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 March 31,June 30, 2020
__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.) |
431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 |
(Address of principal executive offices) |
(954) 252-3440 |
(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 [_] | 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. [_]
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | N/A | N/A |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No
The number of shares outstanding of each of the issuer’s classes of common stock, as of June 19,August 11, 2020, is as follows: 46,296,364 shares of Common Stock, $0.0001 par value per share. The issuer’s common stock is quoted on the OTCQB Venture Market of the OTC Markets Group, Inc. under the trading symbol “CAPC.”
EXPLANATORY NOTE
The Company has relied upon SEC Release No. 34-88465 (the “SEC Order") issued by the SEC on March 25, 2020, under Section 36 of the Securities Exchange Act of 1934, as amended (Exchange Act)As used in connection with the filing of the Form 10-Qthis Quarterly Report (Form 10-Q Report). The SEC Order provides conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the novel coronavirus (“COVID-19”) outbreak by extending, subject to the conditions of the SEC Order, the filing deadline by up to 45 days for certain Exchange Act reports due on or before July 1, 2020. As previously disclosed in the Company's Current Report on Form 8-K filed with10-Q for the SEC on May 6,fiscal period ending June 30, 2020 the Company determined(“Form 10-Q report”), “COVID-19” refers to rely on the relief providedCoronavirus/COVID 19, a highly contagious novel virus that was declared a global pandemic by the SEC OrderWorld Health Organization or “WHO” on March 11, 2020. “COVID-19 pandemic” refers to delay“global pandemic” (as defined by WHO) by COVID-19. COVID-19 pandemic has had a significant, adverse economic disruption in the filing of its Form 10-Q due to circumstances related toUnited States and China, especially the COVID-19 pandemic.
Specifically, COVID-19 and related cautionary measures disrupted routine interactions among the Company’s accounting personnel, other staff and personnel in its offices in Florida and Hong Kong, and third parties, including suppliers of Company products, involved in preparation and completionlocality of the Quarterly Report. Additionally,offices of Capstone Companies, Inc. and its subsidiaries and the Chinese original equipment manufacturers or “OEMs” of the products sold by Capstone Companies, Inc. The products sold by Capstone Companies, Inc. are primarily sold by traditional brick-and-mortar retailers and COVID-19 resulted inpandemic significantly, adversely impacted those retailers and our sale of LED products. We are developing a new product line on internet connected surfaces, like smart mirrors, (”Connected Surface”) for residential use, but this new product line has not been launched as of the need to evaluate the various impactssecond quarter of the2020. The impact of COVID-19 pandemic on the Company’s business and financial statements. These impediments slowedperformance has been significant and ongoing and, coupled with the preparation and completiondevelopment of the Company’s Form 10-Q Report.Connected Surface product line, has placed a significant financial strain on Capstone Companies, Inc.
CAPSTONE COMPANIES, INC.
Quarterly Report on Form 10-Q
Three and Six Months Ended March 31,June 30, 2020
TABLE OF CONTENTS
PART 1 | FINANCIAL INFORMATION | 3 |
| | |
Item 1. | Condensed Consolidated Financial Statements (Unaudited) | 3 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operation | 25 28 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 45 55 |
Item 4. | Controls and Procedures | 45 55 |
| | |
PART II | Other Information | 4756 |
| | |
Item 1. | Legal Proceedings | 4756 |
Item 1A. | Risk Factors | 4757 |
Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds | 5265 |
Item 3. | Defaults of Senior Securities | 5265 |
Item 4. | Mine Safety Disclosures | 5265 |
Item 5. | Other Information | 5266 |
Item 6. | Exhibits | 5366 |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
| | | | | | |
| | March 31, | | | December 31, | |
| | 2020 | | | 2019 | |
Assets: | | (Unaudited) | | | | |
Current Assets: | | | | | | |
Cash | | $ | 2,452,652 | | | $ | 3,131,249 | |
Accounts receivable, net | | | 69,973 | | | | 13,459 | |
Inventories | | | 13,426 | | | | 24,818 | |
Prepaid expenses | | | 140,583 | | | | 182,782 | |
Income tax refundable | | | 966,179 | | | | 220,207 | |
Total Current Assets | | | 3,642,813 | | | | 3,572,515 | |
| | | | | | | | |
Property and equipment, net | | | 75,314 | | | | 65,649 | |
Operating lease – right of use asset | | | 200,619 | | | | 214,202 | |
Deposit | | | 11,147 | | | | 46,021 | |
Goodwill | | | 1,645,961 | | | | 1,936,020 | |
Total Assets | | $ | 5,575,854 | | | $ | 5,834,407 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 837,344 | | | $ | 635,593 | |
Operating lease – current portion | | | 58,514 | | | | 51,174 | |
Total Current Liabilities | | | 895,858 | | | | 686,767 | |
| | | | | | | | |
Long-Term Liabilities: | | | | | | | | |
Operating lease – long-term portion | | | 155,851 | | | | 170,998 | |
Deferred tax liabilities | | | 172,287 | | | | - | |
Total Long-Term Liabilities | | | 328,138 | | | | 170,998 | |
Total Liabilities | | | 1,223,996 | | | | 857,765 | |
| | | | | | | | |
Commitments and Contingencies | | | | | | | | |
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, outstanding 46,296,364 shares at March 31, 2020 and 46,579,747 shares at December 31, 2019 | | | 4,630 | | | | 4,658 | |
Additional paid-in capital | | | 7,034,185 | | | | 7,061,565 | |
Accumulated deficit | | | (2,686,957 | ) | | | (2,089,581 | ) |
Total Stockholders' Equity | | | 4,351,858 | | | | 4,976,642 | |
Total Liabilities and Stockholders’ Equity | | $ | 5,575,854 | | | $ | 5,834,407 | |
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED BALANCE SHEETS | |
| |
| | June 30, | | | December 31, | |
| | 2020 | | | 2019 | |
Assets: | | (Unaudited) | | | | |
Current Assets: | | | | | | |
Cash | | $ | 2,122,729 | | | $ | 3,131,249 | |
Accounts receivable, net | | | 69,271 | | | | 13,459 | |
Inventories | | | 13,426 | | | | 24,818 | |
Prepaid expenses | | | 89,490 | | | | 182,782 | |
Income tax refundable | | | 1,027,007 | | | | 220,207 | |
Total Current Assets | | | 3,321,923 | | | | 3,572,515 | |
| | | | | | | | |
Property and Equipment, net | | | 69,240 | | | | 65,649 | |
Operating lease - right of use asset | | | 186,831 | | | | 214,202 | |
Deposit | | | 11,148 | | | | 46,021 | |
