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This discussion should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations in the Companys 2021
Annual Report.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q Report contains forward-looking statements that are contained
principally in the sections describing our business as well as in “Risk Factors,
and in “Managements Discussion and Analysis of Financial Condition and Results
of Operations. These statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance, or
achievements to be materially different from any future results, performances or
achievements expressed or implied by the forward-looking statements. All
statements other than statements of historical facts contained, or incorporated
by reference, in this Form 10-Q Report, including, without limitation, those
regarding our business strategy, financial position, results of operations,
plans, prospects, actions taken or strategies being considered with respect to
our liquidity position, valuation and appraisals of our assets and objectives of
management for future operations, our ability to weather the impacts of the
COVID-19 pandemic (including variant viruses), financing opportunities, and
future cost mitigation and cash conservation efforts and efforts to reduce
operating expenses and capital expenditures are forward-looking statements.
These risks and uncertainties include, but are not limited to, the factors
described in the section captioned “Risk Factors in our latest 2021 Annual
Report. In some cases, you can identify forward-looking statements by terms such
as “anticipates, “believes, “could, “estimates, “expects, “intends, “may,
“plans, “potential, “predicts, “projects, “should, “would and similar
expressions (including the negative and variants of such words). Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions and are subject to various risks and uncertainties. Given these
uncertainties, a reader of this Form 10-Q Report should not place undue reliance
on these forward-looking statements. The forward-looking statements contained in
this Form 10-Q Report are made as of the date of filing this Form 10-Q Report.
You should not rely upon forward-looking statements as predictions of future
events. In addition, neither we nor any other person assumes responsibility for
the accuracy and completeness of any of these forward-looking statements.
Examples of these risks, uncertainties and other factors include, but are not
limited, to the impact of:
? COVID-19 pandemic and new emerging variants of the virus on our financial
condition and operations, which could adversely affect our ability to obtain
acceptable financing in an amount equal to the resulting reduction in cash
from operations, disruption of our Thai or Chinese OEM operations and the
current, and uncertain future, other impacts of the COVID-19 pandemic
outbreak, including its effect on the retail market place and the closure of
retail stores and its effect on consumer confidence and on the ability or
desire of consumers to purchase nonessential goods, such as our products,
which are expected to continue to adversely impact our results, operations,
outlook, plans, goals, growth, cash flows, liquidity, demand for consumer
products and share price.
? Failure of e-commerce marketing and sales initiatives to counter reduced
sales of products in retail brick-and-mortar or to elicit consumer interest
in our Connected Surface product line.
? our success in reducing operating expenses and the impact of any such
reductions.
? adverse general economic and related factors, such as fluctuating or
increasing levels of unemployment, declines in the securities and real estate
markets, and perceptions of these conditions that decrease the level of
disposable income of consumers or consumer confidence and the impact of
inflationary cost increases to disposable income.
? the spread of other epidemics, pandemics, and viral outbreaks.
? our anticipated need for additional financing, which may not be available on
favorable terms, or at all, and may be dilutive to existing shareholders.
? our ability to raise sufficient capital and/or take other actions to improve
our liquidity position or otherwise meet our liquidity requirements that are
sufficient to eliminate the substantial doubt about our ability to continue
as a going concern.
25
? an impairment of our goodwill, in future reporting periods.
? the risks and increased costs associated with operating internationally.
? fluctuations in foreign currency exchange rates.
? our expansion into and investments in new product categories and any inability
to establish the Connected Surface product line as a viable primary revenue
source in 2022.
? our inability to obtain adequate insurance coverage.
? volatility and disruptions in the credit and financial markets, which may
adversely affect our ability to borrow. ? our inability to recruit or retain qualified personnel or the loss of key
personnel.
? our inability to keep pace with developments in technology.
? other factors are set forth under “Risk Factors in our 2021 Annual Report.
Additionally, many of these risks and uncertainties are currently amplified by
and will continue to be amplified by, or in the future may be amplified by, the
COVID-19 pandemic outbreak and emergence of new variant viruses. It is not
possible to predict or identify all such risks. There may be additional risks
that we consider immaterial, or which are unknown.
The challenge facing the Company is to establish a new profitable product line,
the Connected Surfaces, before the poor performance of Companys traditional LED
product line and economic disruptions imposed by COVID-19 pandemic and variant
viruses and cost of marketing and penetrating a new product market company
impose unsustainable financial burdens and losses on the Company. The Company is
a “penny stock company under Commission rules and the public stock market price
for our common stock is impacted by the lack of significant institutional
investor and primary market maker support. Investment in our common stock is
highly risky and should only be considered by investors who can afford to lose
their investment and do not require on demand liquidity. Potential investors
should carefully consider risk factors in our
public market price of the common stock in first fiscal quarter of 2021 is not
indicative of potential performance of the common stock in the public market.
The Companys common stock lacks the primary market maker and institutional
investor support to protect the public market from being unpredictable and
volatile.
The above examples are not exhaustive and new risks emerge from time to time.
Such forward-looking statements are based on our current beliefs, assumptions,
expectations, estimates and projections regarding our present and future
business strategies and the environment in which we expect to operate in the
future. These forward-looking statements speak only as of the date made. We
expressly disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statement to reflect any change in our
expectations with regard thereto or any change of events, conditions, or
circumstances on which any such statement was based, except as required by law.
Use of Certain Defined Terms. Except as otherwise indicated by the context, the
following terms have the stated meanings.
(1) “
subsidiary of Capstone Companies, Inc.
(2) "Capstone International Hong Kong Ltd or "CIHK is a wholly owned subsidiary
of
currently moving to a dormant status.
(3) "Capstone Industries, Inc. , a Florida corporation and a wholly owned
subsidiary of CAPC, may also be referred to as “
(4) “
“we, “us “our, “Company, or “CAPC. Unless the context indicates otherwise,
“Company includes in its meaning all of
Subsidiaries.
(5) "China meansPeoples 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) “
(10) “Subsidiaries means
International H.
(“CLTL).
(11) Any reference to fiscal year in this Annual Report on Form 10-K means our
fiscal year, ending December 31st.2021.
