intention of paying any cash dividends on shares of our Common Stock. We do not currently anticipate, based on existing financial performance, to be declaring or paying dividends on any series of our preferred stock in the foreseeable future. Our current policy is to retain earnings, if any, to finance the expansion and development of our business. The future payment of dividends on shares of our Common Stock are at the sole discretion of our board of directors.
Recent Sales of Unregistered Securities
There were no unregistered securities sold or issued during the year ended December 31, 2023.
Unregistered Sales of Equity Securities and Use of Proceeds.
Adoption of Stock Repurchase Plan
On August 23, 2016, the Company’s Board of Directors authorized the Company to implement a stock repurchase plan for up outstanding common stock. The repurchase plan may be discontinued at any time at the Company’s discretion.
On December 19, 2018, Company entered a Purchase Plan pursuant to Rule 10b5-1 under the Exchange Act, with Wilson Davis & Co., Inc., a registered broker-dealer. Under the Purchase Plan, Wilson Davis & Co., Inc will make periodic purchases of shares at prevailing market prices, subject to the terms of the Purchase Plan.
On May 31, 2019, the Company’s Board of Directors the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program remained at $1,000,000 during the renewal period.
During May and June 2022, the Company repurchased 66,167 shares of the Company’s outstanding common stock in the open market. The total purchase cost was $11,662.
On July 7, 2022, the Board of Directors resolved to discontinue the stock purchase agreement.
As of December 31, 2023, a total of 816,167 of the Company’s common stock was repurchased since the plan was incepted at a total cost of 119,402. The cost of the repurchased shares were recorded as a reduction of additional paid-in capital.
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Item 6. Reserved.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 2023 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.
Executive Summary
Total net revenue for the year ended December 31, 2023, decreased 45% to $192,176 as compared to $346,474 in the same period of last year. The net operating loss was approximately $1,634,854 for the year 2023 compared to a net loss of $2,921,514 in 2022. The Company had an estimated net tax provision in 2023 and 2022 of $35,000 and $68,000, respectively.
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. Capstone International Hong Kong, Ltd., or “CIHK”, was established to expand the Company’s product development, engineering, and factory resource capabilities. With the 2021 shift of manufacturing to Thailand from China, the CIHK operation was dormant. 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 Chef a purpose-built kitchen tablet with an accessory platform to accommodate food prep accessories such as a cutting board. The Connected Chef has Google mobile services allowing for pre-installation of specific Google applications including Playstore, voice assistant, YouTube to name those highly recognized.
The Company’s focus through 2017 was the integration of LEDs into most commonly used consumer lighting products in today’s home. The LED category has matured and is no longer the innovative “must have” consumer product as in previous years, as such, revenues for the LED product line have declined significantly in 2023. The Connected Surfaces is the Company’s effort to establish business in an emerging segment that is intended for future revenue growth. The smart home segment is the umbrella category in which we intend to participate with the Connected Surfaces program. The Connected Surfaces products have not enjoyed significant sales in 2023 – either online or through efforts to sell in bulk to brick-and-mortar, “big box” retailers. The Smart Mirror product line had limited sales for 2023, and all inventory was expensed as of December 31, 2023.
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The Connected Chef, a purpose-built kitchen tablet with an accessory platform to accommodate food prep accessories such as a cutting board. The Connected Chef has Google mobile service allowing for pre-installation of specific Google applications including Playstore, voice assistant, YouTube to name those highly recognized. The Connected Chef was ready for formal introduction in quarter four of 2023, and Management is actively marketing the Connected Chef tablet to appliance manufacturers and distributors, but the product has no purchase commitments from retailers as of the date of this filing. Further, the Company will have to raise funding to fund production costs, which funding may not be available to the Company.
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 Chef. 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. |
| ● | 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
For 2023, revenue was derived from sales of our residential lighting products and Connected Surfaces Smart Mirrors. The residential products were directed towards consumer home LED lighting for both indoor and outdoor applications while the Smart Mirrors were sold directly to consumers via e-commerce efforts. We recognize revenue upon shipment of the order to the customer when all performance obligations have been completed and title has transferred to the customer and in accordance with the respective sale’s contractual arrangements. Each contract on acceptance will have a fixed unit price. All of our sales were to the U.S. market in 2023 and we expect to the U.S Market to continue to be the major source of revenue for the Company. Net revenue also includes the cost of instant rebate coupons, promotional coupons, and product support allowances provided to retailers to promote certain products. All of our revenue is denominated in U.S. dollars.
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Cost of Goods Sold
Our cost of goods sold consists primarily of purchased products from contract manufacturers and when applicable associated duties and inbound freight. In addition, our cost of goods sold also includes reserves for potential warranty claims and freight allowances. We source our manufactured LED lighting products based on customer orders. Beginning in 2021 with the launch of our Connected Surfaces Smart Mirror, we maintained inventory on hand for direct to consumer shipment to fulfill sales orders. As the Smart Mirror product line had limited sales for 2023, and all inventory was expensed as of December 31, 2023.
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 expensed includes charges relating to product development, office and warehousing, accounting, legal, insurance and stock-based compensation.
CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
| December 31, 2023 | December 31, 2022 | |||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | |||||||||||||
| Revenue, Net | $ | 192,176 | 100.0 | % | $ | 346,474 | 100.0 | % | ||||||||
| Increase in inventory reserve and inventory write offs | 133,775 | (69.8 | )% | 692,154 | (200.0 | )% | ||||||||||
| Cost of sales | 324,041 | (168.6 | )% | 256,868 | (73.9 | )% | ||||||||||
| Gross Profit (Loss) | (265,640 | ) | (138.2 | )% | (602,548 | ) | (173.9 | )% | ||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing | 75,890 | 39.6 | % | 359,535 | 103.8 | % | ||||||||||
| Compensation | 469,599 | 244.8 | % | 817,409 | 235.9 | % | ||||||||||
| Professional fees | 426,157 | 221.9 | % | 457,500 | 132.0 | % | ||||||||||
| Product development | 101,409 | 52.6 | % | 203,751 | 58.8 | % | ||||||||||
| Other general and administrative | 296,159 | 154.2 | % | 480,771 | 138.8 | % | ||||||||||
| Total Operating Expenses | 1,369,214 | 713.0 | % | 2,318,966 | 669.3 | % | ||||||||||
| Operating Loss | (1,634,854 | ) | (851.6 | )% | (2,921,514 | ) | (843.2 | )% | ||||||||
| Other Income (Expenses) | ||||||||||||||||
| Miscellaneous Income , net | 77,106 | 40.1 | % | 394,952 | 114.0 | % | ||||||||||
| Interest expense, net | (103,741 | ) | (54.2 | )% | (69,686 | ) | (20.1 | )% | ||||||||
| Total Other Income, net | (26,635 | ) | (14.1 | )% | 325,266 | 93.9 | % | |||||||||
| Loss Before Tax Benefit | (1,661,489 | ) | (865.1 | )% | (2,596,248 | ) | (749.3 | )% | ||||||||
| Income Tax Expense | 34,950 | 0.5 | % | 67,503 | 19.5 | % | ||||||||||
| Net Loss | $ | (1,696,439 | ) | (883.3 | )% | $ | (2,663,751 | ) | (768.8 | )% | ||||||
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Net Revenues
For the year ended December 31, 2023, net revenues were $192,176, a decrease of $154,298 or 45% from $346,474 in fiscal 2022.
Due to working capital constraints during 2023, the Company was unable to effectively market the Smart Mirrors, resulting in lower than anticipated revenues .
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. The Company also provides promotional coupons for the Connected Surfaces Smart Mirror when determined necessary. Sales reductions for anticipated discounts, coupons, 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 approximately $17,000 and $26,700 for the years ended December 31, 2023 and 2022, respectively.
For the years ended December 31, 2023 and 2022, international sales were approximately $0 or 0% of revenue and $44,000 or 13 % of revenue, respectively.
The following table disaggregates net revenue by major source:
| For the Year Ended December 31, 2023 | For the Year Ended December 31, 2022 | |||||||||||||||
| Capstone Brand | % of Revenue | Capstone Brand | % of Revenue | |||||||||||||
| Lighting Products- U.S. | $ | 65,025 | 34 | % | $ | 228,680 | 66 | % | ||||||||
| Smart Mirror Products- U.S. | 127,151 | 66 | % | 73,154 | 21 | % | ||||||||||
| Lighting Products-International | — | — | % | 44,640 | 13 | % | ||||||||||
| Total Revenue | $ | 192,176 | 100 | % | $ | 346,474 | 100 | % | ||||||||
Gross Profit and Cost of Sales
Gross loss for the year ended December 31, 2023, was approximately ($265,640), or (138.2%) of net revenues, as compared to ($602,548) or (173.9%) of net revenues, for fiscal 2022. For the years ended December 31, 2023 and 2022, cost of sales were approximately $458,000 and $949,022, respectively, a reduction of $491,206 or 22% from the previous year. The gross profit reduction was the direct result of the reduced revenue in the year, relating to the low sales of the Smart Mirror and reduction in sales of the LED lighting products. Costs represented 239% and 274% of net revenues for 2023 and 2022, respectively. This increased cost was primarily due to a write off of ending Smart Mirror inventory at December 31, 2023 of $133,775. Management is currently reviewing liquidation opportunities on the Smart Mirror while actively marketing the new product line of Connected Chef, a purpose built kitchen tablet with an accessory platform to accommodate food prep accessories such as a cutting board. The Connected Chef has Google mobile services allowing for pre-installation of specific Google applications including Playstore, voice assistant, YouTube to name those highly recognized.
Operating Expenses
Sales and Marketing Expenses
In fiscal 2023 and 2022, sales and marketing expenses were approximately $76,000 and $360,000 respectively, a reduction of $284,000 or 79%. As a percent to revenue, 2023 sales and marketing expenses were 39.6% as compared to 104% in 2022
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Social Media expense in 2023 was $3,500, a reduction of $142,500 or 98% from $146,0000 in 2022. Advertising and promotional expenses were $4,700 in 2023 as compared to $24,900 in 2022, a reduction of $20,200 or 81%. The decrease in social media and advertising expenses were in connection with the working capital restraints. Trade Show expense was $0 in 2023 as compared to $113,300 in 2022, a reduction of $113,300 as the Company did not attend any trade shows during 2023.
Compensation Expenses
For the years ended December 31, 2023 and 2022 compensation expenses were approximately $469,600 and $817,400, respectively, a reduction of $347,800 or 43.0%. As a percent of net revenues, 2023 expenses were 244.8% as compared to 235.9% in 2022. The Company reduced the workforce during 2023 as a result of the poor sales on the Smart Mirror.
Professional Fees
For fiscal 2023, professional fees were approximately $426,200 compared to $457,500 in 2022, a reduction of $31,300 or 7 %. As a percent of net revenue 2023 expenses were 221.9% as compared to 132.0% in 2022. In 2023, consulting fees were approximately $190,000 compared to $260,000 for 2022. Accounting, legal and other expenses were $235,700, an increase of $38,100 from $197,600 in the prior year.
Product Development Expenses
For the years ended December 31, 2023, and 2022, product development expenses were approximately $101,000 and $204,000, respectively, a decrease of $103,000 or 50%. In 2023 the Company invested $79,000 in the development of the Connected Chef compared to $44,000 in 2022. In 2023, the Company spent $22,000 in Smart Mirror development compared to approximately $138,000 in 2022.
Other General and Administrative Expenses
For fiscal 2023 and 2022, other general and administration expenses were approximately $296,000 and $481,000, respectively, a decrease of $185,000 or 38.6%. As a percent to revenue 2023 other general and administrative expenses were 154.2% as compared to 138.8% in 2022. The Directors insurance decreased in 2023 from $124,000 in 2022 to $114,000 a $10,000 or 8% decrease. The Company’s liability insurance also decreased in 2023 from $32,000 to $17,000, a decrease of $15,000 or 46.9%. Lodging fees decreased from $41,000 in 2022 to $12,000 in 2023. These reductions are a result of the cost reduction strategies taking by Management to streamline and reduce operating overhead as much as possible.
Total Operating Expenses
For the years ended December 31, 2023, and 2022, total operating expenses were approximately $1,369,000 and $2,319,000, respectively. This represents a $950,000 or 41.0% decrease over fiscal year 2022.
Operating Loss
For the year ended December 31, 2023, the operating loss was approximately $1,634,000 as compared to $2,922,000 in 2022, a loss decrease of $1,288,000 over 2022.
Other Income (Expense)
For fiscal 2023 other income was approximately $77,000 compared to $395,000 in 2022, a decrease of $318,000 over 2022. The other income for the year ended December 31, 2022 resulted from $152,000 in employee retention tax credit received under Cares act 2020-2021, versus $49,000 received in 2023 and $162,000 freight claim recovery for the damaged Smart Mirror inventory that was written off in December 31, 2021.
Interest expense for 2023 amounted to $104,000 compared to $70,000 in 2022, an increase of $34,000 or 49%, due to the increase of $632,500 in notes payable held by the Company, accruing interest at 5% per annum.
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For the years ended December 31, 2023, the net tax expense for income tax was estimated at $35,000 compared to a net tax expense of $67,000 in the same period 2022.
The effective tax rate for the years ended December 31, 2023 and 2022, respectively, was (2.10 %) and (2.61%) and the statutory tax rate was 23.82% in 2023 and 25.39% in 2022.
Net Loss
For fiscal 2023 and 2022 net loss before taxes was approximately $1,661,000 and $2,596,000, respectively, a net loss decrease of approximately $934,000 over the previous year due to the reasons summarized above.