Goodwill | | | 1,445,254 | | | | 1,936,020 | |
Total Assets | | $ | 5,034,396 | | | $ | 5,834,407 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity: | | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 1,018,422 | | | $ | 635,593 | |
Paycheck protection program loan | | | 89,733 | | | | - | |
Operating lease - current portion | | | 60,071 | | | | 51,174 | |
Total Current Liabilities | | | 1,168,226 | | | | 686,767 | |
| | | | | | | | |
Long-Term Liabilities: | | | | | | | | |
Operating lease - long-term portion | | | 140,439 | | | | 170,998 | |
Deferred tax liabilities | | | 22,022 | | | | - | |
Total Long-Term Liabilities | | | 162,461 | | | | 170,998 | |
Total Liabilities | | | 1,330,687 | | | | 857,765 | |
| | | | | | | | |
Commitments and Contingencies | | | | | | | | |
| | | | | | | | |
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 46,296,364 shares at June 30, 2020 and 46,579,747 shares at December 31, 2019 | | | 4,630 | | | | 4,658 | |
Additional paid-in capital | | | 7,043,110 | | | | 7,061,565 | |
Accumulated deficit | | | (3,344,031 | ) | | | (2,089,581 | ) |
Total Stockholders' Equity | | | 3,703,709 | | | | 4,976,642 | |
Total Liabilities and Stockholders’ Equity | | $ | 5,034,396 | | | $ | 5,834,407 | |
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. | |
| |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |
(Unaudited) | |
| | | | | | |
| | For the Three Months Ended | |
| | March 31, | |
| | 2020 | | | 2019 | |
| | | | | | |
Revenues, net | | $ | 148,977 | | | $ | 2,978,802 | |
Cost of sales | | | (114,821 | ) | | | (2,352,215 | ) |
Gross Profit | | | 34,156 | | | | 626,587 | |
| | | | | | | | |
Operating Expenses: | | | | | | | | |
Sales and marketing | | | 211,973 | | | | 191,875 | |
Compensation | | | 376,675 | | | | 374,848 | |
Professional fees | | | 130,530 | | | | 157,803 | |
Product development | | | 51,614 | | | | 85,229 | |
Other general and administrative | | | 144,366 | | | | 163,711 | |
Goodwill impairment charge | | | 290,059 | | | | - | |
Total Operating Expenses | | | 1,205,217 | | | | 973,466 | |
| | | | | | | | |
Operating Loss | | | (1,171,061 | ) | | | (346,879 | ) |
| | | | | | | | |
Other Expenses, net | | | - | | | | (10,461 | ) |
| | | | | | | | |
Loss Before Tax Benefit | | | (1,171,061 | ) | | | (357,340 | ) |
| | | | | | | | |
Benefit for Income Tax | | | (573,685 | ) | | | (12,000 | ) |
| | | | | | | | |
Net Loss | | $ | (597,376 | ) | | $ | (345,340 | ) |
| | | | | | | | |
Net Loss per Common Share | | | | | | | | |
Basic and Diluted | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | |
Weighted Average Shares Outstanding | | | | | | | | |
Basic and Diluted | | | 46,463,365 | | | | 47,033,670 | |
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |
(Unaudited) | |
| | | | | | | | | | | | |
| | For the Three Months Ended | | | For the Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | | | | | | | | | | | |
Revenues, net | | $ | 906,558 | | | $ | 3,407,822 | | | $ | 1,055,535 | | | $ | 6,386,624 | |
Cost of sales | | | (871,536 | ) | | | (2,673,711 | ) | | | (986,357 | ) | | | (5,025,926 | ) |
Gross Profit | | | 35,022 | | | | 734,111 | | | | 69,178 | | �� | | 1,360,698 | |
| | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | |
Sales and marketing | | | 42,954 | | | | 35,395 | | | | 254,928 | | | | 227,270 | |
Compensation | | | 399,727 | | | | 382,317 | | | | 776,402 | | | | 757,165 | |
Professional fees | | | 109,707 | | | | 82,803 | | | | 240,237 | | | | 240,606 | |
Product development | | | 41,573 | | | | 94,534 | | | | 93,186 | | | | 179,763 | |
Other general and administrative | | | 107,548 | | | | 157,552 | | | | 251,914 | | | | 321,263 | |
Goodwill impairment charge | | | 200,707 | | | | - | | | | 490,766 | | | | - | |
Total Operating Expenses | | | 902,216 | | | | 752,601 | | | | 2,107,433 | | | | 1,726,067 | |
Operating Loss | | | (867,194 | ) | | | (18,490 | ) | | | (2,038,255 | ) | | | (365,369 | ) |
| | | | | | | | | | | | | | | | |
Other Income (Expenses): | | | | | | | | | | | | | | | | |
Interest Expense | | | (133 | ) | | | - | | | | (133 | ) | | | - | |
Other Income (Expense), Net | | | - | | | | 7,986 | | | | - | | | | (2,475 | ) |
Total Other Income (Expenses) | | | (133 | ) | | | 7,986 | | | | (133 | ) | | | (2,475 | ) |
| | | | | | | | | | | | | | | | |
Loss Before Tax Benefit | | | (867,327 | ) | | | (10,504 | ) | | | (2,038,388 | ) | | | (367,844 | ) |
| | | | | | | | | | | | | | | | |
Benefit for Income Tax | | | (210,253 | ) | | | - | | | | (783,938 | ) | | | (12,000 | ) |
| | | | | | | | | | | | | | | | |
Net Loss | | $ | (657,074 | ) | | $ | (10,504 | ) | | $ | (1,254,450 | ) | | $ | (355,844 | ) |
| | | | | | | | | | | | | | | | |
Net Loss per Common Share | | | | | | | | | | | | | | | | |
Basic and Diluted | | $ | (0.01 | ) | | $ | (0.00 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | |
Weighted Average Shares Outstanding | | | | | | | | | | | | | | | | |
Basic and Diluted | | | 46,296,364 | | | | 46,928,935 | | | | 46,378,481 | | | | 46,906,092 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | | CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | | |
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND MARCH 31, 2019 | | |
(Unaudited) | | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | | CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | | | | |
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019 | | FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019 | | | | |
| | | | | | | | | | | | | | | (Unaudited) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Preferred Stock | | Preferred Stock | | | | Additional | | | | | | | Preferred Stock | | | Preferred Stock | | | Preferred Stock | | | | | | Additional | | | | | | | |
| Series A | | Series B | | Series C | | Common Stock | | Paid-In | | Accumulated | | Total | | | Series A | | | Series B | | | Series C | | | Common Stock | | | Paid-In | | | Accumulated | | | Total | |
| Shares | | | Par Value | | Shares | | Par Value | | Shares | | Par Value | | Shares | | Par Value | | Capital | | Deficit | | Equity | | | Shares | | | Par Value | | | Shares | | | Par Value | | | Shares | | | Par Value | | | Shares | | | Par Value | | | Capital | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | - | | | $ | - | | | - | | | $ | - | | | - | | | $ | - | | | 46,579,747 | | | $ | 4,658 | | | $ | 7,061,565 | | | $ | (2,089,581 | ) | | $ | 4,967,642 | | | - | | | $ | - | | | - | | | $ | - | | | - | | | $ | - | | | 46,579,747 | | | $ | 4,658 | | | $ | 7,061,565 | | | $ | (2,089,581 | ) | | $ | 4,976,642 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options for compensation | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 8,925 | | | - | | | 8,925 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 8,925 | | | - | | | 8,925 | |
