UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 20172018
__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 000-28831
CAPSTONE COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Florida | 84-1047159 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
350 Jim Moran Boulevard,431 Fairway Drive, Suite 120,200, Deerfield Beach, Florida 3344233441 |
(Address of principal executive offices) |
(954) 570-8889 extension 313 |
(Issuer's Telephone Number) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [__] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] | Accelerated filer [_] |
Non-accelerated filer [_] (Do not check if a smaller reporting company) | Smaller reporting company [x] |
Emerging Growth company [ ] | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of September 30, 2017,November 5, 2018, there were 47,046,364 shares of the issuer's Common Stock, $0.0001 par value per share, issued and outstanding.
CAPSTONE COMPANIES, INC.
Quarterly Report ofon Form 10-Q
Three Months and Nine Months Ended September 30, 2017
2018
TABLE OF CONTENTS
PART 1 | FINANCIAL INFORMATION | 3 |
| | |
Item 1. | Financial Statements (Unaudited) | 3 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operation | 1723 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 3242 |
Item 4. | Controls and Procedures | 3342 |
| | |
PART II | Other Information | 3344 |
| | |
Item 1. | Legal Proceedings | 3344 |
Item 1A. | Risk Factors | 3344 |
Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds | 3444 |
Item 3. | Defaults of Senior Securities | 3444 |
Item 4. | Mine Safety Disclosures | 3445 |
Item 5. | Other Information | 3445 |
Item 6. | Exhibits | 3445 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | | | | | | |
CONSOLIDATED BALANCE SHEETS | | | | | | |
| | | | | | |
| | September 30, | | | December 31, | |
| | 2018 | | | 2017 | |
Assets: | | (Unaudited) | | | | |
Current Assets: | | | | | | |
Cash | | $ | 3,593,296 | | | $ | 3,668,196 | |
Accounts receivable, net | | | 2,387,590 | | | | 4,367,721 | |
Inventories | | | 8,316 | | | | 140,634 | |
Prepaid expenses | | | 164,345 | | | | 239,150 | |
Income tax refundable | | | 354,912 | | | | - | |
Total Current Assets | | | 6,508,459 | | | | 8,415,701 | |
| | | | | | | | |
Property and Equipment: | | | | | | | | |
Computer equipment and software | | | 56,932 | | | | 9,895 | |
Machinery and equipment | | | 395,601 | | | | 318,801 | |
Furniture and fixtures | | | 12,493 | | | | 5,665 | |
Less: Accumulated depreciation | | | (299,454 | ) | | | (266,997 | ) |
Total Property & Equipment | | | 165,572 | | | | 67,364 | |
| | | | | | | | |
Other Non-current Assets: | | | | | | | | |
Deposit | | | 14,755 | | | | 13,616 | |
Goodwill | | | 1,936,020 | | | | 1,936,020 | |
Total Other Non-current Assets | | | 1,950,775 | | | | 1,949,636 | |
Total Assets | | $ | 8,624,806 | | | $ | 10,432,701 | |
| | | | | | | | |
Liabilities and Stockholders' Equity: | | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 1,801,248 | | | $ | 2,733,516 | |
Income tax payable | | | 11,694 | | | | 624,782 | |
Total Current Liabilities | | | 1,812,942 | | | | 3,358,298 | |
| | | | | | | | |
Long Term Liabilities: | | | | | | | | |
Deferred tax liabilities | | | 283,000 | | | | 251,000 | |
Total Long Term Liabilities | | | 283,000 | | | | 251,000 | |
Total Liabilities | | | 2,095,942 | | | | 3,609,298 | |
| | | | | | | | |
Commitments and Contingencies (Note 4) | | | | | | | | |
| | | | | | | | |
Stockholders' Equity: | | | | | | | | |
Preferred Stock, Series A, par value $.001 per share, authorized 6,666,667 shares, issued -0- shares | | | - | | | | - | |
Preferred Stock, Series B-1, par value $.0001 per share, authorized 3,333,333 shares, issued -0- shares | | | - | | | | - | |
Preferred Stock, Series C, par value $1.00 per share, authorized 67 shares, issued -0- shares | | | - | | | | - | |
Common Stock, par value $.0001 per share, authorized 56,666,667 shares, issued 47,046,364 shares | | | 4,704 | | | | 4,704 | |
Additional paid-in capital | | | 7,081,194 | | | | 7,005,553 | |
Accumulated deficit | | | (557,034 | ) | | | (186,854 | ) |
Total Stockholders' Equity | | | 6,528,864 | | | | 6,823,403 | |
Total Liabilities and Stockholders' Equity | | $ | 8,624,806 | | | $ | 10,432,701 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. | | | | | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | | CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONSOLIDATED STATEMENTS OF INCOME | | |
CONSOLIDATED STATEMENTS OF OPERATIONS | | CONSOLIDATED STATEMENTS OF OPERATIONS | |
(Unaudited) | (Unaudited) | | (Unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | For the Nine Months Ended | | | For the Three Months Ended | | | For the Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenues, net | | $ | 13,817,909 | | | $ | 11,692,146 | | | $ | 30,789,653 | | | $ | 22,672,551 | | | $ | 5,726,145 | | | $ | 13,817,909 | | | $ | 11,889,520 | | | $ | 30,789,653 | |
Cost of sales | | | (10,707,657 | ) | | | (8,841,148 | ) | | | (23,457,070 | ) | | | (17,079,271 | ) | | | (4,395,761 | ) | | | (10,707,657 | ) | | | (9,179,145 | ) | | | (23,457,070 | ) |