(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 in this Report
26
Overview of Our Business
organized under the laws of the
manufacturer and marketer of consumer inspired products that bridge
technological innovations. The primary operating subsidiary is
Industries, Inc.
offices of the Company (“
“CIHK, was established to expand the Companys product development, engineering,
and factory resource capabilities. With the 2021 shift of manufacturing to
The Company has exploited technologies in areas of induction charging, power
failure control, security and home LED lighting products and most recently has
entered the electronics market with its introduction of Capstones Smart Mirrors.
The Companys focus through 2017 was the integration of LEDs into most commonly
used consumer lighting products in todays home. 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. The Connected Surfaces is the
Companys effort to establish business in an emerging segment that will allow for
future revenue growth. The smart home segment is the umbrella category in which
we will participate with the Connected Surfaces program.
In late 2017, as management recognized that the LED category was maturing, it
sought a business opportunity that would transition the Companys revenue streams
to an emerging new product category. While we currently continue to supply LED
products on a limited basis, our strategic plan to develop and launch new
innovative product lines, like Connected Surfaces Smart Mirrors, is believed to
be essential for sustaining or growing revenues.
The Company began its foray into the electronics industry in 2019 with its
Connected Surfaces initiative. We decided to enter the market as we identified
the smart home category to be emerging with strong long term growth potential.
This strategy would require the Company to adopt a different short term business
model as a way of building awareness and revenues. The business model is
consumer direct through e-commerce marketing including a company webstore as
well as third party resellers like Amazon, Wayfair and other recognized,
available e-commerce platforms. The smart mirror business requires maintenance
of inventory in order to be responsive to e-commerce and retail sales orders and
lessen the impact of logistical problems with the delivery of products from
consumers but will also allow the Company to potentially exploit and promote
sales of products in brick-and-mortar retailers stores.
The Companys financial initiatives are driven by its entry into new distribution
channels and calls for an increased emphasis on an e-commerce business model. As
a result of the COVID-19 pandemic, retail foot traffic has diminished and
e-commerce platforms have advanced with consumers across all product lines. The
COVID-19 pandemic accelerated an existing trend of consumers purchasing more
products online. The Connected Surfaces category is intended to find its way to
retail shelves after it has been established through its direct-to-consumer
e-commerce platform. The Company does not have prior experience in operating and
promoting its own e-commerce website. The Companys e-commerce marketing and
sales strategy will shift its historic reliance on ‘Big Box, brick and mortar
retailers to an emphasis on e-commerce marketing and sales. If Connected
Surfaces is successful, the gross margins generated by the e-commerce model
should be greater than LED consumer lighting products. The Company will require
additional funding to build its marketing effort, inventory levels and service
levels, which funding must be timely and affordable to fund the desired
marketing and product launch. The future growth will be directly impacted by the
level of exposure, messaging and distribution capabilities. Certain members of
the Companys management (“Corporate Insiders and Directors) have provided
funding from time to time to support the Companys basic operational funding
needs, but there is no guarantee that this funding will continue or be adequate
to fund operations or Smart Mirror program marketing and inventory as well as
possible enhancements or an expansion of the portfolio with additional items.
27
During the three months ended
indicators show signs of a slowdown caused by interest rate increases in order
to reduce the impact of increasing inflationary pressures. Although the
unemployment rate remained at 3.6% and unemployment dropped in
thousand, the consumer confidence index in June was at its lowest point in one
year. Retail sales in
remained resilient despite inflation. But the impact of inflation on consumer
prices and consumer buying patterns will be a factor through 2022. It is
projected that the inflation rate will average 7.9% through 2022. Management
believes that the national vaccine inoculation program made major advances, and
initially increased consumer confidence, however the recent impact of the
increased interest rates and energy costs have seriously eroded into consumers
available spending or adversely impacted consumer confidence in the economy.
Since our Connected Surface product line is not an essential product, but a
discretionary purchase, consumer products that are discretionary purchases are
generally adversely impacted by uncertain or negative economic news and downturn
in consumer confidence. The Company anticipates that the States will continue to
open their economies and consumer foot traffic will increase in brick-and-mortar
retailers in 2022 but the volume of spending may be greatly reduced.
Additionally during 2022 if the Omnicron variant of COVID 19 or a new variant
proves to be vaccine resistant or causes a surge in severe illness and death
among a significant percentage of unvaccinated Americans and to others in other
nations the negative impact to consumer confidence will be significant.
Future economic indicators are trending that the
2022-23 but narrowly avoid a recession. Reducing inflation and providing price
stability will protect real incomes and help sustain growth over the medium
term, however, as our wholesale business revenue is dependent on customer orders
issued many months in advance, the revenue shortfall during the period continued
to be driven by the uncertainty felt by retail buyers as to the short and
long-term impact on the retail market of COVID-19 and its overall long-term
impact on the
monitors the impact of the global pandemic on the Companys financial condition,
liquidity, operations, suppliers, industry, and workforce. Given the evolution
of the COVID-19 pandemic, emergence of variants and uncertainty about future
variants, and the global response to curb its spread, the Company is not able to
estimate the effects of the COVID-19 pandemic on its results of operations,
financial condition, or liquidity for fiscal year 2022.
Effects of COVID-19
During the three and six months ended
global spread of COVID-19 pandemic caused significant global economic
volatility, uncertainty and disruption in our operating environment.
In response to the COVID-19 and various state and local orders, the Company
instituted the following actions in
? Placed restrictions on business travel for our employees. ? Closed our Corporate offices both in theU.S. and inHong Kong . ? Modified our corporate and division office functions to allow all employees to work remotely.
As of the filing of this Form 10-Q Report, the Company continues to adhere to
the same practices. With government mandated restrictions in
of
restrictions on business travel remains in effect. While all the
above-referenced steps are appropriate considering COVID-19 pandemic, they have
impacted the Companys ability to operate the business in its ordinary and
traditional course. The Company does not have a vaccination mandate for its
employees.