RESULTS OF OPERATIONS AND BUSINESS OUTLOOK
Our goal is for the new Connected Chef kitchen utility device to launch in early 2024 through a partnership with a appliance manufacturer and distributor. Approximately 46% of domestic households have one smart device in their home. Our Connected Surfaces portfolio falls in line with the average user of internet-of-things home devices. 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 will require additional funding to build its marketing effort, inventory levels and service levels once the revised marketing back to retail 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 Connected Chef, may impact selling prices and related margins of profit.
Contractual Obligations
The following table represents contractual obligations as of December 31, 2023.
| Payments Due by Period | ||||||||||||||||||||
| Total | 2024 | 2025 | 2026 | After 2027 | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | 804,623 | $ | 804,623 | $ | — | $ | — | $ | — | ||||||||||
| Short-Term Debt – related parties | 1,946,315 | 1,946,315 | — | — | — | |||||||||||||||
| Short-Term Debt | 594,161 | 594,161 | — | — | — | |||||||||||||||
| Long-Term Debt – related parties | — | — | — | — | — | |||||||||||||||
| Long-Term Debt | — | — | — | — | — | |||||||||||||||
| Operating and Short Term Leases | — | — | — | — | — | |||||||||||||||
| Total Contractual Obligations | $ | 3,345,099 | $ | 3,345,099 | $ | — | $ | — | $ | — | ||||||||||
Notes to Contractual Obligations Table
Accounts payable and accrued liabilities —Comprised of the Company’s liability for goods and services in the normal course of business as well as deferred compensation for management.
Short Term Debt – notes payable with related parties – Related to working capital funding.
Short Term Debt – note payable with unrelated parties – Related to working capital funding.
Long Term Debt – related parties – Related to working capital and purchase order funding.
Long Term Debt — note payable unrelated parties – Related to purchase order funding.
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LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2023, the Company used cash in operations of approximately $614,000 and generated net operating losses of $1,634,000. As of December 31, 2022, the Company had working capital deficit of $3,277,000 and an accumulated deficit of $10,797,000. The Company’s cash balance decreased by approximately $25,000 from $61,000 as of December 31, 2022 to $36,000 as of December 31, 2023. With the reduced revenues in 2022 and 2023 the Company initiated an expense mitigation plan that reduced discretionary spending including travel, lodging and trade show expenses, deferred executive management compensation, and closed the Hong Kong operation. These efforts assisted the Company in conserving cash and allowing for management to focus on finalizing production of the Connected Chef by the end of 2023.
The Company is actively seeking alternative sources of liquidity, including but not limited to accessing the capital markets, strategic partnerships, or other alternative financing measures. but has been unable to secure long term funding or establish strategic partnerships, or secure other sources of liquidity. As stated, Company’s low market price for its common stock and poor financial condition and performance hinder these efforts.
Besides the efforts to finish development the Connected Chef kitchen appliance product line, the Company is exploring the merger of the Company with a private operating company as a possible means of developing a new business line as well as considering other common strategic alternatives for a company facing business and financial challenges and uncertainties such as ours. Management is closely monitoring its operations, liquidity, and capital resources and is actively working to minimize the current and future impact of this unprecedented situation.
Director and Chief Executive Officer, Stewart Wallach, has funded working capital since 2022 as the Company navigates these challenges. Total working capital note proceeds received as of the date of this filing are $672,500. The note payable accrues simple interest at a rate of 5 percent per annum, matures June 15, 2024, with the ability for the Company to request a 90-day extension.
The Company can make no assurances that it will be able to raise the required capital. 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, | ||||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Net cash provided by (used in): | ||||||||
| Operating Activities | $ | (614,527 | ) | $ | (1,904,367 | ) | ||
| Investing Activities | (42,970 | ) | — | |||||
| Financing Activities | 632,500 | 688,338 | ||||||
| Net increase (decrease) in cash | $ | (24,997 | ) | $ | (1,216,029 | ) | ||
As of December 31, 2023 the Company’s working capital deficit was approximately $3,300,000 of which $36,000 was cash. Current liabilities were $3,345,000 and include:
| ● | Accounts payable of approximately $69,000 for amounts due vendors and service providers. |
| ● | Accrued expenses of approximately $735,000 for warranty allowances, wages, and customer deposits. |
| ● | Notes payable – related parties - current portion of approximately $1,946,000. |
| ● | Notes payable – unrelated parties - current portion of approximately $594,000. |
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Cash Flows provided by (used in) Operating Activities
Cash used in operating activities was approximately $614,000 in 2023 compared with approximately $1,900,000 in 2022. The cash used in operating activities in 2023 included the negative cash impact of the net loss, which was approximately $1,696,000, offset by a decrease in inventory of $412,000, an increase in accounts payable and accrued expenses of $495,000.
Cash Flows used in Investing Activities
Cash provided by in investing activities in 2023 was $42,970 compared to cash used in investing activities of $0 in 2022. The Company continued and finalized production of the Connected Chef during 2023 and purchased the product mold for future manufacturing. Future capital requirements will increase to fund future mold and tooling as the Company expands the Connected Chef manufacturing.
Cash Flows used in Financing Activities
Cash received and used in financing activities for the years ended December 31, 2023 and 2022, was approximately $632,000 and $688,000, respectively. During 2023, the Company received $632,000 in working capital. In 2022, the Company received $700,000 in working capital funding netted against a $12,000 repurchase of common shares.
Exchange Rates
We sell all of our products in U.S. dollars and pay for all of our manufacturing costs in U.S. dollars.
While exchange rates have been stable for several years, we cannot assure you that the exchange rate between the United States, 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 eight 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.
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Revenue Recognition
The Company recognizes lighting product revenue when the Company’s performance obligations as per the terms in the customers purchase order have been fully satisfied, specifically, when the specified product and quantity ordered has been manufactured and shipped pursuant to the customers requested ship window, when the sales price as detailed in the purchase order is fixed, when the product title and risk of loss for that order has passed to the customer, and collection of the invoice is reasonably assured. This means that the product ordered and to be shipped has gone through quality assurance inspection, customs and commercial documentation preparation, the goods have been delivered, title transferred to the customer and confirmed by a signed cargo receipt or bill of lading. Only at the time of shipment when all performance obligations have been satisfied will the judgement be made to invoice the customer and complete the sales contract.
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 products 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, 2023 and 2022, the Company had processed approximately $17,000 and $26,700, 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.
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Allowance for Credit Losses
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 credit losses 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 credit losses 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 December 31, 2023 and 2022, management determined that the accounts receivable is fully collectible. As such, management has not recorded an allowance for credit losses.
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. There was no impairment charge for the year ended December 31, 2023 and 2022.
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.
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.
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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, 2023, the Company had federal and state net operating loss carry forwards of approximately $6,540,000 and $5,028,000 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, 2023 and 2022 was $320,000 and $285,000, 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 included 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 approximately $862,000 which was recorded in the first quarter 2020 of which a total of $806,800 was subsequently received. During the year ended December 31, 2022, the difference of $55,265 was reflected in income tax expense on the consolidated statement of operations.
The effective tax rate for the years ended December 31, 2023 and 2022, respectively, was (2.10%) and (2.61%) and the statutory tax rate was 23.82% in 2023 and 25.9% in 2022.
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, 2023 and 2022. 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 $320,000 and $285,000 is presented on the company’s balance sheet, respectively. The Company’s valuation allowance increased by $248,056 in 2023.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. (Not Applicable)
Item 8. Financial Statements and Supplementary Data.
The financial statements and financial statement schedules of CAPC as well as supplementary data are listed in Item 15 below and are included after the signature page to this Form 10-K report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
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Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2023 and concluded that the Company’s disclosure controls and procedures are effective. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is accumulated, recorded, processed, summarized and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure to be reported within the time periods specified in the SEC’s rules and regulations.
Management’s Annual Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the Company’s assessment, management has concluded that its internal control over financial reporting was effective as of December 31, 2023 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company. |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because the Company is a smaller reporting company, this Form 10-K report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm.
Management, including the Company’s Chief Executive Officer and Interim Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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The certifications of our Chief Executive Officer and Interim Chief Financial Officer attached as Exhibits 31 and 32 and to this Report include information concerning our disclosure controls and procedures and internal control over financial reporting.
Item 9B. Other Information. None
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection. Not applicable.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
CURRENT BOARD OF DIRECTORS
The incumbent and current members of the Board of Directors are:
| 1. | Stewart Wallach. Mr. Wallach has been a Director since April 2007. |
| 2. | Gerry McClinton. Mr. McClinton resigned as a Director as of November 30, 2022 |
| 3. | Jeffrey Postal. Mr. Postal has been a Director since January 2004. |
| 4. | Jeffrey Guzy. Mr. Guzy was appointed as a Director on May 3, 2007. Mr. Guzy is deemed an “Independent Director” under applicable standards. |
| 5. | George Wolf was appointed as a Director on January 13, 2022. |
Each Director’s term is for one year. Company Directors have typically been elected in the past by written consent of stockholders holding more than 50% of the current voting power. The Company uses the written consent because a small number of shareholders have sufficient voting power to decide the election of Directors and approval or denial of any other corporate resolution and the cost of conducting an annual stockholders’ meeting is significant for a small reporting company. The Company conducts regular stockholder-investor conference calls to allow stockholders to interact with Company senior management and to ask questions of that management.
Further, stockholders may make inquiries in writing by sending their inquiries to Secretary, Capstone Companies, Inc., #144-V 10 Fairway Drive, Suite 100, Deerfield Beach, Florida 33441. The information required in Part III of this Form 10-K report is set forth in the information statement filed for the written consent approval of nominee slates of Directors and the requirements for stockholders to submit proposed resolutions and Director nominees is set forth in this Form 10-K report.
DIRECTOR PROFILES
Stewart Wallach, Age 72, Chief Executive Officer and Chairman of the Board of Directors since April 23, 2007, a director of the Company since September 22, 2006, and the founder and Chief Executive Officer and Chairman of the Board of Directors of Capstone Industries, Inc., a wholly owned subsidiary, and principal operating subsidiary of the Company since September 20, 2006. Mr. Wallach is an American entrepreneur and has founded and operated a number of successful businesses over his 35-year career. Over the past 15 years, Mr. Wallach has been focused on technology-based companies in addition to consumer product businesses, the field in which he has spent most of his career. Prior to founding Capstone Industries, Inc., he sold Systematic Marketing, Inc., which designed, manufactured, and marketed automotive consumer products to mass markets, to Sagaz Industries, Inc., a leader in these categories. He served as President of Sagaz Industries, Inc. for 10 years before forming Capstone Industries, Inc. In 1998, Mr. Wallach co-founded Examsoft Worldwide, Inc. (“Examsoft”), which developed and delivered software technology solving security challenges of laptop-based examinations for major educational institutions and state bar examiners.
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Mr. Wallach remained chairman of Examsoft until it was acquired in late 2009. Mr. Wallach has designed and patented a number of innovations over the span of his career and has been traveling to China establishing manufacturing and joint venture relationships since the early 1980s.
Dr. Jeffrey Postal, Age 66. Director. He has served as a director of the Company since January of 2004. Dr. Postal presently is a businessman and entrepreneur in the Miami, Florida region. Dr. Postal owns, founded or funded numerous successful businesses over the last few years, including but not limited to: Sportacular Art, a company that was licensed by the National Football League, Major League Baseball and National Hockey League to design and manufacture sports memorabilia for retail distribution in the U.S; Co-Owner of Natures Sleep, LLC, a major distributor of Visco Memory Foam mattresses, both nationally and internationally; Dr. Postal is a Partner in Social Extract, LLC, a Social Media company offering consulting services to many major companies in the U.S.; Dr. Postal is the principal investor of Postal Capital Funding, LLC, a private investment fund whose mission is to find undervalued/under capitalized companies and extend funding to them in exchange for equity and/or capital consideration; and Dr. Postal is the founder of Datastream Card Services, a company that provides innovative billing solutions to companies conducting business on the internet.
Jeffrey Guzy, Age 71. Director. He was appointed to the Company’s Board of Directors on May 3, 2007. He serves as Chairman and Chief Executive Officer of CoJax Oil and Gas Corporation, an SEC reporting company. Mr. Guzy is an outside director of Leatt Corporation, an SEC reporting company (OTCQB: LEAT). Mr. Guzy served, from October 2007 to August 2010 as President of Leatt Corporation. Mr. Guzy has a MBA in Strategic Planning and Management from The Wharton School of the University of Pennsylvania; a M.S. in Systems Engineering from the University of Pennsylvania; a B.S. in Electrical Engineering from Penn State University; and a Certificate in Theology from Georgetown University. Mr. Guzy has served as an executive manager or consultant for business development, sales, customer service and management in the telecommunications industry, specifically, with IBM Corp., Sprint International, Bell Atlantic Video Services, Loral CyberStar and FaciliCom International. Mr. Guzy has also started his own telecommunications company providing Internet services in Western Africa. He serves as an independent director and chairman of the audit committee of Purebase Corporation (OTC: PUBC) a public company.
George Wolf, Age 73. Mr. Wolf has provided sales and business development consulting services to the Company since 2014. Prior to Mr. Wolf providing these consulting services, he served as President and Chief Executive Officer of Systematic Development Group, LLC from 2010 into 2014, President and Chief Executive Officer of ExamSoft Worldwide, Inc. (1998 – 2009) and as Executive Vice President of Sagaz Industries, Inc. (1986 – 1997).