Gross Profit | | | 3,110,252 | | | | 2,850,998 | | | | 7,332,583 | | | | 5,593,280 | | | | 1,330,384 | | | | 3,110,252 | | | | 2,710,375 | | | | 7,332,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 928,321 | | | | 488,057 | | | | 1,869,596 | | | | 903,888 | | | | 359,715 | | | | 928,321 | | | | 838,323 | | | | 1,869,596 | |
Compensation | | | 351,915 | | | | 325,283 | | | | 1,065,621 | | | | 949,753 | | | | 359,539 | | | | 351,915 | | | | 1,104,396 | | | | 1,065,621 | |
Professional fees | | | 109,257 | | | | 111,339 | | | | 429,440 | | | | 286,681 | | | | 102,532 | | | | 109,257 | | | | 394,320 | | | | 429,440 | |
Product development | | | 80,991 | | | | 127,367 | | | | 219,464 | | | | 227,552 | | | | 95,661 | | | | 80,991 | | | | 385,994 | | | | 219,464 | |
Other general and administrative | | | 189,780 | | | | 195,046 | | | | 572,461 | | | | 501,458 | | | | 232,888 | | | | 189,780 | | | | 573,852 | | | | 572,461 | |
Total Operating Expenses | | | 1,660,264 | | | | 1,247,092 | | | | 4,156,582 | | | | 2,869,332 | | | | 1,150,335 | | | | 1,660,264 | | | | 3,296,885 | | | | 4,156,582 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Operating Income | | | 1,449,988 | | | | 1,603,906 | | | | 3,176,001 | | | | 2,723,948 | | |
Operating Income (Loss) | | | | 180,049 | | | | 1,449,988 | | | | (586,510 | ) | | | 3,176,001 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Income (Expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Income | | | (12,945 | ) | | | 13,664 | | | | - | | | | 13,664 | | |
Miscellaneous income (expense) | | | | (1,960 | ) | | | - | | | | 145,330 | | | | - | |
Interest expense | | | (56,514 | ) | | | (103,363 | ) | | | (113,431 | ) | | | (227,522 | ) | | | - | | | | (69,459 | ) | | | - | | | | (113,431 | ) |
Total Other Income (Expense) | | | (69,459 | ) | | | (89,699 | ) | | | (113,431 | ) | | | (213,858 | ) | | | (1,960 | ) | | | (69,459 | ) | | | 145,330 | | | | (113,431 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income Before Tax Provision | | | 1,380,529 | | | | 1,514,207 | | | | 3,062,570 | | | | 2,510,090 | | |
Income (Loss) Before Tax Provision (Benefit) | | | | 178,089 | | | | 1,380,529 | | | | (441,180 | ) | | | 3,062,570 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Provision for Income Tax | | | (390,000 | ) | | | (24,412 | ) | | | (920,000 | ) | | | (37,012 | ) | |
Provision (Benefit) for Income Tax | | | | 6,000 | | | | 390,000 | | | | (71,000 | ) | | | 920,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | $ | 990,529 | | | $ | 1,489,795 | | | $ | 2,142,570 | | | $ | 2,473,078 | | |
Net Income (Loss) | | | $ | 172,089 | | | $ | 990,529 | | | $ | (370,180 | ) | | $ | 2,142,570 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income per Common Share | | | | | | | | | | | | | | | | | |
Net Income (Loss) per Common Share | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.021 | | | $ | 0.031 | | | $ | 0.046 | | | $ | 0.051 | | | $ | 0.004 | | | $ | 0.021 | | | $ | (0.008 | ) | | $ | 0.046 | |
Diluted | | $ | 0.021 | | | $ | 0.031 | | | $ | 0.045 | | | $ | 0.051 | | | $ | 0.004 | | | $ | 0.021 | | | $ | (0.008 | ) | | $ | 0.045 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted Average Common Shares Outstanding | | | | | | | | | | | | | | |
Weighted Average Shares Outstanding | | | | | | | | | | | | | | | | | |
Basic | | | 46,660,456 | | | | 48,132,664 | | | | 46,989,940 | | | | 48,132,664 | | | | 47,046,364 | | | | 46,660,456 | | | | 47,046,364 | | | | 46,989,940 | |
Diluted | | | 47,152,574 | | | | 48,371,158 | | | | 47,462,664 | | | | 48,320,017 | | | | 47,046,364 | | | | 47,152,574 | | | | 47,046,364 | | | | 47,462,664 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements. | | |
The accompanying notes are an integral part of these consolidated financial statements. | | The accompanying notes are an integral part of these consolidated financial statements. | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | | | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | |
(Unaudited) | (Unaudited) | | | | | | | |
| | | | | | | | | | | | |
| | For the Nine Months Ended | | | For the Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2018 | | | 2017 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net income | | $ | 2,142,570 | | | $ | 2,473,078 | | |
Adjustments necessary to reconcile net income to net cash provided by (used in) operating activities: | | |
Net income (loss) | | | $ | (370,180 | ) | | $ | 2,142,570 | |
Adjustments necessary to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | |
Depreciation and amortization | | | 55,725 | | | | 44,400 | | | | 32,457 | | | | 55,725 | |
Accrued interest on note receivable | | | 26,887 | | | | (13,654 | ) | | | - | | | | 26,887 | |
Stock based compensation expense | | | 66,594 | | | | 46,581 | | | | 75,641 | | | | 66,594 | |
Provision for deferred income tax | | | 146,000 | | | | - | | | | 32,000 | | | | 146,000 | |
Accrued sales allowance | | | (831,731 | ) | | | (94,203 | ) | |
(Increase) decrease in accounts receivable | | | 731,532 | | | | (6,755,174 | ) | |
(Increase) decrease in inventory | | | 224,265 | | | | (275,049 | ) | |
Increase (decrease) in accrued sales allowance | | | | 153,025 | | | | (831,731 | ) |
Decrease in accounts receivable, net | | | | 1,827,100 | | | | 731,532 | |
Decrease in inventories | | | | 132,318 | | | | 224,265 | |
