UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from _____________ to _____________
Commission
File Number:
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) |
| ( |
| (Issuers Telephone Number) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large, accelerated file, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of “large, accelerated filer, “accelerated filer, “smaller reporting company and “emerging growth company in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging Growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None | N/A | N/A |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
As of November 14, 2023, the Company had shares of Common Stock issued and outstanding. The Common Stock is quoted on the OTCQB Venture Market of the OTC Markets Group, Inc. under the trading symbol “CAPC”.
| 1 |
Use of Certain Defined Terms. Except as otherwise indicated by the context, the following terms have the stated meanings.
As used in this Form 10-Q Quarterly Report for the fiscal period ending September 30, 2023 (“Form 10-Q Report” or “Form 10-Q”), “COVID-19” refers to Coronavirus/COVID-19 virus and all variants of that virus, a highly contagious novel virus that was declared a global pandemic by the World Health Organization or “WHO on March 11, 2020. “COVID-19 pandemic” refers to “global pandemic” (as defined by WHO) caused by COVID-19. “Company”, “Capstone”, “we, “our”, and “us” refers to Capstone Companies, Inc. and its subsidiaries, unless context indicates just Capstone Companies, Inc.
Additionally:
| (1) | “Capstone Lighting Technologies, L.L.C.” or “CLTL” is a wholly owned subsidiary of Capstone Companies, Inc. |
| (2) | “Capstone International Hong Kong Ltd” or “CIHK” is a wholly owned subsidiary of Capstone Companies, Inc. and a Hong Kong registered Company, which is dormant. |
| (3) | “Capstone Industries, Inc.”, a Florida corporation and a wholly owned subsidiary of CAPC, may also be referred to as “CAPI” |
| (4) | “Capstone Companies, Inc.”, a Florida corporation, may also be referred to as “we”, “us,” “our”, “Company”, or “CAPC”. Unless the context indicates otherwise, “Company” includes in its meaning all of Capstone Companies, Inc. Subsidiaries. |
| (5) | “China” means People’s Republic of China. |
| (6) | “W” means watts. |
| (7) | References to “33 Act” or “Securities Act” means the Securities Act of 1933, as amended. |
| (8) | References to “34 Act” or “Exchange Act” means the Securities Exchange Act of 1934, as amended. |
| (9) | “SEC” or “Commission” means the U.S. Securities and Exchange Commission. |
| (10) | “Subsidiaries” means CAPI, CIHK, CLTL. |
| (11) | Any reference to fiscal year in this Form 10-Q means our fiscal year, ending December 31, 2022. |
| (12) | “LED” or “LEDs” means a light-emitting diode component(s) which can be assembled into light bulbs or can be used in lighting fixtures. |
| (13) | “OEM” means “original equipment manufacturer. |
| (14) | “Connected Surfaces” or “Connected Products” means smart home devices with embedded sensors that provide communication and data transfer between the Connected Surface and internet-enabled systems of the Company or associated third parties. Connected Surfaces may permit internet access for defined functions. |
We may use “FY” to mean “fiscal year” and “Q” to mean fiscal quarter ended September 30, 2023. “This report” means this Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2023.
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CAPSTONE COMPANIES, INC.
Quarterly Report on Form 10-Q
Nine Months Ended September 30, 2023
TABLE OF CONTENTS
| 3 |
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets: | (Unaudited) | |||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net of allowances of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Operating lease- right of use asset, net | ||||||||
| Property and equipment, net | ||||||||
| Deposit | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity: | ||||||||
| 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 party and accrued interest, less current portion | ||||||||
| Deferred tax liabilities -long-term | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies: ( Note 4 ) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred Stock, Series A, par value $ per share, authorized shares, issued and outstanding- - shares | ||||||||
| Preferred Stock, Series B-1, par value $ per share, authorized shares, issued and outstanding- shares at September 30, 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 4 shares at September 30, 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 unaudited condensed consolidated financial statements.
| 4 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross Profit | ( | ) | ( | ) | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Compensation | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Product development | ||||||||||||||||
| Other general and administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expenses): | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Income (Expenses), 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 unaudited condensed consolidated financial statements.
| 5 |
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023, AND SEPTEMBER 30, 2022
(Unaudited)
| Preferred Stock | Preferred Stock | Preferred Stock | Additional | |||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | Common Stock | Paid-In | Accumulated | Total | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | — | $ | $ | — | $ | 48,826,864 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | — | — | 48,826,864 | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | — | — | 48,826,864 | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | — | $ | $ | — | $ | 48,826,864 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | — | $ | $ | — | $ | 48,893,031 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Stock options for compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | — | — | 48,893,031 | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Stock options for compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares | (66,167 | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | — | — | 48,826,864 | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||
| Stock options for compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | — | $ | $ | — | $ | 48,826,864 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 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 | ||||||||
| Lease amortization expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accrued interest added to notes payable related and unrelated parties | ||||||||
| Increase in accounts receivable, net | ( | ) | ( | ) | ||||
| (Increase) decrease in inventories | ( | ) | ||||||
| (Increase) decrease in prepaid expenses and other current assets | ( | ) | ||||||
| (Increase) decrease in deposits | ( | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | ( | ) | ||||||
| Income 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 | ||||||||
| Repurchase of shares | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net Decrease in Cash | ( | ) | ( | ) | ||||
| Cash at Beginning of Period | ||||||||
| Cash at End of Period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest cash paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Capstone Companies, Inc. (“CAPC”, “Company”, “we”, “our” or “us”), a Florida corporation and its wholly owned subsidiaries is presented to assist in understanding the Company’s consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the consolidated financial statements.
Nature of Business
The Company has its principal executive offices in Deerfield Beach, Florida.
From 2007 until 2022, the Company, through 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. There were no sales of LED lighting products during 2023 and Lighting Products ceased to be an active product line of the Company in 2023. 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 condensed consolidated financial statements, the Company’s future product development effort is focused on the development of a “Connected Surfaces” portfolio. The Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding Internet of Things, wireless connected lifestyles prevalent today, with the initial product launch of the Smart Mirror, an internet connected and interactive mirror. Subject to adequate funding, the Company’s current business strategy is to seek to expand the new line of Connected Surfaces in 2023 and 2024. The Company 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 third quarter of 2023. The launch of the Connected Chef is slated to take place in the first quarter of 2024, subject to available working capital to pay for product production, inventory and marketing.
In addition to efforts to develop the Connected Chef, the Company has also 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 in 2023 or early 2024. 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.
Basis of Presentation
The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2023, and results of operations, stockholders’ equity and cash flows for the three and nine months ended September 30, 2023 and 2022. All material intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) relating to interim financial statements and in conformity with U.S. GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”) filed with the SEC on March 31, 2023.
| 8 |
The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.
From 2020 into 2022, the COVID-19 pandemic adversely impacted our Company at the same time as we were implementing a major shift in product line, from mature LED products to new Connected Surfaces products, amplified the financial impact of COVID-19 pandemic by disrupting development and production of new Connected Surfaces products in Thailand and China and resulting delay in the Company being able to promote, market and sell Connected Surfaces products. This delay in launching the new product line coupled with the decline in sales of the LED product line adversely impacted the Company and created uncertainty about the ongoing viability of the current product lines of the Company. The Company’s plan to orderly transition from LED lighting products to Connected Surfaces products as the primary source of revenues was undermined by these delays and disruptions. By the time that the Company was ready to fill bulk orders for Smart Mirrors, the traditional primary customers for Company products did not place orders and the Company’s e-commerce initiative did not generate any significant orders. This ‘perfect storm’ of events has left the Company without a current product line that is generating significant revenues. The Company is evaluating the best way for the Company to establish a product line or business line that provides a sufficient revenue source to fund working capital and growth needs of the Company. This evaluation includes possible new Connected Surfaces products, new industry focus for those products and potential new business lines. The Company has not established a new product line or a new business line in the fiscal quarter ending September 30, 2023. Development of a new business line and product line will depend on the ability of the Company to locate funding for working capital to pay for production, inventory and marketing.
Principles of Consolidation
The condensed consolidated financial statements for the periods ended September 30, 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.
Liquidity and Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
As of September 30, 2023, the Company had negative
working capital of approximately $
These liquidity conditions raise substantial doubt about the Company’s ability to continue as a going concern. We are seeking alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures 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.
| 9 |
Inventories
The Company’s inventory, which consists of finished Thin Cast Smart Mirror products for resale to consumers by Capstone, is recorded at the lower of landed cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when the expected realizable value of a specific inventory item falls below its original cost. Management regularly reviews the Company’s investment in inventories for such declines in value.
Management reviewed the valuation of
inventory on hand as of the year ended December 31, 2022, and considered the need for a reserve for slow moving inventory due to sales
not meeting projected forecasts during 2022. Management estimated a 50% reserve for inventory held in domestic warehouses and a 100% reserve
for inventory held in international warehouses, which resulted in an increase in the inventory reserve of $
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. During 2020, the Company recognized $623,538 of impairment charges. There was no impairment charge for the nine months ended September 30, 2023 or for the year ended December 31, 2022.
| 10 |
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 September 30, 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 September 30, 2023 and 2022, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 408,288 options, 199,733 warrants and 15,000 of preferred B-1 stock convertible into 999,900 shares of common stock for 2023 and 608,288 options, 199,733 warrants and 15,000 of preferred B-1 stock convertible into 999,900 shares of common stock for 2022.
Revenue Recognition
The Company generates revenue from developing, marketing and selling consumer products through national and regional retailers. The Company’s products are targeted for applications such as home indoor and outdoor lighting as well as Internet-of-Thing devices and will have different functionalities. CAPI currently operates in the consumer home goods products category in the United States. These products may be offered either under the CAPI brand or a private brand.
A sales contract occurs when the customer-retailer submits a purchase order to buy a specific product, a specific quantity, at an agreed-fixed price, within a shipping window, from a specific location and on agreed payment terms. The selling price in all of our customers’ orders has been previously negotiated and agreed to including any applicable discount prior to receiving the customer’s purchase order. The stated unit price in the customer’s order has already been determined and is fixed at the time of invoicing.
The Company recognizes Lighting Product revenue and Smart Mirror 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’s revenue recognition policy is in accordance with ASC 606.
| 11 |
Marketing allowances include the cost of underwriting an in-store instant rebate coupon or a target markdown allowance on a specific product. The Company retains these allowances for a period of 3 to 5 years in the event the customer chargebacks for a promotional allowance against an open invoice or submits an invoice for their claim. Cash discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment. These allowances are evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer and may be released as other income if deemed not required.
Direct-to-consumer orders for the Connected Surfaces Smart Mirrors are sold initially through e-commerce platforms. The Company also sells the Connected Surfaces Smart Mirror program through independent retailers. The Company will only bill the customer and recognize revenue upon the customer or retailer 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 Three Months Ended September 30, 2023 | For the Three Months Ended September 30, 2022 | |||||||||||||||
| Revenues | % of Revenue | Revenues | % of Revenue | |||||||||||||
| Lighting Products- U.S. | $ | % | $ | % | ||||||||||||
| Lighting Products- International | % | % | ||||||||||||||
| Smart Mirror Products- U.S. | % | % | ||||||||||||||
| Total Net Revenue | $ | % | $ | % | ||||||||||||
| For the Nine Months Ended September 30, 2023 | For the Nine Months Ended September 30, 2022 | |||||||||||||||
| Revenues | % of Revenue | Revenues | % of Revenue | |||||||||||||
| Lighting Products- U.S. | $ | % | $ | % | ||||||||||||
| Lighting Products- International | % | % | ||||||||||||||
| Smart Mirror Products- U.S. | % | % | ||||||||||||||
| Total Net Revenue | $ | % | $ | % | ||||||||||||
Sales reductions for allowances and other promotional coupons are recognized during the period when the related revenue is recorded. The reduction of accrued allowances is included in net revenues and amounted to $0 and $719 for the three months ended September 30, 2023 and 2022, respectively and $15,300 and $3,000, for the nine months ended September 30, 2023, and 2022, respectively.
Warranties
For the LED product line, the Company provides the end user with limited rights of return as a consumer assurance warranty on all products sold, stipulating that the product will function properly for the warranty period. The warranty period for all products is one year from the date of consumer purchase. Certain retail customers may receive an off invoice-based discount such as a defective/warranty allowance, that will automatically reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the cost of any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances are charged to cost of sales at the time the order is invoiced. For those customers that do not receive a discount off-invoice, the Company recognizes a charge to cost of sales for anticipated non-conforming returns based upon an analysis of historical product warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.
For the online Smart Mirror customers the product has a One Year Limited Warranty. The purchaser must register the product within 30 days from date of purchase with specific product information to activate the warranty. CAPI warrants the product to be free from defects in workmanship and materials for the warranty period. If the product fails during normal and proper use within the warranty period, CAPI at its discretion, will repair or replace the defective parts of the product, or the product itself.
The warranty allowance is included in cost of sales and amounted to $846 and $3,050 for the three months ended September 30, 2023 and 2022, respectively and $1,680 and $3,667 for the nine months ended September 30, 2023, and 2022, respectively.
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Advertising and Promotion
Advertising
and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales
and marketing expenses. Advertising and promotion expense was $
Due to declining revenues, a change in strategy to move emphasis away from e-commerce back to direct sales to Big Box retailers for the Smart Mirror and the end of the LED product line as a revenue source, the Company significantly reduced advertising and promotion expenses in 2023.
Product Development
Our research and development contractors located in Thailand and working with our designated contract OEM factories, are responsible for the design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All research and development costs are charged to results of operations as incurred.
For the three months
ended September 30, 2023 and 2022, product development expenses were $
Accounts Payable and Accrued Liabilities
The following table summarizes the components of accounts payable and accrued liabilities as of September 30, 2023, and December 31, 2022, respectively:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued warranty reserve | ||||||||
| Accrued compensation and deferred wages, marketing allowances, customer deposits. | ||||||||
| Total | $ | $ | ||||||
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.
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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.