Set forth below is a tabular disclosure summarizing some of the specific qualifications, attributes, skills and experiences of our directors.
| Name | Title | Qualifications | ||
| Stewart Wallach | Chairman of the Board and Chief Executive Officer | He has extensive experience in executive management of companies. He has experience in growing operations and merger and acquisition transactions. He has extensive experience in arranging the design, development and production of products in foreign nations for shipment and sale in the U.S. and conducting business abroad. His experience provides insight for the implementation of effective operational, financial and strategic leadership of the Company. | ||
| Jeffrey Postal | Director | He has extensive experience in investing in companies. He has extensive experience in management and business, He has experience growing a company and mergers and acquisitions. | ||
| Jeffrey Guzy | Director | Through his MBA in Strategic Planning & Management and his knowledge of U.S. capital markets, Mr. Guzy provides invaluable guidance and perspective to the Board. He serves and has served as an officer and director of public companies and worked for large corporations in business development. He brings this experience to the Board. | ||
| George Wolf | Director | He has extensive experience in sales and business development and has prior management experience. He is familiar with the Company’s sales and business development strategies and operations and has worked closely with executive officers of the Company in sales and business development. |
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POLICY REGARDING BOARD ATTENDANCE
Company Directors are expected to attend all annual and special board meetings per Company policy. An attendance rate of less than 75% over any 12-month period is grounds for removal from the Board of Directors. In fiscal year 2023, all Directors attended the (1) one board meeting .
ROLE OF THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCE
The Board of Directors is responsible for overseeing the Chief Executive Officer and other senior management in order to assure that such officers are competent and ethical in running the Company on a day-to-day basis and to assure that the long-term interests of the stockholders are being served by such management. The Directors must take a pro-active focus and approach to their obligation in order to set and enforce standards to ensure that the Company is committed to business success through maintenance of the highest standards of responsibility and ethics. The Company has adopted a Code of Ethics, which is posted on http://capstonecompaniesinc.com. The contents of the Company Website are not incorporated herein by reference and that Website provided in this Report is intended to be an inactive textual reference only.
AUDIT COMMITTEE
The Audit Committee was established in accordance with Section 3(a)(58) (A) of the Exchange Act. It is primarily responsible for overseeing the services performed by the Company’s Independent Registered Public Accounting Firm, evaluating the Company’s accounting policies and its system of internal controls and reviewing significant financial transactions. The members of the Audit Committee in fiscal year 2022 were Jeffrey Guzy and Jeffrey Postal. The Company believes that Mr. Guzy is an Independent Director under SEC and NASDAQ applicable standards. The Board of Directors has determined that Mr. Guzy qualifies as an “Audit Committee Financial Expert” as defined under applicable SEC rules and also meets the additional criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee is responsible for providing oversight to Company’s accounting and financial reporting processes and the audit of the Company’s financial statements. The Audit Committee monitors the Company’s external audit process, including auditor independence matters, the scope and fees related to audits, and the extent to which the Independent Registered Public Accounting Firm may be retained to perform non-audit services. The Audit Committee also reviews the results of the external audit with regard to the adequacy and appropriateness of our financial, accounting and internal controls over financial reporting. It also generally oversees the Company’s internal compliance programs. The function of the Audit Committee is not intended to duplicate or to certify the activities of the management and the Independent Registered Public Accounting Firm, nor can the Audit Committee certify that the independent registered public accounting firm is “independent” under applicable rules. The Audit Committee members are not professional accountants or auditors. Under its Charter, the Audit Committee has authority to retain outside legal, accounting or other advisors as it deems necessary to carry out its duties and to require the Company to pay for such expenditures.
The Audit Committee provides counsel, advice and direction to management and the Independent Registered Public Accounting Firm on matters for which it is responsible, based on the information it receives from management and the independent registered public accounting firm and the experience of its members in business, financial and accounting matters.
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The Company’s management is responsible for the preparation and integrity of its financial statements, accounting and financial reporting principles, and internal controls and procedures designed to ensure compliance with accounting standards, applicable laws and regulations.
In this context, the Audit Committee hereby reports as follows:
| 1) | Company’s management has represented to the Audit Committee that the 2023 audited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The Audit Committee has reviewed and discussed the audited financial statements for year 2023 with Company’s management and the independent registered public accounting firm. |
| 2) | The Audit Committee has received written disclosures and a letter from the Independent Registered Public Accounting Firm, Assurance Dimensions, required by the PCAOB and has discussed with Assurance Dimensions, their independence. |
| 3) | Based on the review and discussion referred to above, the Audit Committee recommended to the board, and the board has approved, that the audited financial statements be included in Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Commission on March 29, 2024. |
The foregoing report is provided by the undersigned Chairman of the Audit Committee.
/s/Jeffrey Guzy
Jeffrey Guzy, Chairman of Audit Committee
COMPENSATION AND NOMINATION COMMITTEE (“Compensation and Nomination Committee”)
Company’s Compensation and Nomination Committee is currently composed of two members (both Company directors): Mr. Jeffrey Guzy and Mr. Jeffrey Postal. Only Mr. Guzy, who serves as Chairman of the Compensation and Nomination Committee, is “independent” within the meaning of the NASDAQ Marketplace Rules.
Company’s Compensation and Nomination Committee assists the Company Board of Directors in reviewing and approving the compensation structure of executive officers, including all forms of compensation to be provided to the executive officers. The chief executive officer and chief financial officer may not be present at any Compensation and Nomination Committee meeting during which the executive’s compensation is discussed and deliberated.
The Compensation and Nomination Committee is responsible for, among other customary duties, the following:
| ● | Reviewing, overseeing and approving the compensation of Company’s executive officers; and |
| ● | Periodically reviewing and making recommendations to the Company Board of Directors about incentive compensation, stock or equity compensation plans, annual bonus programs and grants, any employee pension or welfare benefit plans and any similar forms of benefit plans; and |
| ● | Periodically reviewing and approving corporate performance and corporate performance goals that are applicable to compensation of Company’s chief executive officer and chief financial officer, evaluating the performance of those executives in light of corporate performance and corporate performance goals; and determining the compensation for the Company’s chief executive officer and chief financial officer. |
CODE OF ETHICS
The Company has a code of ethics that applies to all of the Company’s employees, including its principal executive officer, and principal financial officer, and its Board. A copy of this code is available on http://www.capstonecompaniesinc.com. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Form 8-K Report.
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DIRECTOR MEETINGS IN FISCAL YEAR 2023
The Board of Directors had (1) one official meetings in year 2023. During 2023, all Directors attended 75% or more of the Board meeting, which were held during the period of time that such person served on the Board or such committee.
Board Leadership Structure and Board’s Role in Risk Oversight
The Company’s Board of Directors endorses the view that one of its primary functions is to protect stockholders’ interests by providing independent oversight of management, including the Chief Executive Officer. The Chief Financial Officer is allowed and encouraged to address the Board of Directors on any issues affecting the Company or its stockholders. The Company also allows outside counsel to participate in some of the board meetings in order to provide legal counsel and an outside perspective on corporate governance and risk issues.
Board Structure. The Company believes that the Chief Executive Officer or “CEO” should also serve as Chairman of the Board of Directors in order to have the person most knowledgeable about the Company heading the Board of Directors.
The CEO is responsible for setting the strategic direction for the Company and the day-to-day leadership and performance of the Company, while the Chairman of the Board of Directors provides guidance to senior management and sets the agenda for Board of Directors meetings and presides over meetings of the full Board of Directors.
Our CEO serves on our Board of Directors, which we believe helps the CEO serve as a bridge between management and the Board of Directors, ensuring that both groups act with a common purpose. We believe that the CEO’s presence on the Board of Directors enhances his ability to provide insight and direction on important strategic initiatives to both management and the independent directors and, at the same time, ensures that the appropriate level of independent oversight is applied to all decisions by the Board of Directors.
The Chairman of the Board has no greater nor lesser vote on matters considered by the Board than any other director, and neither the Chairman nor any other director votes on any related party transaction. All directors of the Company, including the Chairman, are bound by fiduciary obligations, imposed by law, to serve the best interests of the stockholders. Accordingly, separating the offices of Chairman and Chief Executive Officer would not serve to enhance or diminish the fiduciary duties of any director of the Company.
Board of Director – 2023 Compensation Table
| Name (1) | Audit Committee | Nomination and Compensation Committees | Total Awards | |||||||||
| Stewart Wallach (2) | — | — | — | |||||||||
| George Wolf (2) | — | — | — | |||||||||
| Jeff Guzy | $ | — | — | — | ||||||||
| Jeff Postal | $ | — | — | — | ||||||||
| (1) | The individuals listed were appointed to the Board of Directors for 2022-2023. |
| (2) | Mr. Wallach and Mr. Wolf as Company Employees did not receive compensation for participating as a Director on the Board. |
On July 5, 2022, the Company approved the suspension of cash compensation for services as a director and services as a member of the Audit Committee, Compensation and Nomination Committee for independent directors Jeffrey Postal and Jeffrey Guzy until further notice.
On July 5, 2022, the Board of Directors of the Company held a special meeting and approved the following corporate actions or proposals:
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| ● | The Board nominated the following incumbent directors to stand for election to the Board for a term commencing upon election and ending in 2023 and the election and assumption of office of successors: (a) Stewart Wallach; (b) James McClinton; (c) George Wolf; (d) Jeffrey Postal; and (e) Jeffrey Guzy approved a resolution to seek shareholders vote or consent to these nominees. |
| ● | July 8, 2022 was set as the record date for holders of record of issued shares of Company Common Stock entitled to vote for election of, or written consent to election of, directors in 2022 and for any other matters presented for shareholder approval. |
On September 30, 2022, the Board rescinded the approval of the record date of July 8, 2022 and approved the record date to be changed to September 30, 2022. The election of directors has been postponed until 2023.
George Wolf, who was appointed as a director on January 13, 2022, waived any compensation as a director for 2022.
Independent Directors. The Board of the Company is typically comprised five directors, one of whom is an independent director under the listing standards of quotation systems like The NASDAQ Stock Market. The Company has sought unsuccessfully to recruit qualified independent directors. Although we have D&O insurance, we believe that past losses and low public stock market price discourages qualified candidates from serving as independent directors. This is a problem commonly faced by micro-cap, “penny stock” companies like our Company.
Our senior officers are responsible for the day-to-day management of risks the Company faces, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the Board of Directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. To do this, the Chairman of the Board and other non-officer directors met quarterly on average with management to discuss strategy and the risks facing the Company. Senior management, each member being also a director, attends the Board meetings and is available to address any questions or concerns raised by the Board on risk management and any other matters. The Chairman of the Board and members of the Board work together to provide strong, independent oversight of the Company’s management and affairs through its standing committees and, when necessary, special meetings of directors. Since most of the directors live in the same area, informal meetings between directors and officers also occur to discuss business risk and appropriate responses.
Director - Minimum Qualifications. The Compensation and Nominating Committee has adopted a set of criteria that it considers when it selects individuals not currently on the Board of Directors to be nominated for election to the Board of Directors. A candidate must meet the eligibility requirements set forth in the Company’s Bylaws. A candidate must also meet any qualification requirements set forth in any Board or committee governing documents. If the candidate is deemed eligible for election to the Board of Directors, the Compensation and Nominating Committee will then evaluate the prospective nominee to determine if he or she possesses the following qualifications, qualities or skills:
| ● | contributions to the range of talent, skill and expertise appropriate for the Board. |
| ● | financial, regulatory and business experience, knowledge of the operations of public companies and ability to read and understand financial statements. |
| ● | familiarity with the Company’s market. |
| ● | personal and professional integrity, honesty and reputation. |
| ● | the ability to represent the best interests of the shareholders of the Company and the best interests of the institution. |
| ● | the ability to devote sufficient time and energy to the performance of his or her duties; and |
| ● | independence under applicable Commission and listing definitions. |
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The Compensation and Nominating Committee will also consider any other factors it deems relevant. With respect to nominating an existing director for re-election to the Board of Directors, the Compensation and Nominating Committee will consider and review an existing director’s Board and committee attendance and performance; length of Board service; experience, skills and contributions that the existing director brings to the Board; and independence.
Director Nomination Process. The process that the Compensation and Nominating Committee follows when it identifies and evaluates individuals to be nominated for election to the Board of Directors is as follows:
For purposes of identifying nominees for the Board of Directors, the Compensation and Nominating Committee relies on personal contacts of the committee members and other members of the Board of Directors and will consider director candidates recommended by stockholders in accordance with the policy and procedures set forth above. The Compensation and Nominating Committee has not used an independent search firm to identify nominees.
In evaluating potential nominees, the Compensation and Nominating Committee determines whether the candidate is eligible and qualified for service on the Board of Directors by evaluating the candidate under the selection criteria, which are discussed in more detail below. If such individual fulfills these criteria, the Compensation and Nominating Committee will conduct a check of the individual’s background and interview the candidate to further assess the qualities of the prospective nominee and the contributions he or she would make to the Board of Directors.
Consideration of Recommendation by Stockholders. It is the policy of the Compensation and Nomination Committee of the Board of Directors of the Company to consider director candidates recommended by stockholders who appear to be qualified to serve on the Company’s Board of Directors. The Compensation and Nominating Committee may choose not to consider an unsolicited recommendation if no vacancy exists on the Board of Directors and the Compensation and Nomination Committee does not perceive a need to increase the size of the Board of Directors. To avoid the unnecessary use of the Compensation and Nominating Committee’s resources, the Compensation and Nomination Committee will consider only those director candidates recommended in accordance with the procedures set forth below.
