CAPC Capstone Companies Inc (QB)

Item 1. Business

Overview

Capstone Companies, Inc. (“Company” or “CAPC”) is a public holding company, that on March 25, 2004, organized under the laws of the State of Florida. The Company is a designer, manufacturer and marketer of consumer inspired products that simplify daily living through technology. Over the past decade, the Company’s various product lines have been distributed globally including consumer markets in Australia, Japan, Korea, North America, South America, and the United Kingdom. The primary operating subsidiary is Capstone Industries, Inc. (“Capstone”), a Florida corporation located at the principal executive offices of the Company. To oversee and manage business activities in the Pacific Rim, the Company established Capstone International Hong Kong, Ltd., or “CIHK”, allowing it to expand the Company’s product development, engineering, and factory resource capabilities. The Company has a history of exploiting technologies in areas of induction charging, power failure control, security and home LED lighting products and most recently has entered the electronics market with its introduction of Capstone’s Connected Surfaces Smart Mirrors internet connected and interactive mirror.

The Company’s focus through 2017 was the integration of LEDs into most commonly used consumer lighting products in today’s 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 Company’s 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.

This direction is in keeping with the Company’s history in identifying emerging product categories where Capstone’s management and innovativeness can be fully leveraged. Over the past decade, the Company’s consistent low-cost manufacturing and operations have provided an advantage in delivering quality products at very competitive prices. This expertise is expected to give the Company a competitive edge as it has in the past.

In late 2017, as management recognized that the LED category was maturing, it sought a business opportunity that would transition the Company’s revenue streams to an emerging new product category. 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 Asia. The e-commerce platform is designed to build product awareness among consumers but will also allow the Company to potentially exploit and promote sales of products in brick-and-mortar retailers’ stores.

Our strategy is based on our expectations that the new portfolio of Connected Surfaces will appeal to a much larger audience than our traditional LED lighting product line. The Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding Internet, wireless connected lifestyles prevalent today. The mirrors have both touch and remote control 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 retails to start at $899.00 per unit, with the goal to deliver cost-attractive product and 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, Capstone’s new Connected Surfaces products is intended to enable users the same level of connectivity in a more relaxed manner that does not require being tethered to these devices.

The Company’s 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 substantially, 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 Company’s 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 Company’s management (“Corporate Insiders and Directors”) have provided short-term funding from time to time to support the Company’s basic operational funding needs, but there is no guarantee that this funding will continue or be adequate to fund operations or Smart Mirror program marketing and inventory as well as possible enhancements in functions demanded by the consumers.

The Company has historically competed in 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, commodity costs and the recovery from the global pandemic. As stated earlier, and based on historical trends, the markets for LED home products have matured and growth within the category will continue to decline as markets are saturated. For these reasons, our focus is directed to the expansion and advancement of the Company’s Connected Surfaces initiative. As planned, we will maintain limited LED replenishment business, but plan to exit the category once these obligations cease to continue. Connected Smart Mirrors program is intended to replace the LED product lines as the Company’s primary business line and its success is critical to the Company’s business and financial performance in the future.

By working overseas with alternate manufacturers located outside China, particularly in Thailand, we anticipated minimal impact to our selling prices and related margins of profit that could otherwise be impacted by an ongoing trade dispute between the United States and China .Political unrest in Thailand in late 2020 and early 2021 did not affect our OEM activities, however the transportation/logistics costs have escalated as a result of the COVID-19 pandemic, but we are beginning to see more stability as we are able to book freight without the surcharges imposed by container shortages earlier in the year.

While the Company announced the plan to launch its ecommerce initiative in March 2021, that effort was continually delayed because the COVID-19 pandemic forced factory closures overseas and inventories planned for Q3, 2021 sales were only shipped in December 2021,which will facilitate January 2022 sales planning. The COVID-19 pandemic and transitioning to Thailand OEM’s as well as to be expected delays in developing an acceptable new product essentially delayed our launch of the Smart Mirror product line by a year, which delay combined with declining LED product sales, has adversely impacted the Company’s business and financial performance. The initial inventory that arrived in our fulfilment center in the United States was damaged by the logistics company, therefore. It is probable that as of the date of the filing of this Form 10-K report , our Q1 2022 e-commerce activity will not compensate for the loss of Smart Mirror revenues planned for Q3 and Q4, 2021.