Repurchase of shares | | - | | | - | | | - | | | - | | | - | | | - | | | (283,383 | ) | | (28 | ) | | (36,305 | ) | | - | | | (36,333 | ) | | - | | | - | | | - | | | - | | | - | | | - | | | (283,383 | ) | | (28 | ) | | (36,305 | ) | | - | | | (36,333 | ) |
Net Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (597,376 | ) | | | (597,376 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (597,376 | ) | | | (597,376 | ) |
Balance at March 31, 2020 | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | 46,296,364 | | | $ | 4,630 | | | $ | 7,034,185 | | | $ | (2,686,957 | ) | | $ | 4,351,858 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 46,296,364 | | | | 4,630 | | | | 7,034,185 | | | | (2,686,957 | ) | | | 4,351,858 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options for compensation | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 8,925 | | | - | | | 8,925 | |
Net Loss | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (657,074 | ) | | | (657,074 | ) |
Balance at June 30, 2020 | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | 46,296,364 | | | $ | 4,630 | | | $ | 7,043,110 | | | $ | (3,344,031 | ) | | $ | 3,703,709 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | - | | | $ | - | | | - | | | $ | - | | | - | | | $ | - | | | 47,046,364 | | | $ | 4,704 | | | $ | 7,092,219 | | | $ | (1,197,912 | ) | | $ | 5,899,011 | | | - | | | $ | - | | | - | | | $ | - | | | - | | | $ | - | | | 47,046,364 | | | $ | 4,704 | | | $ | 7,092,219 | | | $ | (1,197,912 | ) | | $ | 5,899,011 | |
Stock options for compensation | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 11,025 | | | - | | | 11,025 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 11,025 | | | - | | | 11,025 | |
Repurchase of shares | | - | | | - | | | - | | | - | | | - | | | - | | | (45,470 | ) | | (3 | ) | | (8,612 | ) | | - | | | (8,615 | ) | | - | | | - | | | - | | | - | | | - | | | - | | | (45,470 | ) | | (3 | ) | | (8,612 | ) | | - | | | (8,615 | ) |
Net Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (345,340 | ) | | | (345,340 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (345,340 | ) | | | (345,340 | ) |
Balance at March 31, 2019 | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | 47,000,894 | | | $ | 4,701 | | | $ | 7,094,632 | | | $ | (1,543,252 | ) | | $ | 5,556,081 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 47,000,894 | | | | 4,701 | | | | 7,094,632 | | | | (1,543,252 | ) | | | 5,556,081 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options for compensation | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 11,025 | | | - | | | 11,025 | |
Repurchase of shares | | | - | | | - | | | - | | | - | | | - | | | - | | | (168,530 | ) | | (17 | ) | | (27,246 | ) | | - | | | (27,263 | ) |
Net Loss | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (10,504 | ) | | | (10,504 | ) |
Balance at June 30, 2019 | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | 46,832,364 | | | $ | 4,684 | | | $ | 7,078,411 | | | $ | (1,553,756 | ) | | $ | 5,529,339 | |
| | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. | The accompanying notes are an integral part of these condensed consolidated financial statements. | | The accompanying notes are an integral part of these condensed consolidated financial statements. | | | | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
(Unaudited) | |
| | For the Three Months Ended | |
| | March 31, | |
| | 2020 | | | 2019 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net loss | | $ | (597,376 | ) | | $ | (345,340 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 6,074 | | | | 10,830 | |
Stock based compensation expense | | | 8,925 | | | | 11,025 | |
Noncash lease expense | | | 13,583 | | | | - | |
Goodwill impairment charge | | | 290,059 | | | | - | |
Provision (Benefit) for deferred income tax | | | 172,287 | | | | (12,000 | ) |
(Increase) in accounts receivable, net | | | (56,515 | ) | | | (2,284,747 | ) |
Decrease in inventories | | | 11,392 | | | | 10,196 | |
Decrease in prepaid expenses | | | 42,199 | | | | 167,152 | |
(Increase) decrease in deposits | | | 34,874 | | | | (388 | ) |
Increase in accounts payable and accrued liabilities | | | 201,752 | | | | 277,389 | |
(Increase) in income tax refundable | | | (745,972 | ) | | | - | |
(Decrease) in deferred rent incentive | | | - | | | | (25,017 | ) |
(Decrease) in operating lease liabilities | | | (7,807 | ) | | | - | |
Net cash used in operating activities | | | (626,525 | ) | | | (2,190,900 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchase of property and equipment | | | (15,739 | ) | | | - | |
Net cash used in investing activities | | | (15,739 | ) | | | - | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Repurchase of Shares | | | (36,333 | ) | | | (8,615 | ) |
Net cash used in financing activities | | | (36,333 | ) | | | (8,615 | ) |
| | | | | | | | |
Net Decrease in Cash | | | (678,597 | ) | | | (2,199,515 | ) |
Cash at Beginning of Period | | | 3,131,249 | | | | 3,822,359 | |
Cash at End of Period | | $ | 2,452,652 | | | $ | 1,622,844 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | - | | | $ | - | |
Income taxes | | $ | - | | | $ | - | |
The accompanying notes are an integral part of these condensed consolidated financial statements. | |
CAPSTONE COMPANIES, INC. AND SUBSIDIARIES | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
(Unaudited) | |
| | For the Six Months Ended | |
| | June 30, | |
| | 2020 | | | 2019 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| | | | | | |
Net Loss | | $ | (1,254,450 | ) | | $ | (355,844 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 12,148 | | | | 21,951 | |
Stock based compensation expense | | | 17,850 | | | | 22,050 | |
Noncash lease expense | | | 27,371 | | | | - | |
Unpaid accrued interest on paycheck protection program loan | | | 133 | | | | - | |
Goodwill impairment charge | | | 490,766 | | | | - | |
Provision (Benefit) for deferred income tax | | | 22,022 | | | | (12,000 | ) |
Increase in accounts receivable, net | | | (55,812 | ) | | | (2,705,724 | ) |
Decrease in inventories | | | 11,392 | | | | 27,497 | |
(Increase) Decrease in prepaid expenses | | | 93,292 | | | | (107,802 | ) |
Decrease in deposits | | | 34,873 | | | | 40,112 | |
Increase in accounts payable and accrued liabilities | | | 382,829 | | | | 594,489 | |
Decrease in deferred rent incentive | | | - | | | | (50,166 | ) |
Increase in income tax refundable | | | (806,800 | ) | | | - | |
Decrease in operating lease liabilities | | | (21,662 | ) | | | - | |