Stockholder Proposal Procedures. To submit a recommendation of a director candidate to the Compensation and Nomination Committee, a stockholder should submit the following information in writing, addressed to the Chairperson of the Compensation and Nomination Committee, care of the Corporate Secretary, at the main office of the Company:
| 1. | The name of the person recommended as a director candidate. |
| 2. | All information relating to such person that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934. |
| 3. | The written consent of the person being recommended as a director candidate to being named in the proxy statement as a nominee and to serving as a director if elected. |
| 4. | The name and address of the stockholder making the recommendation, as they appear on the Company’s books; provided, however, that if the stockholder is not a registered holder of the Company’s common stock, the stockholder should submit his or her name and address along with a current written statement from the record holder of the shares that reflects ownership of the Company’s common stock; and |
| 5. | A statement disclosing whether such stockholder is acting with or on behalf of any other person and, if applicable, the identity such person. |
In order for a director candidate to be considered for nomination at the Company’s annual meeting of stockholders, when and if one is held, or to be considered prior to a written consent vote on director nominees, the recommendation must be received by the Compensation and Nominating Committee at least 30 days before the date of the annual meeting or, in the case of an information statement and no shareholder meeting being held, prior to April 1st.
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MANAGEMENT OF THE COMPANY
CURRENT OFFICERS. The current officers of the Company are:
| 1. | Stewart Wallach, age 72, was appointed as Chief Executive Officer and President of the Company on April 23, 2007. Mr. Wallach is also the senior executive officer and director of Capstone. |
| 2. | Dana Eschenburg Perez, age 46, was engaged as a consultant to perform the duties of Chief Financial Officer on January 1, 2023. She was appointed as interim Chief Financial Officer on March 27, 2023. |
FAMILY RELATIONSHIP: There is no family relationship between members of Company management.
Delinquent Section 16(a) Reports .
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and owners of more than ten percent of the Company’s Common Shares (“10% stockholders”), to file with the Commission initial reports of ownership and reports of changes in ownership of Common Shares of the Company. Executive officers, directors and 10% stockholders are required by SEC regulations to furnish the Company with copies of all forms they file pursuant to Section 16(a).
To the Company’s knowledge, based on review of the copies of such reports furnished to the Company, and with respect to the officers and directors, representations that no other reports were required, during the year ended December 31, 2022, all Section 16(a) filing requirements applicable to its executive officers, directors and 10% stockholders were complied with.
Item 11. Executive Compensation.
Role of Management
The Company believes that it is important to have our Chief Executive Officer’s input in the design of compensation programs for his direct reports. The Chief Executive Officer reviews his direct reports’ compensation programs annually with the Committee, evaluating the adequacy relative to the marketplace, inflation, internal equity, external competitiveness, business and motivational challenges and opportunities facing the Company and its executives. In particular, he considers base salary a critical component of compensation to remain competitive and retain his executives. All final decisions regarding compensation for the Chief Executive Officer’s direct reports listed in the Summary Compensation Table are made by the Compensation Committee. The Chief Executive Officer does not make recommendations with regard to his own compensation.
Role of the Compensation Consultant
While we may consult industry sources on compensation for executives, we have not engaged a consultant to analyze our compensation levels.
Compensation Components
For 2023, the principal components of compensation for each named executive officer (“NEO(s)”) were:
| ● | base salary. |
| ● | annual incentive. |
| ● | long-term incentive compensation (restricted stock awards); and |
| ● | perquisites and other benefits. |
Due to the financial condition of the Company, cash compensation has been deferred in fiscal years 2022 and 2023 and into first fiscal quarter of 2024 - See “Salary Deferrals” below.
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EXECUTIVE COMPENSATION
| Name & Principal Position | Year | Salary $ | Bonus $ | Stock Awards $ | Non-Equity Incentives $ | All Others $ | TOTAL | |||||||||||||||||||||
| Stewart Wallach, | 2023 | $ | 301,521 | $ | — | $ | — | $ | — | $ | — | $ | 301,521 | |||||||||||||||
| Chief Executive | 2022 | $ | 301,521 | $ | — | $ | — | $ | — | $ | — | $ | 301,521 | |||||||||||||||
| Officer (1,2,3,7,8,9,10,11,12) | 2021 | $ | 301,521 | $ | — | $ | — | $ | — | $ | — | $ | 301,521 | |||||||||||||||
| James G. McClinton, | 2023 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Chief Financial | 2022 | $ | 191,442 | $ | — | $ | — | $ | — | $ | — | $ | 191,442 | |||||||||||||||
| Officer & COO (4,5,6,7,8,9,10,11) | 2021 | $ | 191,442 | $ | — | $ | — | $ | — | $ | — | $ | 191,442 | |||||||||||||||
| Dana Eschenburg Perez | 2023 | $49,700 | — | — | — | — | — | |||||||||||||||||||||
| Chief Financial Officer | 2022 | — | — | — | — | — | — | |||||||||||||||||||||
| 2021 | — | — | — | — | — | — | ||||||||||||||||||||||
Footnotes:
(1) On February 5, 2023, the Company extended Stewart Wallach’s Employment Agreement, whereby Mr. Wallach will be paid $301,521 per annum.
(4) On February 5, 2020, the Company entered into a new Employment Agreement with James McClinton, , whereby Mr. McClinton would be paid $191,442 per annum.
(7) The Company has no non-equity incentive plans.
(8) The Company has no established bonus plan. Any bonus payments are made ad hoc upon recommendation of the Compensation Committee. Bonuses are only paid on a performance basis.
(9) On September 1, 2020, fifty percent of both Mr. Wallach and Mr. McClinton’s salary for the period September 1, 2020 through December 31, 2020 was accrued and deferred for payment until further notice.
(10) On January 1, 2021, fifty percent of both Mr. Wallach and Mr. McClinton’s salary for the period January 1, 2021 through March 31, 2021 was deferred for payment until further notice.
(11) On January 1, 2022, fifty percent of both Mr. Wallach and Mr. McClinton’s salary was deferred for payment until further notice.
(12) On October 1, 2022, one hundred percent of Mr. Wallach’s salary was deferred for payment until further notice.
Key Developments impacting Executive Compensation
The financial condition of the Company as of 2023 and into the first fiscal quarter of 2024 has caused the Company to defer cash compensation of senior executives. The Company did not replace the retired chief financial officer with a full-time chief financial officer. There were no grants of incentive compensation to senior executives. The deferral of compensation for senior executive officers is anticipated to continue in fiscal year 2024 if the financial condition of the Company does not significantly improve. See “Salary Deferrals” below.
Compensation Objectives
The overall objectives of the Company’s compensation program for NEO’s are as follows:
| ● | Motivate executives to achieve and maintain a high level of performance and foster company performance that attains sustained profitability | |
| ● | align the interests of our executives with the interests of our shareholders; | |
| ● | provide for market-competitive levels of compensation to the extent that can be supported by our financial condition and performance; and | |
| ● | Retain key executives and employees of outstanding ability. |
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CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information regarding the ratio of the annual total compensation of the Company’s median employee to the annual total compensation of Stewart Wallach, the Company’s Chief Executive Officer and President. We consider the pay ratio specified below to be a reasonable estimate, calculated in a manner that is intended to be consistent with the requirements of Item 402(u) of Regulation S-K. For the fiscal year ended December 31, 2023:
| ● | The median of the annual total compensation of all employees of the Company, except the Chief Executive Officer and President, was $70,000; | |
| ● | The annual total compensation of the Company’s Chief Executive Officer and President was $301,521; and | |
| ● | The ratio of the median of the annual total compensation of all Company employees, other than the Company’s President and Chief Executive Officer, to the annual total compensation of the Company’s President and Chief Executive Officer was approximately 4 to 1. |
Pay versus Performance Table
| Name | Year | Summary Compensation Table Total for Principle Executive Officer (“PEO") | Compensation Actually Paid to PEO | Average Compensation actually paid to Non-PEO named executive officers | Total Shareholder Return | Net Loss | ||||||||||||||||||
| Stewart Wallach, Chief Executive Officer | 2023 | $ | 301,521 | $ | 301,521 | $ | 191,442 | -3 | % | $ | (1,696,439 | ) | ||||||||||||
| Stewart Wallach, Chief Executive Officer | 2022 | $ | 301,521 | $ | 301,521 | $ | 191,442 | -1 | % | $ | (2,663,751 | ) | ||||||||||||
The Company chose December 31, 2023, as the date for determining the employee population used to identify the median employee. The Company used base salaries to identify the median employee because the Company does not widely distribute annual equity awards to employees and because this measure approximately reflects the total annual compensation of employees. The Company calculated the median employee’s and the Chief Executive Officer’s annual total compensation consistent with the disclosure requirements for the Summary Compensation Table. For purposes of this calculation, the median employee’s annual total compensation consisted of wages, premium pay (including overtime and holiday pay), paid time off, non-equity incentive plan compensation, change in pension value and retirement plan contributions.
Compensation Peer Review
To better review the compensation practices of similar companies (“peer group companies”), the Company has from time to time in the past reviewed the median compensation levels of companies of peer group companies as a reference point for determining the competitiveness of the Company’s compensation of its principal executive officers. No peer group companies review was conducted in 2023 due to the financial condition of the Company and the deferral of cash compensation of the principal executive officers.
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Executive Compensation Best Practices the Company Follows
| What we will provide | What we do not provide |
| Provide limited executive perquisites | No grants of Stock Appreciation Rights |
| Align total executive compensation with shareholders’ interests | No repricing of granted stock options |
| Bonuses based on performance | No agreements guaranteeing employment |
Compensation Philosophy
The Company’s guiding philosophy in setting executive compensation is that the compensation of executive officers should reflect the scope of their job responsibilities and the level of individual and corporate performance achieved. With the declining financial condition of the Company in 2023 and into the first fiscal quarter of 2024, the compensation of senior executives has been deferred to conserve cash for basic operating overhead.
The Company endeavors to strike an appropriate balance between long-term and current cash compensation. The current executives are key to the ability of the Company to conduct its business because of their individual experience and relationships in our current business line. Their compensation reflects their individual value to the ability of the Company to conduct its current business.
EMPLOYMENT AGREEMENTS
Stewart Wallach, Chief Executive Officer and President
On February 5, 2020, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach would be paid $301,521 per annum. The term of this new agreement began February 5, 2020, and ends February 5, 2023. The parties may extend the employment period of this agreement by mutual consent with approval of the Company’s Board of Directors, but the extension may not exceed two years in length.
On February 5, 2023, was extended through February 5, 2025.
The February 5, 2020, Employment Agreement with Mr. Wallach was filed by the Company as an exhibit to Report Form 10-K for fiscal year ended December 31, 2019 - (as filed by the Company with the Commission on March 30, 2020).
Dana Eschenburg Perez Chief Financial Officer
The February 5, 2020, Consulting Agreement with Ms. Perez was filed by the Company as an exhibit to Report Form 8-K on March 28, 2023. The Consulting Agreement was extended and filed by the Company as an exhibit to Report Form 10-K for fiscal year ended December 31, 2023.
Salary Deferrals
Effective September 1, 2020 through December 31, 2020, payments equivalent to fifty percent of Mr. Wallach’s salary or approximately $48,707 was deferred until further notice.
Effective January 1, 2021 through March 31, 2021, payments equivalent to fifty percent of Mr. Wallach’s salary or approximately $40,589 was deferred until further notice.
On January 1, 2022, fifty percent of Mr. Wallach’s salary was deferred for payment until further notice.
On October 1, 2022, one hundred percent of Mr. Wallach’s salary was deferred for payment until further notice.
Total salary deferral for Mr. Wallach amounted to $371,103 through December 31, 2023.
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Common Provisions in both new Employment Agreements:
The following provisions are contained in each of the above employment agreements: If the officer’s employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer’s estate or the officer, an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to (a) the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of “merit” based bonuses earned by the Executive during the prior calendar year of his termination. Any payments owed by the Company shall be paid from a normal payroll account on a bi-weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be paid out bi-weekly over the course of the year but at no time will be no more than twenty (26) installments. The Company will also continue to pay the Executive’s health and dental insurance benefits for 6 months starting at the Executives date of termination. If the Executive had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against the Executive’s severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment.
The above summary of the employment agreements is qualified by reference to the actual employment agreements, which were filed as exhibits to the Form 10-K by the Company for fiscal year ended December 31, 2019 (as filed by the Company with the Commission on March 30, 2020).
These amended agreements supersede any existing employment agreements and are the only employment agreements with Company officers:
SUMMARY TABLE OF OPTION GRANTS TO OFFICERS OF COMPANY (1)
As of December 31, 2023
| Name | No. of Shares Underlying | %
of Total Options Granted Employees in 2023 |
Expiration Date | Restricted Stock Grants | No.
