Capstone Companies Inc (CAPC)

[StockpickerCAPC]

Excerpts from the 60-page report.

Source
https://sec.report/Document/0001575705-22-000343/

Page 9
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.

The COVID-19 pandemic’s resurgence globally and in many states or emergence of new vaccine-resistant strains of the virus could have a continuing negative impact on the brick-and-mortar retail sector, with consumers’ unwilling to visit retail stores, causing reduced consumer foot traffic and consumer spending. However, with a successful relaunch of the Smart Mirror portfolio using the online retail platform, the Company will not be as dependent on brick-and-mortar and e-commerce sites of Big Box retailers for our revenue streams as in previous years.

Our business operations and financial performance for the three months ended March 31, 2022 was adversely impacted by the developments discussed above. For the three months ended March 31, 2022 and 2021, the Company reported a decrease in net revenue from $438 thousand in 2021 to $263 thousand in 2022, a reduction of approximately $175 thousand or 40%. The net loss for the three months ended March 31,2022 and 2021 was approximately $461 thousand as compared to approximately $499 thousand in 2021. With these recurring losses, the cash generated from operations was negatively impacted and the Company utilized approximately $654 thousand of cash during the three months ended March 31, 2022

During the three months ended March 31, 2022 and 2021 the Company used approximately $654 thousand of cash in 2022 and provided $238 thousand in 2021 With the net operating loss of $461.3 thousand in the current period, the Company also used $526.3 thousand in building inventories for the new Smart Mirror programs in order to generate future ecommerce revenue.

As of March 31, 2022, the Company had working capital of approximately $1.522 million, an accumulated deficit of approximately $6.9 million, a cash balance of $624 thousand and a related party long term note payable of $1.043 million and $699.4 thousand of current liabilities for accounts payable and accrued liabilities. These conditions raise substantial doubt about the Company’s ability to continue as a going concern..

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

The Company has been in discussions with alternate funding sources that offer programs that are more in line with the Company’s future business model, particularly a facility that provides funding options that are more suitable for the e-commerce business. The borrowing costs associated with such financing are dependent upon market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future. On July 2, 2021, the Board of Directors 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, J. Postal and E. Fleisig, a natural person. This agreement was finalized, and the Company received the $1,020,000 funding under this agreement on October 18, 2021.

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.

Based on past performances and current expectations, Management believes that with the recent $1,393,000 equity investment and the $1,020,000 purchase order funding facility and now with the recently negotiated $600 thousand working capital line (See Note 7) ,provides adequate liquidity to meet the Company’s cash needs for our daily operations, capital expenditures and procurement of the Smart Mirror inventory for the short-term. However, we will need to continue seeking additional funding through either debt or equity to continue meeting our financial obligations which consist approximately of $700 thousand of accounts payable and accrued expenses as well as a $1,043,000 note payable with related parties and accrued interest that becomes due in April 2023 until we are able to generate sufficient cash flows from the sale of the Smart Mirror inventory.

Page 11
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. The write-downs are recognized as a component of cost of sales. As of March 31, 2022, and December 31, 2021, respectively, the inventory was valued at $1,035,196 and $508,920, respectively. The $526,276 inventory increase is the result of the buildup of Connected Surfaces inventory to support the online sales program.

Page 12
Revenue Recognition
The following presents net revenue by geographic location which is recognized at a point in time:

For the Three Months Ended March 31, 2022 For the Three Months Ended March 31, 2021
Revenues % of Revenue Revenues % of Revenue
Lighting Products- U.S. $ 202,259 77 % $ 141,900 32 %
Lighting Products- International 44,640 17 % 296,523 68 %
Smart Mirror Products- U.S. 16,080 6 % — —
Total Net Revenue 262,979 100 % 438,423 100 %

Page 14
Product Development
Our research and development consultants located in Hong Kong working with our designated contractor 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. With the reduction of revenue resulting from the impact of the COVID-19 pandemic and combined with the transfer of manufacturing to Thailand, the CIHK operation was closed down in March 2022 and will remain in a dormant status. Two key management were retained as consultants to support product development and sales operations.

Page 16
Major Customers
The Company had two customers who comprised 77% and 17%, respectively, of net revenue during the three months ended March 31, 2022, and two customers who comprised 47% and 32%, respectively, of net revenue during the three months ended March 31, 2021. The loss of these customers would adversely impact the business of the Company. March 31, 2022, and 2021, approximately 17% and 68%, respectively, of the Company’s net revenue resulted from international sales.

As of March 31, 2022, approximately $145 thousand or 100% of accounts receivable was from two customers. As of December 31, 2021, approximately $1 thousand or 100% of accounts receivable was from two customers.