(Increase) decrease in prepaid expenses | | | (20,813 | ) | | | 43,764 | | | | 74,805 | | | | (20,813 | ) |
Increase (decrease) in accounts payable and accrued liabilities | | | (263,912 | ) | | | 958,580 | | |
(Increase) in deposits | | | | (1,139 | ) | | | - | |
(Decrease) in accounts payable and accrued liabilities | | | | (932,262 | ) | | | (263,912 | ) |
(Decrease) in income tax payable | | | | (613,088 | ) | | | - | |
(Increase) in income tax refundable | | | | (354,912 | ) | | | - | |
(Decrease) in accrued interest on notes payable | | | (135,337 | ) | | | (168,492 | ) | | | - | | | | (135,337 | ) |
Net cash provided by (used in) operating activities | | | 2,141,780 | | | | (3,740,169 | ) | |
Net cash provided by operating activities | | | | 55,765 | | | | 2,141,780 | |
| | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | (47,587 | ) | | | (15,501 | ) | | | (130,665 | ) | | | (47,587 | ) |
Net cash (used in) investing activities | | | (47,587 | ) | | | (15,501 | ) | | | (130,665 | ) | | | (47,587 | ) |
| | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Proceeds from notes payable | | | 30,559,312 | | | | 19,393,834 | | | | 18,352,018 | | | | 30,559,312 | |
Repayments of notes payable | | | (30,559,312 | ) | | | (15,049,345 | ) | | | (18,352,018 | ) | | | (30,559,312 | ) |
Repurchase of shares from Involve, LLC | | | (250,000 | ) | | | - | | | | - | | | | (250,000 | ) |
Warrant issued | | | 7,500 | | | | - | | | | - | | | | 7,500 | |
Proceeds from notes and loans payable to related parties | | | - | | | | 860,000 | | |
Repayments of notes and loans payable to related parties | | | (257,100 | ) | | | (1,453,946 | ) | | | - | | | | (257,100 | ) |
Net cash provided by (used in) financing activities | | | (499,600 | ) | | | 3,750,543 | | |
Net cash (used in) financing activities | | | | - | | | | (499,600 | ) |
| | | | | | | | | | | | | | | | |
Net Increase (decrease) in Cash and Cash Equivalents | | | 1,594,593 | | | | (5,127 | ) | | | (74,900 | ) | | | 1,594,593 | |
Cash and Cash Equivalents at Beginning of Period | | | 1,646,128 | | | | 364,714 | | | | 3,668,196 | | | | 1,646,128 | |
Cash and Cash Equivalents at End of Period | | $ | 3,240,721 | | | $ | 359,587 | | | $ | 3,593,296 | | | $ | 3,240,721 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | | | | | |
Interest | | | 221,881 | | | $ | 396,014 | | | $ | - | | | $ | 221,881 | |
Income taxes | | $ | 371,500 | | | $ | 31,912 | | | $ | 865,000 | | | $ | 371,500 | |
| | | | | | | | | | | | | | | | |
Non-cash financing and investing activities: | | | | | | | | | | | | | | | | |
Sale of Investment for Note receivable | | $ | - | | | $ | 500,000 | | |
| | | | | | | | | | | | | | | | |
Shares issued in satisfaction of loan payable to related party | | $ | 240,900 | | | $ | - | | | $ | - | | | $ | 240,900 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements. | | |
The accompanying notes are an integral part of these consolidated financial statements. | | | | | | | | | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Capstone Companies, Inc. ("CAPC", "Capstone" or the "Company" or "Capstone"), a Florida corporation (formerly, "CHDT Corporation") and its wholly-owned subsidiaries is presented to assist in understanding the Company's consolidated financial statements. The accounting policies conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently applied in the preparation of the consolidated financial statements.
Organization and Basis of Presentation
The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position as of September 30, 20172018 and results of operations and cash flows for the three months and nine months ended September 30, 20172018 and 2016.2017. All significant intercompany accounts and transactions are eliminated in consolidation. These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission ("SEC") relating to interim financial statements and in conformity with U.S. GAAP. Certain information and note disclosures have been condensed or omitted in the condensed financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Annual Report on Form 10-K for the year ended December 31, 20162017 (the "2016"2017 Annual Report").
The operating results for any interim period are not necessarily indicative of the operating results to be expected for any other interim period or the full fiscal year.
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumerhome LED products through national and regional retailers and distributors in North America.America and in certain overseas markets. The Company's products are targeted for applications such as home indoor and outdoor lighting and will have different functionalities to meet consumer's needs. These products may be offered either under the Capstone currently operates in eight primary product categories: Induction Charged Power Failure Lights; LED Night Lights and Power Failure Lights; Motion Sensor Lights; Wireless Remote-Control Outlets; Wireless Remote-Control Accent Lights; Dual Power Solar Lights; Outdoor Light Fixtures and Power Control Light Bulbs. brand or licensed brands.
The Company's products are typically manufactured in China by third-partycontract manufacturing companies.
InventoryThe Company's operations consist of one reportable segment for financial reporting purposes: Lighting Products.