Shares underlying Options Granted in 2023 | |||||||||||||||
| Stewart Wallach | — | — | — | — | — | |||||||||||||||
| Dana Eschenburg Perez | — | — | — | — | — | |||||||||||||||
OTHER COMPENSATION (1)
| NAME/POSITION | YEAR | SEVERANCE PACKAGE | CAR ALLOWANCE | CO. PAID SERVICES | TRAVEL LODGING | TOTAL ($) | ||||||||||||||||||
| Stewart Wallach | 2023 | — | — | — | — | — | ||||||||||||||||||
| Chief Executive | 2022 | — | — | — | — | — | ||||||||||||||||||
| Officer | — | — | — | — | — | |||||||||||||||||||
| Gerry McClinton | 2023 | — | — | — | — | — | ||||||||||||||||||
| Chief Operating | 2022 | — | — | — | — | — | ||||||||||||||||||
| Officer & Chief | — | — | — | — | — | |||||||||||||||||||
| Financial Officer | ||||||||||||||||||||||||
| Dana Eschenburg Perez | 2023 | |||||||||||||||||||||||
| Chief Financial Officer | ||||||||||||||||||||||||
Footnotes:
| (1) | There were no equity awards, no 401(k) matching contributions by the Company and no medical supplemental payments by the Company in any of the years specified. |
| 53 |
OUTSTANDING EQUITY AWARDS FOR YEAR END 2023 TABLE
OPTIONS (1)
| NAME | Securities Underlying Unexercised Options | Option
Exercise Price |
Option Expiration Date | |||||||||
| Stewart Wallach | — | — | — | |||||||||
| Dana Eschenburg Perez | — | — | — | |||||||||
Footnotes:
| (1) | The Company does not have any stock awards for the years specified for the above named senior officers. |
2023 OPTION EXERCISES AND VESTED OPTIONS
| Name | Number
of Shares Acquired on Exercise |
Value
Realized on Exercise | ||||||
| Stewart Wallach | — | — | ||||||
| Dana Eschenburg Perez | — | — | ||||||
POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT
| SALARY SEVERANCE | BONUS SEVERANCE | GROSS UP TAXES | BENEFIT COMPENSATION | GRAND TOTAL | ||||||||||||||||
| Stewart Wallach | $ | 301,521 | $ | — | $ | 12,600 | $ | 6,600 | $ | 320,721 | ||||||||||
Indemnification.
The Company maintains directors and officer’s liability insurance or “D&O insurance” coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been material. Further, the Company’s articles of incorporation and bylaws provide for indemnification of directors and officers.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The sole class of voting Common Stock of the Company as of March 29, 2024 , that are issued and outstanding is the Common Stock, $0.0001 par value per share, or “Common Stock”. The table below sets forth, as of March 29, 2024, (“Record Date”), certain information $0.0001 par value per share, or “Common Stock” information with respect to the Common Stock beneficially owned by (i) each Director, nominee and executive officer of the Company; (ii) each person who owns beneficially more than 5% of the Common Stock; and (iii) all Directors, nominees and executive officers as a group. There were 48,826,864 shares of Common Stock outstanding as of March 29, 2024 .
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| NAME, ADDRESS & TITLE | STOCK OWNERSHIP | % OF STOCK OWNERSHIP | SHARES - COMMON STOCK ISSUABLE UPON CONVERSION | STOCK OWNERSHIP AFTER CONVERSION -ALL OPTIONS, WARRANTS & THOSE EXERCISEABLE WITHIN NEXT 60 DAYS | % OF STOCK OWNED AFTER CONVERSION – OPTIONS, WARRANTS INCLUDES EXERCISEABLE WITHIN THE 60 DAYS | OPTIONS & WARRANTS VESTED | OPTIONS & WARRANTS EXPIRED | OPTIONS, WARRANTS NOT VESTED | ||||||||||||||||||||||||
| Stewart Wallach, CEO, 144-V 10 Fairway Drive, Suite 100, Deerfield Beach, FL 33441 | 9,831,745 | 20.1 | % | 499,950 | 9,831,745 | 19.9 | % | — | 1,515,556 | — | ||||||||||||||||||||||
| Dana Eschenburg Perez, CFO, 144-V 10 Fairway Drive, Suite 100, Deerfield Beach, FL 33441 | — | — | % | — | — | — | % | — | — | — | ||||||||||||||||||||||
| Jeff Postal, Director, 144-V 10 Fairway Drive, Suite 100, Deerfield Beach, FL 33441 | 9,034,120 | 18.5 | % | 499,950 | 9,238,264 | 20.1 | % | 204,144 | 700,000 | — | ||||||||||||||||||||||
| Jeff Guzy, Director, 3130 19th Street North, Arlington, VA 22201 | 152,800 | 0.03 | % | — | 356,944 | 0.7 | % | 204,144 | 700,000 | — | ||||||||||||||||||||||
| George Wolf Director, 144-V 10 Fairway Drive, Suite 100, Deerfield Beach, FL 33441 | — | — | 66,667 | — | ||||||||||||||||||||||||||||
| ALL OFFICERS & DIRECTORS AS A GROUP | 19,018,665 | 39 | % | 999,900 | 19,426,953 | 39.8 | % | 408,288 | 2,982,223 | — | ||||||||||||||||||||||
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Notes to Table.
| (1) | Unless otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. |
| (2) | Mr. Wallach’s ownership of common stock in the table does not include 499,950 shares issuable upon conversion of Series B-1 Convertible Preferred Stock and does not include 500,000 shares of common stock that may be issued, upon occurrence of a trigger event under a January 4, 2021 Loan agreement but that has not occurred. |
| (3) | Mr. Postal’s ownership of common stock in the table does not include 499,950 shares issuable upon conversion of Series B-1 Convertible Preferred Stock and does not include 500,000 shares of common stock that may be issued, upon occurrence of a trigger event under a January 4, 2021 Loan agreement but that has not occurred. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Company is a “controlled company” under typical stock exchange corporate governance rules, that is a company where 50% or more of the voting power is owned by a person or a group and does not currently have to meet requirements for a board of directors with a majority of “independent directors.” Currently, only Jeffrey Guzy qualifies as an “independent director” under the listing standards of most stock exchanges or quotation systems. No other director qualifies as an “independent director” under those rules because they are officers of the Company or have business relationships with the Company. The CAPC Board adopted a written policy for approval of transactions between the Company and its directors, director nominees, executive officers, greater than 5% beneficial owners and their respective immediate family members. The policy governs transactions in which the value exceeds or is expected to exceed $120,000 in a single calendar year.
A “related-person transaction” will be a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we and any “related person” are participants involving an amount that exceeds $120,000. Transactions involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person will not be covered by this policy. A related person will be any executive officer, director or a holder of more than five percent of our common stock, including any of their immediate family members and any entity owned or controlled by such persons.
The policy provides that the Audit Committee reviews transactions subject to the policy and determines whether to approve or ratify those transactions. The Audit Committee considers, among other factors it deems appropriate, the following factors:
| ● | Benefits derived by the related person from the transaction versus the benefits derived by the Company. |
| ● | Total value of the transaction. |
| ● | Whether the transaction was undertaken in the ordinary course of business of the Company; and |
| ● | Were the terms and conditions of the transaction usual and customary and commercially reasonable. |
| 56 |
The Audit Committee does not have any policies on expedited or pre-approval of certain routine related person transactions.
From time to time, the Company borrows working capital on a short-term basis, usually with maturity dates of less than a year, from Company directors and officers. The Company believes that these working capital loans are commercially reasonable, especially in light of the inability of the Company to obtain such short-term financing from traditional funding sources.
During 2023, the Company negotiated working capital funding agreements with Directors S. Wallach for $632,500 of proceeds to provide funding for daily operations. The agreement matures June 15, 2024 and principal accrues simple interest at a rate of 5 percent per annum. The loan may be prepaid in full or partially without any penalty.
Process for Identifying Related Person Transactions.
To identify related-person transactions in advance, we are expected to rely on information supplied by our executive officers, directors and certain significant stockholders. In considering related-person transactions, our board of directors will take into account the relevant available facts and circumstances including, but not limited to:
| ● | the risks, costs and benefits to us. |
| ● | the impact on a director’s independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated. |
| ● | the terms of the transaction. |
| ● | the availability of other sources for comparable services or products; and |
| ● | the terms available to or from, as the case may be, unrelated third parties or to or from our employees generally. |
Promoters and Certain Control Persons
We did not have any promoters at any time during the past five fiscal years.
Director Independence
Our Board of Directors has determined that our director, Mr. Jeffery Guzy, is an independent director, as the term “independent” is defined by the rules of the Nasdaq Stock Market. The Company was not successful in recruiting additional, qualified and interested independent directors in fiscal year 2023.
Item 14. Principal Accountant Fees & Services
The following is a summary of the fees billed to date by Assurance Dimensions CPA, for professional services rendered for the years ended December 31, 2023 and 2022:
| 2023 | 2022 | |||||||
| Audit Fees | $ | 45,000 | $ | — | ||||
| Other Fees | — | — | ||||||
| Total | $ | 45,000 | $ | — | ||||
The following is a summary of the fees billed to date by D. Brooks & Associates CPA’s, P.A., for professional services rendered for the years ended December 31, 2023 and 2022:
| 2023 | 2022 | |||||||
| Audit Fees | $ | 52,025 | $ | 85,000 | ||||
| Tax Fees | — | — | ||||||
| Total | $ | 52,025 | $ | 85,000 | ||||
| 57 |
The following is a summary of the fees billed to us by Kaufman, Rossin & Co., for professional services rendered for the years ended December 31, 2023 and 2022:
| 2023 | 2022 | |||||||
| Audit Fees | $ | — | $ | 12,600 | ||||
| Tax Fees | 25,725 | 10,500 | ||||||
| Total | $ | 25,725 | $ | 23,100 | ||||
Audit Fees. Consists of fees billed for professional services rendered for the audits of our consolidated financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the Commission and related comfort letters and other services that are normally provided by the Independent Registered firm in connection with statutory and regulatory filings or engagements.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The Audit Committee is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services as allowed by law or regulation. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specifically approved amount. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval and the fees incurred to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
The Audit Committee pre-approved 100% of the Company’s 2023 audit fees, audit-related fees, tax fees, and all other fees to the extent the services occurred after the effective date of the SEC’s final pre-approval rules.
Part IV
Item 15. Exhibits, and Financial Statement Schedules Reports
(a) The following documents are filed as part of this Report.
| 58 |
1. FINANCIAL STATEMENTS
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.
3. EXHIBITS
Exhibits Required by Item 601 of Regulation S-K. Pursuant to the Instructions to Exhibits, certain instruments defining the rights of holders of long-term debt securities of the Company and its consolidated subsidiaries are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. A copy of such instrument will be furnished to the Securities and Exchange Commission upon request.
Note: CHDT Corp. is a prior name of Capstone Companies, Inc.
^ Filed Herein.
| 59 |
Item 16. Form 10-K Summary. Not Applicable.
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, Capstone Companies, Inc. has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Broward County, Florida on this 29th day of March 2024.
CAPSTONE COMPANIES, INC.
Dated: March 29, 2024
By: /s/ Stewart Wallach
Stewart Wallach
Chief Executive Officer and Director
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of Capstone Companies, Inc. and in the capacities and on the dates indicated.
/s/ Stewart Wallach
Stewart Wallach
Principal Executive Officer
Director and Chief Executive Officer
March 29, 2024
/s/ Jeffrey Guzy
Jeffrey Guzy
Director
March 29, 2024
/s/ Jeffrey Postal
Jeffrey Postal
Director
March 29, 2024
/s/ George Wolf
George Wolf
Director
March 29, 2024
| 60 |
INDEX TO FINANCIAL STATEMENTS
| 61 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders of Capstone Companies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Capstone Companies, Inc. and Subsidiaries (the Company) as of December 31, 2023, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2023, and the related consolidated notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and the results of its operations and its cash flows for year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring operating losses, has incurred negative cash flows from operations and has an accumulated deficit. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| F-1 |
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Description of the Matter
The Company is required to test the carrying amount of goodwill at least annually, or more frequently upon the occurrence of certain events. The Company is also required to assess if certain events occur or circumstances change that may be indicators of impairment. We identified this area as a critical audit matter because the annual goodwill impairment test requires significant judgment regarding the evaluation of qualitative factors. Additionally, these assessments also require appropriate determination of reporting units.
How we addressed the matter in our audit
Our audit procedures to address the risk of material misstatement relating to goodwill included, among others, evaluating the appropriateness of the reporting unit level. Our audit procedures focused on evaluating the appropriateness of management's assumptions and methodologies used in assessing goodwill impairment and have addressed the matter by evaluating management’s quantitative analysis. We also tested the Company’s calculation for mathematical accuracy; testing the estimated fair value of the reporting unit; testing the carrying value of the reporting unit; validating the appropriateness and reliability of inputs and amounts used; performing a sensitivity analysis to evaluate the impact of changes in key assumptions and evaluating the adequacy of the financial statement disclosures relating to goodwill, including key assumptions and judgments. As a result of our testing we did not take exception to management’s conclusion that no impairment should be recognized related to goodwill for the year ended December 31, 2023.
Based on our audit procedures and evaluations, we concluded that the assumptions and methodologies applied by management in assessing goodwill impairment were reasonable and in accordance with generally accepted accounting principles.
| We have served as the Company’s auditor since 2023. | |
| Margate, Florida | |
March 29, 2024 |
|
| F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Capstone Companies, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Capstone Companies, Inc. and Subsidiaries (the Company) as of December 31, 2022 and the related consolidated statement of operations, stockholders’ equity, and cash flows for the years ended December 31, 2022, and the related notes to the consolidated financial statements (collectively referred to as the consolidated financial statements).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and the results of its operations and its cash flows for the years ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt Regarding Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred operating losses, has incurred negative cash flows from operations and has an accumulated deficit. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments.
| F-3 |
Description of the Matter
As described in footnote 1 “Inventory”, to the consolidated financial statements, inventory is valued at the lower of landed cost or net realizable value. Management estimates an inventory reserve as necessary for excess or slow-moving inventory. Changes in the inventory reserve are recorded in cost of goods sold.
As of December 31, 2022, the Company’s consolidated net inventory balance was $412,261, inclusive of the inventory reserve of $533,254. The amount of the inventory reserve is equal to the difference between the cost of the inventory and its estimated net realizable value based on assumptions about future demand, selling prices, and market conditions.
The principal considerations for our determination that performing procedures relating to the inventory reserve is a critical audit matter are the significant judgment by management in determining the estimated net realizable value of inventories that are in excess or slow-moving, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the estimate.