During the year, the Company also experienced limitations in employee resources resulting from travel restrictions and “stay at home” orders due to precautions due to COVID-19 pandemic and its “waves” of variants of the virus. Despite these restrictions, the Company staff continues to manage the overseas supply chain requirements for its Smart Mirror products.

Since early 2020, the Company has been building its infrastructure to transition into the online retail business by developing an e-commerce website. E-commerce increasingly is the means by which consumer purchase products, and it has experienced substantial growth during the COVID-19 pandemic. The Company saw a change in consumer buying trend before the COVID-19 pandemic impact and has been investing in developing a social media presence over the last year in order to be prepared to officially launch shipping product by its online Smart Mirror business in January 2022. The delay of the roll-out of the Smart Mirror products delayed the roll-out of the planned Company e-commerce initiative.

We believe the COVID-19 virus and the related economic conditions will continue to have an impact on retail store markets through the first half of 2022 by depressing consumer shopping at brick and mortar retail stores. Consumer confidence should rise commensurately with increased job opportunities and income recovery upon a decrease of the impact of the COVID-19 pandemic and as the CDC guidelines are relaxed. The extent to which COVID-19 pandemic will continue to impact the Company’s results will depend primarily on future developments, including the severity and duration of the crisis, the speed 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 the 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. While mask mandates and recommendations have been eased in late February and early March 2022 in the United States as the vaccination program has blunted the overall lethality of the latest variant of COVID 19, the COVID-19 pandemic continues to infect and kill Americans and there have been no pronouncements from public health officials about the end of COVID-19 pandemic and there is no certainty as of the date of the filing of this Form 10-K that COVID-19 pandemic’s impact on consumers’ willingness to return to pre-COVID-19 pandemic retail shopping.

We continue to make product investments to ensure that we provide quality, useful products. Additionally, the Company continues to enhance its customer service support. In 2021 and 2020, the Company substantially expanded its investment and commitment to social media marketing. With the growing importance of on-line commerce and social media to consumers, this marketing will play a vital role in expanding our lifestyle brands and will also serve to establish credibility with the Company’s growing consumer base. The effort will focus on creating a more extensive and aggressive social media presence through use of third-party social media like Facebook, Twitter, YouTube and Instagram. Continued analytics will govern and refine our investments in these social media campaigns.

As the Company focuses on e-commerce for its new product line, it faces intense competition from established, competing e-commerce websites as well as the daunting challenge of attracting consumer attention through social media and online marketing. Consumers have many options in e-commerce. The Company is experimenting with online sponsors or promoters, known as ‘influencers,’ in addition to traditional promotion on social media websites like Facebook. There has not been sufficient operating experience with the Company e-commerce effort to opine on its effectiveness. Since the Company is new to e-commerce and social media marketing, the cost of developing an effective e-commerce program and social media marketing may be greater than anticipated by the Company.

The Company oversees and controls the manufacturing of its products, which are currently made in Thailand and China by OEM contract manufacturers, through three wholly owned operating subsidiaries: CAPI, CIHK and CLTL. To support the current e-commerce model that will drive our business in 2022, we will be putting inventories into warehouse facilities stateside for direct-to-consumer fulfillment. When introducing the Connected Surfaces program to Big Box retailers in the first half of 2022, the Company will resume its direct import model. At that time, the Company’s products will be built to order for specific promotional periods and does not require replenishment domestically. While the Company is focusing its efforts on establishing an effective e-commerce presence, sales of products through brick and mortar retail stores of retailers will remain a priority in marketing connected surfaces until and unless the e-commerce program is established as sales leader for the product line.

With the establishment of the overseas suppliers, particularly in Thailand, the need and contribution of the CIHK operation has been greatly reduced. With the reduced revenue, the Company evaluated the necessity of the CIHK operation, and decided to close the operation in 2022, particularly as manufacturing and product development are now focused in Thailand. Two key product sourcing employees of CIHK were retained as independent contractors. COVID-19 pandemic impact on the ability of CIHK staff to operate without restrictions on travel and meeting internally and with others was a secondary factor in closing CIHK.