Net cash used in operating activities | | | (1,046,048 | ) | | | (2,525,437 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchase of property and equipment | | | (15,739 | ) | | | (28,123 | ) |
Net cash used in investing activities | | | (15,739 | ) | | | (28,123 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from loan under paycheck protection program | | | 89,600 | | | | - | |
Repurchase of Shares | | | (36,333 | ) | | | (35,878 | ) |
Net cash provided by (used in) financing activities | | | 53,267 | | | | (35,878 | ) |
| | | | | | | | |
Net Decrease in Cash | | | (1,008,520 | ) | | | (2,589,438 | ) |
Cash at Beginning of Period | | | 3,131,249 | | | | 3,822,359 | |
Cash at End of Period | | $ | 2,122,729 | | | $ | 1,232,921 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | - | | | $ | - | |
Income taxes | | $ | - | | | $ | - | |
| | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements. | |
CAPSTONE COMPANIES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED 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"), 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 March 31,June 30, 2020 and results of operations, stockholders’ equity and cash flows for the three months and six months ended March 31,June 30, 2020 and 2019. All material 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, 2019 (the “2019 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.
Effects of COVID-19
During the quarter ended March 31,June 30, 2020, the Company wascontinued to be negatively impacted by the effects of the worldwide COVID-19 pandemic. During the monthsend of February and March 2020, the Company’s Hong Kong office and Chinese suppliers were impacted by the closedown of facilitiesthat had been previously closed down by local and regional authorities in their efforts to combat the spread of COVID-19.COVID-19, started to gradually reopen their factories. Orders that had been previously delayed because of the close down started to ship. The CIHK staff worked remotely from home, howevernewly certified Thailand factory also produced and shipped its first orders in the factory closures delayed certain orders from the first quarter of 2020 until the second and third quarter, 2020. These factories are now functioning, and orders are being produced both in ChinaThailand and in Thailand.China. Capstone International H.K. Ltd., (“CIHK”) staff have continued to work remotely from home.
On March 9, 2020, the State of Florida declared a state of emergency inand issued a “stay at home” order to combat the spread of the COVID-19 pandemic. This order has since been lifted and during the second quarter 2020, many states enacted a phased reopening of their economies. The Company in 2019 had expanded its IT systems to allow for remote operations and as of March 20, 2020 the Company’s U.S. staff havehad been working remotely from their homes. With the State of Florida reopening, the Corporate office also opened, but staff are working on rotating schedules between the office and remotely from home.
With the initial phased reopening of many states, retailers experienced improving sales trends but with the resulting resurgence of the number of COVID-19 cases in those states, many phased reopenings have now been paused and other protective health measures are being considered. Our business operations and financial performance for the three and six months ended March 31,June 30, 2020 werecontinued to be adversely impacted by the developments discussed above, including a significantfurther decrease in net revenue resultingwhich resulted in an approximate 73% increase in the net loss for the three and six months ended March 31,June 30, 2020 as compared to the prior year. The decrease in net sales for this period was driven by the overseas governments mandated factory closures related to the COVID-19 pandemic, resulting in the unavailability of components and the shipment of finished orders.
Our business may continue to be adversely impacted byorders and the resurgence of COVID-19. This disruption could have a continued negative impact onuncertainty with the retail business and consumers’ willingnessmarket felt by buyers as COVID-19 started to visit retail stores, causing reduced consumer foot traffic and consumer spending which could negatively impact the demand for our products.
The Company reported a net loss of approximately $597 thousand for the three months ended March 31, 2020 compared to a net loss of approximately $345 thousand for the period ended March 31, 2019. The cash generated from operations was negatively impacted and the Company utilized $679 thousand of cash.
With orders now shipping to customers in the second quarter 2020, we expect that the cash generated from operations will gradually improve in the second and future quarters in 2020.
U.S. economy.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
At March 31,The COVID-19 pandemic has adversely impacted general economic conditions in markets for our products.
The Company reported a net loss of approximately $657 thousand and $1.254 million for the three and six months ended June 30, 2020, respectively, compared to a net loss of approximately $11 thousand and $356 thousand for the three and six months ended June 30, 2019, respectively. With these losses the cash generated from operations was negatively impacted and the Company remained debt free, had autilized $1.009 million of cash balance of $2.5 million and an available credit facility of $7.5 million at Sterling National Bank, subject to eligible collateral. This credit facility is up for renewal and is currently being negotiated, which Management expects to be finalized induring the next couple of weeks.six months ended June 30, 2020.
As a result of the continuing economic uncertainties caused by the COVID-19 pandemic, Managementmanagement determined sufficient indicators existedremained to trigger the performance of ana further interim goodwill impairment analysis as of March 31,June 30, 2020. The analysis concluded that the Company’s carrying value of its single reporting unit exceeded the fair value and the Company recognized $290,059an approximate $200.7 thousand goodwill impairment charge in the quarterthree months ended March 31,June 30, 2020. The total impairment charge for the six months ended June 30, 2020 was $490.8 thousand.
With the continuing economic uncertainties caused by the COVID-19 pandemic, the capital markets may continue to have a downturn and adversely affect the Company’s stock price which will require the Company to further test its goodwill for impairment in future reporting periods.