How the Critical Audit Matter Was Addressed in the Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others: (i) evaluated the appropriateness of management’s process for developing the estimates of net realizable value; (ii) tested the reliability of reports used by management by agreeing to underlying records; (iii) tested the reasonableness of the assumptions about future demand, selling prices and market conditions by considering historical trends and consistency with evidence obtained in other areas of the audit.
We have served as the Company’s auditor since 2020. |
March 31, 2023
| F-4 |
| CAPSTONE COMPANIES, INC. AND SUBSIDIARIES |
| CONSOLIDATED BALANCE SHEETS |
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets: | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventories,
net of allowances of $ | ||||||||
| Prepaid expenses | ||||||||
| Due from related party | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease- right of use asset, net | ||||||||
| Deposit | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Notes payable related parties and accrued interest-current | ||||||||
| Notes payable unrelated party and accrued interest-current | ||||||||
| Operating lease- current portion | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities: | ||||||||
| Notes payable related parties and accrued interest-less current portion | ||||||||
| Notes payable unrelated parties and accrued interest-less current portion | ||||||||
| Deferred tax liabilities -long-term | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies: ( Note 5 ) | ||||||||
| Stockholders' Deficit: | ||||||||
| Preferred Stock, Series B-1, par value $ per share, authorized shares, issued and outstanding- shares at December 31, 2023, and December 31, 2022 (Liquidation Preference $15,000) | ||||||||
| Preferred Stock, Series C, par value $ per share, authorized shares, issued and outstanding -- shares | ||||||||
| Common Stock, par value $ per share, authorized shares, issued and outstanding shares at December 31, 2023 and December 31, 2022. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders' Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
| CAPSTONE COMPANIES, INC. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues, net | $ | $ | ||||||
| Increase in inventory reserve and write offs | ( | ) | ( | ) | ||||
| Cost of sales | ( | ) | ( | ) | ||||
| Gross Loss | ( | ) | ( | ) | ||||
| Operating Expenses: | ||||||||
| Sales and marketing | ||||||||
| Compensation | ||||||||
| Professional fees | ||||||||
| Product development | ||||||||
| Other general and administrative | ||||||||
| Total Operating Expenses | ||||||||
| Operating Loss | ( | ) | ( | ) | ||||
| Other Income (Expense): | ||||||||
| Other income, net | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Total Other Income (Expense), net | ( | ) | ||||||
| Loss Before Income Taxes | ( | ) | ( | ) | ||||
| Income Tax Expense | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Net Loss per Common Share | ||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted Average Shares Outstanding | ||||||||
| Basic and Diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT |
| YEARS ENDED DECEMBER 31, 2023 AND 2022 |
| Preferred Stock | Preferred Stock | Additional | ||||||||||||||||||||||||||||||||||
| Series B | Series C | Common Stock | Paid-In | Accumulated | Total | |||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | — | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Stock options for compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Repurchase of shares | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net Loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Net Loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
| CAPSTONE COMPANIES, INC. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| For the Twelve Months Ended | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Stock based compensation expense | ||||||||
| Deferred tax expense | ||||||||
| Lease amortization expense | ||||||||
| Impairment of equipment | ||||||||
| Increase in inventory allowance | ||||||||
| Write off of prepaid inventory deposit | ||||||||
| Accrued interest added to note payable related parties | ||||||||
| Increase in deferred income tax liabilities- long term | ||||||||
| (Increase) decrease in accounts receivable, net | ( | ) | ||||||
| (Increase) decrease in inventories | ( | ) | ||||||
| Decrease in prepaid expenses | ||||||||
| (Increase) in due from related party | ( | ) | ||||||
| (Increase) decrease in deposits | ( | ) | ||||||
| (Decrease) increase in accounts payable and accrued liabilities | ( | ) | ||||||
| Decrease in tax refundable | ||||||||
| Decrease in operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from notes payable related parties | ||||||||
| Proceeds from notes payable unrelated party | ||||||||
| Repurchase of shares | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net Increase (Decrease) in Cash | ( | ) | ( | ) | ||||
| Cash at Beginning of Year | ||||||||
| Cash at End of Year | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest cash paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-8 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for the years ended December 31, 2023 and 2022, include the accounts of the parent entity and its wholly-owned subsidiaries. All intra-entity transactions and balances have been eliminated in consolidation.
This summary of accounting policies for Capstone Companies, Inc. (“CAPC”), a Florida corporation (formerly, “CHDT Corporation”) and its wholly-owned subsidiaries (collectively referred to as the “Company”, “we”, “our” or “us”), is presented to assist in understanding the Company’s consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the consolidated financial statements.
Organization and Nature of Business
Capstone Companies, Inc. is headquartered in Deerfield Beach, Florida and is incorporated under the laws of the State of Florida.
On April 13, 2012, the Company established a wholly owned subsidiary in Hong Kong, named Capstone International Hong Kong Ltd (“CIHK”) which provides support services such as engineering, new product development, product sourcing, factory certification and compliance, product price negotiating, product testing and quality control and ocean freight logistics for the Company’s other subsidiaries. With the shift of manufacturing to Thailand from China, the CIHK operation was downsized and dormant as of March 2022.
From 2007 until 2022, the Company, through Capstone Industries, Inc “CAPI”, was primarily engaged in the business of developing, marketing, and selling home LED products (“Lighting Products”) through national and regional retailers in North America and in certain overseas markets. The Lighting Products are targeted for applications such as home indoor and outdoor lighting and have different functionalities to meet consumer’s needs. Over the last few years there has been significant LED price erosion, which has commoditized LED consumer products. The LED category has matured and is no longer the innovative “must have” consumer product as in previous years. As such, the Company entered into another home goods product segment by developing a smart interactive mirror (“Smart Mirror”) for residential use. The Company planned for the Smart Mirror product launch in 2021, but its release to the retail market was delayed until March 2022 due to product development delays at the Company’s suppliers, resulting from the impact of COVID-19. The development of the Smart Mirrors was part of the Company’s strategic effort to find new product lines to replace the Lighting Products. The Smart Mirrors have not provided sufficient sustained revenues to support the Company operations.
The Company’s products have been typically manufactured in Thailand and China by contract manufacturing companies. As of the date of these consolidated financial statements, the Company’s future product development effort is focused on the development of a “Connected Surfaces” portfolio. The Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding Internet of Things, wireless connected lifestyles prevalent today. The Company has finalized development of a kitchen appliance, the “Connected Chef”, which is the world’s first purpose-built tablet form factor with an integrated platform for cooking accessories, i.e.: cutting board, and designed to safely deliver and access content on mobile and web based platforms. The Connected Chef is not yet in production and has not produced any pre-production sales orders or revenues as of the year ended December 31, 2023.
| F-9 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In addition to efforts to develop the Connected Chef, the Company has explored development or acquisition of a new business line. As
of the filing of this report, the Company has not identified a new business line that could, in the judgment of the Company, attract
working capital funding to sustain company operations, or provide sufficient operating revenues to sustain Company operations through
2024. The Company is continuing efforts to locate a new business line in case efforts to internally establish a new product line do not
succeed. The financial condition of the Company and low market price of its Common Stock adversely affects the Company’s ability
to acquire or fund a new business line.
The Company’s operations consist of one reportable segment for financial reporting purposes: Consumer Home Goods.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
During the year ended December 31, 2023, the Company used cash in operations of $614,527 and generated net operating losses of approximately $1,634,854. As of December 31, 2023, the Company had a working capital deficit of approximately $3,276,943 and an accumulated deficit $10,797,216. The Company’s cash balance decreased by $24,997 from $61,463 as of December 31, 2022 to $36,466 as of December 31, 2023. As of December 31, 2023, the Company does not have sufficient cash on hand to finance its plan of operations and will need to seek additional capital through debt and/or equity financing. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
We are seeking alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures and strategic partnerships. 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 lack of operating income from products and the financial condition of the Company are also hindering efforts to locate working capital funding.
Certain directors have provided necessary funding including a working capital line to support the Company’s cash needs through this period of revenue development, but this funding is limited in amount and frequency. Unless the Company succeeds in raising additional capital or successfully increases cash generated from operations, management believes there is substantial doubt about the Company’s ability to continue as a going concern and meet its obligations over the next twelve months from the filing date of this report.
Concentrations of Credit Risk
Cash is deposited with major banks in the United States. From time to time, such deposits may be in excess of insured limit. Generally, the FDIC limit per bank is $250,000. Any loss incurred or a lack of access to such funds above the FDIC limit could have a significant adverse impact on the Company’s financial condition, results of operations and cash flows.
| F-10 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued
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.
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 credit losses 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 credit losses 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 December 31, 2023 and 2022, management has not recorded an allowance for doubtful accounts.
Inventory
The Company’s inventory, which consists of finished Thin Cast Smart Mirror products for resale to consumers by Capstone, is recorded at the lower of landed cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when the expected realizable value of a specific inventory item falls below its original cost. Management regularly reviews the Company’s investment in inventories for such declines in value. The write-downs are recognized as a component of cost of sales.
During 2022, Management reviewed the valuation of inventory on hand as of the year ended December 31, 2022, and considered the need for a reserve for slow moving inventory due to sales not meeting projected forecasts during 2022. Management estimated a 50% reserve for inventory held in domestic warehouses and a 100% reserve for inventory held in international warehouses, which resulted in an inventory reserve of $533,254.
During the fourth quarter of 2023, Management reviewed the valuation of inventory on hand and decided to write off all Smart Mirror inventory as of December 31, 2023, resulting in a $133,775 reduction in inventory to bring the balance to $0 and a corresponding expense to cost of sales. The write off of the remaining inventory was due to lower than expected sales of the Smart Mirrors coupled with limited working capital to advance marketing efforts.
Prepaid Expenses
The Company’s prepaid expenses consist primarily of prepaid insurance and investor relation services. As of December 31, 2023 and 2022, respectively, prepaid expenses were $22,120 and $37,090, respectively. During the year ended December 31, 2022, the Company wrote off a deposit on inventory in the amount of $158,900, which was included in increase in inventory reserve as the Company did not complete the manufacturing of the product.
| F-11 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Due from Related Party
During 2023, the Company offered supplemental health care benefits for employees. Employees may add dependents to the health plan where the employee would pay for the additional dependent’s coverage through payroll deductions. Due to the deferral of wages from the CEO, Stewart Wallach, the portion of health insurance benefits paid by the Company for his dependents were not paid for via employee payroll deductions. As a result, the Company recorded a $9,570 receivable from a related party for the amounts owed for Mr. Wallach’s dependents health insurance coverage.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated economic useful lives of the related assets as follows:
| Useful Life | December 31, 2023 | December 31, 2022 | ||||||||||
| Computer equipment and software | $ | $ | ||||||||||
| Machinery and equipment | ||||||||||||
| Furniture and fixtures | ||||||||||||
| Less: Accumulated depreciation | ( |
) | ||||||||||
| Less: Impairment of equipment | ( |
) | ||||||||||
| Property and Equipment, Net | $ | $ | ||||||||||
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell. Upon sale or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination of income or loss.
In 2022, the Company began a re-engineering of the Smart Mirror for its next rollout for version two and decided the current tooling and product molds would not manufacture the mold for version two. The Company determined its Smart Mirror tooling machine was impaired as of December 31, 2022 and recorded an impairment loss of $51,285, included in product development expenses on the consolidated statements of operations. The Company wrote off fully depreciated fixed assets with a net book value of $74,323 during the year ended December 31, 2022.
In 2023, the Company invested $42,970 in a manufacturing mold for the new product, the Connected Chef. The mold was not ready for production in 2023, and therefore was not depreciated during 2023.
Depreciation and
amortization expense was $
Leases
The Company accounts for leases under ASU 2016-02 which requires leases with durations greater than twelve months to be recognized on the balance sheet and disclose key information about the leasing arrangements. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the consolidated balance sheets. See Note 6 “Operating Leases” for additional disclosures as required by the new standard.
Goodwill
On September 13, 2006, the Company entered into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (“CAPI”). Capstone was incorporated in Florida on May 15, 1996 and is engaged primarily in the business of wholesaling technology inspired consumer products to distributors and retailers in the United States. Under the Stock Purchase Agreement, the Company acquired 100% of the issued and outstanding shares of CAPI’s Common Stock, and recorded goodwill of $1,936,020.
Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired. Goodwill is tested for impairment on December 31 of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company will then perform a one-step quantitative impairment text, 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). Goodwill is not amortized. The Company estimates the fair value of its single reporting unit relative to the Company’s market capitalization. The Company recognized $623,538 of impairment charges during 2020.
The total impairment charges for the year ended December 31, 2023 and 2022 was $0, respectively, as the fair value exceeded carrying value.
| F-12 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value Measurement
The accounting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), “Fair Value Measurements and Disclosures” (ASC 820-10) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3: Significant unobservable inputs.
Basic earnings per common share is computed by dividing net income(loss) by the weighted average number of shares of common stock outstanding as of December 31, 2023 and 2022. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. As of December 31, 2023 and 2022, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 408,288 options and 199,733 warrants for 2023, and 608,288 options and 199,733 warrants for 2022.
Revenue Recognition
The Company generates revenue from developing, marketing and selling consumer products through national and regional retailers. The Company’s products are targeted for applications such as home indoor and outdoor lighting as well as Internet-of-Thing devices and will have different functionalities. Capstone currently operates in the consumer electronic 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.
| F-13 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
The Company recognizes lighting product revenue when the Company’s performance obligations as per the terms in the customers purchase order have been fully satisfied, specifically, when the specified product and quantity ordered has been manufactured and shipped pursuant to the customers requested ship window, when the sales price as detailed in the purchase order is fixed, when the product title and risk of loss for that order has passed to the customer, and collection of the invoice is reasonably assured. This means that the product ordered and to be shipped has gone through quality assurance inspection, customs and commercial documentation preparation, the goods have been delivered, title transferred to the customer and confirmed by a signed cargo receipt or bill of lading. Only at the time of shipment when all performance obligations have been satisfied will the judgement be made to invoice the customer and complete the sales contract.