Accounts Receivable
For product revenue, the Company invoices its customers at the time of shipment for the sales value of the product shipped. Accounts receivable are recognized at the invoiced amount and are not subject to any interest or finance charges. The Company does not have any off-balance sheet credit exposure related to any of its customers. As of September 30, 2018 and December 31, 2017, accounts receivable serves as collateral for the Company's note payable.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table summarizes the components of accounts receivable, net:
| September 30, | | December 31, | |
| 2018 | | 2017 | |
Trade accounts receivables at period end | | $ | 2,734,676 | | | $ | 4,561,782 | |
Reserve for estimated marketing allowances, cash discounts and other incentives | | | (347,086 | ) | | | (194,061 | ) |
Total Accounts Receivable, net | | $ | 2,387,590 | | | $ | 4,367,721 | |
The following table summarizes the changes in the Company's reserve for marketing allowances, cash discounts and other incentives which is included in net accounts receivable:
| | September 30, | | | December 31, | |
| | 2018 | | | 2017 | |
Balance at beginning of the period | | $ | (194,061 | ) | | $ | (1,200,792 | ) |
Accrued allowances | | | (173,660 | ) | | | (921,833 | ) |
Reversal of prior year accrued allowances | | | 1,749 | | | | 58,867 | |
Expenditures | | | 18,886 | | | | 1,869,697 | |
Balance at period-end | | $ | (347,086 | ) | | $ | (194,061 | ) |
Marketing allowances include the cost of underwriting an in store instant rebate coupon or a target markdown allowance on a specific product. Cash discounts represent discounts offered to the retailer off outstanding accounts receivable in order to initiate early payment.
Inventories
The Company's inventory, recorded at lower of cost (first-in, first-out) or net realizable value, consists of finished goods for resale by Capstone, totaling $142,065$8,316 and $366,330$140,634 at September 30, 20172018 and December 31, 2016,2017, respectively.
Prepaid Expenses
The Company's prepaid expenses consist primarily of deposits on inventory purchases for future orders as well as prepaid advertising. As of September 30, 2017,insurance and December 31, 2016, the Company has $93,010 and $186,019, respectively, in prepaid advertising credits included in prepaid expenses on the consolidated balance sheets.trade show expense.
Net Income (Loss) Per Common Share
Basic earnings per common share wereare computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that couldwould occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and warrants using the treasury stock method. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. At September 30, 20172018 and 2016,2017, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 0993,335 and 5,818,7000, respectively.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this Form 10-Q quarterly report and with our annual report on Form 10-K for the fiscal year ended December 31, 2016.2017. In addition to historical information, the following discussion contains certain forward-looking statements under the Private Securities Litigation Act of 1995, as amended.statements. See "Special Note Regarding Forward Looking Statements" below for certain information concerning those forward- looking statements. As used below, "our" and "we" refers to the Company and its subsidiaries.
Special Note Regarding Forward Looking Statements
This Form 10-Q quarterly report contains forward-looking statements that are contained principally in the sections describing our business as well as in "Risk Factors," and thisin "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" in our latest annual report on Form 10-K for the fiscal year ended December 31, 2016,2017, as filed with the SEC. 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) intended to identify forward-looking statements. 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 quarterly report should not place undue reliance on these forward-looking statements.
Forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q quarterly report. One should read this Form 10-Q quarterly report and the documents that we reference herein and filed as exhibits to this Form 10-Q quarterly report completely and with the understanding that our actual future results may be materially different from what we expect.expect or current results. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
The Company is a "penny stock" company under Commission rules and the public stock market price for its Common Stock has been depressed for several consecutive fiscal quarters. The Company's Common Stock lacks sufficient or active primary market makers and institutional investor support in the public market and this lack of support means that any increase in the per share price of our Common Stock in the public market is usually eliminated by selling pressure from profit taking by investors. As of November 2, 2017,5, 2018, the Common Stock was trading at $.50$.1445 on the Bid Investment in our Common Stock. 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. Investors should consider risk factors in this quarterly report on Form 10-Q and other SEC filings of the Company. The Company completed a 1-for-15 reverse stock split for the Common Stock on July 25, 2016. The reverse stock split did not change the Company's status as a "penny stock" company.
Use of Certain Defined Terms. Except as otherwise indicated by the context references in this quarterly report to:
, the following terms have the stated meanings.
(1) | "Capstone Lighting Technologies, L.L.C." or "CLTL" is a Florida limited liability company and a wholly owned subsidiary of Capstone Companies, Inc. |
(2) | "Capstone International Hong Kong Ltd" or "CIHK" is a company organized under Hong Kong SAR laws and a wholly owned subsidiary of Capstone Companies, Inc. and a Hong Kong SAR registered Company. |
(3) | "Capstone Industries, Inc.", a Florida corporation and a wholly owned subsidiary of CAPC, may also be referred to as "CAPI" or "Capstone". |
(4) | "Capstone Companies, Inc.," a Florida corporation, may also be referred to as "we," "us" "our," "Company," or "CAPC." Unless the context indicates otherwise, "Company" includes in its meaning all of Capstone Companies, Inc.'s subsidiaries. |
(5) | "China" or "PRC" means People's Republic of China. |
(6) | "Commission" or "SEC" means the U.S. Securities and Exchange Commission. |
(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) | "Subsidiaries" means the followingabove wholly owned subsidiaries of the Company: Capstone Industries, Inc. ("CAPI"), Capstone International H.K Ltd., ("CIHK"), and Capstone Lighting Technologies, Inc. ("CLTL").Company. |
(10) | "LED" or "LED's" means a light-emitting diode component(s) which can be assembled into light bulbs or can be used in lighting fixtures. |
Further, we may use "OEM" which means "original equipment manufacturer."