On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, provided for the Employee Retention Tax Credit (“ERTC"), a refundable tax credit for businesses that continued to pay employees while shut down due to COVID-19 or had significant declines in gross receipts from March 13, 2022 to December 31, 2021. During the second quarter of 2023, the Company received a refund of $49,000 and received a refund of $152,000 during the first quarter of 2022, included as other income on the consolidated statements of operations as of September 30, 2023 and 2022, respectively.
The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company’s condensed consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense. The Company accounts for forfeitures as they occur.
Stock-based compensation expense recognized during the three months ended September 30, 2023, and 2022 was $ and $, respectively and $ and $ for the nine months ended September 30, 2023 and 2022, respectively.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, periodic impairment tests, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change, and actual results could differ materially from those estimates.
Adoption of New Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU) 2016-13, “Financial Instruments – Credit Losses. This ASU sets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In November 2019, the effective date of this ASU was deferred until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASC 326 on January 1, 2023 and ASC 326 did not have a material impact on its condensed consolidated financial statements.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to credit risk consist principally of cash and accounts receivable. The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash
The Company at times has cash with its financial institution in excess of Federal Deposit Insurance Corporation (“FDIC) insurance limits. The Company places its cash with high credit quality financial institutions which minimize the risk of loss. To date, the Company has not experienced any such losses. As of September 30, 2023 and December 31, 2022, the Company did not have any cash in excess of FDIC insurance limits.
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Accounts Receivable
The Company grants credit to its customers, located throughout the United States and their international locations. The Company typically does not require collateral from national retail customers. Credit risk is limited due to the financial strength of the customers comprising the Company’s customer base and their dispersion across different geographical regions. The Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. Stripe is the company that processes online payments for the Company’s e-commerce website. The Company receives payments within 3 days of the product shipment. If the product is shipped through Amazon online platform, it could take between 20 and 30 days for collection.
Financial instruments that potentially subject the Company to credit risk, consist principally of cash and accounts receivable. The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Major Customers
The Company had one major customer for the nine months ended September 30, 2023, comprising 78% of net revenue. The Company had two customers who comprised 63% and 14%, respectively, of net revenue during the nine months ended September 30, 2022.
As of September
30, 2023, 100% of accounts receivable was from one customer. As of December 31, 2022, approximately $
Major Vendors
The Company did not have any major vendors during the nine months ended September 30, 2023. The Company had two vendors from which it purchased 73% and 22%, respectively, of merchandise during the nine months ended September 30, 2022. As of December 31, 2022, approximately $3,200 or 8% of accounts payable was due to one vendor.
NOTE 3 – NOTES PAYABLE TO RELATED AND UNRELATED PARTIES
Purchase Funding Agreement with Directors and Unrelated Party
On July 2, 2021, the Board of Directors (“Board”) resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror business. The Board resolved that certain Directors could negotiate the terms of a Purchase Order Funding Agreement for up to $1,020,000 with Directors S. Wallach and J. Postal and E. Fleisig, a natural person who is not affiliated with the Company. This agreement was finalized on October 18, 2021, and the Company received the funding of $1,020,000 on October 18, 2021 with an original maturity of April 2023 which was extended an additional 12 months. Under this agreement the interest terms are 5% based on a 365- day year. The note payable is due on April 13, 2024. As of September 30, 2023, the principal outstanding and accrued interest is $1,020,000 and $99,485, respectively.
Working Capital Loan with Directors and Unrelated Party
On May 1, 2022, the Company negotiated three $200,000 working capital funding agreements, to provide $600,000 in funding for daily operations. The Board resolved that certain Directors could negotiate the terms of a Working Capital Funding Agreement for up to a total of $600,000, with Directors S. Wallach (through Group Nexus, a company controlled by Mr. Wallach) 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 September 30, 2023, the principal outstanding and accrued interest is $600,000 and $42,577, respectively.
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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 September 30, 2023, the principal outstanding and accrued interest is $50,000 and $2,411, 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 September 30, 2023, the principal outstanding and accrued interest is $50,000 and $2,082, 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 January 15, 2024. The loan may be prepaid in full or partially without any penalty. As of September 30, 2023, the principal outstanding and accrued interest is $40,000 and $1,480, 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 $543,500 as of September 30, 2023. Principal accrues simple interest at a rate of 5 percent per annum, maturing January 15, 2023. The loan may be prepaid in full or partially without any penalty. Accrued interest amounted to $10,399 as of September 30, 2023. See Note 6.
As of September 30, 2023 and December 31, 2022, the Company had a total of $2,461,933 and $1,802,230, of outstanding balance respectively, on the above referenced funding agreements, which includes accrued interest of $158,433 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 | ||||||||
September 30, 2023 |
December 31, 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 | ||||||||
| Total notes payable principle and accrued interest | ||||||||
| 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.
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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 will pay a total of $58,500 with monthly payments of $6,500 per month for nine months commencing April 1, 2023 and ending December 31, 2023, to satisfy the aforementioned operating lease liabilities for the executive office lease. As of September 30, 2023, accrued expenses includes 19,500 of CAM and rent expense that will be paid during the next three months related to the 2022 operating lease year.
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 three months ended September 30, 2023 and 2022 amounted to $1,139 and $35,819, respectively and $94,065 and $110,500 for the nine months ended September 30, 2023 and 2022, respectively, including the monthly CAM charges and additional CAM charges included in accrued expenses.
Employment Agreements
On February 5, 2023, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2023 and ends February 5, 2025. The parties may extend the employment period of this agreement by mutual consent with approval of the Company’s Board of Directors, but the extension may not exceed two years in length.
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On February 5, 2020, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. The term of agreement began February 5, 2020 and ended February 5, 2022. On February 6, 2022, the Company entered into an Employment Agreement with James McClinton (Chief Financial Officer and Director), whereby Mr. McClinton was paid $736 per day. On November 30, 2022, Mr. McClinton retired from all positions with the Company.
Beginning in 2020 and through 2023, executive salaries and consulting fees have been deferred from time to time to conserve cash flow. Deferrals amounted to approximately $622,000 and $252,000, as of September 30, 2023 and December 31, 2022, respectively, and are included in accounts payable and accrued liabilities.
There is a provision in Mr. Wallach’s employment agreement, if the officer’s employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer’s estate or the officer, an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to: the sum of twelve (12) months base salary at the rate Mr. Wallach was earning as of the date of termination and the sum of “merit” based bonuses earned by Mr. Wallach 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 Mr. Wallach, 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 Mr. Wallach’s health and dental insurance benefits for 6 months starting at the Executives date of termination. If Mr. Wallach had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against Mr. Wallach’s severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment. The Company did not accrue for the benefits owed at the time of death or disability as it is not probable as of the period ended September 30, 2023.
The following table summarizes potential payments upon termination of employment :
| Salary Severance |
Bonus Severance |
Gross
up Taxes |
Benefit Compensation |
Grand Total | ||||||||||||||||
| Stewart Wallach | $ | $ | $ | $ | $ | |||||||||||||||
Directors Compensation
On July 5, 2022, The Board of Directors voted to suspend granting compensation to the independent directors for the remainder of the fiscal year 2022. There have been no payments to the Board of Directors during the period ended September 30, 2023.
NOTE 5 - STOCK TRANSACTIONS
Stock Purchase Agreements
On April 5, 2021, the Company entered into a Private Equity Placement with five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667 shares (“Shares”) of its common stock, $0.0001 par value per share, (“common stock”) for an aggregate purchase price $1,498,000. The five unrelated investors in the Private Placement consisted of four private equity funds and one individual – all being “accredited investors” (under Rule 501(a) of Regulation D under the Securities Act. 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.
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Warrants
On April 28, 2021, Company issued common stock warrants to purchase 199,733 shares of common stock at an exercise price of $0.66 and exercisable for five years from the issuance date. The warrants were issued to Wilmington Capital Securities, LLC, a FINRA and SEC registered broker under a financial services and placement agreement with a broker dealer in connection with the Company’s placement of $1.4 million of restricted shares of common stock to five investors on April 5, 2021. The issuance of these warrants were made an exemption from registration under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act.
As of September 30, 2023 and December 31, 2022, the Company had 199,733 warrants outstanding.
Series B-1 Preferred Stock
On June 7, 2016, the Company authorized 3,333,333 of the B-1 preferred stock (“B-1”). The B-1 preferred stock are convertible into common shares, at a rate of 66.66 of common stock for each share of B-1 convertible preferred stock. The par value of the B-1 preferred shares is $0.0001. The B-1 shares shall not be entitled to any dividends and have no voting rights. In the event of a liquidation, the B-1 holders are entitled to distribution prior to common stockholders but not before any other preferred stockholders.
On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal (“Lenders”). In consideration for the Lenders allowing for loan advances under the loan agreement, a below market rate of interest and the loan made on an unsecured basis, as payment of a finance fee for the loan, the Company issued a total of 7,500 shares of B-1 Convertible Preferred Stock to each of the Lenders. Each preferred share converts into 66.66 shares of common stock at option of Lender. The Preferred Shares and any shares of common stock issued under the loan agreement are “restricted” securities under Rule 144 of the Securities Act of 1933, as amended.
The B-1 shares have a liquidation preference of $1.00 per share or $15,000 as of September 30, 2023.
Series C Preferred Stock
On July 9, 2009, the Company authorized 67 shares of Series C Preferred Stock. The par value of the Series C Preferred Stock is $1.00 and a share of Series C Preferred Stock shall be converted into 67,979.425 shares of common stock. There were no Series C Preferred Stock issued or outstanding as of the period ended September 30, 2023 or December 31, 2022.
All shares of capital stock and warrants were issued in reliance on an exemption from registration under Section 4(a)(2) and/or Rule 506(b) of Regulation D under the Securities Act.
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 September 30, 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 1.38 years. During the nine months ended September 30, 2023, there were no stock option grants, exercises, and 200,000 options were forfeited.
All stock options were issued under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act of 1933.
For the three months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of $0 and $1,120, respectively, and $0 and $7,844 for the nine months ended September 30, 2023 and 2022, respectively, related to these stock options. Such amounts are included in compensation expense in the accompanying condensed and consolidated statements of operations.
Increase in Authorized Shares
On May 9, 2023, by way of written consent of Common Stock shareholders of the Company with the requisite voting power to amend the Company’s Amended and Restate Articles of Incorporation, those shareholders consented to amend Article 1 of the Corporation’s Amended and Restated Articles of Incorporation to increase the authorized shares of capital stock from 60,000,000 to 300,000,000 shares of capital stock authorized, of which 295,000,000 shares shall be Common Stock, par value of $0.0001 per share, and 5,000,000 shares of Preferred Stock, par value of $0.0001.
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 outstanding common stock. The repurchase plan may be discontinued at any time at the Company’s discretion.
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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 Board of Directors approved that the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program remained at $1,000,000 during the renewal period.
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 with Wilson-Davis & Company.
As of September 30, 2023 a total of 816,167 shares of the Company’s common stock has been repurchased since the plan was incepted at a total cost of $119,402. The cost of the repurchased shares were recorded as a reduction of additional paid-in capital.
NOTE 6 - SUBSEQUENT EVENTS
Working Capital Loan with Directors
Subsequent to September 30, 2023, and through the date of this filing, the Company has received an additional $49,000 in working capital note payable proceeds from Chief Executive Officer and Director Stewart Wallach. The total principal outstanding under this note payable is $592,500 as of the date of this filing. Principal accrues simple interest at a rate of 5 percent per annum, maturing January 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2022 Annual Report.
Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements that are contained principally in the sections describing our business as well as in “Risk Factors, and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. All statements other than statements of historical facts contained, or incorporated by reference, in this report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects, actions taken or strategies being considered with respect to our liquidity position, valuation and appraisals of our assets and objectives of management for future operations, financing opportunities, and future cost mitigation and cash conservation efforts and efforts to reduce operating expenses and capital expenditures are forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” in our latest 2022 Form 10-K Annual Report. In some cases, you can identify forward-looking statements by terms such as “anticipates, “believes, “could, “estimates, “expects, “intends, “may, “plans, “potential, “predicts, “projects, “should, “would and similar expressions (including the negative and variants of such words). Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to various risks and uncertainties. Given these uncertainties, a reader of this report should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this report are made as of the date of filing this report. You should not rely upon forward-looking statements as predictions of future events. Examples of these risks, uncertainties and other factors include, but are not limited, to the impact of:
| ● | Our inability to fund ongoing operations. Our anticipated need for additional, potentially ongoing funding or financing, which may not be available on favorable terms, or at all, and may be dilutive to existing shareholders. The Company will need funding to sustain operations beyond 2023. The Company’s status as a “penny stock” company significantly hinders the ability of the Company to use issuance of equity securities to product working capital. |
| ● | Our failure to fund the development, production and marketing of a new product line that attracts working capital investment and customers’ orders, or, alternatively, our failure to develop and fund a new business line that generates sufficient operating revenues to support ongoing operations. |
| ● | If the Company obtains sufficient working capital funding and then develops, produces and markets a new product line or develops a new business line, then Company’s business and financial condition could be adversely impacted by general economic and related factors, such as fluctuating or increasing levels of unemployment, declines in the securities and real estate markets, and perceptions of these conditions that decrease the level of disposable income of consumers or consumer confidence and the impact of inflationary cost increases to disposable income. Consumer concerns over inflation in the United States may adversely impact consumers’ willingness to purchase discretionary products like our Connected Surfaces products. Demand for the Connected Surfaces products has not been significant in 2023. |
| ● | Our ability to raise sufficient capital or take other actions to improve our liquidity position or otherwise meet our liquidity requirements that are sufficient to eliminate the substantial doubt about our ability to continue as a going concern. The low market price of the common stock and poor financial performance and condition of the Company has hindered efforts to locate funding for working capital. |
| ● | An impairment of our goodwill, in future reporting periods. |
| ● | The risks and increased costs associated with production of products in foreign nations and shipment to U.S. customers. |
| ● | When and if the Company has significant sales of products made abroad, fluctuations in foreign currency exchange rates and impact of inflation in the U.S. and abroad. |
| ● | Our inability to obtain adequate or maintain insurance coverage. |
It is not possible to predict or identify all such risks. There may be additional risks that we consider immaterial, or which are unknown as of the date of the filing of this report.