Marketing allowances include the cost of underwriting an in-store instant rebate coupon or a target markdown allowance on a specific product. The Company retains these allowances for a period of 3 to 5 years in the event the customer chargebacks for a promotional allowance against an open invoice or submits an invoice for their claim. Cash discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment. These allowances are evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer and may be released as other income if deemed not required. During the year ended December 31, 2023 and 2022, the Company reversed into other income approximately $0 and $39,300 of previously accrued marketing and promotional allowances for previous product sales that are deemed highly unlikely for the customer to chargeback the Company due to the age of the allowance and the sales of the specific item ceasing.
With the launch of the Connected Surfaces Smart Mirror program, the direct-to-consumer orders are sold initially through e-commerce platforms. The Company also sells the Connected Surfaces Smart Mirror program through independent retailers. The Company will only bill the customer and recognize revenue upon the customer obtaining control of the Smart Mirror order which generally occurs upon delivery.
The Company expenses license royalty fees and sales commissions when incurred and these expenses are recognized during the period the related sale is recorded. These costs are recorded within sales and marketing expenses.
The following table presents net revenue by geographic location which is recognized at a point in time:
| For the
Year Ended December 31, 2023 | For the
Year Ended December 31, 2022 | |||||||||||||||
| Capstone Brand | % of Revenue | Capstone Brand | % of Revenue | |||||||||||||
| Lighting Products- U.S. | $ | % | $ | % | ||||||||||||
| Smart Mirror Products- U.S. | % | % | ||||||||||||||
| Lighting Products-International | — | % | % | |||||||||||||
| Total Revenue | $ | % | $ | % | ||||||||||||
We provide our Smart Mirror and Lighting Product customers with limited rights of return for non-conforming product warranty claims. As a policy, the Company does not accept product returns from customers, however occasionally we may receive back residual inventory.
| F-14 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue, continued
Smart Mirror customer orders are shipped within one to two days of receipt. Revenue is recorded upon processing of the sale with a third-party merchant processor such as Stripe or Amazon Pay. Lighting Product 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 Smart Mirror customers are charged when executing the e-commerce purchase. We do not have extended payment terms for our Smart Mirror customers. Our Lighting Product 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 and which country their corporate office is located. The time between invoicing date and when payment is due may vary between 30 days and 90 days depending on the customer type. To ensure there are no payment issues, overseas customers or new customers may be required to provide a deposit or full payment before the order is delivered to the customer.
Sales reductions for anticipated discounts, allowances and promotional coupons are recognized during the period the related revenue is
recorded. The discounts, allowances and promotional coupons amounted to approximately $17,000 and $26,700 for the years ended
December 31, 2023 and 2022, respectively.
Warranties
For the LED product line, the Company provides the end user with limited rights of return as a consumer assurance warranty on all products sold, stipulating that the product will function properly for the warranty period. The warranty period for all products is one year from date of consumer purchase.
Certain retail customers may receive an off-invoice based discount such as a defective/warranty allowance, that will automatically reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the cost of any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances are charged to cost of sales at the time the order is invoiced. For those customers that do not receive a discount off-invoice, the Company recognizes a charge to cost of sales for anticipated non-conforming returns based upon an analysis of historical product warranty claims and other relevant data.
For the online Smart Mirror customers the product has a One Year Limited Warranty. The purchaser must register the product within 30 days from date of purchase with specific product information to activate the warranty. Capstone warrants the product to be free from defects in workmanship and materials for the warranty period. If the product fails during normal and proper use within the warranty period, Capstone at its discretion, will repair or replace the defective parts of the product, or the product itself.
We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.
| F-15 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Warranties, continued
The following table summarizes the changes in the Company’s product warranty liabilities which are included in accounts payable and accrued liabilities in the accompanying December 31, 2023 and 2022 balance sheets:
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Balance at the beginning of the year | $ | $ | ||||||
| Amount accrued | ||||||||
| Payments and credits | ( | ) | ( | ) | ||||
| Reversal of prior years’ accrual unclaimed | ( | ) | ||||||
| Balance at year-end | $ | $ | ||||||
Advertising and Promotion
Advertising and promotion
costs, including advertising, social media, and trade show expenses, are expensed as incurred and included in sales and marketing expenses.
Advertising and promotion expenses were $
Product Development
Our research and development team located in Thailand working with our designated factories, are responsible for the design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All research and development costs are charged to results of operations as incurred.
For the year ended
December 31, 2023 and 2022, product development expenses were $
Shipping and Handling
The Company’s shipping and handling costs are included in sales and marketing expenses and are recognized as an expense during the period in which they are incurred and amounted to $62,923 and $50,150 for the years ended December 31, 2023 and 2022, respectively.
Accounts Payable and Accrued Liabilities
The following table summarizes the components of accounts payable and accrued liabilities at December 31, 2023 and 2022:
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued warranty reserve | ||||||||
| Accrued compensation and deferred wages, marketing allowances, customer deposits and other liabilities | ||||||||
| Total | $ | $ | ||||||
| F-16 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions.
The Company accounts for income taxes under the provisions of 740 Income Taxes. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries file consolidated income tax returns.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant judgement to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities generally for a period of 3 years from the later of each return due date or date filed.
If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be recorded as a component of income tax expense.
The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company’s consolidated statements of operations.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense. The Company accounts for forfeitures as they occur.
Stock-based compensation expense recognized during the years ended December 31, 2023 and 2022 was $and $, respectively.
Other Income (Expense)
For fiscal 2023 other income was approximately $77,000 compared to $395,000 in 2022, a decrease of $318,000 over 2022. The other income for the year ended December 31, 2022 resulted from $152,000 in employee retention tax credit received under Cares act 2020-2021, versus $49,000 received in 2023.
Interest expense for 2023 amounted to approximately $104,000 compared to $70,000 in 2022, an increase of $34,000 or 49%, due to the increase of $632,500 in notes payable held by the Company, accruing interest at 5% per annum.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to valuation of inventories, goodwill impairment, valuation of deferred tax assets, and valuation of stock-based compensation. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Historically, past changes to these estimates have not had a material impact on the Company’s consolidated financial statements. However, circumstances could change, and actual results could differ materially from those estimates.
| F-17 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Pronouncements
In June 2016 and subsequently amended in March 2022, the FASB issued ASC 326, Financial Instruments – Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments (“ASC 326”), which replaces the existing incurred loss model with a current expected credit loss (“CECL”) model that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company would be required to use a forward-looking CECL model for accounts receivables, guarantees and other financial instruments. The Company adopted ASC 326 on January 1, 2023 and ASC 326 did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued Accounting Standards Update 2023-07 – Segment Reporting (Topic ASC 280) Improvements to Reportable Segment Disclosures. The ASU improves reportable segment disclosure requirements, primarily through enhanced disclosure about significant segment expenses. The enhancements under this update require disclosure of significant segment expenses that are regularly provided to the Chief Operating Decision Maker ("CODM") and included within each reported measure of segment profit or loss, require disclosure of other segment items by reportable segment and a description of the composition of other segment items, require annual disclosures under ASC 280 to be provided in interim periods, clarify use of more than one measure of segment profit or loss by the CODM, require that the title of the CODM be disclosed with an explanation of how the CODM uses the reported measures of segment profit or loss to make decisions, and require that entities with a single reportable segment provide all disclosures required by this update and required under ASC 280. ASU 2023-07 is effective for public business entities for fiscal years beginning after December 15, 2023, with early adoption permitted. We do not expect that this guidance will have a material impact upon our financial position and results of operations.
In December 2023, the FASB issued Accounting Standards Update 2023-09 – Income Taxes (Topic ASC 740) Income Taxes. The ASU improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in ASU 2023-09 will become effective beginning of our 2025 fiscal year. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. We do not expect that this guidance will have a material impact upon our financial position and results of operations.
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company’s financials properly reflect the change.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to credit risk consist principally of cash and accounts receivable. The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash
The Company at times has cash with its financial institution in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company places its cash with high credit quality financial institutions which minimize the risk of loss. To date, the Company has not experienced any such losses. As of December 31, 2023, the Company did not have cash balances in excess of FDIC insurance limits.
| F-18 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
Accounts Receivable
The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States and their international locations. The Company typically does not require collateral from customers. Credit risk is limited due to the financial strength of the customers comprising the Company’s customer base and their dispersion across different geographical regions. The Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. As the Company’s ecommerce revenue starts to increase the makeup of the accounts receivable change significantly. Stripe is the company that processes online payments for our website, we should receive payment from them within 3 days of the product shipment. If the product is shipped through Amazon it could take between 20 and 30 days for collection.
For the years ended December 31, 2023 and 2022, approximately 0% and 13% respectively, of the Company’s consolidated net revenue resulted from international sales.
Major Customers
| Net Revenue % | Net Accounts Receivable | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Customer A | % | % | — | — | ||||||||||||
| Customer B | % | — | — | — | ||||||||||||
| Customer C | — | % | — | — | ||||||||||||
| Total | % | % | $ | — | — | |||||||||||
Major Vendors
The Company had one vendor from which it purchased 19% of merchandise sold during the year ended December 31, 2023, and 61% of merchandise sold during the year ended December 31, 2022. The loss of this supplier could adversely impact the business of the Company.
As of December 31,
2023, and 2022, approximately
NOTE 3 – NOTES PAYABLE TO RELATED AND UNRELATED PARTIES
Working Capital Loan with Directors
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’). There were no advances taken by the Company on this working capital loan agreement.
| F-19 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – NOTES PAYABLE TO RELATED AND UNRELATED PARTIES (continued)
In consideration for the Lenders providing the loan under this Agreement for the Initial Period and agreeing to a below market rate of interest, and as payment of a finance fee for the loan on an unsecured basis, the Company issued to the Lenders the following securities 7,500 shares of the Company’s Series B-1 Convertible Preferred Stock (“Preferred Shares”) issued to each Lender. The Preferred Shares shall have the appropriate restrictive legends. Each Preferred Share converts into 66.66 shares of Common Stock at option of Lender. The Preferred Shares and any shares of Common Stock issued under the loan agreement are “restricted” securities under Rule 144 of the Securities Act of 1933, as amended. The Preferred Shares have no further rights, preferences, or privileges. The fair value of the Preferred Shares was determined to be $48,996 based on the number of shares of Common Stock to be issued upon conversion and the market price of the Common Stock on the date the working capital loan agreement was executed. The Company amortized the $48,996 Finance Fee into interest expense over the six months of the agreement. See Note 5.
Purchase Funding Agreement with Directors and Unrelated Party
On July 2, 2021, the Board of Directors (“Board”) resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror business. The Board resolved that certain Directors could negotiate the terms of a Purchase Order Funding Agreement for up to $1,020,000 with Directors S. Wallach and J. Postal and E. Fleisig, a natural person who is not affiliated with the Company. This agreement was finalized on October 18, 2021, and the Company received the funding of $1,020,000 on October 18, 2021 with an original maturity of April 2023 which was extended an additional 12 months. Under this agreement the interest terms are 5% based on a 365- day year. The note payable is due on September 13, 2024. As of December 31, 2023 and 2022, the principal outstanding is $1,020,000 respectively. The accrued interest is $112,340 and $61,340 as of December 31, 2023 and 2022, respectively. See Note 7.
Working Capital Loan with Directors and Unrelated Party
On May 1, 2022, the Company negotiated three $200,000 working capital funding agreements, to provide $600,000 in funding for daily operations. The Board resolved that certain Directors could negotiate the terms of a Working Capital Funding Agreement for up to a total of $600,000, with Directors S. Wallach (through Group Nexus, a company controlled by Mr. Wallach) and J. Postal and Mouhaned Khoury, a natural person. Under these agreements the interest terms are 5% based on a 365-day year, maturing May 1, 2024. These loans may be prepaid in full or partially without any penalty. As of December 31, 2023 and 2022, the principal outstanding is $600,000, respectively. The accrued interest is $50,139 and $20,137 as of December 31, 2023 and 2022, respectively.
On October 13, 2022, the Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations. The term of this agreement is 18 months and principal accrues simple interest at a rate of 5 percent per annum, maturing April 13, 2024. As of December 31, 2023 and 2022, the principal outstanding is $50,000 respectively. The accrued interest is $3,041 and $541 as of December 31, 2023 and 2022, respectively.
On December 1, 2022, the Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations. The term of this agreement is 18 months and principal accrues simple interest at a rate of 5 percent per annum, maturing June 1, 2024. The loan may be prepaid in full or partially without any penalty. As of December 31, 2023 and 2022, the principal outstanding is $50,000 respectively. The accrued interest is $2,712 and $212 as of December 31, 2023 and 2022, respectively.
On January 3, 2023, the Company negotiated a $40,000 Working Capital Funding agreement with Director S. Wallach (through Group Nexus, a company controlled by Mr. Wallach), to provide funding for daily operations. Principal accrues simple interest at a rate of 5 percent per annum, maturing June 15, 2024. The loan may be prepaid in full or
| F-20 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – NOTES PAYABLE TO RELATED AND UNRELATED PARTIES, continued
partially without any penalty. As of December 31, 2023, the principal outstanding and accrued interest is $40,000 and $1,984, respectively.