Our business operations and financial performance for the period ended
2022
the poor performance of our traditional LED product line in 2021 and the lack of
revenues from the new Connected Surface products. In
variant of COVID-19 has recently surged which disrupted our overseas OEMs and
delayed some of the Smart Mirror certification testing. This resulted in
shipment delays of the company critical Connected Surface devices. The Company
reported a net loss of approximately
three months ended
28
During the three months ended
indicators show signs of a slowdown caused by interest rate increases in order
to reduce the impact of increasing inflationary pressures. The consumer
confidence index in June was at its lowest point in one year. Management
believes that the national vaccine inoculation program made major advances, and
initially increased consumer confidence, however the recent impact of the
increased interest rates and energy costs should seriously erode into consumers
available spending. Company anticipates that the States will continue to open
their economies and consumer foot traffic will increase in brick-and-mortar
retailers in 2022 but the volume of spending maybe greatly reduced. Additionally
during 2022 if the Omnicron variant of COVID 19 or a new variant proves to be
vaccine resistant or continues to cause a surge in severe illness and death
among a significant percentage of unvaccinated Americans and others in other
nations the negative impact to consumer confidence will be significant.
The Company has been building its infrastructure to transition into the online
retail business by developing an e-commerce website and has invested in
developing a social media presence over the last year and these systems are
ready to launch and ship its Smart Mirror product.
During the quarter ended
on its Capstone Connected website. Prior to 2021, the Companys wholesale
business relied on brick-and-mortar retail for sale of its products to consumers
and sought to piggyback off retailers e-commerce websites as well as dedicated
online retailers like Amazon. As the Company focuses its effort on social media
driven e-commerce, the Companys online strategy is projected to deliver future
growth and reduce reliance on Big Box retail. The Company believes that the
gross margin is more favorable on the e-commerce business which then should
translates to better returns on lower revenues. The Company does not have
operational experience in running its own e-commerce site for Connected Surfaces
products to substantiate this expectation of better returns on lower revenues.
If the Company cannot operate an effective e-commerce site or effectively market
in the e-commerce marketplace, the launch of the Connected Surfaces product line
may not be successful.
Further, the market for Connected Surfaces products may not materialize as
anticipated and to the extent necessary to generate sufficient revenues to fund
Company operations. Since the Connected Surface products are intended to be the
core business line of the Company, the failure of the Connected Surface products
to gain consumer acceptance and generate sufficient revenues to sustain Company
operations would leave the Company without a viable business line. It is
possible that the interactive smart mirror market does not have the anticipated
potential for a niche market competitor like the Company or that the Connected
Surface products do not match then current consumer demand in the smart mirror
market.
Further reliance on brick-and-mortar retailers may not provide the necessary
financial benefits to address the Companys current financial problems. COVID-19
pandemic may have substantially altered the consumer product distribution
environment. The extent to which COVID-19 pandemic will continue to impact the
Companys results will depend primarily on future developments, including the
severity and duration of the crisis, the acceptance and effectiveness of the
national vaccine inoculation program, potential mutations of COVID-19 pandemic,
and the impact of future actions that will be taken to contain COVID-19 pandemic
or treat its impact. These future developments are highly uncertain and cannot
be predicted with confidence, especially if mutations of the COVID-19 virus
become widespread and prove resistant to vaccines. The Delta and Micron variant
of COVID-19 for the last few months had a major surge in
necessitated sporadic regional lockdowns and s resulted in delays in finalizing
certain Smart Mirror certifications, production of the initial Smart Mirror
inventory and a major logistics backlog. The Company placed orders for the
initial inventory rollout and has received shipments in the
has other shipments in transit.as part of the domestic inventory buildup.
As a result of the continuing economic uncertainties caused by the COVID-19
pandemic and the reduced revenue during the period, Management determined
sufficient indicators existed to trigger the performance of an interim goodwill
impairment analysis as of
Companys fair value of its single reporting unit exceeded the carrying value and
a goodwill impairment charge was not required in the quarter ended
2022
On
we refer to as the “CARES Act. was enacted into law. The CARES Act includes
several significant income and other business tax provisions that, among other
things, would eliminate the taxable income limit for certain net operating
losses (“NOLs) and allow businesses to carry back NOLs arising in 2018, 2019,
and 2020 to the five prior tax years. The Company was able to carryback the 2018
and the 2019 NOLs to 2017 tax year and generate an estimated refund of
previously paid income taxes at an approximate 34% federal tax rate. As of
2022
the three month period ended
over estimated. leaving
29
Goodwill Impairment
As a result of the economic uncertainties caused by the resurgence of the
COVID-19 pandemic, management determined sufficient indicators existed to
trigger the performance of interim goodwill impairment analysis for the three
months ended
exceeded the carrying value of its single reporting unit and a goodwill
impairment charge was not required. For the three months and six months ended
With the continuing economic uncertainties caused by the COVID-19 pandemic
including variant viruses and the increasing inflationary impact, the capital
markets may have a downturn and adversely affect the Companys stock price which
will require the Company to test its goodwill for impairment in future reporting
periods.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
The uncertainty and the continuing negative impact that the COVID-19 disruption
and inflationary policies could have on the future retail business and consumers
willingness to visit retail stores, causing reduced consumer foot traffic and
consumer spending, could negatively impact the demand for our products or delay
future planned promotional opportunities. However, with the launch of the Smart
Mirror portfolio using the online retail platform, the Company secured an
additional working capital credit line of
working capital needs during the period needed to facilitate revenue growth in
that category.
Our business operations and financial performance for the six months ended
30, 2022
For the six months ended
thousand
thousand
was approximately
2021. During the six months ended
operating activities approximately
thousand
million
for the Smart Mirror program. The cash usage was partially offset by
thousand
refundable.
As of
thousand
decreased by approximately
31, 2021
substantial doubt about the Companys ability to continue as a going concern,
As discussed above, the overall impact of the COVID-19 pandemic to our business,
financial condition, cash flow and results of operations remains uncertain. If
any of our major wholesale customers fail to maintain normal operations or the
Connected Surfaces program is not accepted by consumers, then the revenue could
further decline, which could have a material adverse effect on our business,
financial condition, results of operations and liquidity. Management believes
that with the ongoing national distribution of vaccines, the economic impact of
the COVID-19 pandemic in the
should not impact the Companys long-term strategy and initiatives.