General.
Capstone Companies, Inc., a Florida corporation, ("CAPC," "Company," "we," or "our")The Company is a public holding company with its Common Stock, $0.0001 par value per share, ("Common Stock") quoted on the OTC QB Venture Market exchange of The OTC Markets Group, Inc. and, since July 6, 2012, quoted under the trading symbol "CAPC." This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, as filed with the Commission on March 27, 2017.28, 2018.
Available Information.
The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act, of 1934, as amended (the "Exchange Act"), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company's website at http://www.capstonecompaniesinc.com/Investor Relations and on the SEC's website at http://www.sec.gov. The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE,N.E., Room 1580, Washington, D.C. 20549, or through the aforesaid website URL's. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.www.sec.gov. The contents of these websites are not incorporated into this report. Further, the Company's references to the URLs for these or other websites referenced herein are intended to be inactive textual references only.
Introduction
The following discussion and analysis provides an introduction to our Company, its current strategy and customers and summarizes the significant factors affecting: (i) our consolidated results of operations for the three months and nine months ended September 30, 20172018 compared with the same periodsperiod in 20162017 and (ii) financial liquidity and capital resources.
Capstone Companies, Inc. is a public holding company organized under the laws of the State of Florida. The Company designsis engaged in the business of developing, marketing, manufacturing and marketsselling consumer oriented LED lighting products for distribution globally with a primary focus on thethrough national and regional retailers in North AmericanAmerica and in certain overseas markets. The primary operating subsidiary is Capstone Industries, Inc., a Florida corporation located in the principal executive offices of the Company ("CAPI"). Capstone International Hong Kong, Ltd., or "CIHK", was established to expand itsthe Company's product development, engineering and factory resource capabilities in Hong Kong. Capstone's LED lightingproducts have been to date targeted for applications such as home indoor and outdoor lighting. The Company's current product portfolio consists of stylish, innovative and easy to use consumer LED lighting products, including power failure multi-function handheld lights, power failure multi-function nightlights, decorative nightlights, wireless motion sensor lights, remote control battery powered accent lights, remote control outlets, bath vanity lights, outdoor LED fixtures, dual powered solar lights and LED power controlled bulbs.products. The Company's products are currently sold under CAPI'sthe CAPI brand name, Capstone Lighting®, as well as under two nationally recognized licensed brand names:brands-named Hoover® Home LED and DuracellÒ®. The Company believes that LED is becoming increasingly moreLEDs are now mainstream in consumer lighting products, and, as such, the Company believes that the component and production costs of LED lighting products will continue to lower for the foreseeable future,due to technological and production developments, which should allow aninnovative smaller company like usthe Company to compete through its innovations and branding that capitalize on non-commodity products utilizing LED. The Company's focus is the integration of LED into most commonly used lighting products in today's home. We continue to make key investments to ensure that we provide quality LED lighting products. The Company understands and strives to couple well made products with superior customer service. Customer service is a vital part of consumer loyalty. Capstone believes that it is positioned well to participate in these expanded product categories which are expecteddesigned to fuel the Company's furtherfuture growth.
The Company seeks to deliver strong, consistent business results and increasing shareholder returns by providing innovative products on a global basis that make consumer's lives simpler and safer while delivering revenue growth results to the Company's retail partners. Whereas the Company's strengths have been demonstrated through the successful executions of its strategic initiatives which have focused on LED lighting products, it believes it is well positioned to exploit categories outside LED lighting that also benefit from these strengths of the Company's management team. Creating and exploiting niche consumer product categories within our industry focus, through advanced design and low-cost manufacturing, are the core competencies of the Company.
The Company oversees and controls the manufacturing of its products, which are currently made in China by OEM contractoriginal equipment manufacturers ("OEM"), through three wholly-owned operating subsidiaries: CAPI, CIHK and CLTL. Capstone believes it has commercially favorable payment terms with its contract manufacturers,OEM's, which terms helps supports any instances of the Company's growth. The Company's direct import business model requires that product shipments to meet minimum order quantity or "MOQ" full container loads from itsOEM's factories directly to retail customerscustomers' shipping brokers. This business model avoids pitfalls resulting from slow moving and obsolete product inventories. The Company's products are built to fill backlog orders and are typically not warehoused for domestic replenishment programming. CIHK continually evaluates its contract manufacturers' ability to meet the Company's growing needs. Additionally, all manufacturers must meet rigorous compliance, security and equipment evaluation audits to ensure competitive pricing for the highest quality products under applicable industry standards.products. The Company continues to exploreexplores alternative manufacturing sources in China and elsewhere in the Pacific Rim as part of its ongoing supply chain strategic planning.planning, but the Company has not allocated as of the date of this Form 10-Q report any production to such alternative manufacturing sources.
Strategy
TheOver the past ten years the global LED lighting market is undergoinghas undergone a perceived significant transition driven by rapid adoptionadvancements in the performance, efficiency and cost of energy efficientenergy-efficient LED lighting products. LED lighting products offer numerous advantages for the user which are driving demand (improved light quality, durability, longer life, cooler temperatures, lower cost of operation). TheseAs the cost of LEDs decreased, and while performance improvements were made, LED technology has expanded its share of the general illumination market. The Company continues to explore other technologies that, like LED, could rapidly and effectively be integrated into traditional product categories providing users advantages in addition to increased regulatory requirements banning inefficient lights have accelerated growth of LED products and are expected to continue to accelerate the adoption of energy efficient LED technologies going forward. According to Allied Market Research, in a forecast in September 2014, the global LED market is forecasted to grow to $42 billion by 2020.