On March 27, 2023, the Company negotiated a Working Capital Funding agreement with Director S. Wallach to provide funding for daily operations. Total funding under the agreement amounted to $592,500 as of December 31, 2023. Principal accrues simple interest at a rate of 5 percent per annum, maturing June 15, 2024. The loan may be prepaid in full or partially without any penalty. Accrued interest amounted to $17,759 as of December 31, 2023.
As of December 31, 2023 and 2022, the Company had a total of $2,540,476 and $1,802,230, of outstanding balance respectively, on the above referenced funding agreements, which includes accrued interest of $187,974 and $82,230, respectively. The outstanding principal balances and accrued interest has been presented on the condensed and consolidated balance sheet as follows:
| Notes Payable | ||||||||
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Current portion of notes payable and accrued interest, related parties | $ | $ | ||||||
| Current portion of notes payable and accrued interest, unrelated parties | ||||||||
| Long-term portion of notes payable and accrued interest, related parties | ||||||||
| Long-term portion of notes payable and accrued interest, unrelated parties | ||||||||
| Less accrued interest | ( |
) | ( |
) | ||||
| Total notes payable | $ | $ | ||||||
Management believes that without additional capital or increased cash generated from operations, there is substantial doubt about the Company’s ability to continue as a going concern and meet its obligations over the next twelve months from the filing date of this report.
NOTE 4 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company had operating lease agreements for its principal executive offices in Fort Lauderdale, Florida that expired June 30, 2023. The Company’s principal executive office were located at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441. The Company did not renew the expiring operating lease.
On April 26, 2023, the landlord amended the terms for the operating lease and related common area management expenses (“CAM”) owed by the Company for its principal executive office to extend the payment terms for the remaining three months of the lease term, ended June 30, 2023, over the following nine months through December 31, 2023. In addition to the monthly rent expense, the landlord included an estimate for additional CAM charges for the 2023 operating lease year of $5,435 and $17,124 for additional CAM charges for the 2022 operating lease year. The Company paid a total of $58,500 with monthly payments of $6,500 per month for nine months commencing April 1, 2023 and ending December 31, 2023, to satisfy the aforementioned operating lease liabilities for the executive office lease.
| F-21 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – COMMITMENTS AND CONTINGENCIES (continued)
On July 1, 2023, the Company commenced an office space license to use designated office space at #144-V, 10 Fairway Drive, Suite 1000, Deerfield Beach, Florida 33441. The short-term lease is a month-to-month agreement for professional office space for a monthly fee of $75 with a security deposit of $75. The agreement may be terminated by the Company or the licensor of the office space upon a written notice provided thirty (30) days in advance.
The Company’s rent expense is recorded on a straight-line basis over the term of the lease. The rent expense for the year ended December 31, 2023 amounted to $95,936 and $145,512 including the monthly CAM charges and storage facility rent expense.
Employment Agreements
On February 5, 2020, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2020 and ended February 5, 2023. The parties may extend the employment period of this agreement by mutual consent with approval of the Company’s Board of Directors, but the extension may not exceed two years in length. On February 5, 2023, the employment agreement was extended for the additional two year period through February 5, 2025.
Beginning in 2020 and through 2023, executive salaries and consulting fees have been deferred from time to time to conserve cash flow. Deferrals amounted to approximately $734,000 and $252,000, as of December 31, 2023 and 2022, respectively, and are included in accounts payable and accrued liabilities.
There is a provision in Mr. Wallach’s employment agreement, if the officer’s employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer’s estate or the officer, an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to:
Employment Agreements, continued
| (a) | the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of “merit” based bonuses earned by the Executive during the prior calendar year of his termination. Any payments owed by the Company shall be paid from a normal payroll account on a bi-weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be payout bi-weekly over the course of the year but at no time will be no more than twenty (26) installments. The Company will also continue to pay the Executive’s health and dental insurance benefits for 6 months starting at the Executives date of termination. If the Executive had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against the Executive’s severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment. |
The following table summarizes potential payments upon termination of employment:
| Salary
Severance |
Bonus
Severance |
Gross
up Taxes |
Benefit
Compensation |
Grand Total | ||||||||||||||||
| Stewart Wallach | $ | $ | $ | $ | $ | |||||||||||||||
| F-22 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – COMMITMENTS AND CONTINGENCIES (continued)
The Company did not accrue for benefits owed at the time of death or disability as it is not probable as of the period ended December 31, 2023.
Directors Compensation
On July 5, 2022, The Board of Directors voted to suspend compensation to the independent directors for the remainder of the fiscal year 2022 and 2023.
Legal Matters
The Company is not a party to any other pending or threatened legal proceedings and, to the best our knowledge, no such action by or against us has been threatened. From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions or settlements may occur in such routine lawsuits, we believe that the final disposition of such routine lawsuits will not have material adverse effect on its financial position, results of operations or status as a going concern.
NOTE 5 -STOCK TRANSACTIONS
Stock Purchase Agreements
On April 5, 2021, the Company entered into a Private Equity Placement with five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares (“Shares”) of its common stock, $0.0001 par value per share, (“common stock”) for an aggregate purchase price $1,498,000. The five unrelated investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, (“Securities Act”). The $1,498,000 in proceeds from the Private Placement was used to purchase start up inventory for the Company’s Smart Mirror product line, as well as for advertising and working capital. Under the SPA, each investor is granted five-year piggyback, ‘best efforts’ registration rights with no penalties. The Shares are ‘restricted securities” under Rule 144 of the Securities Act and are subject to a minimum six month hold period. Based on representations made to the Company, the five investors do not constitute a “group” under 17 C.F.R. 240.13d-3 and have purchased the Shares solely as an investment for each investor’s own account. No individual investor owns more than 2% of the issued and outstanding shares of common stock.
Warrants
On April 28, 2021, Company issued common stock warrants to purchase 199,733 shares of common stock at an exercise price of $0.66 and exercisable for five years from the issuance date. The warrants were issued to Wilmington Capital Securities, LLC, a FINRA and SEC registered broker under a financial services and placement agreement with a broker-dealer in connection with the Company’s placement of $1,498,000 of restricted shares of common stock to five investors on April 5, 2021. The issuance of these warrants were made an exemption from registration under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act.
As of December 31, 2023, and 2022, the Company had 199,733 warrants outstanding.
Series “B-1” Preferred Stock
On June 7, 2016, the Company authorized 3,333,333 of the B-1 preferred stock(“B-1”). The B-1 preferred stock are convertible into common shares, at a rate of 66.66 of common stock for each share of B-1 convertible preferred stock. The par value of the B-1 preferred shares is $0.0001. The B-1 shares shall not be entitled to any dividends and have no voting rights. In the event of a liquidation, the B-1 holders are entitled to distribution prior to common stockholders but not before any other preferred stockholders.
| F-23 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -STOCK TRANSACTIONS, continued
On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal (“Lenders”). In consideration for the Lenders allowing for loan advances under the loan agreement, a below market rate of interest and the loan made on an unsecured basis, as payment of a finance fee for the loan, the Company issued a total of 7,500 shares of Company’s Series B-1 Convertible Preferred Stock, $0.0001 par value per share, (“Preferred Shares”) to each of the Lenders. Each preferred share converts into 66.66 shares of common stock at option of Lender. The Preferred Shares and any shares of common stock issued under the loan agreement are “restricted” securities under Rule 144 of the Securities Act of 1933, as amended. See Note 3.
The B-1 shares have a liquidation preference of $1.00 per share or $15,000 as of December 31, 2023 and 2022.
Options
In 2005, the Company authorized the 2005 Equity Plan that made available shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.
As of December 31, 2023, there were 408,288 stock options outstanding and vested held by directors of the Company. The stock options have a weighted average exercise price of $ 0.456 and have a weighted average contractual term remaining of 1.13 years. During the year ended December 31, 2023, there were no stock option grants, exercises and 200,000 options were forfeited.
Stock options were issued under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act of 1933.
For the years ended December 31, 2023 and 2022, the Company recognized stock-based compensation expense of $0 and $7,844, respectively, related to stock options. Such amounts are included in compensation expense in the accompanying consolidated statements of income. All options are fully vested as of the year ended December 31, 2023.
| F-24 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCK TRANSACTIONS (continued)
The following table sets forth the Company’s stock options outstanding as of December 31, 2023 and 2022 and activity for the years then ended.
|
Shares | Weighted Average Exercise Price | Weighted Average Fair Value | Weighted Average Remaining Contractual Term (Years) | Intrinsic Value | ||||||||||||||||
| Outstanding, January 1, 2022 | |||||||||||||||||||||
| Granted | — | ||||||||||||||||||||
| Exercised | — | ||||||||||||||||||||
| Forfeited/expired | ( |
) | — | ||||||||||||||||||
| Outstanding, December 31, 2022 | |||||||||||||||||||||
| Granted | — | ||||||||||||||||||||
| Exercised | — | ||||||||||||||||||||
| Forfeited/expired | ( |
) | — | ||||||||||||||||||
| Outstanding, December 31, 2023 | |||||||||||||||||||||
| Vested/exercisable at December 31, 2023 | |||||||||||||||||||||
The following table summarizes the information with respect to options granted, outstanding and exercisable under the 2005 Plan:
| Exercise Price | Options Outstanding | Remaining Contractual Life in Years | Number of Options Currently Exercisable | |||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
Adoption of Stock Repurchase Plan
On August 23, 2016, the Company’s Board of Directors authorized the Company to implement a stock repurchase plan for up outstanding common stock. The repurchase plan may be discontinued at any time at the Company’s discretion.
On December 19, 2018, Company entered a Purchase Plan pursuant to Rule 10b5-1 under the Exchange Act, with Wilson Davis & Co., Inc., a registered broker-dealer. Under the Purchase Plan, Wilson Davis & Co., Inc will make periodic purchases of shares at prevailing market prices, subject to the terms of the Purchase Plan.
On May 31, 2019, the Company’s Board of Directors the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program remained at $1,000,000 during the renewal period.
| F-25 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCK TRANSACTIONS (continued)
During May and June 2022, the Company repurchased 66,167 shares of the Company’s outstanding common stock in the open market. The total purchase cost was $11,662.
On July 7, 2022, the Board of Directors resolved to discontinue the stock purchase agreement.
As of December 31, 2023, a total of 816,167 of the Company’s common stock was repurchased since the plan was incepted at a total cost of $119,402. The cost of the repurchased shares were recorded as a reduction of additional paid-in capital.
NOTE 6 - INCOME TAXES
As of December 31, 2023, the Company had federal and state net operating loss carry forwards of approximately $6,540,448. The federal net operating loss is available to the Company indefinitely and available to offset up to 80% of future taxable income each year.
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 included 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 approximately $862,000 which was recorded in the first quarter 2020 of which a total of $806,800 was subsequently received. During the year ended December 31, 2022, the difference of $55,265 was reflected in income tax expense on the consolidated statement of operations.
Tax benefit for income taxes differs from the amount computed using the federal US statutory income tax rate as follows:
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Tax benefit at U.S. statutory rate | $ | ( |
) | $ | ( |
) | ||
| State income taxes, net of federal benefit | ( |
) | ( |
) | ||||
| Tax effect of foreign operations | ||||||||
| Non-deductible items | ( |
|||||||
| Valuation allowance | ||||||||
| Adjustment to net operating loss | ||||||||
| Other | ||||||||
| Income Tax Expense (Benefit) | $ | $ | ||||||
The effective tax rate for the years ended December 31, 2023 and 2022, respectively, was (2.10%) and (2.61%) and the statutory tax rate was 23.829% in 2023 and 25.39% in 2022.
| F-26 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (continued)
The income tax benefit for the years ended December 31, 2023 and 2022 consists of:
| 2023 | 2022 | |||||||
| Current: | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Deferred: | ||||||||
| Federal | ( |
) | ||||||
| State | ||||||||
| Income Tax Expense (Benefit) | $ | $ | ||||||
The tax effects of temporary differences and carry forwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:
| Years Ended December 31, | ||||||||
| Deferred tax assets: | 2023 | 2022 | ||||||
| Accruals and allowances | $ | $ | ||||||
| Capitalized research and development | ||||||||
| Stock based compensation | ||||||||
| Net operating allowances | ||||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets | ( | ) | ( | ) | ||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets and liabilities | $ | ( | ) | $ | ( | ) | ||
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, 2023 and 2022. 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 $320,000 and $285,000 is presented on the company’s balance sheet, respectively. The Company’s valuation allowance increased by $248,056 in 2023.
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.
| F-27 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SUBSEQUENT EVENTS
Related Party Notes Payable
Subsequent to December 31, 2023, and through the date of this filing, the Company has received $50,000 in working capital note payable proceeds from Director, Jeffery Postal. Principal accrues simple interest at a rate of 5 percent per annum, maturing September 13, 2024 with the ability for the Company to request a 90-day extension. The loan may be prepaid in full or partially without any penalty.
Subsequent to December 31, 2023, and through the date of this filing, the Company has received $40,000 in working capital note payable proceeds from Chief Executive Officer, Stewart Wallach. Principal accrues simple interest at a rate of 5 percent per annum, maturing June 15, 2024 with the ability for the Company to request a 90-day extension. The loan may be prepaid in full or partially without any penalty.
Extension of Purchase Order Funding Agreement
On March 13, 2024, the $1,020,000 Purchase Order Funding Agreement note payable was amended, extending the maturity date from April 13, 2024 to September 13, 2024. All other terms remain unchanged (see Note 3).
Renewal of CFO Agreement
On March 25, 2024, the Company renewed Ms. Perez’s contracting agreement for Chief Financial Officer services, commencing January 1, 2024 and ending March 31, 2025.
| F-28 |