We will seek alternative sources of liquidity, including but not limited to
accessing the capital markets, or other alternative financing measures. However,
instability in, or tightening of the capital markets, could adversely affect our
ability to access the capital markets on terms acceptable to us. An economic
recession or a slow recovery could adversely affect our business and liquidity.
The ongoing impact of the COVID-19 pandemic on the Companys business and
financial performance may also affect the Companys ability to obtain funding.
30
The Company has been in discussions with alternate funding sources that offer
programs that are more in line with the Companys future business model,
particularly a facility that provides funding options that are more suitable for
the e-commerce business. The borrowing costs associated with such financing are
dependent upon market conditions and our credit rating. We cannot assure that we
will be able to negotiate competitive rates, which could increase our cost of
borrowing in the future. Based on past performances and current expectations,
Management believes that with the
provides adequate liquidity to meet the Companys 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
expenses as well as a
interest that becomes due approximately
thousand
from the sale of the Smart Mirror inventory. Company may be unable to secure
future necessary long term funding in adequate amounts, on affordable terms and
conditions or in a timely manner.
The COVID-19 pandemic resurgence in many states or emergence of new
vaccine-resistant strains of the virus could have a continuing negative impact
on the brick-and-mortar retail sector, with consumers unwilling to visit retail
stores, causing reduced consumer foot traffic and consumer spending. However,
with a successful relaunch of the Smart Mirror portfolio using the online retail
platform, the Company will not be as dependent on Big Box retailers for our
revenue streams as in previous years.
On
agreements (“SPAs) whereby the Company privately placed an aggregate of
2,496,667 shares of Company common stock for an aggregate purchase price
investors in the Private Placement consisted of four private equity funds and
one individual – all being “accredited investors (under Rule 501(a) of
Regulation D under the Securities Act of 1933, as amended, (“Securities Act).
The
purchase start up inventory for the Companys new Smart Mirror product line, for
a major online e-commerce fulfilment company, and the remainder for advertising
and working capital (See Note 6).
On
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
natural person who is not affiliated with the Company other than as a lender.
This agreement was finalized, and the Company received the
funding under this agreement on
balance
On
funding agreements, to provide 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
Nexus),
individual agreements became effective. The terms are for 18 months with a
simple interest rate of 5 percent per annum. The loans may be prepaid in full or
partially without any penalty The Company has received the
under these agreements. As of
an accrued interest of
With the global resurgence of the Omicron variant of COVID-19, the Companys
manufacturers both in
which caused production delays for Connected Surface products. With the same
virus now becoming the dominant variant in
on the retail marketplace remains uncertain, which places uncertainty on the
timing of the Companys new retail programs that are planned to be introduced
during 2022. Further delays in the shipment of Connected Surface products to
consumers and distributors could have a significant impact on the ability of the
Company to continue to withstand the multiple challenges of a declining LED
product line, delay in shipping the new product line and the ongoing impact of
COVID-19 pandemic.
As part of its traditional strategic planning, the Company reviews alternatives
to its current business approach, including, without limitation, development of
a new product line, sale of the public company or merger of the Company with a
private operating company and other common strategic alternatives to a company
facing business and financial challenges and uncertainties.
Management is closely monitoring its operations, liquidity, and capital
resources and is actively working to minimize the current and future impact of
this unprecedented situation. Those efforts may not successfully remediate or
combat in all instances the adverse impact of COVID-19 pandemic and the affected
efforts to launch the Connected Surfaces product line.
31
Our Growth Strategy
The Companys looking forward strategy requires continued expansion of its
product development and engineering, manufacturing base marketing and
distribution of a broadened portfolio of consumer electronic products. The
Company will pursue new revenue opportunities through the introduction and
expansion of its “Connected Surfaces portfolio into alternate distribution
channels including e-commerce and others that the Company has not previously
focused on. The Company also intends to leverage its existing valuable customer
base and strong relationships to achieve organic growth initiatives within this
new category.
Capstones past success has been in its ability to identify emerging product
categories where Capstones 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 Companys low-cost OEM manufacturing and operations have typically,
in the past, provided an advantage in delivering great products affordably.
Our expectation is that the new product portfolio appeals to a much larger
audience than our traditional LED lighting product line. The new Connected
Surfaces portfolio is designed to tap into consumers ever-expanding connected
lifestyles prevalent today. The products have both touch screen and voice
interfacing, internet access and an operating system capable of running
downloadable applications. The average selling prices will be comparable to that
of tablets and smartphones, expected MSRP retail to start at
goal to deliver exceptional consumer value to mainstream America. Whereas,
during the day your smartphone/tablet keeps you connected, whether it is work or
personal, now when entering your home, Capstones new Connected Surfaces products
will enable users the same level of connectivity in a more relaxed manner that
does not require being tethered to these devices.
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 Companys products is highly
dependent on economic drivers such as consumer spending and discretionary
income.
Although the overseas factories have previously been fully functioning, a
resurgence of the Omnicron variant of COVID-19 caused sporadic regional
lockdowns with certain overseas factories that could delay shipments of products
from
States
believe the impact of the virus in the
disruption has not impacted our long-term strategy and initiatives as of the
date of the filing of this Form 10-Q Report.
Last year, the Company expanded its investment and commitment in social media
marketing. With our Companys plan to shift its focus to on-line commerce in the
first half of 2022 and thereafter, its social media presence will be key to the
Companys growth initiatives. The analytics derived from testing various
messaging on social media platforms (i.e., Facebook Ads, Google Ads) has
validated consumer interest in the Smart Mirror program. Based on the results
from the Smart Mirrors product rollout, the Companys social media marketing
efforts may be revised or expanded. Additional capital may be required to fully
exploit an effective social media and e-commerce effort to support the
company-critical Smart Mirrors product launch. As stated, the Company is new to
social media and ecommerce marketing on the current contemplated scale and no
assurances can be given, due to the lack of operational experience, on the
success of those efforts, which are critical to our future financial performance
and condition.