The Company entered the LED consumer market eight years ago. At that time, it was clear to management that there was a significant opportunity for an innovative low-cost LED product supplier as the lighting industry was on its transition path from traditional lighting technologies to LED.
The Company's product lines consist of decorative lighting, outdoor fixtures, lighting with built-in power failure technology and safety and security. The power failure lighting and security products were initially sold under its wholly – owned subsidiary Capstone Industries' brand name through 2015.
their daily life activities.
Target Markets: Our objective is to become recognized as a leading-edge consumer products company, based on "Rapidly Integrating Technologies into Consumer Products."
· | As the LED lighting market begins to show signs of stabilizing and moderate growth, the Company plans to continue to strengthen its relationships and expand into other departments and other channels of distribution through its relationships and product line expansions. |
· | We plan to continue to refine and improve our products portfolio and expand into other product segments through focused investment into the Company's research and development efforts. |
· | By introducing new products and expanding sales of existing products and continuing to increase our sales volumes, we believe that we can continue to improve operational efficiency by further reducing cost of materials, components and manufacturing costs, allowing us to maintain very competitive price points in the market place. |
AsPursuit and achievement of all of these objectives are subject to adequate cash flow from operations and available, affordable funding as well as putting the Company initially entered the market withdemands of existing operations ahead of efforts at expansion of products branded Capstone LightingÒ, the Company was able to stay under the radar and avoid direct competition with the larger brands that were focused on light bulbs and commercial lighting. The strategy was to establish the Company's products in the marketplace, building on retail success and user satisfaction.or exploitation of new technologies.
Moreover, in 2014, Capstone acquired the exclusive license and sub-license to an advanced power failure technology. The Company's proprietary technology is referred to as Capstone Power ControlPerceived or CPC. It is a patented technology and the U.S. patents were issued August of 2016. The CPC was developed over a two-year period by a group of MIT PhD Engineers operating as AC Kinetics, a private company. This technology can potentially be incorporated into a host of products. The Company is exploring ways to commercialize this technology, but has not commercially exploited this technology as of the date of this Quarterly Report on Form 10-Q. Whether it will result in any significant financial benefit is uncertain at the time of this report.
In the latter part of 2014, the Company concluded that conventional retail was going to undergo significant change in its LED product and vendor selections resulting from swift retail pricing adjustments. Early LED products, particularly light bulbs, that were deemed early technologies were seen by the Company as too expensive and no longer appropriate for the market. The early products did not look like light bulbs and were not marketed effectively in the opinion of the Company. As such, buying an LED light bulb was potentially confusing to the consumer. Over the course of the next year, retail prices for early LED products plummeted and negatively impacted the supply chain. Capstone forecasted this outcome and determined to focus its primary marketing approach towards the warehouse club channel where low retail mark-ups was deemed to have circumvented this market condition. The Company was timely in this strategic market entry and benefited from the limited number of vendors competing in this arena. The Company concluded that larger LED bulb suppliers were concerned with protecting retail price positions and they could not, as such, effectively market their brands in both conventional retail channels and warehouse club channels.
Commencing in 2014, Capstone explored and researched branding opportunities that would allow the Company to differentiate from its own Capstone LightingÒ brand. The underlying strategy enabled Capstone to effectively provide product to competing retailers within the same channel.
Through product differentiation and a visibly recognized brand launched in 2015, HooverÒ Home LED became a Capstone success story. The Company secured the North America trademark license for the Hoover® brand for LED lighting products. The HooverÒ name is a 100-year-old household iconic brand name. Hoover® is a registered trademark of Techtronic Floor Care Technology Limited.
On January 9, 2017, the Company secured a license from DuracellÒ for a major warehouse club. The first shipments of the branded product occurred in the first quarter 2017.Essential Strengths
Capstone believes that itthe following competitive strengths have and will continue to serve as a foundation for its business strategy:
Capstone believes that the specialized nature of its existing product portfolio and its relative market share has effectively positioned itself in this channel and posted successive revenue growth while delivering strong gross margins. provided a platform for successful introductions of future product segments, either updated versions of existing models or variant products.
The Company believes its multiple brand strategy is currently expanding its distribution into international home improvement centers that accept Capstone's direct import model. The Company is distributingimportant in maintaining competitiveness in the marketplace. Capstone Lighting,Lighting® and Hoover® Home LED and a DuracellÒ LED product and will, from time to time andhave proven successful in selected markets, offer private label programming to international accounts.
Capstone's 2013 investment in AC Kinetic Technologies, an Armonk, New York, private technology development company, allowed the Company to develop certain innovative concepts that the Company conceived and that are complex and has yielded intellectual property that we believe will further distinguish themeeting Company's products from other off-the-shelf products commonly marketedexpectations at the retail level. The Company intends to exploit, but has not commercially exploited aspoint of the date of this Quarterly Report on Form 10-Q, the patented technologies developed and completed by AC Kinetic Technologies within the Company's own products, both labeled under "Capstone" and under the Hoover® Home LED brand.
On June 8, 2016, the Board of Directors approved and accepted an offer from AC Kinetics to buy back their 100 shares of AC Kinetics Series A Preferred Stock for a $1,500,000 Note Receivable with an estimated fair market value of $500,000.
As further consideration, the Company also received an option to repurchase 1,666,667 shares of Company common stock held by Involve L.L.C. at an exercise price of $.15. The Agreements were signed June 27, 2016, at an exercise price of $.15 per share.
On February 13, 2017 and May 1, 2017 as authorized under the Company's stock repurchase plan, the Company repurchased 1,000,000 shares and 666,667 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.