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The challenge facing the Company is to fund production, inventory and marketing of, and to establish, a new profitable product line, whether the Connected Surfaces or another product line, before the lack of operating revenue and the cost of marketing and penetrating a new product market company impose unsustainable financial burdens and losses on the Company. The Company is not certain that it can obtain working capital funding to sustain operations through 2024.
As of the fiscal period of this report, the COVID 19 virus only impacts our operations when a Company employee or contractor is infected and is unable to perform his or her duties during the recovery period. As of September 30, 2023, any such infections have not significantly impacted the Company’s operations.
The Company is a “penny stock” company under Commission rules and the public stock market price for our common stock is impacted by the lack of significant institutional investor and primary market maker support as well as the poor financial condition and performance of the Company. Investment in our common stock is highly risky and should only be considered by investors who can afford to lose their investment and do not require on demand liquidity. Potential investors should carefully consider risk factors in our SEC filings. The Company’s common stock lacks the primary market maker and institutional investor support to protect the public market from being unpredictable and volatile, especially from adverse impact of day traders. Investors may not have liquidity or desired liquidity in our common stock as an investment.
The above examples are not exhaustive and new risks emerge from time to time. Such forward-looking statements are based on our current beliefs, assumptions, expectations, estimates and projections regarding our present and future business strategies and the environment in which we expect to operate in the future. These forward-looking statements speak only as of the date made. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard thereto or any change of events, conditions, or circumstances on which any such statement was based, except as required by law.
Overview of Our Business
Capstone Companies, Inc. (“Company” or “CAPC”) is a public holding company organized under the laws of the State of Florida. The Company is a designer, manufacturer and marketer of consumer inspired products that bridge technological innovations. The primary operating subsidiary is Capstone Industries, Inc., a Florida corporation located in the principal executive offices of the Company, (“CAPI”). Capstone International Hong Kong, Ltd., or “CIHK”, was established to expand the Company’s product development, engineering, and factory resource capabilities. With the 2021 shift of manufacturing to Thailand from China, the CIHK operation was downsized and put in dormant status in March 2022. Our products are made by third party original manufacturers who work closely with the Company on design, finish, functions, quality and pricing. When and if we commence production of a product line, we may seek production of products in Mexico in order to shorten and reduce cost and complexity of shipment of products to U.S. The Company may utilize Chinese manufacturing sources when and if such an arrangement is deemed reliable and advantageous to the Company.
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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 2022. The Connected Surfaces is the Company’s effort to establish business in an emerging segment that is intended for future revenue growth. The smart home segment is the umbrella category in which we intend to participate with the Connected Surfaces program. 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. As a discretionary purchase, Connected Surfaces products are susceptible to consumer tastes and economic concerns.
In late 2017, as management recognized that the LED category was maturing, it sought a business opportunity that would transition the Company’s revenue streams to an emerging new product category. Our strategic plan to develop and launch new innovative product lines, like Connected Surfaces’ Smart Mirrors and the Connected Chef kitchen appliance, is believed to be essential for growing revenues. However, we were unable to establish the Connected Surfaces’ Smart Mirrors as a product line to replace the LED product line and provide revenues sufficient to fully fund Company operations and overhead. The Smart Mirror product line continues to have limited sales for 2023, as of the date of the filing of this report. The Connected Chef is expected to be ready for formal introduction in quarter four of 2023, but the product has no purchase commitments from retailers as of the end of the third quarter of 2023. 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 Smart Mirrors have both touch and remote control interfacing and its casting capabilities offer voice control through one’s smartphone. Full access to the internet and an operating system capable of running downloadable applications makes the smart mirror customizable to one’s usage preferences. During the second quarter of 2023, 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. Whereas, during the day your smartphone/tablet keeps you connected, whether it is work or personal, now when entering your home, CAPI’s new Connected Surfaces products are intended to enable users the same level of connectivity in a more relaxed manner that does not require being tethered to these devices. The Company is currently marketing the Connected Chef to retailers and appliance brands, however no purchase commitments have been received as of the this date of this filing.
The Company will require third party funding to cover operating overhead and to resume efforts to fund its marketing and product launch campaigns. The future growth will be directly impacted by the level of exposure, messaging and distribution capabilities. Certain members of the Company’s management (“Corporate Insiders and Directors”) have provided short-term funding to support the Company’s basic operational funding needs, but there is no guarantee that this funding will continue or be adequate to fund operations or Connected Surfaces program marketing and inventory as well as possible enhancements in functions demanded by the consumers. The Company will require third party funding to sustain basic operations and continue efforts to market the Connected Surfaces’ Smart Mirror product line as well as any Connected Chef product launch.
The Connected Surfaces category is intended to find its way to retail and Big Box retailers after an unsuccessful direct-to-consumer e-commerce launch during 2022. The Company has been sustained through 2023 by Corporate Insiders and Directors funding, but there is no guarantee that this funding will continue or be adequate to fund and sustain operations or to fund the Smart Mirror program marketing and inventory as well as possible enhancements or an expansion of the portfolio with additional items.
The Company has explored acquiring a new product line or business line, but the low market price of the common stock and poor financial condition and performance of the Company has hindered efforts to locate any a suitable, affordable and interested candidate.
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Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
Our business operations and financial performance for the nine months ended September 30, 2023 continued to be adversely impacted the poor sales of the Smart Mirrors. For the nine months ended September 30, 2023 and 2022, the Company reported an approximate $223,000 or 70% decrease in net revenue from $319,000 in 2022 to $96,000 in 2023. The net loss for the nine months ended September 30, 2023 and 2022 was approximately $1,215,000 as compared to approximately $1,453,000 in 2022. During the nine months ended September 30, 2023 and 2022 the Company used in operating activities approximately $574,000 of cash in 2023 and $1,604,000 in 2022. The decrease in net cash used in operations primarily relates to Smart Mirror inventory purchased during the nine months ended September 30, 2022 of approximately $530,000 versus no purchases of inventory during 2023 along with a reduction in operating expenses of the Company during 2023.
As of September 30, 2023, the Company has negative working capital of approximately $2,830,000 and an accumulated deficit of $10,316,000. The Company’s cash balance decreased by approximately $33,000 from $61,000 as of December 31, 2022 to $28,000 as of September 30, 2023. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
As discussed above, the impact of the COVID-19 pandemic on our product line transition and resulting adverse impact on our business, financial condition, cash flow and results of operations has created uncertainty about the ability of the Company to sustain operations into 2024. If the Connected Surfaces program is not accepted by consumers in 2023 or we fail to develop and sell a new product line with sufficient revenues to sustain operations, then the Company may be unable to sustain operations in 2024.
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 develop the new Connected Chef kitchen appliance product line and to locate a new business 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 to 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 $592,500. The note payable accrues simple interest at a rate of 5 percent per annum, matures January 15, 2024, with the ability for the Company to request a 90-day extension.
Our Growth Strategy
The Company’s traditional looking forward strategy requires continued expansion of its product development and engineering, manufacturing base marketing and distribution of a broadened portfolio of consumer electronic products. Subject to available working capital, the Company’s strategic plan is to pursue new revenue opportunities through the introduction and expansion of its “Connected Surfaces” portfolio into alternate distribution channels that the Company has not previously focused on. In the event of new revenue opportunities, the Company’s approach is typically to leverage its existing valuable customer base to achieve organic growth initiatives within a new category with sufficient market acceptance. These efforts will depend on having adequate working capital from funding and cash flow from product sales. We may be unable to achieve sufficient working capital when and, in the amounts, required to meet operational needs and overhead or pursue or establish new product lines.
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CAPI’s past success has been in its ability to identify emerging product categories where CAPI’s management experience can be fully leveraged. We demonstrated this when the Company entered the LED lighting category. Our branding and product strategies delivered the Company to a well-respected market position. The Company’s low-cost OEM manufacturing and operations have typically, in the past, provided an advantage in delivering great products affordably.
With respect to the Connected Surfaces portfolio, our expectation is was that the new product portfolio would appeal to a much larger audience than our traditional LED lighting product line. The new Connected Surfaces portfolio is designed to tap into consumers ever-expanding connected lifestyles prevalent today. The products are designed to have both touch screen and voice interfacing, internet access and an operating system capable of running downloadable applications. Connected Surfaces products will enable users the same level of connectivity as smartphones in a more relaxed manner that does not require being tethered to these devices.
As a consumer product company, the Company competes in emerging, highly competitive consumer market channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence, employment levels, credit availability and commodity costs. Demand for the Company’s products is highly dependent on economic drivers such as consumer spending and discretionary income as well as providing a product line that is in demand when offered to consumers. 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.
Due to working capital constraints, 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 to the Big Box retailer space with the Connected Surfaces product lines.
Organic Growth Strategy
Subject to adequate funding and favorable cash flow from Connected Surfaces products, which has not been achieved, the Company is exploring various potential initiatives to execute its traditional organic growth strategy, which is designed to enhance its market presence, expand its customer base and maintain its recognition as an industry leader in new product development, and also alternative business lines and new product lines. Key elements of our traditional organic growth strategy include:
Connected Surfaces. While consistently launching successful lighting programs in years prior to 2022, the Company determined that it needed to develop a new product line with greater profit margin potential than LED Lighting and as a replacement revenue generating source. The Company refocused its development and marketing initiatives and is focused on developing the Connected Surfaces products as its primary business line to replace the LED lighting business, which is no longer being actively promoted by the Company. The failure of the LED lighting product line was due to gross margin reductions as a result of increased tariffs and declining consumer interest. The Company’s existing product roadmap outlines a plan for an additional product launch in Q1 of 2024, branded the “Connected Chef”, a kitchen appliance item, which is the world’s first 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 believes this program could leverage existing relationships with its current retail partners and collectively contribute organic growth for the Company. 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 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.
We are also considering other industries in which our ability to develop connected products may have the potential for market penetration and a significant revenue source. None of these alternative markets have produced any orders during 2023.
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Perceived or Essential Strengths
Capstone believes that the following competitive strengths has 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.
Perceived Weaknesses: The Company’s lack of sufficient revenue generating operations and lack of sufficient working capital funding has prevented the Company from pursuing the full development and marketing of a new product line.
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 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 molds, 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.
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As a smaller reporting company, and with any new product line, we were and will be more vulnerable to events like COVID-19 pandemic, production and shipping delays, travel and operational disruptions and restrictions and an accelerated shift to e-commerce from reliance on brick-and-mortar retail sales. We lack the staff, money, internal capabilities and resources and operational experience to significantly or timely respond to significant challenges and adverse changes in business and financial requirements.
The Company relies on OEM’s located in Thailand and China, which have been periodically impacted in the past by the COVID-19 pandemic in meeting development, production and shipping deadlines. The emergence of new variants of COVID 19 virus could adversely affect these regions in the future in terms of shipping products. Any tariff or trade disputes, or legal restrictions on exporting products, or exchange rates could also adversely impact these regions as suppliers of products.
CAPI’s international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies. Should the increased U.S. tariffs imposed on Chinese manufactured goods remain it may increase the cost of electronic components used in our products.
While we have established new production capacity in Thailand, there is no final resolution of the U.S. / China trade dispute from which specific components are sourced. Developing a new, efficient OEM relationship in a new country takes time and effort to reach acceptable production efficiencies. We have only a short operational experience with Thai OEMs and cannot predict long term effectiveness of the relationship. 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. Like many companies, the Company conducts periodic strategic reviews where the feasibility of significant corporate transactions are considered, including mergers, asset purchases or sales and diversification or change in business lines. The Company lacks the financial resources of larger companies to withstand adverse, significant and sustained changes in business and financial condition. This vulnerability necessitates an ongoing consideration of alternatives to current operations. Due to the decline in financial performance of the Company since 2021, and the Company being in transition from a declining product line and not yet establishing a profitable product line, as well as the Company having its shares of Common Stock quoted on The OTC Markets Group, Inc. QB Venture Market and being a “penny stock”, the Company may be unable to consummate a significant corporate transaction that sustains operations or creates a new viable product line or business line.
Products and Customers
The existing product lines available as of the date of this report are as follows:
Connected Surfaces – Smart Mirrors
| - | Standard Rectangular |
| - | Wardrobe/Fitness Mirror |
Current product lines under development as of this report are as follows:
| - | Connected Surfaces – Connected Chef, a purpose-built kitchen appliance tablet form factor with an integrated platform for cooking accessories, i.e.: cutting board. |
The plan to expand the Company’s product portfolio through Connected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits. Expense categories including molds, prototyping, engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred for a period before revenues occur. Promotion of the Connected Surfaces product line was hampered in 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.
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Over the past ten years, the Company has established product distribution relationships with numerous leading international, national and regional retailers, including but not limited to: Amazon, Costco Wholesale, Sam’s Club-Walmart, the Container Store and Firefly Buys. These distribution channels may sell the Company’s products through the internet as well as through retail storefronts and catalogs/mail order. The Company believes it has developed the scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche product opportunities in our largest consumer domestic and international markets. The Company may have to pursue a different market segment if it cannot secure adequate orders from these traditional distribution channels. 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.
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.
Our strategic plan is to service the needs of a wide range of consumers by providing products to satisfy their different interests, preferences, and budgets. The Company believes in its strategy to offer consumers with innovative connected products and quickly introduce additional products to continue to allow Capstone to further penetrate this developing market.
Tariffs. The previous U.S. administration implemented certain tariffs that directly affected the Company’s competitiveness. While all companies in certain industries are affected equally, the appeal for these products to consumers was negatively impacted when retail prices increased due to higher duty rates. The Company has seen promotional schedules cut back and retailers have requested pricing adjustments that would not be known to them in advance to products being shipped. CAPI’s business model insulates the Company from paying duties as its retail partners are the importers of record. The obvious unknown is the final impact of tariffs to the landed costs. Accordingly, retailers have demonstrated caution in their promotional planning schedules and will continue to do so until the administration has clarified its position enabling importers to calculate estimated landed costs.