On March 27, 2020, the current administration signed into law the Coronavirus Aid, Relief and Economic Security Act, which we refer to as the “CARES Act.” The CARES Act, among other things, includes provisions related to net operating loss carryback periods. We wereThe Company was able to carryback available net operating losses to the NOL to 2017 tax yearsyear and generate an estimated net refund of previously paid income taxes at an approximate 34% federal tax rate. This resulted in a net tax benefit of $573,685approximately $210.3 thousand which has been recorded in the first quarterthree months ended June 30, 2020. A total net tax benefit of approximately $783.9 thousand has been recorded for the six months ended June 30, 2020.
We identifiedThe CARES Act also provided for the Paycheck Protection Program, (“PPP”). On May 11, 2020, the Company’s received a $89,600 loan under the PPP which was processed through Sterling National Bank.
At June 30, 2020, the Company’s had a loan balance of $89,600 under the PPP and had certified a cash balance of $2.1 million.
The Company’s factory in Thailand that started producing and shipping orders forin the Company insecond quarter of 2020. This additional manufacturing capacity will provide the Company with more flexibility in determining which factory location should produce goods for future orders, particularly if COVID-19 impacts Chinese manufacturing in a second wave pandemic.
With the United States now being impacted by a resurgence of the COVID-19 pandemic we believe the economic impact of the virus in the U.S. will continue through the third quarter and view this as a major disruption but should not impact our long-term strategy and initiatives.
As the COVID 19 pandemic subsides and markets reopen, we intend to execute our organic growth strategy, which is designed to enhance our market presence and expand our customer base.
The continuing spread of COVID-19many state governments could result in a further expansion of thereinstate public health crisismeasures that could adversely affect the U.S. economy and financial markets, consumer spending and confidence levels, resulting in a further economic downturn that could affect customer and consumer demand for our products. The overall impact of the COVID-19 pandemic to our business, financial condition, cash flow and results of operations, therefore, remains uncertain. For example, if any of our major wholesale customers fail to return to normal operations, our revenue could decline, which could have a material adverse effect on our business, financial condition and results of operations.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
DuringAs discussed above, the quarter ended March 31, 2020, the Company was negatively impacted by the effectsoverall impact of the worldwide COVID-19 pandemic. Ourpandemic to our business, financial condition, cash flow and results of operations remains uncertain. For example, if any of our major wholesale customers fail to maintain normal operations, our revenue could decline, which could have a material adverse effect on our business, financial condition, results of operations and financial performance forliquidity. Management believes the three months ended March 31, 2020 were adversely impacted which resulted in a $2.8 million or 95% decrease in net revenue. The Company reported a net loss of approximately $597 thousand for the three months ended March 31, 2020 compared to a net loss of approximately $345 thousand for the three months ended March 31, 2019, a net loss increase of approximately 73%.
The Company’s factory suppliers in Thailand and China are now fully functioning and shipping orders. However with the resurgenceeconomic impact of the COVID-19 pandemic in the United States,U.S. will continue through to the futureend of 2020 and views this as a major disruption to the 2020 forecast but ultimately should not impact on the retail market place remains uncertain, which places doubt on the timing of the Company’s new retail programs that are planned to be introduced later in the year, which could result in further reduced revenueour long-term strategy and continued losses.initiatives.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has had a recent history of losses and negative cash from operations and its cash balance has dropped by $1.0 million from $3.1million as of December 31, 2019 to $2.1 million as of June 30, 2020. The uncertainty and the continuing negative impact this disruption could have on the retail business and consumers’ willingness to visit retail stores, causing reduced consumer foot traffic and consumer spending, could negatively impact the demand for our products or delay future planned promotional opportunities. As the Company relies on cash generated from operations to support its ongoing business, based on the Company’s expected rate of consumption, if the new programs are delayed or postponed the Company will need additional working capital in the fourth quarter of 2020 and its prospects of obtaining that capital are uncertain at this time. The Company may be able to raise the required additional capital through debt or equity financing. However, the Company can make no assurances that it will be able to raise the required capital, on acceptable terms or at all. Unless the Company succeeds in raising additional capital or successfully increases cash generated from operations, Managementmanagement believes there is substantial doubt about the Company’s ability to continue as a going concern forand meet its obligations over the next twelve months from the filing date of this report. However, there are compensating factors and actions that are being taken to address these uncertainties, including the following:
The Company has an $89,600 PPP loan but no other debt or other outstanding obligations, outside of normal trade obligations.
The Company has no obligations or agreements containing financial covenants.
The Company has working capital of approximately $2.2 million consisting mostly of cash of $2.1 million.
The Company has income tax refundable of approximately $1.0 million of which approximately $800 thousand has already been applied for refund.
The Company is in discussions with an alternate funding source that offers more extensive programs that will service the Company’s future business model.
The Company’s plan has been to sell direct to consumers. The funding and cashflow requirements for this business model will require e-commerce funding. The Company is in discussions with a funding source that provides this option.
The Company has in place a mitigation plan that reduces discretionary expenses, executive managements compensation, and significantly reduces the cost of the Hong Kong operation and also reduces future travel, lodging and show expenses.
Management is closely monitoring its operations, liquidity, and capital resources and is actively working to minimize the current and future impact of this unprecedented situation. TheTo conserve liquidity, the Company has takenmade some immediate steps to reduce operating costs in the second quarter of 2020 with other cost reductions effective later in the year. Disregarding the goodwill impairment charge that did not occur in 2019, the total operating expenses for the 3 months ended June 30, 2020 and 2019 were $701.5 thousand and $752.6 thousand, respectively, a reduction of $51.1 thousand. Disregarding the impairment charge in the first quarter 2020, the operating expenses are reduced to conserve cash including reductions$915.2 thousand. When compared against the same calculated operating expenses in rent, travelthe second quarter 2020 of $701.5 thousand, expenses and staff reductions and plans to make further cost reductions to further conserve liquidity.are down by $213.7 thousand since the first quarter 2020.
At MarchOn July 31, 2020, the Company continued to remain debt free, had a cash balance of $2.5 million and an available credit facility of $7.5 million atterminated its factoring agreement with Sterling National Bank. ThisThe Company will seek a new credit facility that will also provide funding options that are suitable to the e-commerce business model that the Company is transitioning into. The borrowing costs associated with such financing, are dependent upon market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which is subject to eligible collateral, is up for renewal and is currently being negotiated.could increase our cost of borrowing in the future.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing, and selling home LED products (“Lighting Products”) through national and regional retailers in North America and in certain overseas markets. The Company’s products are targeted for applications such as home indoor and outdoor lighting and have different functionalities to meet consumer’s needs. The Company has developed a smart interactive mirror for residential use as a variant line for its lighting products, which was launched for market at the Consumer Electronics Show in early 2020. The development of the smart interactive mirror is part of the Company’s strategic effort to find new product lines to replace or supplement existing products that are nearing or at the end of their product life cycle. These products are offered either under the Capstone brand or licensed brands.