With the purchase of all available options under the repurchase agreement, part of the collateral used to substantiate the value of the note receivable was no longer available and, consequently management has determined that the fair value of the note at September 30, 2017 was $0.
Perceived or Essential Strengthssale.
Capstone's core executive team has been working together for over three decades in business and has successfully built and managed other consumer product companies. CIHK resident management team has extensive experience with low cost off shore OEM manufacturing and is led by an industry leader that has provided sourcing and procurement services to such recognized companies as Circuit City and Dicks Sporting Goods. Operating management's extensiveManagement's experience in hardline product manufacturing and marketing prepared the Company for its entry into the LED market.
FromProduct Quality: We offer quality products allowing consumers to maximize the benefits of adopting LED products. We design, manufacture through OEM's and sell quality and reliable products across all of our brands with functional advantages that are deemed to be cost competitive. We achieve this, in part, through a market perspective, Capstone's branding strategy is focusedcombination of sourcing skills, stringent manufacturing quality control and conducting rigorous third-party product testing. To deliver cost-competitive products, we are investing in product advancements, leveraging purchasing volume, capitalizing on establishing multiple trusted brands allowing for a broader reach into various channels. Capstone Lighting® (2008), Hoover® Home LED (2015)strategic vendor relationships and DuracellÒ, contributemigrating high-volume products to expanding the Company's retail position. All three brands are currently available in the marketplace.our proprietary design.
The Company's product characteristics are supposed to satisfy the following standards:and design criteria are:
· | Designed to make everyday tasks or usage simpler and more enjoyable for consumers; |
· | While continuing to focus on increased profit margins, the products must be affordable to win at the point of sale and deliver increased revenues for retail partners; |
· | The products must represent significant value when compared with items produced or marketed by competitive consumeconsumer product companies; and |
· | Wherever feasible, the products must be unique to the market whether this be accomplished though design techniques, added functionality or some proprietary innovation. |
Authoritative Knowledge: We emphasize employees and manufacturers with extensive knowledge, understanding and experience of technology, and regulatory environments that enables us to continue to provide superior quality products and service for our customers. Our management team has demonstrated its ability to drive organic growth.
With respect to the Company's goal of sustained profitability, the challenge has been and remains to achieve greater profit margins from our product lines by either innovative productproducts that induce consumers to pay a higher purchase price or increased efficiencies in producing and selling products that sustain attractive pricing. This challenge confronts many consumer product companies. Capstone believes that appropriate use of OEM capabilities in innovation and production coupled with design that appeals to consumers are critical factors in meeting this challenge, especially for a smaller or niche competitor.
Due to the extensive, modern manufacturing, design and engineering capabilities with the Company's OEM contract manufacturers, and the lower unit costs in China, Capstone believes that it is more economical and efficient to continue to manufacture certain products in China and have them shipped to the United States rather than to have such products produced in North America. While this resource is available to and used by large numbers of U.S. companies, including our competitors, the Company believes this Chinese manufacturing resource gives the Company the level of innovation, production cost and quality that allows Capstone to be competitive with larger competitors in the United States. However, as design technologies can influence the degree of hand labor in building its future products, the Company expects the advantages it has realized by manufacturing solely in China to be challenged. The Company periodically evaluates alternative OEM manufacturing within and outside the Pacific Rim.
Rim (in the event that non-Chinese OEM's become more efficient or profitable than Chinese OEM's).
The Company's CIHK operationsCIHK's operation in Hong Kong is staffed withhas personnel experienced in engineering and design, product development and testing, product sourcing, international logistics and quality control. These associates work with our Chinese OEM factories to develop and prototype new product concepts and to ensure products meet consumer product regulations and rigorous quality control standards. All products are tested before and during production by Company personnel. This team also provides extensive product development, quality control and logistics support to our factory partners to ensure on time shipments. In anticipation of the Company'spossible Company growth, we have continued our investment in CIHK by contracting additional engineering and software development services, expanding our relationships with testing and certification facilities and hiring additional operations support in an effort to ensure that the overseas factory performance meets our stringent operational tolerances to maintain our product quality, competitiveness and operational excellence.
WePerceived Weaknesses.
Capstone believes that its competitive weaknesses are: (1) it does not possess the business, marketing and financial resources of its larger competitors; (2) it does not have expandedan extensive or aggressive Social Media marketing program or its own e-commerce capability; (3) it sells a niche consumer product that is sensitive to a drop in consumer discretionary spending and general economic conditions affecting consumer confidence; (4) its products lines are focused on a niche consumer LED lighting; (5) profitability may be limited by attainable profit margins from consumer lighting products; (6) Capstone does not have the large internal research and development capability of its larger competitors; (7) Capstone operates with a limited number of employees who are dedicated to executive management, sales and marketing or administrative support; and (8) we rely on our international sales by leveraging our relationships with our existingOEM's for product production. As a smaller reporting company, we face the challenges of a smaller enterprise competing in global retailersmarkets and by strengthening our international product offerings. Our Hong Kong office assists us in placing more products into foreign market channels as well. In 2017, we have product sales in Australia, Canada, Japan, South Korea, Taiwan, Thailand and the United Kingdom. For the nine-months ended September 30, 2017 and 2016, international sales were approximately $1,309,800 and $1,847,300 respectively or 4.3% and 8.1% of revenue, respectively. This continues to be a growing distribution channeldependent on Chinese OEM's for the Company.production.