Tariffs and trade restrictions imposed by the previous U.S. administration provoked trade and tariff retaliation by other countries. A “trade dispute of this nature or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our businesses. As of the date of this Form 10-Q Report, the new U.S. administration is currently reviewing its future position on this issue and there has not been a resolution of the Chinese American trade dispute.
Sales and Marketing
We use direct sales by our Chief Executive Officer and sales agents to sell our products, which effort includes direct sales to home-goods chain retailers. Company’s e-commerce initiatives have not provided significant sales during 2023.
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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.
In the nine months ended September 30, 2023, Company had one customer who comprised approximately 78% of net revenue. In the nine months ended September 30, 2022, the Company had two customers who comprised 63% and 14% of net revenue.
We have utilized social media platforms and online advertising campaigns to further grow the Company’s online presence. In addition to Facebook, Instagram, Pinterest and LinkedIn, CAPI has launched a You Tube channel to host Smart Mirror videos and established a Twitter account. Our Social Media marketing has not resulted in any significant sales of products. We have not and may not be able to effectively compete in e-commerce and Social Media marketing and sales. As such, in 2023 we are returning to marketing to the brick and mortar and Big Box retailers. The Company has a Social Media presence on the following Social Media platforms:
FACEBOOK1: https://www.facebook.com/capstoneindustries and https://www.facebook.com/capstoneconnected
INSTAGRAM2: https://www.instagram.com/capstoneconnected
PINTEREST3: https://www.pinterest.com/capstoneconnected/
LINKEDIN4: https://www.linkedin.com/company/6251882
TWITTER5 https://twitter.com/CAPC_Capstone
YOUTUBE6 https://www.youtube.com/channel/UCMX5W8PV0Q59qoAdMxKcAig
1 Facebook is a registered trademark of Facebook, Inc.
2 Instagram is a registered trademark of Instagram.
3 Pinterest is a registered trademark of Pinterest.
4 LinkedIn is a registered trademark of LinkedIn Corporation.
5 Twitter is a registered trademark of Twitter Corporation.
6YouTube is a registered trademark of YouTube Corporation.
Competitive Conditions
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.
Other competitive factors include rapid technological changes, product availability, credit availability, speed of delivery, ability to tailor solutions to customer needs, quality and depth of product lines and training. Smart Mirrors and other Connected Surface products are an emerging industry. The Company’s product line is innovative and does not require licensing of technologies, as the Connected Surfaces program is developed with open source resources. The Company 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.
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Research, Product Development, and Manufacturing Activities
The Company’s research and development operations based in Florida and Thailand design and engineer many of the Company’s products, with collaboration from its third-party manufacturing partners, software developers and CAPI U.S. engineering advisers. The Company outsources the manufacture and assembly of our products to a select group of OEM manufacturers overseas. Our research and development focus includes efforts to:
| ● | Establish CAPI Connected Surfaces portfolio as an innovator in the smart home segment. |
| ● | Develop product with increasing technology and functionality with enhanced quality and performance, and at a very competitive cost; and |
| ● | Solidify new manufacturing relationships with contract manufacturers in Thailand. |
The Company establishes strict engineering specifications and product testing protocols with the Company’s contract manufacturers and ensure that their factories adhere to all Regional Labor and Social Compliance Laws. These contract manufacturers purchase components that we specify and provide the necessary facilities and labor to manufacture our products. We leverage the strength of the contract manufacturers and allocate the manufacturing of specific products to the contract manufacturer best suited to the task. Quality control and product testing is conducted at the contract manufacturers facility and at their 3rd party testing laboratories overseas.
CAPI uses its proprietary manufacturing expertise by maintaining control over all outsourced production and critical production molds. To ensure the quality and consistency of the Company’s products manufactured overseas, CAPI uses globally recognized certified testing laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all products are designed and tested to adhere to each country’s individual regulatory standards. The Company also hires quality control inspectors who examine and test products to CAPI’s specification(s) before shipments are released.
To successfully implement CAPI’s business strategy, the Company’s ongoing challenge is to 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 CAPI are sourced in Thailand and China, as the Company orders product exclusively through contract manufacturers in the region. These contract manufacturers purchase components based on the Company’s specifications and provide the necessary facilities and labor to manufacture the Company’s products. CAPI allocates the production of specific products to the contract manufacturer the Company believes is more experienced to produce the specific product and whose facility is located in the country that most benefits from the U.S. Tariff regulations. To ensure the consistent quality of CAPI’s products, quality control procedures have been incorporated at each stage of the manufacturing process, ranging from the inspection of raw materials through production and delivery to the customer. These procedures are additional to the manufacturers internal quality control procedures and performed by Quality Assurance personnel.
| ● | Raw Materials – Components and supplies are subject to sample inspections upon arrival at the contract manufacturer, to ensure the correct specified components are being used in production. |
| ● | Work in Process – Our quality control inspectors conduct quality control tests at different points during the product stages of our manufacturing process to ensure that quality integrity is maintained. |
| ● | Finished Goods – Our inspectors perform tests on finished and packaged products to assess product safety, integrity and package compliance. |
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Raw materials used in manufacturing include plastic resin, copper, led bulbs, batteries, and corrugated paper. Prices of materials have remained competitive in the last year. CAPC believes that adequate supplies of raw materials required for its operations are available at the present time. CAPC cannot predict the future availability or prices of such materials. These raw materials are generally available from a number of different sources, and the prices of those raw materials are susceptible to currency fluctuations and price fluctuations due to transportation, government regulations, price controls, economic climate, or other unforeseen circumstances. In the past, CAPC has not experienced any significant interruption in availability of raw materials. We believe we have extensive experience in manufacturing and have taken positions to assure supply and to protect margins on anticipated sales volume.
Section 1502 of Title XV of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires SEC-reporting companies to disclose annually whether any conflict minerals are necessary to the functionality or production of a product. Based on our inquiries to our manufacturers, we do not believe as of the date of such inquiries that any conflict minerals are used in making our products.
Distribution and Fulfillment
Since January 2015, the Company has outsourced its U.S. domestic warehousing and distribution needs to a third-party warehousing facility situated in Anaheim, California. The warehouse operator provides full inventory storage, packaging and logistics services including direct to store and direct to consumer shipping capabilities that electronically interface to our existing operations software. The warehouse operator provides full ERP (Enterprise Resource Planning), Inventory Control and Warehouse Management Systems. These fulfillment services can be expanded to the east coast in Charleston, South Carolina, if the Company needed to establish an east coast distribution point. This relationship, if required, will allow us to fully expand our U.S. distribution capabilities and services. For the e-commerce and direct to consumer marketplace, the Company has developed a new website with full shopping cart capabilities. The Company has negotiated contracts for secured credit card processing capability, state sales tax compliance services and order fulfillment and logistics services, at a very competitive rate. The Company will also warehouse and supply its Smart Mirror program through Amazon fulfilment.
Seasonality
In general, sales for household products and electronics are seasonally influenced. Certain gift products cause consumers to increase purchases during key holiday winter season of the fourth quarter, which requires increases in retailer inventories during the third quarter. However, we do not have sufficient operational experience with Connected Surfaces to predict the seasonality of Connected Surfaces.
Intellectual Property
CAPC 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 |
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While the Company may license third party technologies for its products, or may rely on other companies, especially OEMs, for design, engineering and testing, the Company believes that its oversight of design and function of its products and its marketing capabilities are significant factors in the ability of the Company to sell its products.
Value of Patents
The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Issued patents or patents based on pending patent applications or any future patent applications may not exclude competitors or may not provide a competitive advantage to us. In addition, patents issued or licensed to us may not be held valid if subsequently challenged and others may claim rights in or ownership of such patents. The validity and breadth of claims in technology patents involve complex legal and factual questions and, therefore, the extent of their enforceability and protection is highly uncertain.
Reverse engineering, unauthorized copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without paying us. We cannot assure shareholders that our competitors have not developed or will not develop similar products, will not duplicate our products, or will not design around any patents issued to or licensed by us. We will assess any loss of these rights and determine whether to litigate to protect our intellectual property rights on a case by case basis.
We rely on trademark, trade secret, patent, and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license intellectual property rights from others to support new product introductions. There can be no assurance that we can acquire licenses under patents belonging to others for technology potentially useful or necessary to us and there can be no assurance that such licenses will be available to us, if at all, on terms acceptable to us. Moreover, there can be no assurance that any patent issued to or licensed by us will not be infringed or circumvented by others or will not be successfully challenged by others in lawsuits. We do not have a reserve for litigation costs associated with intellectual property matters. The cost of litigating intellectual property rights claims may be beyond our financial ability to fund.
As is customary in the retail industry, many of our customer agreements 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.
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We have incorporated into our data network various on and off-site data backup processes which should allow us to mitigate any data loss events, however our information technology systems are vulnerable to damage or interruption from:
| ● | hurricanes, fire, flood and other natural disasters |
| ● | power outage |
| ● | internet, computer system, telecommunications or data network failure Hacking as well as malware, computer viruses, ransomware and similar malicious software code |
Environmental Regulations
We believe that the Company is in compliance with environmental protection regulations and will not have a material impact on our financial position and results of operations.
Critical Accounting Policies
We believe that there have been no significant changes to our critical accounting policies during the nine months ended September 30, 2023, as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Annual Report.
CONSOLIDATED OVERVIEW OF RESULTS OF OPERATIONS
Results of operations.
Net Revenues
Revenue is derived from sales of our Connected Surfaces Smart Mirrors. Previous to 2023, the Company derived revenue from consumer home LED lighting for both indoor and outdoor applications while the Smart Mirrors were sold directly to consumers via e-commerce efforts. We recognize revenue upon shipment of the order to the customer when all performance obligations have been completed and title has transferred to the customer and in accordance with the respective sale’s contractual arrangements. Each contract on acceptance will have a fixed unit price. Our 2023 sales are in the U.S. market which represented 100% of revenues and we expect to the U.S Market to continue to be the major source of revenue for the Company. Net revenue also includes the cost of instant rebate coupons, promotional coupons, and product support allowances provided to retailers to promote certain products. All of our revenue is denominated in U.S. dollars.
Cost of Goods Sold
Our cost of goods sold consists primarily of purchased products from contract manufacturers and when applicable associated duties and inbound freight. In addition, our cost of goods sold also includes reserves for potential warranty claims, freight allowances and reserves for inventory. We maintained Smart Mirror inventory on hand for direct to consumer shipment to fulfill sales orders.
Gross Profit
Our gross profit has and will continue to be affected by a variety of factors, including average sales price for our products, product mix, promotional allowances, our ability to reduce product costs and fluctuations in the cost of our purchased components.
Operating Expenses
Operating expenses include sales and marketing expenses, consisting of sales representative’s commissions, advertising and trade show expense and costs related to employee’s compensation. In addition, operating expenses include charges relating to product development, office and warehousing, accounting, legal, insurance and stock-based compensation.
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CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
| Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 | ||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | |||||||||||||
| Revenues, net | $ | 63,771 | 100 | % | $ | 35,876 | 100 | % | ||||||||
| Cost of sales | (163,194 | ) | (256 | )% | (27,440 | ) | (76 | )% | ||||||||
| Gross Profit | (99,4237 | ) | (156 | )% | 8,436 | 24 | % | |||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing | 9,733 | 15 | % | 84,171 | 235 | % | ||||||||||
| Compensation | 115,662 | 181 | % | 210,730 | 587 | % | ||||||||||
| Professional fees | 93,085 | 146 | % | 90,761 | 253 | % | ||||||||||
| Product development | 25,115 | 39 | % | 29,500 | 82 | % | ||||||||||
| Other general and administrative | 52,397 | 82 | % | 115,477 | 322 | % | ||||||||||
| Total Operating Expenses | 295,992 | 464 | % | 530,639 | 1479 | % | ||||||||||
| Operating Loss | (395,415 | ) | (620 | )% | (522,203 | ) | (1456 | )% | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Other income | — | — | % | 161,848 | 451 | % | ||||||||||
| Other expense | (28,183 | ) | (44 | )% | (20,418 | ) | (57 | )% | ||||||||
| Total Other Income (Expense) | (28,183 | ) | (44 | )% | 141,430 | 394 | % | |||||||||
| Loss Before Tax Benefit | (423,598 | ) | (664 | )% | (380,773 | ) | (1061 | )% | ||||||||
| Income Tax (Benefit) Expense | — | — | % | (800 | ) | (2 | )% | |||||||||
| Net Loss | $ | (423,598 | ) | (664 | )% | $ | (379,973 | ) | (1059 | )% | ||||||
| Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 | ||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | |||||||||||||
| Revenues, net | $ | 95,968 | 100 | % | $ | 318,762 | 100 | % | ||||||||
| Cost of sales | (199,287 | ) | (203 | )% | (225,571 | ) | (71 | )% | ||||||||
| Gross Profit | (103,319 | ) | (108 | )% | 93,191 | 29 | % | |||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing | 66,144 | 69 | % | 278,323 | 87 | % | ||||||||||
| Compensation | 376,658 | 392 | % | 626,199 | 196 | % | ||||||||||
| Professional fees | 321,175 | 335 | % | 353,088 | 111 | % | ||||||||||
| Product development | 76,454 | 80 | % | 125,768 | 39 | % | ||||||||||
| Other general and administrative | 260,598 | 272 | % | 374,039 | 117 | % | ||||||||||
| Total Operating Expenses | 1,101,029 | 1147 | % | 1,757,417 | 551 | % | ||||||||||
| Operating Loss | (1,204,348 | ) | (1255 | )% | (1,664,226 | ) | (522 | )% | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Other income | 63,972 | 67 | % | 313,848 | 98 | % | ||||||||||
| Other expense | (74,199 | ) | (77 | )% | (48,516 | ) | (15 | )% | ||||||||
| Total Other Income (Expense) | (10,227 | ) | (11 | )% | 265,332 | 83 | % | |||||||||
| Loss Before Tax Benefit | (1,214,575 | ) | (1266 | )% | (1,398,894 | ) | (439 | )% | ||||||||
| Income Tax (Benefit) Expense | 800 | 1 | % | 53,718 | 17 | % | ||||||||||
| Net Loss | $ | (1,215,375 | ) | (1266 | )% | $ | (1,452,612 | ) | (456 | )% | ||||||
Net Revenues
Our business operations and financial performance for the nine months ended September 30, 2023, reflected slow e-commerce sales for the Smart Mirror. Executive management are actively pursuing by direct sales brick and mortar retailers for placement in large, home goods stores. Executive management redesigned the packaging for in-store placement, versus warehouse storage for online retailers, for a more eye catching and informative package design.