The Company’s products are typically manufactured in ChinaThailand and ThailandChina by contract manufacturing companies. As of the date of this Form 10-Q Report, the Company’s future product development effort is focused on Smart Mirrors because the Company believes, based on Company’s management understanding of the industry, the Smart Mirrors have the potential for greater profit margin than the Company’s historical LED consumer products. Technological developments and changes in consumer tastes could alter the perceived potential and future viability of Smart Mirrors as a primary product. The Company may change its product development strategies and plans as economic conditions and consumer tastes change, which condition and changes may be unforeseeable by the Company or may be beyond the ability of the Company to timely or at all adjust its strategic and product development plans.
The 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 amount expected to be collected 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 March 31,June 30, 2020 and December 31, 2019, accounts receivable servesserved as collateral when the Company borrowsborrowed against its credit facilities.
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will recognize an allowance against amounts due, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due and consideration of other factors such as industry conditions, the current business environment and the Company’s historical payment experience. An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.
As of March 31,June 30, 2020 and December 31, 2019, management has determined that accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table summarizes the components of Accounts Receivable, net:
| March 31, | | December 31, | | June 30, | | December 31, | |
| 2020 | | 2019 | | 2020 | | 2019 | |
Trade Accounts Receivables at period end | | $ | 69,973 | | | $ | 276,551 | | | $ | 146,373 | | $ | 276,551 | |
Reserve for estimated marketing allowances, cash discounts and other incentives | | | - | | | | (263,092 | ) | |
Reserve for estimated marketing allowances | | | | (77,102 | ) | | | (263,092 | ) |
Total Accounts Receivable, net | | $ | 69,973 | | | $ | 13,459 | | | $ | 69,271 | | $ | 13,459 | |
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.
Prepaid Expenses
The Company’s prepaid expenses consist primarily of deposits on inventory purchases for future orders as well as prepaid insurance, trade show and subscription expense. As of March 31,June 30, 2020 and December 31, 2019, prepaid expenses were $140,583$89,490 and $182,782, respectively.
Goodwill
On September 13, 2006, the Company entered into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (“Capstone”). Capstone was incorporated in Florida on May 15, 1996 and is engaged primarily in the business of wholesaling technology inspired consumer products to distributors and retailers in the United States. Under the Stock Purchase Agreement, the Company acquired 100% of the issued and outstanding shares of Capstone’s Common Stock, and recorded goodwill of $1,936,020.
Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired.
Goodwill is tested for impairment on December 31 of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the carrying amount exceeds its fair value, an impairment loss is recognized. Goodwill is not amortized. The Company estimates the fair value of its single reporting unit relative to the Company's market capitalization.
Goodwill is subject to ongoing periodic impairments tests based on fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. At December 31, 2019, the required annual impairment test of goodwill was performed, and no impairment existed as of the valuation date.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As a result of the continuing economic uncertainties caused by the COVID-19 pandemic, wemanagement determined sufficient indicators existed to trigger the performance of an interim goodwill impairment analysis as of March 31, 2020. The analysis concluded thatanalysis. For the Company’s carrying value of its single reporting unit exceeded the fair valuethree months and the Company recognized $290,059 goodwill impairment charge in the quartersix months ended March 31, 2020 as shownand June 30, 2020, the Company recognized an impairment charge of $290,059 and $200,707, respectively.
The following table summarizes the changes in the following table.Company’s goodwill asset which is included in the total assets in the accompanying condensed consolidated balance sheets:
Balance at December 31, 2019 | | $ | 1,936,020 | |
Impairment charge | | | (290,059 | ) |
Balance at March 31, 2020 | | $ | 1,645,961 | |
| June 30, | | December 31, | |
| 2020 | | 2019 | |
Balance at the beginning of the period | | $ | 1,936,020 | | | $ | 1,936,020 | |
Impairment charges | | | 490,766 | | | | - | |
Balance at June 30, 2020 | | $ | 1,445,254 | | | $ | 1,936,020 | |
With the continuing economic uncertainties caused by the COVID-19 pandemic, the capital markets may continue to have a downturn and adversely affect the Company’s stock price which will require the Company to test its goodwill for impairment in future reporting periods.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value Measurement
The accounting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820-10,(“ASC”), “Fair Value Measurements and Disclosures” (“ASC 820-10”)(ASC 820-10) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3: Significant unobservable inputs.
The input used in the goodwill fair value calculation falls within the level 1 hierarchy.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the reporting periods. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For calculation of the diluted earnings 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. As of March 31,June 30, 2020 and 2019, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 900,000880,000 and 870,001,813,334, respectively.
During the periodsix months ended March 31,June 30, 2020 a total of 100,000120,000 stock options expired.
Basic weighted average shares outstanding is reconciled to diluted weighted shares outstanding as follows:
| | Three months ended | | | Three months ended | | | Three Months Ended | | | Three Months Ended |
| | March 31, 2020 | | | March 31, 2019 | | | June 30, 2020 | | | June 30, 2019 |
Basic weighted average shares outstanding | | | 46,463,365 | | | | 47,033,670 | | | | 46,296,364 | | | | 46,928,935 |
Dilutive options | | | - | | | | - | | | | - | | | | - |
Diluted weighted average shares outstanding | | | 46,463,365 | | | | 47,033,670 | | | | 46,296,364 | | | | 46,928,935 |
| | Six Months Ended | | | Six Months Ended |
| | June 30, 2020 | | | June 30, 2019 |
Basic weighted average shares outstanding | | | 46,378,481 | | | | 46,906,092 |
Dilutive options | | | - | | | | - |
Diluted weighted average shares outstanding | | | 46,378,481 | | | | 46,906,092 |
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Company generates revenue from developing, marketing and selling consumer lighting products through national and regional retailers. The Company’s products are targeted for applications such as home indoor and outdoor lighting and have different functionalitiesfunctionalities. Capstone currently operates in the consumer lighting products category in the United States and in certain overseas markets. These products may be offered either under the Capstone brand or licensed brands.
A sales contract occurs when the customer-retailer submits a purchase order to buy a specific product, a specific quantity, at an agreed-fixed price, within a ship window, from a specific location and on agreed payment terms.
The selling price in all of our customers’ orders has been previously negotiated and agreed to including any applicable discount prior to receiving the customer’s purchase order. The stated unit price in the customer’s order has already been determined and is fixed at the time of invoicing.
