Capstone Companies Inc (CAPC)

[StockpickerCAPC]

Quarterly Report (10-q)

http://ih.advfn.com/p.php?pid=nmona&article=74593444

My picked Highlights from the full Quarterly Report

1
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors in North America. Capstone currently operates in five primary product categories: Induction Charged Power Failure Lights; LED Night Lights and Power Failure Lights; Motion Sensor Lights; Wireless Remote Control Outlets and Wireless Remote Control Accent Lights. The Company's products are typically manufactured in China by third-party manufacturing companies.

2
The Company is a public holding company organized under the laws of the State of Florida. The Company designs and markets consumer oriented LED lighting products for distribution globally with a primary focus on the North American markets. 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 its product development, engineering and factory resource capabilities in Hong Kong. Capstone's LED lighting portfolio consists of stylish, innovative and easy to use consumer LED lighting products, including power failure multi-function handheld lights, power failure multi-function nightlights, decorative nightlights, wireless motion sensor lights, remote control battery powered accent lights, remote control outlets, bath vanity lights and outdoor LED fixtures. The Company's products are sold under CAPI brand name, Capstone Lighting® as well as under a nationally recognized licensed brand named Hoover ® Home LED. The Company believes that LED is becoming increasingly more mainstream, and, as such, the Company believes that the component and production costs will continue to lower, which should allow a smaller innovative company like ourselves to capitalize on non-commodity products utilizing LED. The Company's focus is the integration of LED into most commonly used lighting products in today's home. Capstone is positioned well to participate in these expanded product categories which will fuel the Company's further growth.

3
Strategy
The global LED lighting market is undergoing a perceived significant transition driven by rapid adoption of energy efficient LED lighting products. LED lighting products offer numerous advantages for the user which are driving demand (improved light quality, durability, longer life, cooler temperatures, lower cost of operation). These advantages in addition to increased regulatory requirements banning inefficient lights have accelerated growth of LED products and are expected to continue to accelerate the adoption of energy efficient LED technologies going forward. According to Allied Market Research, in a forecast in September 2014, the global LED market is forecasted to grow to $42 billion by 2020.

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Moreover, in 2014, Capstone also acquired the exclusive license and sub-license to an advanced power failure technology. The Company's proprietary technology is referred to as Capstone Power Control or CPC. It is a patented technology and the U.S. patents were issued August of 2016. The CPC was developed over a two-year period by a group of MIT PhD Engineers operating as AC Kinetics, a private company. This technology can potentially be incorporated into a host of products. The Company is exploring ways to commercialize this technology and whether it will result in any significant financial benefit is uncertain at the time of this report.

5
The Company has expanded CIHK's operations in Hong Kong, with personnel experienced in engineering and design, product development and testing, product sourcing, international logistics and quality control. These associates work with our OEM factories to develop and prototype new product concepts and to ensure products meet consumer product regulations and rigorous quality control standards. All products are tested before and during production by Company personnel. This team also provides extensive product development, quality control and logistics support to our factory partners to ensure on time shipments. In anticipation of possible Company growth, we have continued our investment in CIHK in an effort to ensure overseas factory performance meets stringent operational tolerances to maintain our competitiveness and operational excellence.

We have expanded our international sales by leveraging our relationships with our existing global retailers and by strengthening our international product offerings. Our Hong Kong office assists us in placing more products into foreign market channels as well. In 2016, we surpassed our initial expansion goal with product sales in Australia, Canada, Japan, South Korea, Taiwan and the United Kingdom. For the three months ended March 31, 2017 and 2016, international sales were $574,300 and $1,016,900, respectively. International sales for the three months ended March 31, 2017 and 2016 were 8.5% and 48.9% of net revenue.

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The Company has established product distribution relationships with numerous leading international, national and regional retailers, including but not limited to: Amazon, Bunnings, Costco Wholesale, Home Depot, Home Pro, Sam's Club, The Container Store and Wal-Mart.
The Company introduced Capstone brands to markets outside the U.S., including Australia, France, Iceland, Japan, Mexico, New Zealand, South Korea, Spain, Taiwan, Thailand and the United Kingdom. This continues to be a promising distribution channel with international sales for the year ended December 31, 2016, increasing 100% up to $2.4 million from $1.2 million the same period in 2015 and representing 8% of net revenue in 2016 and 92% of net revenue originating in the United States.

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Sales and Marketing
In order for continued sales growth in the retail market, the Company is focused on expanding its market share at existing accounts by expanding its portfolio of both branded and private label LED lighting products. The Company will also be targeting direct to retail clients through CIHK for products that fall outside Capstone's branded categories but are innovative and preferably exclusive to CIHK. This should allow for quicker revenue expansion as time consuming product and brand development efforts are the responsibility of the retailer.

Capstone depends on e-commerce efforts of Amazon and other on-line retail customers in lieu of pursuing our own aggressive in-house e-commerce effort. We believe this reliance on Amazon and other retail customer e-commerce is the most cost efficient and effective approach for the Company. We maintain a Facebook website at https://www.facebook.com/powerfailuresolutions/ and our sales staff may use Social Media from time to time to promote our products and brands. We have not developed a specific Social Media campaign based on third party sponsors or promotors.

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CONSOLIDATED OVERVIEW OF OPERATIONS

Revenue, net
For the 3 months ended March 31, 2017 and 2016, total net sales were approximately $6,752,200 and $2,078,200, respectively, an increase of $4,674,000 or 224.9 % from the previous year.

In the 3 months ended March 31, 2017 the Company continued to have a very strong revenue performance in the Accent Light Category in all three-brands including Duracell LED Lighting, Capstone Lighting and Hoover Ò HOME LED. In the quarter ended March 31, 2017, the Company provided $256,100 for marketing and rebate allowances for product promotions. International sales for the 3 months ended March 31, 2017, and 2016 were approximately $574,300 or 8.5% of net revenue as compared to $1,016,900 or 48.9% of net revenue for the same period in 2016.

Gross Profit
For the 3 months ended March 31, 2017 and 2016, gross profit was approximately $1,579,500 and $613,600 respectively, an increase of $965,900 or 157.4% from the same period in 2016. Gross profit as a percentage of sales was 23.4% in the quarter compared to 29.5% for the same quarter in 2016. As noted in the Cost of Sales comments, adjustments can impact individual quarterly results, however the trailing 12 months' results reflect an average of the last four quarters and are more representative of the trend. The gross profit for the trailing 12 months is 23.6%.

Net Operating Income
For the 3 months ended March 31, 2017 the operating income was approximately $387,500 compared to a loss of $41,200 in 2016. This is an improved performance of $428,700 over the same period 2016.

Net Income
For the 3 months ended March 31, 2017, the Company had a net income of approximately $250,700 as compared to a net loss of $98,900 in the same period last year.
The overall net income improvement in quarter ended March 31, 2017 of $349,600 compared to 2016, was the result of the $4,674,000 increase in revenue, resulting from the rollout of 5 new products.