Net revenues for the three months ended September 30, 2023, were approximately $64,000, an increase of $28,000 or 78% from approximately $36,000 in the same period 2022. The increase is due to a second purchase order placed during September 2023 from a large brick-and-mortar retailer who is continuing to test the Smart Mirror in their customer base.
Net revenues for the nine months ended September 30, 2023, were approximately $96,000, a decrease of $223,000 or 70% from approximately $319,000 in the same period 2022. The decrease is due to a switch in product lines from the deteriorating LED lighting market to the Smart Mirror in 2022, whereas there were no LED lighting sales during the nine months ended September 30, 2023.
The following tables disaggregates revenue by geographic area:
| For the Three Months Ended September 30, | For the Three Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Revenues | % of Total Revenue | Revenues | % of Total Revenue | |||||||||||||
| Lighting Products- US | $ | — | — | % | $ | 26,421 | 74 | % | ||||||||
| Lighting Products- International | — | — | % | — | — | % | ||||||||||
| Smart Mirror Products- U.S. | 63,771 | 100 | % | 9,455 | 26 | % | ||||||||||
| Total Revenue | $ | 63,771 | 100 | % | $ | 35,876 | 100 | % | ||||||||
| For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Revenues | % of Total Revenue | Revenues | % of Total Revenue | |||||||||||||
| Lighting Products- US | $ | — | — | % | $ | 228,680 | 72 | % | ||||||||
| Lighting Products- International | — | — | % | 44,640 | 14 | % | ||||||||||
| Smart Mirror Products- U.S. | 95,968 | 100 | % | 45,442 | 14 | % | ||||||||||
| Total Revenue | $ | 95,968 | 100 | % | $ | 318,762 | 100 | % | ||||||||
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Gross Profit and Cost of Sales
Gross profit for the three months ended September 30, 2023, and 2022, was ($99,000) and $8,000, respectively, a decrease of $107,000 from the previous year. Gross Profit as a percent of revenue was (156%) in the third quarter 2023 as compared to 24% in the same quarter 2022. The decline in gross margin for the three months ended September 30, 2023 is due to an inventory write down of approximately $60,000 to reduce the carrying amount of inventory on hand to the most recent selling price of the Smart Mirrors during the third quarter of 2023, which resulted in an increase in net cost of goods sold.
Gross profit for the nine months ended September 30, 2023, and 2022, was ($103,000) and $93,000, respectively, a decrease of $196,000 from the previous year. Gross Profit as a percent of revenue was (108%) for the nine months ended September 2023 as compared to 29% in the same period for 2022. Decrease in gross profit is due to the Smart Mirrors selling at a sales price lower than the cost of inventory. An inventory valuation adjustment was recorded as of September 30, 2023 to reflect the proper carrying value of the Smart Mirrors at lower than cost or net realizable value.
Operating Expenses and Other Income (Expenses)
The Company made concerted efforts to reduce operating expenses in 2023 in accordance with the low Smart Mirror e-commerce sales, as denoted further. 2022’s poor performance of e-commerce sales for the Smart Mirror proved to Executive Management that e-commerce was not the ideal market for the Smart Mirror product. Focus of sales and marketing efforts are now re-directed to placement in brick-and-mortar retail stores with the expectation of an enhanced consumer experience in person with the Smart Mirror and newly re-designed retail packaging.
Sales and Marketing Expenses
For the three months ended September 30, 2023, and 2022, sales and marketing expenses were approximately $10,000 and $84,000, respectively, a decrease of $74,000 or 88%. For the nine months ended September 30, 2023, and 2022, sales and marketing expenses were approximately $66,000 and $278,000, respectively, a decrease of $212,000 or 76%. The Company made concerted efforts to reduce operating expenses in accordance with the low Smart Mirror e-commerce sales. The Consumer Electronics Show expense was $100,000 in January 2022 as compared to $0 in 2023. The Social Media expense was $3,000 in 2023 as compared to $106,000 in 2022.
Compensation Expenses
For the three months ended September 30, 2023, and 2022, compensation expenses were approximately $116,000 and $210,000 respectively, a decrease of $95,000 or 45%. For the nine months ended September 30, 2023, and 2022, compensation expenses were approximately $377,000 and $626,000 respectively, a decrease of $250,000 or 40%. The Company’s CFO retired November 2022 and the Company hired a consultant as an Interim CFO, classified as professional fees, which has reduced compensation expenses. In addition, the Company has reduced workforce to essential employees as it repositions the brand and Connected Surfaces product line for a brick-and-mortar launch.
Professional Fees
For the three months ended September 30, 2023, and 2022, professional fees were approximately $93,000 and $91,000 respectively, a decrease of $2,000 or 3%. For the nine months ended September 30, 2023, and 2022, professional fees were approximately $321,000 and $353,000 respectively, a decrease of $32,000 or 9%.
Product Development Expenses
For the three months ended September 30, 2023, product development expenses were approximately $25,000 as compared to $30,000 in 2022, a reduction of $4,000 or 15%. For the nine months ended September 30, 2023, product development expenses were approximately $76,000 as compared to $125,000 in 2022, a reduction of $49,000 or 39%. During the first quarter 2022, fees were incurred for patent and trademarks related to the Connected Surfaces which were not incurred first quarter 2023. In addition, the nine months ended September 2022 included $30,000 in expenses for prototypes for the Smart Mirror which were not incurred during 2023. An offset to these reductions was a $30,000 increase in development costs for the Connected Chef for the nine months ended September 30, 2023.
Other General and Administrative Expenses
For the three months ended September 30, 2023, other general and administrative expenses were approximately $52,000 as compared to $115,000 in 2022 for a reduction of $63,000 or 55%. For the nine months ended September 30, 2023, other general and administrative expenses were approximately $261,000 as compared to $374,000 in 2022, a reduction of $113,000 or 30%. Travel costs were reduced in 2023 as part of the reduction in nonessential expenses. First quarter 2022 included an expense for a LED patent infringement legal settlement of $22,000 that was not incurred 2023. The Company’s fixed assets, made up of computers, furniture and fixtures, were fully depreciated by the end of 2022 and the Company has not incurred any depreciation expense as of the first half of 2023 as the tooling machinery purchased in the second quarter of 2023 for the Connected Chef has not yet been put into production. In addition, the office lease for the executive offices ended June 30, 2023 when the Company moved to a virtual office, reducing expenses by $16,000 during the third quarter of 2023.
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Total Operating Expenses
For the three months ended September 30, 2023, and 2022, total operating expenses were approximately $296,000 and $531,000, respectively, a decrease of approximately $235,000 or 44%. For the nine months ended September 30, 2023, and 2022, total operating expenses were approximately $1,101,000 and $1,757,000, respectively, a decrease of approximately $656,000 or 37%. See above for drivers of the decrease in 2023 operating expenses.
Operating Loss
For the three months ended September 30, 2023 and 2022, the operating loss was approximately $395,000 and $522,000, respectively, a decreased loss of $126,000 or 25%. For the nine months ended September 30, 2023 and 2022, the operating loss was approximately $1,204,000 and $1,664,000, respectively, a decreased loss of $459,000 or 28%. The reduction in the Company’s operating losses are a result of reduced workforce, reduced advertising expenditures, reduced production costs and reduced office lease expenses.
Total Other Income (Expense), net
For the three months ended September 30, 2023, and 2022, other income (expense) was ($28,000), net as compared to $141,000 for 2022. For the nine months ended September 30, 2023, other income (expense) was ($10,000), net as compared to $265,000 for 2022. During 2023, the Company received $49,000 in employee retention tax credit income under the Cares Act 2020-2021 and $15,000 in premium refunds from their product liability insurance carrier during the second quarter of 2023. The net other income for the nine months ended September 30, 2022 included $152,000 employee retention tax credit income received under Cares Act 2020-202, an insurance recovery of $80,000 for damaged Smart Mirrors and vendor credit of $82,000 received from FedEx for damaged Smart Mirrors in the third quarter of 2022. Interest expense, included in total other income (expense), net, for the nine months ended September 30, 2023 was ($74,000) which is increase of $26,000 from September 30, 2022 interest expense of ($49,000) which is due to the increase in working capital advances made during 2023.
Net Loss
For the three months ended September 30, 2023, the net loss was approximately $424,000 compared to a net loss of $380,000 in the same period 2022, an increased loss of $44,000 or 11%. The increase in net loss for the third quarter period is attributable to the insurance recovery of damaged Smart Mirrors and vendor credit received from FedEx for damaged Smart Mirrors in the third quarter of 2022, which reduced the net loss for 2022. For the nine months ended September 30, 2023 the net loss was approximately $1,215,000 compared to a net loss of $1,453,000 in the same period 2022, a decreased loss of $237,000 or 16%. Management credits the reduction in net loss for the nine months ended to its cost reduction efforts for operating expenses during 2023.
Off-Balance Sheet Arrangements
The Company does not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.
Contractual Obligations
There were no material changes to contractual obligations for the nine months ended September 30, 2023.
Cash flow from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers. Cash as of September 30, 2023, and December 31, 2022, was approximately $28,000 and $61,000 respectively, a decrease of approximately $30,000.
| Summary of Cash Flows | For the Nine Months ended September 30, | |||||||
| 2023 | 2022 | |||||||
| (In thousands) | ||||||||
| Net cash used in: | ||||||||
| Operating Activities | $ | (573,611 | ) | $ | (1,603,523 | ) | ||
| Investing Activities | (42,970 | ) | — | |||||
| Financing Activities | 583,504 | 588,338 | ||||||
| Net decrease in cash | $ | (33,077 | ) | $ | (1,015,185 | ) | ||
As of September 30, 2023, the Company’s working capital deficit was approximately $2,830,000. Current assets were approximately $354,000 and current liabilities were approximately $3,185,000 and include:
| ● | Accounts payable of approximately $64,000 due vendors and service providers. |
| ● | Accrued expenses of approximately $622,000 in deferred wages and $37,000 in other liabilities. |
| ● | Note payable related and unrelated parties with accrued interest of approximately $2,462,000. |
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Cash Flows used in Operating Activities
Cash used in operating activities in the nine months ended September 30, 2023, and 2022 was approximately $574,000 and $1,604,000, respectively, a decrease of $1,030,000 compared to last year. The decrease in net cash used in operations primarily relates to inventory purchased in the nine months of 2022 of approximately $487,000 versus no purchases of inventory during 2023 along with a reduction in operating expenses of the Company during 2023.
Cash Flows used in Investing Activities
Cash used in investing activities in the nine months ended September 30, 2023, and 2022 was $43,000 and $0, respectively. The Company purchased tooling machinery in 2023 for the “Connected Chef” product line, a 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.
Cash Flows provided by Financing Activities
Cash provided by financing activities from proceeds from notes payables for the nine months ended September 30, 2023 and 2022, was approximately $584,000 and $588,000, respectively.
As of September 30, 2023, and 2022, the Company had outstanding note payable of approximately $2,462,000 and $1,681,000 which includes accrued interest of $158,433 and $61,000 respectively.
Directors and Officers Insurance
The Company currently has Directors and Officers liability insurance, and the Company believes the coverage is adequate to cover likely liabilities under such a policy.
Exchange Rates
We sell all of our products in U.S. dollars and pay for all of our manufacturing costs in U.S. dollars. Our factories are located in mainland China and Thailand.
Country Risks: Changes in foreign, cultural, political, and financial market conditions could impair the Company’s international manufacturing operations and financial performance.
The Company’s manufacturing is currently conducted in China and Thailand. Consequently, the Company is subject to a number of significant risks associated with manufacturing in overseas, including:
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| ● | The possibility of expropriation, confiscatory taxation, or price controls. |
| ● | Adverse changes in local investment or exchange control regulations. |
| ● | Political or economic instability, government nationalization of business or industries, government corruption, and civil unrest. |
| ● | Legal and regulatory constraints. |
| ● | Tariffs and other trade barriers, including trade disputes between the U.S. and China. |
| ● | Political or military conflict between the U.S. and China, or between U.S. and North Korea, resulting in adverse or restricted access by U.S.-based companies to Chinese manufacturing and markets. |
Currency: Currency fluctuations may significantly increase our expenses and affect the results of operations, especially where the currency is subject to intense political and other outside pressures.
Interest Rate Risk: The Company does not have significant interest rate risk during the nine month period ended September 30, 2023. All outstanding loans have been disclosed including the agreed interest rates.
Credit Risk: The Company has not experienced significant credit risk. The e-commerce business requires customer credit approval prior to shipment and the payment is received by the Company between 5 and 20 days after shipment depending on which ordering platform is used by the consumer. To date we have not experienced any credit risk issues, but we will closely monitor the process to assess that this trend continues.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
Because the Company is a smaller reporting company, this Form 10-Q Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by our independent registered public accounting firm.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of September 30, 2023, to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting.
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15 and 15d-15 under the Exchange Act, during the fiscal quarter ending September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The certifications of our Chief Executive Officer and Interim Chief Financial Officer attached as Exhibits 31 and 32 and to this report include information concerning our disclosure controls and procedures and internal control over financial reporting.