As the Company increases its ecommerce business, rather than having hundreds of individual consumer customers we will have those companies that we have selected to process our orders such as Stripe, Amazon or Wayfair.

Major Vendors
The Company had two vendors from which it purchased 72% and 23%, respectively, of merchandise during the three months ended March 31, 2022, and two vendors from which it purchased 47% and 31% of merchandise during the three months ended March 31, 2021. The loss of these suppliers could adversely impact the business of the Company.

Page 17
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES
On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The short-term facility ended June 30, 2021.
In consideration for the Lenders providing the loan under this Agreement and agreeing to a below market rate of interest, and as payment of a finance fee for the loan on an unsecured basis, the Company issued to the Lenders the following securities 7,500 shares of the Company’s Series B-1 Convertible Preferred Stock (“Preferred Shares”) issued to each Lender. The Preferred Shares shall have the appropriate restrictive legends. Each Preferred Share converts into 66.66 shares of Common Stock at option of Lender . The Preferred Shares and any shares of Common Stock issued under the loan agreement are “restricted” securities under Rule 144 of the Securities Act of 1933, as amended. The Preferred Shares have no further rights, preferences, or privileges. The fair value of the Preferred Shares was determined to be $48,996 based on the number of shares of Common Stock to be issued upon conversion and the market price of the Common Stock on the date the working capital loan agreement was executed. The Company amortized the $48,996 Finance Fee into interest expense over the six months of the agreement. The Finance Fee was recognized as expense and included in interest expense on the consolidated statements of operations.

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 which is due 18 months from receipt of the funds. Under this agreement the interest terms are 5% based on a 365- day year. This agreement shall continue in full force for 18 months from the start date. On March 31, 2022, the note payable of $1,042,915 includes accrued interest of $22,915.

Page 19
Employment Agreements
On February 5, 2020, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2020 and ends February 5, 2023. The parties may extend the employment period of this agreement by mutual consent with approval of the Company’s Board of Directors, but the extension may not exceed two years in length.

On February 5, 2020, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton was paid $191,442 per annum. The term of agreement began February 5, 2020 and ended February 5, 2022.

Effective September 1, 2020, through March 31, 2021, payments equivalent to fifty percent of both Mr. Wallach and Mr. McClinton’s salary were deferred to be repaid in the future. As of December 31, 2021, $86,977 and $20,616 respectively, have been deferred until later in 2022. As of March 31, 2022, total wages deferred for Mr. Wallach were approximately $86,977 and $0 for Mr. McClinton.

On February 6, 2022, the Company entered into an Employment Agreement with James McClinton (Chief Financial Officer and Director), whereby Mr. McClinton will be paid $736.41 per day. The term of this new agreement began February 6, 2022 and ends August 30, 2022.

Page 21
COMMITMENTS AND CONTINGENCIES
On May 6, 2021, the Company approved the following basic compensation arrangement for independent directors of the Company, effective August 6, 2021 and ending August 5, 2022: A total compensation value of $15,000 per annum, payable $750 monthly cash, compensation or $9,000 or (60% of total value) and remainder $6,000 payable in non-qualified stock options vesting as of August 6, 2022 and with an exercise price equal to market price of common stock as of August 6, 2021, less 20% (discount).

Page 22
Options
On May 31, 2019, the Company granted 100,000 stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation Committee, and 10,000 stock options to the Company Secretary. The Director options have a strike price of $.435 with an effective date of August 6, 2019 and will vest on August 5, 2020 and have a term of 5 years. The Company Secretary options have a strike price of $.435 with an effective date of August 6, 2019 and vested on August 5, 2020 and have a term of 10 years.

On July 15, 2021, Jeffrey Guzy a Company director, exercised a previously granted non-qualified stock option and purchased 100,000 shares of Company common stock for an aggregate purchase price of $43,500 or a per share price of $.435. The shares are restricted shares under federal securities laws and were acquired by independent Director Guzy. The proceeds will be used by the Company for general working capital to support the rollout of the Smart Mirror product line.

As of March 31, 2022, there were 880,000 stock options outstanding and vested. The stock options have a weighted average exercise price of $0.435 and have a weighted average contractual term remaining of 2.40 years.

Page 23
Public Relations
Effective May 1st the Company has finalized a marketing/ public relations agreement with Tongal, who will provide services for the development and creation of digital assets for use on the Company’s website, social media ads and other ecommerce websites such as Amazon. The platform fee will be $30,000 with production expenses additional. The initial period will be for six months. The Company can terminate the agreement with a written notice 30 days prior to the end of the Agreement and will automatically renew for a further six months at the same rate.