The Company recognizes product revenue when the Company’s performance obligations as per the terms in the customers purchase order have been fully satisfied, specifically, when the specified product and quantity ordered has been manufactured and shipped pursuant to the customers requested ship window, when the sales price as detailed in the purchase order is fixed, when the product title and risk of loss for that order has passed to the customer, and collection of the invoice is reasonably assured. This means that the product ordered and to be shipped has gone through quality assurance inspection, customs and commercial documentation preparation, the goods have been delivered, title transferred to the customer and confirmed by a signed cargo receipt or bill of lading. Only at the time of shipment when all performance obligations have been satisfied will the judgement be made to invoice the customer and complete the sales contract.
The Company may enter into a licensing agreement with globally recognized companies, that allows the Company to market products under a licensed brand to retailers for a designated period of time, and whereby the Company will pay a royalty fee, typically a percentage of licensed product revenue to the licensor in order to market the licensed product.
The Company expenses license royalty fees and sales commissions when incurred and these expenses are recognized during the period the related sale is recorded. These costs are recorded within sales and marketing expense.
The following tabletables disaggregates net revenue by brand and geographical area:
| For the Three Months Ended March 31, 2020 | | For the Three Months Ended March 31, 2019 | | For the Three Months Ended June 30, 2020 | | | For the Three Months Ended June 30, 2019 | |
| Capstone Brand | | License Brands | | Total Consolidated | | Capstone Brand | | License Brands | | Total Consolidated | | Capstone Brand | | | % of Revenue | | | Capstone Brand | | | % of Revenue | |
Lighting Products- U.S. | | $ | 48,303 | | | $ | - | | | $ | 48,303 | | | $ | 2,677,627 | | | $ | - | | | $ | 2,677,627 | | | $ | 780,171 | | | | 86 | % | | $
| 3,307,382 | | | | 97 | % |
Lighting Products-International | | | 100,674 | | | | - | | | | 100,674 | | | | 301,175 | | | | - | | | | 301,175 | | | | 126,387 | | | | 14 | % | | | 100,440 | | | | 3 | % |
Total Revenue | | $ | 148,977 | | | $ | - | | | $ | 148,977 | | | $ | 2,978,802 | | | $ | - | | | $ | 2,978,802 | | |
Total Net Revenue | | | $ | 906,558 | | | | 100 | % | | $
| 3,407,822 | | | | 100 | % |
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
| For the Six Months Ended June 30, 2020 | | | For the Six Months Ended June 30, 2019 | |
| Capstone Brand | | | % of Revenue | | | Capstone Brand | | | % of Revenue | |
Lighting Products- U.S. | | $ | 828,474 | | | | 78 | % | | $ | 5,985,009 | | | | 94 | % |
Lighting Products-International | | | 227,061 | | | | 22 | % | | | 401,615 | | | | 6 | % |
Total Net Revenue | | $ | 1,055,535 | | | | 100 | % | | $ | 6,386,624 | | | | 100 | % |
We provide our customers with limited rights of return for non-conforming product warranty claims. As a policy, the Company does not accept product returns from customers, however occasionally as part of a customer's in store test for new product, we may receive back residual inventory.
Customer orders received are not long-term orders and are typically shipped within six months of the order receipt, but certainly within a one-year period.
Our payment terms may vary by the type of customer, the customer's credit standing, the location where the product will be picked up from and for international customers, which country their corporate office is located. The term between invoicing date and when payment is due may vary between 30 days and 90 days depending on the customer type. In order to ensure there are no payment issues, overseas customers or new customers may be required to provide a deposit or full payment before the order is delivered to the customer.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company selectively supports retailer's initiatives to maximize sales of the Company's products on the retail floor or to assist in developing consumer awareness of new products launches, by providing marketing fund allowances to the customer. The Company recognizes these incentives at the time they are offered to the customers and records a credit to their account with an offsetting charge as either a reduction to revenue, increase to cost of sales, or marketing expenses depending on the type of sales incentives. Sales reductions for anticipated discounts, allowances and other deductions are recognized during the period the related revenue is recorded.
Warranties
The Company provides the end user with limited rights of return as a consumer assurance warranty on all products sold, stipulating that the product will function properly for the warranty period. The warranty period for all products is one year from the date of consumer purchase.
Certain retail customers may receive an off-invoice based discount such as a defective/warranty allowance, that will automatically reduce the unit selling price at the time the order is invoiced. This allowance will be used by the retail customer to defray the cost of
any returned units from consumers and therefore negate the need to ship defective units back to the Company. Such allowances are charged to cost of sales at the time the order is invoiced.
For those customers that do not receive a discount off-invoice, the Company recognizes a charge to cost of sales for anticipated non-conforming returns based upon an analysis of historical product warranty claims and other relevant data. We evaluate our warranty reserves based on various factors including historical warranty claims assumptions about frequency of warranty claims, and assumptions about the frequency of product failures derived from our reliability estimates. Actual product failure rates that materially differ from our estimates could have a significant impact on our operating results. Product warranty reserves are reviewed each quarter and recognized at the time we recognize revenue.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following table summarizes the changes in the Company's product warranty liabilities which are included in accounts payable and accrued liabilities in the accompanying March 31,June 30, 2020 and December 31, 2019 balance sheets:
| | March 31, | | | December 31, | | | June 30, | | | December 31, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Balance at the beginning of the period | | $ | 247,850 | | | $ | 212,495 | | | $ | 247,850 | | | $ | 212,495 | |
Amount accrued | | - | | | 180,797 | | | - | | | 180,797 | |
Expenditures | | | (115,919 | ) | | | (145,442 | ) | | | (193,016 | ) | | | (145,442 | ) |
Balance at period-end | | $ | 131,931 | | | $ | 247,850 | | | $ | 54,834 | | | $ | 247,850 | |
Advertising and Promotion
Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in sales and marketing expenses. Advertising and promotion expense was $188,808$8,146 and $171,457$14,549 for the three months and $196,954 and $186,006 for the six months ended March 31,June 30, 2020 and 2019, respectively.
Product Development
Our research and development team located in Hong Kong working with our designated contractor factories, are responsible for the design, development, testing, and certification of new product releases. Our engineering efforts support product development across all products, as well as product testing for specific overseas markets. All research and development costs are charged to results of operations as incurred.
ForProduct development expenses were $41,573 and $94,534, respectively for the three months and $93,186 and $179,763, respectively for the six months ended March 31,June 30, 2020 and 2019, research and development expenses were $51,614 and $85,229, respectively.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)2019.