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Inherent Limitations on Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. Internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of internal control are met. Further, the design of internal control must reflect the fact that there are resource constraints, and the benefits of the control must be considered relative to their costs. While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company, have been detected.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any other pending or threatened legal proceedings and, to the best our knowledge, no such action by or against us has been threatened. From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions or settlements may occur in such routine lawsuits, we believe that the final disposition of such routine lawsuits will not have material adverse effect on its financial position, results of operations or status as a going concern.
Other Legal Matters. To the best of our knowledge, none of our directors, officers, or owners of record of more than five percent (5%) of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us in reference to pending litigation.
Item 1A. Risk Factors.
You should carefully consider the “Risk Factors” disclosed under “Item 1A. Risk Factors” in our 2022 Form 10-K Annual Report. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The Company has insufficient revenues to support its basic operating overhead and relies on funding from a director and senior officer to pay basic operating overhead. The Company may be unable to sustain operations through 2023 without continued financial support from the directors and senior officer or investment or funding from a third party. There can be no assurance that the Company can obtain sufficient funding to sustain operations through 2023. The financial difficulties of the Company severely hamper the pursuit of Connected Surface products and any new business lines and new products.
There is substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further financing. Our public auditor’s report for the 2022 Annual Report stated that the Company has incurred operating losses, has incurred negative cash flows from operations and has an accumulated deficit, and these and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.
If funding sources are not available or are inadequate or unwilling to fund operations, or the products at hand and under development are not capable of generating sustainable revenues in the future, we will be required to reduce operating costs even further, which could further jeopardize any future strategic initiatives and business plans. Furthermore, uncertainty concerning our ability to continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going concern are dependent on our ability to obtain additional funding in the near future and thereafter, and there are no assurances that such funding will be available to us at all or will be available in sufficient amounts or on reasonable terms. Without adequate working capital funding, the Company may be forced into bankruptcy, either to reorganize or liquidate, or to liquidate.
There may be risks that are not presently material or known and not discussed in this report or other SEC filings. There are also risks within the economy, the industry, and the capital markets that could materially adversely affect the Company, including those associated with an economic recession, inflation, a global economic slowdown, political instability, war, government regulation (including tax regulation), employee attraction and retention, and customers inability or refusal to pay for the products and services provided by the Company. There are also risks associated with the occurrence of extraordinary events, such as COVID-19 pandemic re-emerging due to new virus variants, terrorist attacks or natural disasters (such as tsunamis, hurricanes, tornadoes, and floods). These factors affect businesses generally, including the Company, its customers and suppliers and, as a result, are not discussed in detail below, but are applicable to the Company. As a “penny stock” without primary market maker support, and due to the decline in financial performance of the Company in 2021 and 2022 and continuing into 2023, an investment in our common stock involves a very high degree of risk. If any of the following risks actually occurs or continues to impact our business, our business, financial condition or results of operations could worsen. In that case, the trading price of our common stock could decline, and an investment in the Common Stock could be rendered worthless or illiquid.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company did not issue any unregistered securities in the fiscal period ended September 30, 2023.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
The Company has no information to disclose that was required to be in a report on Form 8-K during the period covered by this report but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors or make shareholder proposals.
| 40 |
Item 6. Exhibits
The following exhibits are filed as part of this Report on Form 10-Q or are incorporated herein by reference.
| 41 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Capstone Companies, Inc.
Dated: November 14, 2023
| /s/ Stewart Wallach | ||
| Stewart Wallach | Chief Executive Officer | |
| Principal Executive Officer |
| /s/Dana Eschenburg Perez | ||
| Dana Eschenburg Perez | Interim Chief Financial Officer | |
| Principal Financial Executive and Accounting Officer |
| 42 |
Exhibit 31.1
Section 302 Certifications
I, Stewart Wallach, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capstone Companies, Inc. for the fiscal quarter ended on September 30, 2023.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report.
4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and |
5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
Date: November 14, 2023
| /s/ Stewart Wallach | |
| Stewart Wallach | |
| CEO, Director, (Principal Executive Officer) |
Exhibit 31.2
Section 302 Certifications
I, Dana E. Perez, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capstone Companies, Inc. for the fiscal quarter ended on September 30, 2023.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report.
4. The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and |
5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
Date: November 14, 2023
| /s/ Dana E. Perez | |
| Dana E. Perez | |
| Interim Chief Financial Officer | |
| (Principal Financial Executive and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Capstone Companies, Inc. (“Company”) on Form 10-Q for the fiscal period ended September 30, 2023, filed with the Securities and Exchange Commission (the “Report”), I, Stewart Wallach, Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
IN WITNESS WHEREOF, the undersigned has signed this statement on this 14th day of November, 2023.
| /s/ Stewart Wallach | |
| Stewart Wallach | |
| CEO, Director | |
| (Principal Executive Officer) |
A signed original of this written statement will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Capstone Companies, Inc. (“Company”) on Form 10-Q for the fiscal period ended September 30, 2023, filed with the Securities and Exchange Commission (the “Report”), I, Dana E. Perez, Interim Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
IN WITNESS WHEREOF, the undersigned has signed this statement on this 14th day of November, 2023.
| /s/ Dana E. Perez | |
| Dana E. Perez | |
| Interim Chief Financial Officer | |
| (Principal Financial Executive and Accounting Officer) |
A signed original of this written statement will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) |
Sep. 30, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Inventory Adjustments | $ 461,734 | $ 533,254 |
| Common Stock, Par or Stated Value Per Share | $ 0.0001 | $ 0.0001 |
| Common Stock, Shares Authorized | 295,000,000 | 295,000,000 |
| Common Stock, Shares, Issued | 8,826,864 | 8,826,864 |
| Common Stock, Shares, Outstanding | 8,826,864 | 8,826,864 |
| Series A Preferred Stock [Member] | ||
| Preferred Stock, Series A, Par Value | $ 0.001 | $ 0.001 |
| Preferred Stock, Authorized | 6,666,667 | 6,666,667 |
| Preferred Stock, Shares Issued | 0 | 0 |
| Preferred Stock, Shares Outstanding | 0 | 0 |
| Series B Preferred Stock [Member] | ||
| Preferred Stock, Series A, Par Value | $ 0.0001 | $ 0.0001 |
| Preferred Stock, Authorized | 5,000,000 | 5,000,000 |
| Preferred Stock, Shares Issued | 15,000 | 15,000 |
| Preferred Stock, Shares Outstanding | 15,000 | 15,000 |
| Series C Preferred Stock [Member] | ||
| Preferred Stock, Series A, Par Value | $ 1.00 | $ 1.00 |
| Preferred Stock, Authorized | 67 | 67 |
| Preferred Stock, Shares Issued | 0 | 0 |
| Preferred Stock, Shares Outstanding | 0 | 0 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|
| Income Statement [Abstract] | ||||
| Revenues, net | $ 63,771 | $ 35,876 | $ 95,968 | $ 318,762 |
| Cost of sales | (163,194) | (27,440) | (199,287) | (225,571) |
| Gross Profit | (99,423) | 8,436 | (103,319) | 93,191 |
| Operating Expenses: | ||||
| Sales and marketing | 9,733 | 84,171 | 66,144 | 278,323 |
| Compensation | 115,662 | 210,730 | 376,658 | 626,199 |
| Professional fees | 93,085 | 90,761 | 321,175 | 353,088 |
| Product development | 25,115 | 29,500 | 76,454 | 125,768 |
| Other general and administrative | 52,397 | 115,477 | 260,598 | 374,039 |
| Total Operating Expenses | 295,992 | 530,639 | 1,101,029 | 1,757,417 |
| Operating Loss | (395,415) | (522,203) | (1,204,348) | (1,664,226) |
| Other Income (Expenses): | ||||
| Other income | 161,848 | 63,972 | 313,848 | |
| Interest expense, net | (28,183) | (20,418) | (74,199) | (48,516) |
| Total Other Income (Expenses), net | (28,183) | 141,430 | (10,227) | 265,332 |
| Loss Before Income Taxes | (423,598) | (380,773) | (1,214,575) | (1,398,894) |
| Income Tax Expense | (800) | 800 | 53,718 | |
| Net Loss | $ (423,598) | $ (379,973) | $ (1,215,375) | $ (1,452,612) |
| Net Loss per Common Share | ||||
| Basic and Diluted | $ (0.01) | $ (0.01) | $ (0.02) | $ (0.03) |
| Weighted Average Shares Outstanding | ||||
| Basic and Diluted | 48,826,864 | 48,826,864 | 48,826,864 | 48,860,743 |
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Capstone Companies, Inc. (“CAPC”, “Company”, “we”, “our” or “us”), a Florida corporation and its wholly owned subsidiaries is presented to assist in understanding the Company’s consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the consolidated financial statements.
Nature of Business
The Company has its principal executive offices in Deerfield Beach, Florida.
From 2007 until 2022, the Company, through 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. There were no sales of LED lighting products during 2023 and Lighting Products ceased to be an active product line of the Company in 2023. 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 condensed consolidated financial statements, the Company’s future product development effort is focused on the development of a “Connected Surfaces” portfolio. The Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding Internet of Things, wireless connected lifestyles prevalent today, with the initial product launch of the Smart Mirror, an internet connected and interactive mirror. Subject to adequate funding, the Company’s current business strategy is to seek to expand the new line of Connected Surfaces in 2023 and 2024. The Company 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 third quarter of 2023. The launch of the Connected Chef is slated to take place in the first quarter of 2024, subject to available working capital to pay for product production, inventory and marketing.
The Company’s operations consist of one reportable segment for financial reporting purposes: Consumer Home Goods.
Basis of Presentation
The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2023, and results of operations, stockholders’ equity and cash flows for the three and nine months ended September 30, 2023 and 2022. All material intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) relating to interim financial statements and in conformity with U.S. GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”) filed with the SEC on March 31, 2023.
The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.
From 2020 into 2022, the COVID-19 pandemic adversely impacted our Company at the same time as we were implementing a major shift in product line, from mature LED products to new Connected Surfaces products, amplified the financial impact of COVID-19 pandemic by disrupting development and production of new Connected Surfaces products in Thailand and China and resulting delay in the Company being able to promote, market and sell Connected Surfaces products. This delay in launching the new product line coupled with the decline in sales of the LED product line adversely impacted the Company and created uncertainty about the ongoing viability of the current product lines of the Company. The Company’s plan to orderly transition from LED lighting products to Connected Surfaces products as the primary source of revenues was undermined by these delays and disruptions. By the time that the Company was ready to fill bulk orders for Smart Mirrors, the traditional primary customers for Company products did not place orders and the Company’s e-commerce initiative did not generate any significant orders. This ‘perfect storm’ of events has left the Company without a current product line that is generating significant revenues. The Company is evaluating the best way for the Company to establish a product line or business line that provides a sufficient revenue source to fund working capital and growth needs of the Company. This evaluation includes possible new Connected Surfaces products, new industry focus for those products and potential new business lines. The Company has not established a new product line or a new business line in the fiscal quarter ending September 30, 2023. Development of a new business line and product line will depend on the ability of the Company to locate funding for working capital to pay for production, inventory and marketing.
Principles of Consolidation
The condensed consolidated financial statements for the periods ended September 30, 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.
Liquidity and Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
As of September 30, 2023, the Company had negative working capital of approximately $2,830,000 an accumulated deficit of approximately $10,316,000, a cash balance of $28,000, short-term notes payable of $2,461,000 and $285,000 of deferred taxes. Further, during the nine months ended September 30, 2023, the Company incurred a net loss of approximately $1,215,000 and used cash in operations of approximately $574,000.
These liquidity conditions raise substantial doubt about the Company’s ability to continue as a going concern. We are seeking alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures 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.
Inventories
The Company’s inventory, which consists of finished Thin Cast Smart Mirror products for resale to consumers by Capstone, is recorded at the lower of landed cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when the expected realizable value of a specific inventory item falls below its original cost. Management regularly reviews the Company’s investment in inventories for such declines in value.
Management reviewed the valuation of inventory on hand as of the year ended December 31, 2022, and considered the need for a reserve for slow moving inventory due to sales not meeting projected forecasts during 2022. Management estimated a 50% reserve for inventory held in domestic warehouses and a 100% reserve for inventory held in international warehouses, which resulted in an increase in the inventory reserve of $533,254. The inventory reserve was revised for the period ended September 30, 2023 to reflect the Smart Mirrors sold or used in promotional events during 2023, for a revised ending balance of $461,734. As of September 30, 2023, all inventory is held in domestic warehouses.
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. During 2020, the Company recognized $623,538 of impairment charges. There was no impairment charge for the nine months ended September 30, 2023 or for the year ended December 31, 2022.
Fair Value Measurement
The accounting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) “Fair Value Measurements and Disclosures (ASC 820-10) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3: Significant unobservable inputs.
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 September 30, 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 September 30, 2023 and 2022, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 408,288 options, 199,733 warrants and 15,000 of preferred B-1 stock convertible into 999,900 shares of common stock for 2023 and 608,288 options, 199,733 warrants and 15,000 of preferred B-1 stock convertible into 999,900 shares of common stock for 2022.
Revenue Recognition
The Company generates revenue from developing, marketing and selling consumer products through national and regional retailers. The Company’s products are targeted for applications such as home indoor and outdoor lighting as well as Internet-of-Thing devices and will have different functionalities. CAPI currently operates in the consumer home goods products category in the United States. These products may be offered either under the CAPI brand or a private brand.
A sales contract occurs when the customer-retailer submits a purchase order to buy a specific product, a specific quantity, at an agreed-fixed price, within a shipping window, from a specific location and on agreed payment terms. The selling price in all of our customers’ orders has been previously negotiated and agreed to including any applicable discount prior to receiving the customer’s purchase order. The stated unit price in the customer’s order has already been determined and is fixed at the time of invoicing.
The Company recognizes Lighting Product revenue and Smart Mirror 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’s revenue recognition policy is in accordance with ASC 606.
Marketing allowances include the cost of underwriting an in-store instant rebate coupon or a target markdown allowance on a specific product. The Company retains these allowances for a period of 3 to 5 years in the event the customer chargebacks for a promotional allowance against an open invoice or submits an invoice for their claim. Cash discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment. These allowances are evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer and may be released as other income if deemed not required.