As of today, all of the Company’s retail sales are made on an order-by-order basis, rather than through long-term sales contracts. As such, the nature of the Company’s business did not provide visibility of material forward-looking information from its customers and suppliers beyond a few months.

The Company started to actively market and sell the Smart Mirror product line in February 2022, which is the first introduction within the Capstone Connected Surfaces program. The initial marketing launch was at the Consumer Electronics Show in early 2020 but its release to the retail market was delayed due to product development delays at our suppliers and other related approval and certification delays resulting from the impact of COVID-19, which impact was mainly limitations on staff work and staffing causing delays in completion of work and backlogs in work at suppliers and certification or regulatory organizations. The Company commenced production after a long awaited FCC approval. This review process which historically has taken 4-5 weeks, was delayed continuously and was finalized after 5 months of delays. These are not unfamiliar steps to management, as all our products are subject to most of the same approval processes; however, we do not control the speed at which the testing companies advance. There was a backlog at the testing laboratories as so many companies were dormant for the past 12 months but are now resuming normal business activities. As of the filing of this Form 10-K report, our first 1,000 Smart Mirrors were shipped and arrived in January 2022 at our fulfillment center. These inventories were originally expected in Q2 2021. We air-freighted initial inventories to the U.S. so that we could activate our Amazon program and fulfill pre-orders. Amazon requires that inventory be available for immediate delivery in their facilities so that effort was delayed until receipt of the air shipments. The inventories were partially damaged in transit and misplaced causing a 30 day delay on the contracted receipt date. The full 1,000 Smart Mirror inventory was available for sale on Amazon in February 2022.

Our Growth Strategy

The Company’s looking forward strategy requires continued expansion of its product development and engineering, manufacturing base marketing and distribution of a broadened portfolio of consumer electronic products. Subject to adequate funding and cash flow from Smart Mirrors product line, 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.

Capstone’s past success has been in its ability to identify emerging product categories where Capstone’s management experience can be fully leveraged. We demonstrated this when the Company entered the LED lighting category. Our branding and product strategies delivered the Company to a well-respected market position. The Company’s low-cost 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 consumer’s 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 $899.00, with the 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, Capstone’s 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 competitive consumer market channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence, employment levels, credit availability and commodity costs. Demand for the Company’s products is highly dependent on economic drivers such as consumer spending and discretionary income. Since the Company produces products, both LED lighting and Smart Mirrors, that are discretionary purchases of consumers and not necessities, general and regional economic conditions affect consumer confidence which in turn usually affects the willingness of consumers to purchase Company products.

Although the overseas factories have previously been fully functioning, a resurgence of the Delta variant of COVID-19 caused sporadic regional lockdowns with certain overseas factories that delayed shipments of products from Thailand and China, which produces all of our products. With the United States being impacted by the Delta variant of the COVID-19 pandemic, we believe the impact of the virus in the U.S. will continue into 2022. As the Omicron variant in the first quarter of 2022 demonstrated, the COVID-19 pandemic continues to produce variants and waves of infections and it is not clear if further variants of COVID 19 may arise and impact our operations or consumer confidence in 2022.

Last year, the Company expanded its investment and commitment in social media marketing. With our Company’s 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 Company’s 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 Company’s 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 and cash flow from Smart Mirror sales, 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:

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 determined that it needed to develop a new product line with greater profit margin potential than LED Lighting. The Company has refocused its development and marketing initiatives and is determined to develop the Connected Surfaces products as its primary business line to replace a fading LED lighting business. The Company intends to expand the new line of “Connected Products” for the next several years. The Company’s product roadmap outlines the plan for product introductions through 2023 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 anticipates that smart homes will become more mainstream over the next several years based on increasing developments of smart home technologies and products and consumer purchases of smart home technologies and products and will present a significant, potential growth opportunity 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 Ralph Lauren and Neiman Marcus to 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.

The automobile segment leads the Smart Mirror industry as technology has imbedded into automobile mirrors. As of the date of this Form 10-K Report, the Company’s Connected Surfaces products target the smart home segment only.