Products and Customers
The Company has expanded its product positioning through the introduction of more indoor and new outdoor lighting programs under the Capstone"Capstone Lighting® brand, the", Hoover® Home LED brand and Duracell® brands and include the DuracellÒbrand. Capstone has also expanded hardwired solid-statefollowing products to its programs in addition to the existing battery and induction poweredthat are reported under one segment: Lighting Products:
· | Wireless Remote-Controlled LED Accent Lights |
· | LED Under Cabinet Lights |
· | LED Dual Mode Security Light |
· | LED Motion Sensor Lights |
· | LED Motion Sensor Light with Air Purifier |
· | Wireless Remote-Control Outlets |
Such product lines, through the introduction of vanity fixtures and outdoor LED Gooseneck Lanterns. Such expansion involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits. Further, some product lines may fall out of favor with consumers before we can recoup product and market development costs.
The Company has established product distribution relationships with numerous leading international, national and regional retailers, including but not limited to: Amazon, Bunnings, Costco Wholesale, Home Depot, Home Pro, Sam's Club and The Container Store and Wal-Mart.Store. These distribution channels may sell the Company's products through the Internetinternet 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 markets and in a growing international market.
While Capstone has traditionally generated the majority of its sales in the domestic 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. CIHK assists the Company in placing more products into foreign market channels as well. The Company introduced Capstone brands to markets outside the U.S., including Australia, France, Iceland, Japan, Mexico, New Zealand, South Korea, Spain, Taiwan, Thailand and the United Kingdom. International sales for the nine months ended September 30, 2018 were $551.2 thousand or 4.6% of net revenue as compared to $1.310 million or 4.3% in the same period 2017. Based on Capstone's experience in the industry, the Company's Chinese contract manufacturing resources and focus on well designed, practical products, Capstone believes it is well positioned to become a leading manufacturer in the growingits segment of LED home lighting and security lighting segments. The Company's efforts to achieve such a goal are ongoing. Capstone believes it will maintain its revenue growth because of the ability to deliver quality, well designed products on time, the quality reputation of its products, business relationships with Capstone's retailers and the aggressive product expansion strategies currently in place. Such continued progressperformance depends on a number of assumptions and factors, including ones mentioned in "Risk Factors" below.factors. 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. Company products are also sensitivesubject to consumer demand and consumer concerns overgeneral economic conditions becausethat impact discretionary consumer spending on non-essential items.
Tariffs. The Company is facing uncertainty relative to the ongoing competitive pricing position it has been recognized for. The current U.S. administration has threatened and has implemented certain tariffs that directly affect the Company's competitiveness. While all companies are affected equally, the appeal for these products to consumers may be negatively impacted when retail prices are increased due to higher duty rates. The Company has seen promotional schedules cut back and retailers have expressed concerns for possible pricing adjustments that would not be known to them in advance to products being shipped. Capstone's business model insulates the Company from paying duties as its retail partners are the importers of record. The obvious unknown is the final impact of tariffs to the landed costs. Accordingly, retailers have demonstrated caution in their promotional planning schedules and will continue to do so until the administration has clarified its position enabling importers to calculate estimated landed costs.
Tariffs and trade restrictions imposed or threatened by the current U.S. administration has provoked and may provoke future trade and tariff retaliation by other countries. A "trade war" 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, are a discretionary purchase by consumers.our costs, customers, suppliers and/or the U.S. economy or certain sectors thereof and, thus, to adversely impact our businesses.
With the Company's branded lighting categories, Capstone has a comprehensive product offering for its niche in the consumer lighting industry. The Company believes that it will provide retailers with a broadbroader and more diversified portfolio of consumer products across numerous product categories, which should add diversity to the Company's revenues and cash flows sources. Within these categories,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 ability to serve retailers with a broadan array of branded products and quickly introduce new products to continue to allow Capstone to further penetrate its existing customer bases, while also attracting new customers. 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.
Sales and Marketing
We continue to make investments to expand our sales, marketing, technical applications support and distribution capabilities to sell our products. We currently market and sell our LED products through our internal sales team and agency networks. Generally, our agencies are recruited, trained and monitored by us directly. We maintain a firm policy on the use of our name for branding our LED lighting products. The Company's products are marketed primarily through a direct independent 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. The Company actively promotes its products to retailers and distributors at North American trade shows but relies on the retail sales channels to advertise its products directly to the end consumer. All sales activities at major account levels involve direct executive management participation.
In order for continued sales growth in the retail market, the Company is focused on expanding its market share at existing accounts by expanding its portfolio of both branded and private label LED lighting products. The Company will also be targeting direct'direct to retail clientsclients' marketing through CIHK for products that fall outside Capstone's branded categories but are innovative and preferably exclusive to CIHK. This should allowis intended to provide for quicker revenue expansion as time consuming product and brand development efforts are the responsibility of the retailer.
CapstoneThe Company depends on e-commerce efforts of Amazon and other on-line retail customers in lieu of pursuing our own aggressive in-house e-commerce effort. We believe this reliance on AmazonAmazon.com and other retail customer e-commerce issites as they are the most cost efficient and effective e-commerce approach for the Company. We maintain a Facebook1 website at https://www.facebook.com /powerfailuresolutions/www.facebook.com/powerfailuresolutions/ and our sales staff may use Social Media from time to time to promote our products and brands. We have not developed or aggressively pursued a specific Social Media campaign based on third party sponsors or promotors. promoters. The growing importance of Social Media will eventually require the Company to develop a more aggressive or extensive plan for using Social Media as a marketing tool.
1Facebook is a registered trademark of Facebook, Inc. Social Media marketing may become more important in launching and sustaining market demand for products and the Company may have to develop a more aggressive Social Media marketing campaign and presence.Inc