Direct-to-consumer orders for the Connected Surfaces Smart Mirrors are sold initially through e-commerce platforms. The Company also sells the Connected Surfaces Smart Mirror program through independent retailers. The Company will only bill the customer and recognize revenue upon the customer or retailer 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:
Sales reductions for allowances and other promotional coupons are recognized during the period when the related revenue is recorded. The reduction of accrued allowances is included in net revenues and amounted to $0 and $719 for the three months ended September 30, 2023 and 2022, respectively and $15,300 and $3,000, for the nine months ended September 30, 2023, and 2022, respectively.
Warranties
For the LED product line, the Company provides the end user with limited rights of return as a consumer assurance warranty on all products sold, stipulating that the product will function properly for the warranty period. The warranty period for all products is one year from the date of consumer purchase. Certain retail customers may receive an off invoice-based discount such as a defective/warranty allowance, that will automatically reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the cost of any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances are charged to cost of sales at the time the order is invoiced. For those customers that do not receive a discount off-invoice, the Company recognizes a charge to cost of sales for anticipated non-conforming returns based upon an analysis of historical product warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.
For the online Smart Mirror customers the product has a One Year Limited Warranty. The purchaser must register the product within 30 days from date of purchase with specific product information to activate the warranty. CAPI warrants the product to be free from defects in workmanship and materials for the warranty period. If the product fails during normal and proper use within the warranty period, CAPI at its discretion, will repair or replace the defective parts of the product, or the product itself.
The warranty allowance is included in cost of sales and amounted to $846 and $3,050 for the three months ended September 30, 2023 and 2022, respectively and $1,680 and $3,667 for the nine months ended September 30, 2023, and 2022, respectively.
Advertising and Promotion
Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing expenses. Advertising and promotion expense was $336 and $62,772 for the three months ended September 30, 2023 and 2022, and $8,068 and $223,258 for the nine months ended September 30, 2023 and 2022. Due to declining revenues, a change in strategy to move emphasis away from e-commerce back to direct sales to Big Box retailers for the Smart Mirror and the end of the LED product line as a revenue source, the Company significantly reduced advertising and promotion expenses in 2023.
Product Development
Our research and development contractors located in Thailand and working with our designated contract OEM factories, are responsible for the design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All research and development costs are charged to results of operations as incurred.
For the three months ended September 30, 2023 and 2022, product development expenses were $25,115 and $29,500, respectively and $76,454 and $125,768 for the nine months ended September 30, 2023 and 2022, respectively. The 2023 expenses were related to the development of the Connected Chef, expanding the Connected Surfaces product portfolio. The 2022 expenses were related to the Smart Mirror development expenses.
Accounts Payable and Accrued Liabilities
The following table summarizes the components of accounts payable and accrued liabilities as of September 30, 2023, and December 31, 2022, respectively:
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.
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.
On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, provided for the Employee Retention Tax Credit (“ERTC"), a refundable tax credit for businesses that continued to pay employees while shut down due to COVID-19 or had significant declines in gross receipts from March 13, 2022 to December 31, 2021. During the second quarter of 2023, the Company received a refund of $49,000 and received a refund of $152,000 during the first quarter of 2022, included as other income on the consolidated statements of operations as of September 30, 2023 and 2022, respectively.
The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company’s condensed consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense. The Company accounts for forfeitures as they occur.
Stock-based compensation expense recognized during the three months ended September 30, 2023, and 2022 was $ and $, respectively and $ and $ for the nine months ended September 30, 2023 and 2022, respectively.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, periodic impairment tests, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change, and actual results could differ materially from those estimates.
Adoption of New Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU) 2016-13, “Financial Instruments – Credit Losses. This ASU sets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In November 2019, the effective date of this ASU was deferred until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASC 326 on January 1, 2023 and ASC 326 did not have a material impact on its condensed consolidated financial statements.
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CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE |
9 Months Ended |
|---|---|
Sep. 30, 2023 | |
| Risks and Uncertainties [Abstract] | |
| CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE | 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 September 30, 2023 and December 31, 2022, the Company did not have any cash in excess of FDIC insurance limits.
Accounts Receivable
The Company grants credit to its customers, located throughout the United States and their international locations. The Company typically does not require collateral from national retail customers. Credit risk is limited due to the financial strength of the customers comprising the Company’s customer base and their dispersion across different geographical regions. The Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. Stripe is the company that processes online payments for the Company’s e-commerce website. The Company receives payments within 3 days of the product shipment. If the product is shipped through Amazon online platform, it could take between 20 and 30 days for collection.
Financial instruments that potentially subject the Company to credit risk, consist principally of cash and accounts receivable. The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Major Customers
The Company had one major customer for the nine months ended September 30, 2023, comprising 78% of net revenue. The Company had two customers who comprised 63% and 14%, respectively, of net revenue during the nine months ended September 30, 2022.
As of September 30, 2023, 100% of accounts receivable was from one customer. As of December 31, 2022, approximately $7,716 or 100% of accounts receivable was from two customers.
Major Vendors
The Company did not have any major vendors during the nine months ended September 30, 2023. The Company had two vendors from which it purchased 73% and 22%, respectively, of merchandise during the nine months ended September 30, 2022. As of December 31, 2022, approximately $3,200 or 8% of accounts payable was due to one vendor.
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NOTES PAYABLE TO RELATED AND UNRELATED PARTIES |
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOTES PAYABLE TO RELATED AND UNRELATED PARTIES | NOTE 3 – NOTES PAYABLE TO RELATED AND UNRELATED PARTIES
Purchase Funding Agreement with Directors and Unrelated Party
On July 2, 2021, the Board of Directors (“Board”) resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror business. The Board resolved that certain Directors could negotiate the terms of a Purchase Order Funding Agreement for up to $1,020,000 with Directors S. Wallach and J. Postal and E. Fleisig, a natural person who is not affiliated with the Company. This agreement was finalized on October 18, 2021, and the Company received the funding of $1,020,000 on October 18, 2021 with an original maturity of April 2023 which was extended an additional 12 months. Under this agreement the interest terms are 5% based on a 365- day year. The note payable is due on April 13, 2024. As of September 30, 2023, the principal outstanding and accrued interest is $1,020,000 and $99,485, respectively.
Working Capital Loan with Directors and Unrelated Party
On May 1, 2022, the Company negotiated three $200,000 working capital funding agreements, to provide $600,000 in funding for daily operations. The Board resolved that certain Directors could negotiate the terms of a Working Capital Funding Agreement for up to a total of $600,000, with Directors S. Wallach (through Group Nexus, a company controlled by Mr. Wallach) 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 September 30, 2023, the principal outstanding and accrued interest is $600,000 and $42,577, 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 September 30, 2023, the principal outstanding and accrued interest is $50,000 and $2,411, 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 September 30, 2023, the principal outstanding and accrued interest is $50,000 and $2,082, 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 January 15, 2024. The loan may be prepaid in full or partially without any penalty. As of September 30, 2023, the principal outstanding and accrued interest is $40,000 and $1,480, 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 $543,500 as of September 30, 2023. Principal accrues simple interest at a rate of 5 percent per annum, maturing January 15, 2023. The loan may be prepaid in full or partially without any penalty. Accrued interest amounted to $10,399 as of September 30, 2023. See Note 6.
As of September 30, 2023 and December 31, 2022, the Company had a total of $2,461,933 and $1,802,230, of outstanding balance respectively, on the above referenced funding agreements, which includes accrued interest of $158,433 and $82,230, respectively. The outstanding principal balances and accrued interest has been presented on the condensed and consolidated balance sheet as follows:
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.
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COMMITMENTS AND CONTINGENCIES |
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Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | 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 will pay a total of $58,500 with monthly payments of $6,500 per month for nine months commencing April 1, 2023 and ending December 31, 2023, to satisfy the aforementioned operating lease liabilities for the executive office lease. As of September 30, 2023, accrued expenses includes 19,500 of CAM and rent expense that will be paid during the next three months related to the 2022 operating lease year.
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 three months ended September 30, 2023 and 2022 amounted to $1,139 and $35,819, respectively and $94,065 and $110,500 for the nine months ended September 30, 2023 and 2022, respectively, including the monthly CAM charges and additional CAM charges included in accrued expenses.
Employment Agreements
On February 5, 2023, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2023 and ends February 5, 2025. The parties may extend the employment period of this agreement by mutual consent with approval of the Company’s Board of Directors, but the extension may not exceed two years in length.
On February 5, 2020, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. The term of agreement began February 5, 2020 and ended February 5, 2022. On February 6, 2022, the Company entered into an Employment Agreement with James McClinton (Chief Financial Officer and Director), whereby Mr. McClinton was paid $736 per day. On November 30, 2022, Mr. McClinton retired from all positions with the Company.
Beginning in 2020 and through 2023, executive salaries and consulting fees have been deferred from time to time to conserve cash flow. Deferrals amounted to approximately $622,000 and $252,000, as of September 30, 2023 and December 31, 2022, respectively, and are included in accounts payable and accrued liabilities.
There is a provision in Mr. Wallach’s employment agreement, if the officer’s employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer’s estate or the officer, an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to: the sum of twelve (12) months base salary at the rate Mr. Wallach was earning as of the date of termination and the sum of “merit” based bonuses earned by Mr. Wallach 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 Mr. Wallach, 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 Mr. Wallach’s health and dental insurance benefits for 6 months starting at the Executives date of termination. If Mr. Wallach had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against Mr. Wallach’s severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment. The Company did not accrue for the benefits owed at the time of death or disability as it is not probable as of the period ended September 30, 2023.
The following table summarizes potential payments upon termination of employment :
Directors Compensation
On July 5, 2022, The Board of Directors voted to suspend granting compensation to the independent directors for the remainder of the fiscal year 2022. There have been no payments to the Board of Directors during the period ended September 30, 2023.
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STOCK TRANSACTIONS |
9 Months Ended |
|---|---|
Sep. 30, 2023 | |
| Equity [Abstract] | |
| STOCK TRANSACTIONS | 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. The $1,498,000 in proceeds from the Private Placement was used to purchase start up inventory for the Company’s Smart Mirror product line, as well as for advertising and working capital. Under the SPA, each investor is granted five-year piggyback, ‘best efforts’ registration rights with no penalties. The Shares are ‘restricted securities” under Rule 144 of the Securities Act and are subject to a minimum six month hold period. Based on representations made to the Company, the five investors do not constitute a “group” under 17 C.F.R. 240.13d-3 and have purchased the Shares solely as an investment for each investor’s own account. No individual investor owns more than 2% of the issued and outstanding shares of common stock.
Warrants
On April 28, 2021, Company issued common stock warrants to purchase 199,733 shares of common stock at an exercise price of $0.66 and exercisable for five years from the issuance date. The warrants were issued to Wilmington Capital Securities, LLC, a FINRA and SEC registered broker under a financial services and placement agreement with a broker dealer in connection with the Company’s placement of $1.4 million of restricted shares of common stock to five investors on April 5, 2021. The issuance of these warrants were made an exemption from registration under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act.
As of September 30, 2023 and December 31, 2022, the Company had 199,733 warrants outstanding.
Series B-1 Preferred Stock
On June 7, 2016, the Company authorized 3,333,333 of the B-1 preferred stock (“B-1”). The B-1 preferred stock are convertible into common shares, at a rate of 66.66 of common stock for each share of B-1 convertible preferred stock. The par value of the B-1 preferred shares is $0.0001. The B-1 shares shall not be entitled to any dividends and have no voting rights. In the event of a liquidation, the B-1 holders are entitled to distribution prior to common stockholders but not before any other preferred stockholders.
On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal (“Lenders”). In consideration for the Lenders allowing for loan advances under the loan agreement, a below market rate of interest and the loan made on an unsecured basis, as payment of a finance fee for the loan, the Company issued a total of 7,500 shares of B-1 Convertible Preferred Stock to each of the Lenders. Each preferred share converts into 66.66 shares of common stock at option of Lender. The Preferred Shares and any shares of common stock issued under the loan agreement are “restricted” securities under Rule 144 of the Securities Act of 1933, as amended.
The B-1 shares have a liquidation preference of $1.00 per share or $15,000 as of September 30, 2023.
Series C Preferred Stock
On July 9, 2009, the Company authorized 67 shares of Series C Preferred Stock. The par value of the Series C Preferred Stock is $1.00 and a share of Series C Preferred Stock shall be converted into 67,979.425 shares of common stock. There were no Series C Preferred Stock issued or outstanding as of the period ended September 30, 2023 or December 31, 2022.
All shares of capital stock and warrants were issued in reliance on an exemption from registration under Section 4(a)(2) and/or Rule 506(b) of Regulation D under the Securities Act.
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 September 30, 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 1.38 years. During the nine months ended September 30, 2023, there were no stock option grants, exercises, and 200,000 options were forfeited.
All stock options were issued under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act of 1933.
For the three months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of $0 and $1,120, respectively, and $0 and $7,844 for the nine months ended September 30, 2023 and 2022, respectively, related to these stock options. Such amounts are included in compensation expense in the accompanying condensed and consolidated statements of operations.
Increase in Authorized Shares
On May 9, 2023, by way of written consent of Common Stock shareholders of the Company with the requisite voting power to amend the Company’s Amended and Restate Articles of Incorporation, those shareholders consented to amend Article 1 of the Corporation’s Amended and Restated Articles of Incorporation to increase the authorized shares of capital stock from 60,000,000 to 300,000,000 shares of capital stock authorized, of which 295,000,000 shares shall be Common Stock, par value of $0.0001 per share, and 5,000,000 shares of Preferred Stock, par value of $0.0001.
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 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 Board of Directors approved that the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program remained at $1,000,000 during the renewal period.
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 with Wilson-Davis & Company.
As of September 30, 2023 a total of 816,167 shares of the Company’s common stock has been repurchased since the plan was incepted at a total cost of $119,402. The cost of the repurchased shares were recorded as a reduction of additional paid-in capital.