Perceived or Essential Strengths

Capstone believes that the following competitive strengths serve to support its business strategies.

In North America, the Company has been recognized for more than a decade as an innovator and highly efficient, low-cost manufacturer in several product niches. Capstone believes that its insight into the needs of retail programming and its proven execution track record with noted retailers globally positions it well for future growth.

Capstone’s core executive team has been working together for over three decades and has successfully built and managed other consumer product companies.

Operating Management’s experience in hardline product manufacturing has prepared the Company for successful entries into various consumer product markets, especially its experience in using foreign OEMs to provide capabilities not possessed internally by our company.

Product Quality: 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

Capstone believes that its competitive weaknesses are:

It 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.

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 Company’s current products lines are 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.

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 the United States. The problems include a lack of sufficient drivers for trucking industry. The Company relies on OEM’s located in Thailand and China, which have 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-K report. The Company is actively exploring production capabilities in Mexico as an alternative product development and production source in order to eliminate shipping delays from Asia, but a Mexican source has not been 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.

Capstone’s international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies.

Should the increased U.S. tariffs imposed on Chinese manufactured goods remain it may increase the cost of electronic components used in our products.

While we have established new production capacity in Thailand, there is no final resolution of the U.S. / China trade dispute from which specific components are sourced. Developing a new, efficient OEM relationship in a new country takes time and effort to reach acceptable production efficiencies. We have only a short operational experience with Thai OEM’s and cannot predict long term effectiveness of the relationship.

If the COVID-19 pandemic has any continuing adverse impact on 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 maintains a select number of LED lighting products under the “Capstone Lighting^®” brand available through Amazon and Wayfair e-commerce websites.

The product lines available as of the date of this Form 10-K report are as follows:

Connected Surfaces – Smart Mirrors

Standard Rectangular

Wardrobe/Fitness Mirror

LED Puck Lights

LED Undercabinet Light Bars

LED Motion Sensor Lights

Eco-i-Lites

Wireless Remote-Control Outlets

Wireless Remote-Controlled LED Accent Lights

The plan to expand the Company’s product portfolio through Connected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits. While the Company makes significant investments into the Connected Surfaces portfolio, it is reasonable to expect the Company to post losses while building the market for a new category of products which were initially marketed at the 2020 Consumer Electronics Show but faced delays to the market as a result of the COVID-19 pandemic. Expense categories including molds, prototyping, engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred before shipments and related 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, Sam’s Club-Walmart, the Container Store and Firefly Buys. These distribution channels may sell the Company’s products through the internet as well as through retail storefronts and catalogs/mail order. The Company believes it has developed the scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche product opportunities in our largest consumer domestic and international markets. 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 sold Capstone brand products to markets outside the U.S., including Australia, Japan, South Korea. International sales for the year ended December 31, 2021 were $341 thousand or 50% of net revenue as compared to $704 thousand or 25% in fiscal 2020. The Company’s 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 Company’s 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 Company’s products are subject to general economic conditions that impact discretionary consumer spending on non-essential items. Such continued progress depends on a number of assumptions and factors, including ones mentioned in “Risk Factors” below. Critical to growth are economic conditions in the markets that foster greater consumer spending as well as success in the Company’s initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new technology or features. The Company’s ability to fund the pursuit of our goals remains a constant, significant factor.

The Company’s primary, perceived challenge is creating sustained consumer demand for its products in a growing number of markets and attaining sustained profitability, which challenge is complicated by the cost of new product development and costs of penetrating new markets. An extensive product line, especially new product line, increases the investment in product development and, as such, increases operating overhead.

With the Company’s “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 U.S. administration implemented certain tariffs that directly affected the Company’s competitiveness. While all companies in certain industries are affected equally, the appeal for these products to consumers was negatively impacted when retail prices increased due to higher duty rates. The Company has seen promotional schedules cut back and retailers have requested pricing adjustments that would not be known to them in advance to products being shipped. Capstone’s previous business model insulates the Company from paying duties as its retail partners are the importers of record. The obvious unknown is the final impact of tariffs to the landed costs. Accordingly, retailers have demonstrated caution in their promotional planning schedules and will continue to do so until the administration has clarified its position enabling importers to calculate estimated landed costs.