Organic Growth Strategy
Subject to adequate funding, the Company intends to pursue various initiatives
to execute its organic growth strategy, which is designed to enhance its market
presence, expand its customer base and maintain its recognition as an industry
leader in new product development. Key elements of our organic growth strategy
include:
32
Connected Surfaces. Historically LED lighting products have been our core
business. The Capstone Lighting and Hoover Home LED brands combined, have sold
millions of LED lighting products over the recent years and consequently the
Company holds a well-respected position in the retail lighting category. While
consistently launching successful lighting programs, the Company has determined
that it needs to diversify and expand its core focus in order to continue to
meet revenue growth initiatives. The Company has refocused its development and
marketing initiatives and is determined to build on its success with a broader
product portfolio beyond lighting products only. The new category “Connected
Surfaces was officially launched in
expand the new line of “Connected Products for the next several years. The
Companys product roadmap outlines plan for product introductions through 2022
and this will continue to expand as consumer product acceptance validates its
innovations. The Company believes this program will leverage existing
relationships with its current retail partners, deliver on its e-commerce
initiatives and collectively contribute organic growth for the Company.
The Company acknowledges that smart homes will become more mainstream over the
next several years and will present significant growth opportunities for the
Company and its Connected Surfaces portfolio.
While our focus of Connected Surface products is the smart home market, smart
mirrors are being employed by retailers like
allow customers to compare outfits on fitting room smart mirrors. Further,
single application smart mirrors are emerging in the fitness industry for
interactive workouts at home as a result of the global pandemic.
Perceived or Essential Strengths
Capstone believes that the following competitive strengths serve to support its
business strategies.
In
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.
Capstones core executive team has been working together for over three decades
and has successfully built and managed other consumer product companies.
Operating Managements experience in hardline product manufacturing has prepared
the Company for successful entries into various consumer product markets,
especially its experience in using foreign OEMs to provide capabilities not
possessed internally by our company.
Product Quality: Through a combination of sourcing quality components, stringent
manufacturing quality control and conducting rigorous third-party testing,
product experiences by consumers are of the highest ranking. To deliver
cost-competitive products without compromising quality standards, we leverage
purchasing volume and capitalize on strategic vendor relationships.
Perceived Weaknesses : The Company does not possess the business, marketing, and
financial resources of larger competitors or the brand recognition or
international markets of some of the larger competitors. The declining financial
performance of the Company due to declining sales and appeal of its LED lighting
product line has placed the Company in a weakened financial position, which in
turn increases the need for working capital funding from investors or lenders.
The Company lacks the hard assets for affordable, sufficient debt financing and
the low market price of its Common Stock makes equity funding difficult in terms
of finding suitable investors who will provide adequate, affordable, timely
working capital funding.
The Companys previous core products lines were focused on consumer LED lighting,
which is a declining revenue source with relatively low profit margins, and
long-term revenue prospects of the recent diversification into Connected
Surfaces products is uncertain as of the date of this Form 10-K report. As a
mature product line, LED business is a declining business line and revenue
source and is not deemed as sufficient to sustain the Company as a revenue
source through 2022 and into 2023.
The Company does not have the large internal research and development capability
of its larger competitors. Capstone operates with a limited number of employees
whose functions are dedicated to executive management, sales and marketing or
administrative support. The limited number of employees may hinder or delay the
ability of the Company to identify or respond to consumer preferences or new
technology developments in a product line. Hiring may be required with any
growth and qualified personnel may not be readily available. We cannot match the
compensation packages to prospective employees that many larger competitors may
offer, and we lack the funding and other resources to change our operational
model and its reliance on contractors for many functions and capabilities,
including development, production, shipping, warehousing and distribution of
products.
33
As a smaller reporting company, we are more vulnerable to events like COVID-19
pandemic, production and shipping delays, travel and operational disruptions and
restrictions and an accelerated shift to e-commerce from reliance on
brick-and-mortar retail sales. We lack, the staff, money, internal capabilities
and resources and operational experience to significantly or timely respond to
significant challenges and adverse changes in business and financial
requirements.
COVID-19 pandemic closures of companies and shipping-distribution channels
produced a delay in shipping and receipt of products from abroad and in
United States
industry. The Company relies on OEMs located in
been impacted by the COVID-19 pandemic in meeting development, production and
shipping deadlines. The extent of the continuing economic impact of the COVID-19
pandemic and resulting logistical delays is uncertain as of the date of this
Form 10-Q report. The Company is actively exploring production capabilities in
eliminate shipping delays from
identified as of the date of the filing of this Form 10-K and the Company may
not be able to locate a Mexican source. Even if identified, a Mexican production
source for products would not be in place prior to 2023, if then.
Capstones international purchases can become more expensive if the
weakens against the foreign currencies.
Should the increased
it may increase the cost of electronic components used in our products.
While we have established new production capacity in
final resolution of the
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.
If the COVID-19 pandemic and increasing inflationary pressures continues to
adversely impact operations and consumer confidence in 2022, it could have a
detrimental impact on our ability to maintain operations by depressing consumer
purchase of our products, whether online or in retail stores. Withstanding
continued losses could cause the Company to consider significant corporate
transaction, including, without limitation, a possible merger and acquisition
transaction or reorganization to protect the core operations from the ongoing
impact of the COVID-19 pandemic. Like many companies, the Company conducts
periodic strategic reviews where the feasibility of significant corporate
transactions are considered, including mergers, asset purchases or sales and
diversification or change in business lines. The Company lacks the financial
resources of larger companies to withstand adverse, significant and sustained
changes in business and financial condition. This vulnerability necessitates an
ongoing consideration of alternatives to current operations. Due to the decline
in financial performance of the Company since 2021, and the Company being in
transition from a declining product line and not yet establishing a profitable
product line, as well as the Company having its shares of Common Stock quoted on
The OTC Markets Group, Inc. QB Venture Market, the Company may be unable to
consummate a corporate transaction that sustains operations.
Products and Customers
While the Company is expanding its product portfolio through the introduction of
the Capstone Connected Surfaces program, it still develops and offers a select
number of LED lighting products under the “Capstone Lighting brand for both the
10-Q report are as follows:
Connected Surfaces – Smart Mirrors
Standard Rectangular
Wardrobe/Fitness Mirror
LED Puck Lights
LED Undercabinet Light Bars
LED Motion Sensor Lights
34
The plan to expand the Companys product portfolio through Connected Surfaces
involves the inherent risk of increased operating and marketing costs without a
corresponding increase in operational revenues and profits.. Expense categories
including molds, prototyping, engineering, advertising, public relations,
tradeshows and social media platforms will continue to be incurred for a period
before revenues occur.