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SUBSEQUENT EVENTS |
9 Months Ended |
|---|---|
Sep. 30, 2023 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 6 - SUBSEQUENT EVENTS
Working Capital Loan with Directors
Subsequent to September 30, 2023, and through the date of this filing, the Company has received an additional $49,000 in working capital note payable proceeds from Chief Executive Officer and Director Stewart Wallach. The total principal outstanding under this note payable is $592,500 as of the date of this filing. Principal accrues simple interest at a rate of 5 percent per annum, maturing January 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. |
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nature of Business | Nature of Business
The Company has its principal executive offices in Deerfield Beach, Florida.
From 2007 until 2022, the Company, through 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. There were no sales of LED lighting products during 2023 and Lighting Products ceased to be an active product line of the Company in 2023. 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 condensed consolidated financial statements, the Company’s future product development effort is focused on the development of a “Connected Surfaces” portfolio. The Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding Internet of Things, wireless connected lifestyles prevalent today, with the initial product launch of the Smart Mirror, an internet connected and interactive mirror. Subject to adequate funding, the Company’s current business strategy is to seek to expand the new line of Connected Surfaces in 2023 and 2024. The Company 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 third quarter of 2023. The launch of the Connected Chef is slated to take place in the first quarter of 2024, subject to available working capital to pay for product production, inventory and marketing.
The Company’s operations consist of one reportable segment for financial reporting purposes: Consumer Home Goods.
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| Basis of Presentation | Basis of Presentation
The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of September 30, 2023, and results of operations, stockholders’ equity and cash flows for the three and nine months ended September 30, 2023 and 2022. All material intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) relating to interim financial statements and in conformity with U.S. GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”) filed with the SEC on March 31, 2023.
The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.
From 2020 into 2022, the COVID-19 pandemic adversely impacted our Company at the same time as we were implementing a major shift in product line, from mature LED products to new Connected Surfaces products, amplified the financial impact of COVID-19 pandemic by disrupting development and production of new Connected Surfaces products in Thailand and China and resulting delay in the Company being able to promote, market and sell Connected Surfaces products. This delay in launching the new product line coupled with the decline in sales of the LED product line adversely impacted the Company and created uncertainty about the ongoing viability of the current product lines of the Company. The Company’s plan to orderly transition from LED lighting products to Connected Surfaces products as the primary source of revenues was undermined by these delays and disruptions. By the time that the Company was ready to fill bulk orders for Smart Mirrors, the traditional primary customers for Company products did not place orders and the Company’s e-commerce initiative did not generate any significant orders. This ‘perfect storm’ of events has left the Company without a current product line that is generating significant revenues. The Company is evaluating the best way for the Company to establish a product line or business line that provides a sufficient revenue source to fund working capital and growth needs of the Company. This evaluation includes possible new Connected Surfaces products, new industry focus for those products and potential new business lines. The Company has not established a new product line or a new business line in the fiscal quarter ending September 30, 2023. Development of a new business line and product line will depend on the ability of the Company to locate funding for working capital to pay for production, inventory and marketing.
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| Principles of Consolidation | Principles of Consolidation
The condensed consolidated financial statements for the periods ended September 30, 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.
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| Liquidity and Going Concern | Liquidity and Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
As of September 30, 2023, the Company had negative working capital of approximately $2,830,000 an accumulated deficit of approximately $10,316,000, a cash balance of $28,000, short-term notes payable of $2,461,000 and $285,000 of deferred taxes. Further, during the nine months ended September 30, 2023, the Company incurred a net loss of approximately $1,215,000 and used cash in operations of approximately $574,000.
These liquidity conditions raise substantial doubt about the Company’s ability to continue as a going concern. We are seeking alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures 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.
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| nventories | Inventories
The Company’s inventory, which consists of finished Thin Cast Smart Mirror products for resale to consumers by Capstone, is recorded at the lower of landed cost (first-in, first-out) or net realizable value. The Company writes down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when the expected realizable value of a specific inventory item falls below its original cost. Management regularly reviews the Company’s investment in inventories for such declines in value.
Management reviewed the valuation of inventory on hand as of the year ended December 31, 2022, and considered the need for a reserve for slow moving inventory due to sales not meeting projected forecasts during 2022. Management estimated a 50% reserve for inventory held in domestic warehouses and a 100% reserve for inventory held in international warehouses, which resulted in an increase in the inventory reserve of $533,254. The inventory reserve was revised for the period ended September 30, 2023 to reflect the Smart Mirrors sold or used in promotional events during 2023, for a revised ending balance of $461,734. As of September 30, 2023, all inventory is held in domestic warehouses.
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| Goodwill | 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. During 2020, the Company recognized $623,538 of impairment charges. There was no impairment charge for the nine months ended September 30, 2023 or for the year ended December 31, 2022.
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| Fair Value Measurement | 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.
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| Earnings Per Common Share |
Basic earnings per common share is computed by dividing net income(loss) by the weighted average number of shares of common stock outstanding as of September 30, 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 September 30, 2023 and 2022, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 408,288 options, 199,733 warrants and 15,000 of preferred B-1 stock convertible into 999,900 shares of common stock for 2023 and 608,288 options, 199,733 warrants and 15,000 of preferred B-1 stock convertible into 999,900 shares of common stock for 2022.
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| Revenue Recognition | Revenue Recognition
The Company generates revenue from developing, marketing and selling consumer products through national and regional retailers. The Company’s products are targeted for applications such as home indoor and outdoor lighting as well as Internet-of-Thing devices and will have different functionalities. CAPI currently operates in the consumer home goods products category in the United States. These products may be offered either under the CAPI brand or a private brand.
A sales contract occurs when the customer-retailer submits a purchase order to buy a specific product, a specific quantity, at an agreed-fixed price, within a shipping window, from a specific location and on agreed payment terms. The selling price in all of our customers’ orders has been previously negotiated and agreed to including any applicable discount prior to receiving the customer’s purchase order. The stated unit price in the customer’s order has already been determined and is fixed at the time of invoicing.
The Company recognizes Lighting Product revenue and Smart Mirror 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’s revenue recognition policy is in accordance with ASC 606.
Marketing allowances include the cost of underwriting an in-store instant rebate coupon or a target markdown allowance on a specific product. The Company retains these allowances for a period of 3 to 5 years in the event the customer chargebacks for a promotional allowance against an open invoice or submits an invoice for their claim. Cash discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment. These allowances are evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer and may be released as other income if deemed not required.
Direct-to-consumer orders for the Connected Surfaces Smart Mirrors are sold initially through e-commerce platforms. The Company also sells the Connected Surfaces Smart Mirror program through independent retailers. The Company will only bill the customer and recognize revenue upon the customer or retailer 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:
Sales reductions for allowances and other promotional coupons are recognized during the period when the related revenue is recorded. The reduction of accrued allowances is included in net revenues and amounted to $0 and $719 for the three months ended September 30, 2023 and 2022, respectively and $15,300 and $3,000, for the nine months ended September 30, 2023, and 2022, respectively.
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| Warranties | Warranties
For the LED product line, the Company provides the end user with limited rights of return as a consumer assurance warranty on all products sold, stipulating that the product will function properly for the warranty period. The warranty period for all products is one year from the date of consumer purchase. Certain retail customers may receive an off invoice-based discount such as a defective/warranty allowance, that will automatically reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the cost of any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances are charged to cost of sales at the time the order is invoiced. For those customers that do not receive a discount off-invoice, the Company recognizes a charge to cost of sales for anticipated non-conforming returns based upon an analysis of historical product warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.
For the online Smart Mirror customers the product has a One Year Limited Warranty. The purchaser must register the product within 30 days from date of purchase with specific product information to activate the warranty. CAPI warrants the product to be free from defects in workmanship and materials for the warranty period. If the product fails during normal and proper use within the warranty period, CAPI at its discretion, will repair or replace the defective parts of the product, or the product itself.
The warranty allowance is included in cost of sales and amounted to $846 and $3,050 for the three months ended September 30, 2023 and 2022, respectively and $1,680 and $3,667 for the nine months ended September 30, 2023, and 2022, respectively.
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| Advertising and Promotion | Advertising and Promotion
Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing expenses. Advertising and promotion expense was $336 and $62,772 for the three months ended September 30, 2023 and 2022, and $8,068 and $223,258 for the nine months ended September 30, 2023 and 2022. Due to declining revenues, a change in strategy to move emphasis away from e-commerce back to direct sales to Big Box retailers for the Smart Mirror and the end of the LED product line as a revenue source, the Company significantly reduced advertising and promotion expenses in 2023.
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| Product Development | Product Development
Our research and development contractors located in Thailand and working with our designated contract OEM factories, are responsible for the design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All research and development costs are charged to results of operations as incurred.
For the three months ended September 30, 2023 and 2022, product development expenses were $25,115 and $29,500, respectively and $76,454 and $125,768 for the nine months ended September 30, 2023 and 2022, respectively. The 2023 expenses were related to the development of the Connected Chef, expanding the Connected Surfaces product portfolio. The 2022 expenses were related to the Smart Mirror development expenses.
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| Accounts Payable and Accrued Liabilities | Accounts Payable and Accrued Liabilities
The following table summarizes the components of accounts payable and accrued liabilities as of September 30, 2023, and December 31, 2022, respectively:
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| Income Taxes | 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.
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.
On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, provided for the Employee Retention Tax Credit (“ERTC"), a refundable tax credit for businesses that continued to pay employees while shut down due to COVID-19 or had significant declines in gross receipts from March 13, 2022 to December 31, 2021. During the second quarter of 2023, the Company received a refund of $49,000 and received a refund of $152,000 during the first quarter of 2022, included as other income on the consolidated statements of operations as of September 30, 2023 and 2022, respectively.
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| Stock Based Compensation |
The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company’s condensed consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense. The Company accounts for forfeitures as they occur.
Stock-based compensation expense recognized during the three months ended September 30, 2023, and 2022 was $ and $, respectively and $ and $ for the nine months ended September 30, 2023 and 2022, respectively.
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| Use of Estimates | Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, periodic impairment tests, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change, and actual results could differ materially from those estimates.
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| Adoption of New Accounting Standards | Adoption of New Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU) 2016-13, “Financial Instruments – Credit Losses. This ASU sets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In November 2019, the effective date of this ASU was deferred until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASC 326 on January 1, 2023 and ASC 326 did not have a material impact on its condensed consolidated financial statements. |
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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Net Revenue by Major Source |
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| Schedule of Components of Accounts Payable and Accrued Liabilities |
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NOTES PAYABLE TO RELATED AND UNRELATED PARTIES (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of notes payable to related parties |
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COMMITMENTS AND CONTINGENCIES (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Potential Payments upon Termination of Employment |
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Schedule of Net Revenue by Major Source (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
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Sep. 30, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|
| Revenues | $ 63,771 | $ 35,876 | $ 95,968 | $ 318,762 |
| Concentration Risk, Percentage | 100.00% | 100.00% | 100.00% | 100.00% |
| [custom:Revenue] | $ 63,771 | $ 95,968 | ||
| Lighting Products U S [Member] | ||||
| Revenues | $ 26,421 | $ 228,680 | ||
| Concentration Risk, Percentage | 74.00% | 72.00% | ||
| Lighting Products International [Member] | ||||
| Revenues | $ 44,640 | |||
| Concentration Risk, Percentage | 14.00% | |||
| Smart Mirror Products U S [Member] | ||||
| Revenues | $ 63,771 | $ 9,455 | $ 95,968 | $ 45,442 |
| Concentration Risk, Percentage | 100.00% | 26.00% | 100.00% | 14.00% |
Schedule of Components of Accounts Payable and Accrued Liabilities (Details) - USD ($) |
Sep. 30, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||
| Accounts payable | $ 61,452 | $ 38,056 |
| Accrued warranty reserve | 347 | 1,926 |
| Accrued compensation and deferred wages, marketing allowances, customer deposits. | 660,844 | 269,457 |
| Total | $ 722,643 | $ 309,439 |
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2023 |
Sep. 30, 2022 |
Sep. 30, 2023 |
Sep. 30, 2022 |
|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||
| Negative Working capital | $ 2,830,000 | $ 2,830,000 | ||
| Accumulated deficit | 10,316,000 | 10,316,000 | ||
| Cash Balance | 28,000 | 28,000 | ||
| Profit loss | 1,215,000 | |||
| Cash in operations | 574,000 | |||
| Inventory reserve | 533,254 | 533,254 | ||
| Promotional events | 461,734 | |||
| Advertising and promotion expense | 336 | $ 62,772 | 8,068 | $ 223,258 |
| Research and Development Expense | 25,115 | 29,500 | 76,454 | 125,768 |
| Stock-based compensation expense | $ 0 | $ 1,120 | $ 0 | $ 7,844 |
CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (Details Narrative) |
12 Months Ended |
|---|---|
|
Dec. 31, 2022
USD ($)
| |
| Risks and Uncertainties [Abstract] | |
| Major customer revenue | $ 7,716 |
Schedule of notes payable to related parties (Details) - USD ($) |
Sep. 30, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Debt Disclosure [Abstract] | ||
| Current portion of notes payable and accrued interest, related parties | $ 1,874,578 | $ 413,425 |
| Current portion of notes payable and accrued interest, unrelated parties | 587,355 | 206,712 |
| Long term portion of notes payable and accrued interest, related parties | 821,647 | |
| Long term portion of notes payable and accrued interest, unrelated parties | 360,446 | |
| Total notes payable principle and accrued interest | 2,461,933 | 1,802,230 |
| Less accrued interest | (158,433) | (82,230) |
| Total notes payable | $ 2,303,500 | $ 1,720,000 |
Schedule of Potential Payments upon Termination of Employment (Details) |
Sep. 30, 2023
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| Salary Severance | $ 301,521 |
| Bonus Severance | |
| Gross up taxes | 12,600 |
| Benefit Compensation | 6,600 |
| Grand Total | $ 320,721 |