Tariffs and trade restrictions imposed by the previous U.S. administration provoked trade and tariff retaliation by other countries. A “trade dispute” of this nature or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our businesses. As of the date of this Report, the new U.S. administration is currently reviewing its future position on this issue and there has not been a resolution of the Chinese-American trade dispute.

Sales and Marketing

Our LED products have been sold nationally and internationally through a direct sales force. The sales force markets the Company’s 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 are under expansion as a result of the Capstone Connected Surfaces program becoming available. As we shift to Connected Surfaces products, the LED products will become a secondary product line.

Direct Import Sales. We currently ship finished products directly to our retail customer from Thailand and China. The sales transaction and title of goods are completed by delivering products to the customers overseas shipping point. The customer takes title of the goods at that point and is responsible for inbound ocean freight and import duties. Direct import sales are made in larger quantities (generally container sized lots) to customers worldwide.

Occasionally as part of the marketing program the Company may provide marketing allowances to the customer to ensure, that the retailer is not left with unsold inventories at the end of the program. As an accounting practice, depending on the item and its selling history, the Company will accrue a reserve for possible future markdowns and will retains these reserves for a period 3 to 5 years in the event the customer deducts such a promotional allowance against an open invoice or submits us an invoice. These reserves will be released if not used or needed by the retailer. These allowances are also evaluated when our relationship with a customer is terminated, or we cease selling a specific product to a customer.

Domestic Sales. The strategy of selling products from a U.S. domestic warehouse enables the Company to provide timely delivery and serve as a domestic supplier of imported goods. With this model the Company imports goods from overseas and is responsible for all related costs including ocean freight, insurance, customs clearance, duties, storage, and distribution charges related to such products and therefore such sales command higher sales prices than direct sales. Domestic orders are for a much smaller size and could be as low as a single unit directly to the end consumer if ordered through an online website. To support an effective e-commerce business model, we will be required to warehouse adequate inventory levels enabling the Company to ship orders directly to the end consumer expediently.

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 U.S. are primarily made by our in-house sales team and our independent sales agencies. Our independent sales agencies are paid a commission based upon sales made in their respective territories. Our sales agencies are recruited, trained and monitored by us directly. We will utilize an agency as needed to help us provide service to our retail customers as required. The sales agency agreements are generally one (1) year agreements, which automatically renew on an annual basis, unless terminated by either party on 30 days’ prior notice. Our international sales to divisions of U.S. based retailers are made by our in-house sales team.

The Company actively promotes 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.

Although we planned to launch to the public in 2021, due to pandemic related delays our program was pushed back and, formally launched in January 2022 at the Consumer Electronics Show. Our Smart Mirrors are unlike any other smart mirror product available. The Company is assessing various organic and digital paid advertising campaigns to define its long term marketing strategy. Capstone Smart Mirrors are the only product of its type available today and we believe we are best positioned to capture a significant market share long -term.

It is undeniable that today’s population is more connected than ever. Just as smart phones tablets and broadband subscriptions expanded from 2010 to 2018 across all age groups and income levels, Capstone envisioned the continuing simplification and access to content and data in new device formats would prove to be an emerging opportunity. The United States is one of the largest consumers of technology-based products, particularly smart home products Currently there are in excess of 110 million homes in the United States alone with fixed broadband subscriptions. Moreover there are more than 230 million smart phone users. These data points alone are indicative of the burgeoning growth potential which is driving investment into Smart Home Products and awareness. Household penetration for smart home devices in 2018 was approximately seven and a half percent and is currently projected to be an estimated 20% in 2022.

For the year ended December 31, 2021, the Company had two customers who comprised approximately 87% of net revenue and two customers who comprised 89% of net revenues in 2020. 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.

Market growth is directly related to smart home devices becoming more price competitive and technologies becoming more compatible with one another. People understand the benefits associated with the internet of things and are embracing and consuming internet devices of several types. Security, doorbells, smart speakers, smart light bulbs, smart refrigerators to name a few are all being welcomed into today’s homes. When we evaluated the market potential, we identified a niche that would bring internet access to the walls of one’s home. Mirrors are common to all homes and essential to modern day life and the integration of technology into a traditional mirror was an obvious form factor to exploit. To be successful ,we believed the Capstone Smart Mirrors had to be affordable for mainstream consumers and provide feature sets that are commonly found in smartphones and tablets.