Over the past ten years, the Company has established product distribution
relationships with numerous leading international, national and regional
retailers, including but not limited to: Amazon, Costco Wholesale, Sams
Club-Walmart, the Container Store and Firefly Buys. These distribution channels
may sell the Companys products through the internet as well as through retail
storefronts and catalogs/mail order. In a post-COVID-19 pandemic environment,
these distribution channels may be less valuable as distribution channels,
especially for the Smart Mirrors product line and if our e-commerce initiative
succeeds and expands. The effective development of an e-commerce-based approach
to distribution of products may be critical to the future performance of the
Company. The Company believes it has developed the scale, manufacturing
efficiencies, and design expertise that serves as the foundation for aggressive
pursuit of niche product opportunities in our largest consumer domestic and
international markets. While Capstone has traditionally generated the majority
of its sales in the U.S. market, urbanization, rising family incomes and
increased living standards abroad have spurred a perceived demand for small
consumer appliances internationally. To capture this market opportunity, the
Company has continued its international sales by leveraging relationships with
our existing global retailers and by strengthening our international product
offerings. The Company has sold Capstone brand products to markets outside the
International sales for the six months ended
the same period 2021. The Companys performance depends on a number of
assumptions and factors. Critical to growth are the economic conditions in the
markets that we serve, as well as success in the Companys initiatives to
distinguish its brands from competitors by design, quality, and scope of
functions and new technology or features. Efforts to expand into new
international markets may be adversely impacted in the near term by COVID-19
pandemic.
The Companys 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 Companys
initiatives to distinguish its brands from competitors by design, quality, and
scope of functions and new technology or features. The Companys ability to fund
the pursuit of our goals remains a constant, significant factor.
With the Companys “Connected Surfaces category, Capstone has developed a
comprehensive product offering. Within the selection of products offered,
Capstone seeks to service the needs of a wide range of consumers by providing
products to satisfy their different interests, preferences, and budgets. The
Company believes in its strategy to offer consumers with an array of innovative
connected products and quickly introduce additional products to continue to
allow Capstone to further penetrate this developing market.
Tariffs. The previous
directly affected the Companys 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. Capstones 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
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
sectors thereof and, thus, to adversely impact our businesses. As of the date of
this Form 10-Q Report, the new
future position on this issue and there has not been a resolution of the Chinese
American trade dispute.
35
Sales and Marketing
Our LED products have been sold nationally and internationally through a direct
sales force. The sales force markets the Companys LED products through numerous
retail locations worldwide, including larger retail warehouse clubs, hardware
centers and e-commerce websites. Our business model has been designed to support
“direct import sales made directly to the retail customer. However, we also
offer “domestic sales programs which will be expanded in the future as a result
of the Capstone Connected Surfaces program becomes available. As we shift to
Connected Surfaces products, the LED products will become a secondary product
line.
Direct Import Sales. We ship finished products directly to our retail customer
from
by delivering products to the customers overseas shipping point. The customer
takes title of the goods at that point and is responsible for inbound ocean
freight and import duties. Direct import sales are made in larger quantities
(generally container sized lots) to customers worldwide.
Domestic Sales. The strategy of selling products from a
enables the Company to provide timely delivery and serve as a domestic supplier
of imported goods. With this model the Company imports goods from overseas and
is responsible for all related costs including ocean freight, insurance, customs
clearance, duties, storage, and distribution charges related to such products
and therefore such sales command higher sales prices than direct sales. Domestic
orders are for a much smaller size and could be as low as a single unit directly
to the end consumer if ordered through an online website. To support an
effective e-commerce business model, we will be required to warehouse adequate
inventory levels enabling the Company to ship orders directly to the end
consumer expediently.
To the extent permitted by our current financial condition, we continue to make
investments to expand our sales, marketing, technical applications support and
distribution capabilities to sell our product portfolio. We also continue to
make investments to promote and build market awareness of the products and
brands we offer. Our sales within the
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
retailers are made by our in-house sales team.
The Company has actively promoted its products to retailers and distributors at
North American trade shows, such as the Consumer Electronics Show (“CES) or the
International Hardware Show, but also relies on the retail sales channels to
advertise its products directly to the end user consumers through various
promotional activities. This marketing effort will continue as a complement to
the social media and e-commerce initiatives.
In the six months ended
who comprised approximately 87 % and 79%, respectively, of net revenue. Although
we have long established relationships with our customers, we do not have
contractual arrangements to purchase a fixed quantity of product annually. A
decrease of business or a loss of any of our major customers could have a
material adverse effect on our results of operations and financial condition.
The Company has been focused on establishing an on-line e-commerce presence to
support the introduction of the “Connected Surfaces program and deliver direct
to consumer.
In 2021, we utilized social media platforms and online advertising campaigns to
further grow the Companys online presence. In addition to Facebook, Instagram,
Pinterest and LinkedIn, Capstone has launched a You Tube channel Smart Mirror
videos and established a Twitter account. The Company has a social media
presence on the following social media platforms:
FACEBOOK1: https://www.facebook.com/capstoneindustries and
https://www.facebook.com/capstoneconnected
INSTAGRAM2: https://www.instagram.com/capstoneconnected
PINTEREST3: https://www.pinterest.com/capstoneconnected/
LINKEDIN4: https://www.linkedin.com/company/6251882
TWITTER5https://twitter.com/capc capstone
YOUTUBE6 https://www.youtube.com/channel/UCMX5W8PV0Q59qoAdMxKcAig
1 Facebook is a registered trademark of Facebook, Inc.
2 Instagram is a registered trademark of Instagram.
3 Pinterest is a registered trademark of Pinterest.
4 LinkedIn is a registered trademark of
5 Twitter is a registered trademark of
6YouTube is a registered trademark of
36
Competitive Conditions
The Company operates in a highly competitive environment, both in
States
Company competes with large multinationals with global operations as well as
numerous other smaller, specialized competitors who generally focus on narrower
markets, products, or particular categories.