Starting in late 2021, which we intend to increase in 2022, we have utilized social media platforms and online advertising campaigns to further grow the Company’s online presence. In addition to Facebook, Instagram, Pinterest and LinkedIn, Capstone has launched a You Tube channel to host 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 LinkedIn Corporation.

⁵ Twitter is a registered trademark of Twitter Corporation.

⁶YouTube is a registered trademark of YouTube Corporation.

Competitive Conditions

The Company operates in a highly competitive environment, both in the United States and internationally, in the lighting and smart mirror segments. The 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 Company’s focus has been on LED lighting, principal competitors include Energizer, Feit Electric and Jasco (GE). Many of the Company’s 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 Capstone’s expansion efforts by marketing campaigns targeting its expansion efforts or price competition. This is not the case in the new Connected Surfaces category as the Company is recognized as early entry to the retail market.

Other competitive factors include rapid technological changes, product availability, credit availability, speed of delivery, ability to tailor solutions to customer needs, quality and depth of product lines and training. Smart Mirrors and other Connected Surface products are an emerging industry, and the Company’s product line is innovative and does not require licensing of technologies, as a Smart Mirror program is developed with open source resources. The Company is also under development of proprietary features that would further establish the Company as a market innovator. The patent applications have been filed.

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 just started our Social Media marketing. Many competitors have more established, widespread and effective e-commerce and Social Media campaigns than we do, however none of these companies are marketing a competitive product to our Thin Cast and Smart Mirror programs. 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-K report.

With trends and technology continually evolving, and subject to adequate and affordable funding, Capstone intends 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. 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, which impact has been heightened by the declining financial performance of the Company in 2021 and 2020. The market price of the Company’s Common Stock and resulting low market capitalization also hinders and finding suitable investors. 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 management’s proven track record in delivering innovation to the market and cost-effective and timely manner.

Research, Product Development, and Manufacturing Activities

The Company’s research and development operations based in Hong Kong and Thailand design and engineer many of the Company’s products, with collaboration from its third-party manufacturing partners, software developers and Capstone U.S. engineering advisers. The Company outsources the manufacture and assembly of our products to a select group of OEM manufacturers overseas. Our research and development focus includes efforts to:

The Company establishes strict engineering specifications and product testing protocols with the Company’s contract manufacturers and ensure that their factories adhere to all Regional Labor and Social Compliance Laws. These contract manufacturers purchase components that we specify and provide the necessary facilities and labor to manufacture our products. We leverage the strength of the contract manufacturers and allocate the manufacturing of specific products to the contract manufacturer best suited to the task. Quality control and product testing is conducted at the contract manufacturers facility and at their 3^rd party testing laboratories overseas.

Capstone’s 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 Company’s products manufactured overseas, Capstone uses globally recognized certified testing laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all products are designed and tested to adhere to each country’s individual regulatory standards. The Company also hires quality control inspectors who examine and test products to Capstone’s specification(s) before shipments are released. CIHK office capabilities include product development, project management, sourcing management, supply chain logistics, factory compliance auditing, and quality enforcement for all supplier factories located in Hong Kong, China, and Thailand.

To successfully implement Capstone’s business strategy, the Company must continually improve its current products and develop new product segments with innovative imbedded technologies to meet consumer’s growing expectations. The Connected Surfaces product development is our current effort to achieve those expectations.

Investments in technical and product development are expensed when incurred and are included in the operating expenses.

Raw Materials

The principal raw materials currently used by Capstone are sourced in Thailand and China, as the Company orders product exclusively through contract manufacturers in the region. These contract manufacturers purchase components based on the Company’s specifications and provide the necessary facilities and labor to manufacture the Company’s products. Capstone allocates the production of specific products to the contract manufacturer the Company believes is more experienced to produce the specific product and whose facility is located in the country that most benefits from the U.S. Tariff regulations. To ensure the consistent quality of Capstone’s products, quality control procedures have been incorporated at each stage of the manufacturing process, ranging from the inspection of raw materials through production and delivery to the customer. These procedures are additional to the manufacturers’ internal quality control procedures and performed by Quality Assurance personnel.

Raw materials 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. CIHK is responsible for developing and sourcing finished products from Asia in order to grow and diversify our product portfolio. Quality testing for these products is performed by our globally recognized third party quality testing laboratories.

Section 1502 of Title XV of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires SEC-reporting companies to disclose annually whether any conflict minerals are necessary to the functionality or production of a product. Based on our inquiries to our manufacturers, we do not believe as of the date of such inquiries that any conflict minerals are used in making our products.

Distribution and Fulfillment

Since January 2015, the Company has outsourced its U.S. domestic warehousing and distribution needs to a third-party warehousing facility situated in Anaheim, California. The warehouse operator provides full inventory storage, packaging and logistics services including direct to store and direct to consumer shipping capabilities that electronically interface to our existing operations software. The warehouse operator provides full ERP (Enterprise Resource Planning), Inventory Control and Warehouse Management Systems. These fulfillment services can be expanded to the east coast in Charleston, South Carolina, if the Company needed to establish an east coast distribution point. This relationship, if required, will allow us to fully expand our U.S. distribution capabilities and services. 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.

Royalties

We have, from time to time, entered into agreements whereby we have agreed to pay royalties for the use of nationally recognized licensed brands on Company product offerings. Royalty expense incurred under such agreements is expensed at the time of shipment.

In recent years the Company’s marketing objective was to transition licensed lighting product lines into the Capstone Lighting brand, which was successfully achieved. The Company’s current focus is on the Connected Surfaces product line and direct sales to consumers as well as distribution through resellers and fulfillment companies.

On February 3, 2020, the remaining royalty license expired.

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 Chinese New Year holiday as factories are closed and shipments are halted during this period. Our transition to Thailand manufacturers may reduce the impact of Chinese New Year holiday.

We do not have sufficient operational experience with Connected Surfaces to predict the seasonality of Connected Surfaces.

Intellectual Property

CAPC subsidiary, CAPI, has filed a number of U.S. trademarks and patents over 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 Slim Line Eco-i-Lite Power Failure Light, LED Induction Charged Headlight. We also have a number of patents pending; Puck Light (cookie), Puck Light Base, Multi-Color Puck Lights, LED Dual Mode Solar Light, Integrated Light Bulb (Coach Light), LED Gooseneck Lantern, Spotlights, Security Motion Activated Lights, Under Cabinet Lighting and Bathroom Vanity Light. CAPC periodically prepares patent and trademark applications for filing in the United States and China. CAPC will also 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. CAPC’s 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.

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:

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.

Employees

The Company’s top priority has been to take appropriate actions to protect the health and safety of our employees as a result of the COVID-19 pandemic. We have adjusted standard operating procedures within our business operations to ensure the continued safety of our employees and we continually monitor evolving health guidelines to ensure ongoing compliance and protection of our employees. These procedures include expanded and more frequent cleaning within facilities, implementation of appropriate social distancing programs, requiring use of certain personal protective equipment, screening protocols and work from home programs.

The Company will continue to evolve these programs to protect the health and safety of our employees.

As of December 31, 2021, we employed 7 employees in our U.S. office and 2 employees (that in March 2022 were converted to independent contractors) in our Hong Kong operation. We consider our relations with our employees to be good. None of our employees are covered by a collective bargaining agreement. We have no part-time workers. We believe that our staff is adequate to handle the current operations, but we recognize that the new product line and social media marketing will probably require additional personnel – either employees or contractors in 2022-2023. Our ability to hire additional personnel is subject to adequate revenue flow and funding.

The following table sets forth the number of employees by function:

Corporate Information

Our principal executive offices are located at 431 Fairway Drive, Suite #200, Deerfield Beach, Florida, USA 33441. Our telephone number is (954)570-8889 and our website is at URL: www.capstonecompaniesinc.com. Our U.S. subsidiaries operate out of our principal executive offices. The Company believes that its current facilities are adequate for conduct of its business.