Competition is influenced by technological innovation, brand perceptions,
product quality, value perception, customer service and price. Over the past
several years while the Companys focus has been on LED lighting, principal
competitors include Energizer,
exclusive licensee of General Electric Company). The Company believes
private-label sales by large retailers has some impact on the market in some
parts of the world as many national retailers such as Costco, Home Depot, Target
and Sams/
Many of the Companys competitors have greater resources and capabilities,
including greater brand recognition, research and development budgets and
broader geographical market reach. Competitors with greater resources could
undermine Capstones expansion efforts by marketing campaigns targeting its
expansion efforts or price competition.
Other competitive factors include rapid technological changes, product
availability, credit availability, speed of delivery, ability to tailor
solutions to customer needs, quality and depth of product lines and training, as
well as service and support provided by the distributor to the customer. Smart
mirrors and other connected surface products are an emerging industry, and the
Company may be unable to develop or license emerging new technologies that are
dominant.
The COVID-19 pandemic has accelerated the decrease in consumer reliance on
traditional brick-and-mortar retailing and heightened the importance of
e-commerce and online marketing and sales. We have started our social media
marketing. Many competitors have more established, widespread and effective
e-commerce and social media campaigns than we do. We may not be able to
effectively compete in e-commerce and social media marketing and sales. The
COVID-19 pandemic has dramatically impacted marketing and sales of many products
and the long-term impact of the pandemic remains uncertain as of the date of the
filing of this Form 10-Q report.
With trends and technology continually evolving, and subject to adequate and
affordable funding, Capstone will continue to invest and develop new products
that are competitively priced with consumer centric features and benefits easily
articulated to influence point of sale decision making. Success in the markets
we serve depends upon product innovation, pricing, retailer support,
responsiveness, and cost management. The Company continues to invest in
developing the technologies and design critical to competing in our markets. Our
ability to invest is limited by operational cash flow and funding from third
parties, including members of management and the Board of Directors, and by the
ongoing impact of the COVID-19 pandemic on our business and financial
performance. Subject to adequate and affordable funding, absence of unexpected
competition or technological developments in connected surface devices, and a
curbing of the impact of the COVID-19 pandemic, the Company believes that it can
effectively pursue and exploit product market niches because of managements
proven track record in delivering innovation to the market and cost-effective
and timely manner.
Research, Product Development, and Manufacturing Activities
The Companys research and development operations based in
design and engineer many of the Companys products, with collaboration from its
third-party manufacturing partners, software developers and Capstone
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 Capstone Connected Surfaces portfolio as an innovator in the smart
home segment.
? Develop product with increasing technology and functionality with enhanced
quality and performance, and at a very competitive cost; and
? Solidify new manufacturing relationships with contract manufacturers in
Thailand . 37
The Company establishes strict engineering specifications and product testing
protocols with the Companys 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.
Capstones research and development team enforces its proprietary manufacturing
expertise by maintaining control over all outsourced production and critical
production molds. To ensure the quality and consistency of the Companys products
manufactured overseas, Capstone uses globally recognized certified testing
laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all
products are designed and tested to adhere to each countrys individual
regulatory standards. The Company also hires quality control inspectors who
examine and test products to Capstones specification(s) before shipments are
released.
To successfully implement Capstones business strategy, the Company must
continually improve its current products and develop new product segments with
innovative imbedded technologies to meet consumers growing expectations. The
Connected Surfaces product development is our current effort to achieve those
expectations.
Investments in technical and product development are expensed when incurred and
are included in the operating expenses.
Raw Materials
The principal raw materials currently used by Capstone are sourced in
and
manufacturers in the region. These contract manufacturers purchase components
based on the Companys specifications and provide the necessary facilities and
labor to manufacture the Companys products. Capstone allocates the production of
specific products to the contract manufacturer the Company believes is more
experienced to produce the specific product and whose facility is located in the
country that most benefits from the
consistent quality of Capstones 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 performs tests on finished and packaged
products to assess product safety, integrity and package compliance.
Raw materials used in manufacturing include plastic resin, copper, led bulbs,
batteries, and corrugated paper. Prices of materials have remained competitive
in the last year. 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
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.
38
Distribution and Fulfillment
Since
distribution needs to a third-party warehousing facility situated in
California
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
needed to establish an east coast distribution point. This relationship, if
required, will allow us to fully expand our
services. As the Company transitions into the e-commerce and direct to consumer
marketplace, the Company has developed a new website with full shopping cart
capabilities. To complete this project 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 and Wayfair.
Seasonality
In general, sales for household products and electronics are seasonally
influenced. Certain gift products cause consumers to increase purchases during
key holiday winter season of the fourth quarter, which requires increases in
retailer inventories during the third quarter. In addition, natural disasters
such as hurricanes and tornadoes can create conditions that drive increased
needs for portable power and power failure light sales. Climate change may
increase the number and severity of hurricanes, tornadoes and flooding.
Historically, the lighting products had lower sales during the first quarter due
to the
during this period. Our transition to
impact of
We do not have sufficient operational experience with Connected Surfaces to
predict the seasonality of Connected Surfaces.
Intellectual Property
CAPC subsidiary,
the past decade. These include the following trademarks: Exclusive license and
sub-license to Power Failure Technology; Capstone Power Control, Timely Reader,
Pathway Lights, and 10 LED – Eco-i-Lite Power Failure Light, 5 LED – Eco-i-Lite
Power Failure Light, 3 LED – Eco-i-Lite Power Failure Light, 3 LED
Eco
number of patents pending; Puck Light (cookie), Puck
Puck Lights, LED Dual Mode Solar Light, Integrated Light Bulb (
Gooseneck Lantern, Spotlights, Security Motion Activated Lights, Under Cabinet
Lighting and Bathroom Vanity Light. CAPC periodically prepares patent and
trademark applications for filing in
pursue foreign patent protection in foreign countries if deemed necessary to
protect a patent and to the extent that we have the available cash to do so.
CAPCs ability to compete effectively in the Home Lighting categories depends in
part, on its ability to maintain the proprietary nature of its technology and
manufacturing processes through a combination of patent and trade secret
protection, non-disclosure agreements, licensing, and cross-licensing
agreements. CAPC owns a number of patents, trademarks, trademark and patent
applications and other technology which CAPC believes are significant to its
business. These intellectual property rights relate primarily to lighting device
improvements and manufacturing processes.