We file our financial information and other materials required under the Exchange Act electronically with the SEC. These materials can be accessed electronically via the Internet at www.sec.gov. Such materials and other information about the Company are also available through our corporate website : https://www.capstonecompanies.com.

Government Regulation

Our operations are subject to regulation by federal and state securities authorities as well as various federal, state, foreign and local laws and regulations governing a consumer products company and a for-profit business. We are not subject to any U.S. federal, state or local regulation that poses, in our opinion, any special or unusual burden or obstacle to conducting our business and financial affairs. Our main concern, although greatly diminished in terms of government regulation is the changing regulatory environment in China and its impact on our ability to access manufacturing sources and obtain our specific consumer products. While the general trend in China has to be conducive to trade and commerce, China is a still a single-party nation-state in which the central government has the power to dramatically and immediately change its trade and commercial policies and laws. Political or military conflict between the United States and China, who are rivals for power and influence in Asia and to an increasing extent all along the Pacific Rim as well as being diametrically opposed to one another over the status of Taiwan, could provoke a change in Chinese trade or commercial law that makes it more difficult or expensive for us to obtain consumer products. Such a development would have a serious impact on our ability to compete in the United States in the niche LED consumer product market.

CIHK is subject to the laws of Hong Kong SAR, which is a part of and subject to governance by China. In light of the reducing operational role of CIHK in our company, we do not believe that such regulation poses a significant risk factor in terms of the business and financial condition of the Company.

Working Capital Requirements and Financing

In order to successfully launch the online Smart Mirror business, the Company will be required to maintain sufficient on hand available inventory levels, to allow for immediate fulfilment of an online order. This will require additional investment in on hand domestic inventory and require an efficient logistics system that will provide for inventory staged throughout the supply chain to provide for efficient inventory replenishment to support forecasted sales. The Company, as needed, will strategically increase its inventory levels held at its designated fulfilment centers. Combined with investment in new product expansion, new product molds, product testing and outside certifications, package design work, and further expansion of its capabilities in Thailand , the Company may require additional working capital to fund these strategic projects.

Since terminating its factoring agreement with Sterling National Bank last year, the Company has had 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 suitable for the e-commerce business that the Company is transitioning into. The borrowing costs associated with such financing programs are dependent upon market conditions and our credit rating. The Company has retained its daily cash operating account with Sterling National Bank.

The Company, through Sterling National Bank, applied for a loan under the Paycheck Protection Program (“PPP”). On May 11, 2020, the Company received loan proceeds in the amount of $89,600.

The Company used the proceeds for purposes consistent with the PPP. On October 30, 2020, the SBA notified the Company that the PPP loan principal of $89,600 and $428 of accumulated interest had been fully forgiven.

On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The short-term facility ended June 30, 2021 (“Initial Period’). The Company had the option to extend the Initial Period for an additional six consecutive months, ending December 31, 2021, but decided not to renew.

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

On July 2, 2021, the Board of Directors (“Board”) resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror 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. This agreement has finalized, and the Company received the $1,020,000 funding under this agreement on October 18, 2021. As of December 31, 2021, the Company had $1,030,340 outstanding note on the facility, which includes accrued interest of $10,340.

The Company’s ability to maintain sufficient working capital is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on the Company’s working capital, ability to obtain financing, and its operations in the future.

With the net operating loss of $1.964 million, the Company utilized $2.381 million of cash, during the twelve months ended December 31, 2021, as compared to $1.857 million used in the same period last year. During the period, the Company’s cash increased approximately $54 thousand after securing net proceeds of $1.393 million in a private equity investment, after approximately $104.9 thousand in stock placement fees. As of December 31, 2021, the Company had working capital of approximately $1.965 million, an accumulated deficit of approximately $6.4 million, and a cash balance of $1.277 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

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 were used by the Company for general working capital to support the rollout of the Smart Mirror product line.

In addition, we intend to seek alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us. An economic recession or a slow recovery could adversely affect our business and liquidity. The ongoing impact of the COVID-19 pandemic on the Company’s business and financial performance may also affect the Company’s ability to obtain funding.

The Company’s liquidity and cash requirements are discussed more fully in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.