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.
39
Reverse engineering, unauthorized copying or other misappropriation of our
technologies could enable third parties to benefit from our technologies without
paying us. We cannot assure shareholders that our competitors have not developed
or will not develop similar products, will not duplicate our products, or will
not design around any patents issued to or licensed by us. We will assess any
loss of these rights and determine whether to litigate to protect our
intellectual property rights on a case by case basis.
We rely on trademark, trade secret, patent, and copyright laws to protect our
intellectual property rights. We cannot be sure that these intellectual property
rights will be effectively utilized or, if necessary, successfully asserted.
There is a risk that we will not be able to obtain and perfect our own
intellectual property rights, or, where appropriate, license intellectual
property rights from others to support new product introductions. There can be
no assurance that we can acquire licenses under patents belonging to others for
technology potentially useful or necessary to us and there can be no assurance
that such licenses will be available to us, if at all, on terms acceptable to
us. Moreover, there can be no assurance that any patent issued to or licensed by
us will not be infringed or circumvented by others or will not be successfully
challenged by others in lawsuits. We do not have a reserve for litigation costs
associated with intellectual property matters. The cost of litigating
intellectual property rights claims may be beyond our financial ability to fund.
As is customary in the retail industry, many of our customer agreements requires
us to indemnify our customers for third-party intellectual property infringement
claims. Such claims could harm our relationships with customers and might deter
future customers from doing business with us. With respect to any intellectual
property rights claims against us or our customers, we may be required to cease
manufacture of the infringing product, pay damages and expend significant
Company resources to defend against the claim and or seek a license.
Information Technology
The efficient operation of our business is dependent on our information
technology systems. We rely on those systems to manage our daily operations,
communicate with our customers and maintain our financial and accounting
records. In the normal course of business, we receive information regarding
customers, associates, and vendors. Since we do not collect significant amounts
of valuable personal data or sensitive business data from others, our internal
computer systems are under a light to moderate level of risk from hackers or
other individuals with malicious intent to gain unauthorized access to our
computer systems. Cyberattacks are growing in number and sophistication and are
an ongoing threat to business computer systems, which are used to operate the
business on a day to day basis. Our computer systems could be vulnerable to
security breaches, computer viruses, or other events. The failure of our
information technology systems, our inability to successfully maintain our
information or any compromise of the integrity or security of the data we
generate from our systems or an event resulting in the unauthorized disclosure
of confidential information or degradation of services provided by critical
business systems, whether by us directly or our third-party service providers,
could adversely affect our business operations, sales, reputation with current
and potential customers, associates or vendors, results of operations, product
development and make us unable or limit our ability to respond to customers
demands.
We have incorporated into our data network various on and off-site data backup
processes which should allow us to mitigate any data loss events, however our
information technology systems are vulnerable to damage or interruption from:
? hurricanes, fire, flood and other natural disasters
? power outage
? internet, computer system, telecommunications or data network failure
Hacking as well as malware, computer viruses, ransomware and similar
malicious software code
Environmental Regulations
We believe that the Company is in compliance with environmental protection
regulations and will not have a material impact on our financial position and
results of operations.
The Company is not aware of any national, state or local environmental laws or
regulations that will materially affect our earnings or competitive position or
result in material capital expenditures. However, the Company cannot predict the
effect on our operations due to possible future environmental legislation or
regulations. During the first fiscal quarter of 2022, there were no material
capital expenditures for environmental control facilities and no such material
expenditures are anticipated.
40
Intellectual Property Issues. Market participants rely on patented and
non-patented proprietary information relating to product development and other
core competencies of their business. Protection of intellectual property is
important. Therefore, steps such as patent applications, confidentiality and
non-disclosure agreements, as well as other security measures are generally
taken. The Company has not created a litigation reserve for intellectual
property rights litigation. As a business judgment, the Company does not patent
or copyright or trademark all intellectual property due to a combination of
factors, including, in part, the cost of registration and maintenance of
registration, odds and cost of successful defense of the registration and
commercial value of the intellectual property rights. To enforce or protect
intellectual property rights, litigation or threatened litigation is common. The
Company has not sued any third parties over intellectual property rights.
Critical Accounting Policies
We believe that there have been no significant changes to our critical
accounting policies during the three months ended
those we disclosed in Managements Discussion and Analysis of Financial Condition
and Results of Operations included in our 2021 Annual Report.
CONSOLIDATED OVERVIEW OF RESULTS OF OPERATIONS
Results of operations.
Net Revenues
Revenue is currently mainly derived from sales of our residential lighting
products. These products are directed towards consumer home LED lighting for
both indoor and outdoor applications. Revenue is subject to both quarterly and
annual fluctuations and is impacted by the timing of individually large orders
as well as delays or sometimes advancements to the timing of shipments or
deliveries. We recognize revenue upon shipment of the order to the customer when
all performance obligations have been completed and title has transferred to the
customer and in accordance with the respective sales contractual arrangements.
Each contract on acceptance will have a fixed unit price. Most of our sales are
to the U.S. market which in the quarter ended
revenues and we expect that region to continue to be the major source of revenue
for the Company. We derived 0 % of our revenue from overseas sales. Net revenue
also includes the cost of instant rebate coupons, and product support allowances
provided to retailers and online orders to promote certain products. All of our
revenue is denominated in
Cost of Goods Sold
Our cost of goods sold consists primarily of purchased products from contract
manufacturers, associated duties and inbound freight. In addition, our cost of
goods sold also include inventory adjustments, warranty claims/reserves and
freight allowances. We source our manufactured products based on customer
orders.
Gross Profit
Our gross profit has and will continue to be affected by a variety of factors,
including average sales price for our products, product mix, promotional
allowances, our ability to reduce product costs and fluctuations in the cost of
our purchased components
Operating Expenses
Operating expenses include sales and marketing expenses, consisting of sales
representatives commissions, advertising and trade show expense and costs
related to employees compensation. In addition, operating expense include
charges relating to accounting, legal, insurance and stock-based compensation.
41
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