Shipping and Handling
The Company's shipping and handling costs are included in sales and marketing expenses and are recognized as an expense during the period in which they are incurred and amounted to $13,782$1,506 and $7,866$8,347 for the three months and $15,289 and $16,214, respectively for the six months ended March 31,June 30, 2020 and 2019, respectively.2019.
Accounts Payable and Accrued Liabilities
The following table summarizes the components of accounts payable and accrued liabilities as of March 31,June 30, 2020 and December 31, 2019, respectively:
| | March 31, | | | December 31, | | | June 30, | | | December 31, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Accounts payable | | $ | 189,008 | | | $ | 273,606 | | | $ | 614,060 | | | $ | 273,606 | |
Accrued warranty reserve | | 131,931 | | | 247,850 | | | 54,834 | | | 247,850 | |
Accrued compensation, benefits, marketing allowances and other liabilities | | | 516,405 | | | | 114,137 | | | | 349,528 | | | | 114,137 | |
Total accrued liabilities | | | 648,336 | | | | 361,987 | | | | 404,362 | | | | 361,987 | |
Total | | $ | 837,344 | | | $ | 635,593 | | | $ | 1,018,422 | | | $ | 635,593 | |
Income Taxes
The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”)ASC 740 Income Taxes. ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company and its U.S. subsidiaries file consolidated income tax returns.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
Tax regulations within each jurisdiction are subject to the interpretation of the relaxed tax laws and regulations and require significant judgement to apply. The Company is not subject to U.S. federal, state and local tax examinations by tax authorities generally for a period of 3 years from the later of each return due date or date filed.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic SecurityCARES Act (“CARES Act”) was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years.
If the Company were to subsequently record an unrecognized tax benefit, associated penalties and tax related interest expense would be recorded as a component of income tax expense.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of ASC 718 Compensation- Stock Compensation, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company's condensed consolidated statements of operations.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.
Stock-based compensation expense recognized during the periods ended March 31, 2020 and 2019 was $8,925 and $11,025, respectively.
In conjunction with the adoption of ASC 718, the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense.
The Company accounts for forfeitures as they occur.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis, including those related to revenue recognition, periodic impairment tests, product warranty obligations, valuation of inventories, tax related contingencies, valuation of stock-based compensation, other contingencies and litigation, among others. The Company generally bases its estimates on historical experience, agreed obligations, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Historically, past changes to these estimates have not had a material impact on the Company’s financial statements. However, circumstances could change, and actual results could differ materially from those estimates.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Standards
To be Adopted in a Future Period
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses.” This ASU sets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In November 2019, the effective date of this ASU was deferred until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is in the process of determining the potential impact of adopting this guidance on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)" (“ASU 2019-12”). The amendments in ASU 2019-12 seek to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplify GAAP in other areas of Topic 740. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2019-12 may have on the Company’s Consolidated Financial Statements.consolidated financial statements.
Adoption of New Accounting Standards
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment,Impairment", which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. The adoption of ASU 2017-04 did not have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued Accounting Standards UpdateASU No. 2018-13, “FairFair Value Measurement (Topic 820): Disclosure Framework - – “Changes to the Disclosure Requirements for Fair Value Measurement.” This new guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. The adoption of ASU 2018-03 did not have a material effect on the Company’s consolidated financial statements.
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company’s consolidated financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company’s financialsconsolidated financial statements properly reflect the change.
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to credit risk consist principally of cash and accounts receivable.
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash
The Company at times has cash with its financial institution in excess of Federal Deposit Insurance Corporation ("FIDC") insurance limits. The Company places its cash with high credit quality financial institutions which minimize these risks.risk of loss.
Accounts Receivable
The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States and their international locations. The Company typically does not require collateral from customers. Credit risk is limited due to the financial strength of the customers comprising the Company's customer base and their dispersion across different geographical regions. The Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.
Major Customers
The Company had two customers who comprised 82%65% and 18%24%, respectively, of net revenue during the threesix months ended March 31,June 30, 2020 and one customer who comprised 100%95% of net revenue during the threesix months ended March 31,June 30, 2019. The loss of these customers would adversely impact the business of the Company.
For the threesix months ended March 31,June 30, 2020 and 2019, approximately 68%22% and 10%6%, respectively, of the Company's net revenue resulted from international sales.
As of March 31,June 30, 2020, approximately $43.6$69.3 thousand or 62%100% of accounts receivable was from one customer and approximately $26.4 thousand or 38% came from a second customer. As of December 31, 2019, approximately $13.5 thousand or 100% of accounts receivable was from one customer.
Major Vendors
The Company had two vendors from which it purchased 66%72% and 18%17%, respectively, of merchandise during the threesix months ended March 31,June 30, 2020, and one vendor from which it purchased 100%98% of merchandise during the threesix months ended March 31,June 30, 2019. The loss of these suppliers could adversely impact the business of the Company.
As of March 31,June 30, 2020, approximately $23.9$330.9 thousand or 100%54% of accounts payable was due to one vendor.two vendors. As of December 31, 2019, approximately $100.7 thousand or 100% of accounts payable were due to one vendor.
NOTE 3 – NOTES PAYABLE
Sterling National Bank
On September 8, 2010, in order to fund increasing accounts receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank), located in New York, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted.
There is a base management fee equal to .30% of the gross invoice amount. The interest rate of the loan advance is .25% above Sterling National Bank's Base Rate which at time of closing was 7%. As of March 31,June 30, 2020, and December 31, 2019, the interest rate on the loan was 5.25% and 6.75%, respectively. The amounts borrowed under this agreement are due on demand and collateralized by substantially all the assets of Capstone.
NOTE 3 – NOTES PAYABLE (continued)
For the periodsthree months ended March 31,June 30, 2020 and 2019, the processing fees associated with the agreement were $333$2,974 and $10,494$9,732, respectively.
NOTE 3 – NOTES PAYABLE (continued)For the six months ended June 30, 2020 and 2019, the processing fees associated with the agreement were $3,307 and $20,228 respectively.
On July 18, 2019, Sterling National Bank renewed the credit line up to $7,500,000 to June 30, 2020. Additional expansion
The credit facility at Sterling National Bank was up for renewal. On July 16, 2020, the Company received a Termination of Factoring Agreement letter advising that the Factoring Agreement would be terminated effective September 30, 2020. The bank advised that as the existing facility had not been used in recent years and with the uncertainties associated with the resurgence of the line will be reviewed asCOVID-19 pandemic and its potential impact on the need arises.
This credit facility is up for renewal and is currently being negotiated. Inretail sector, the unlikely event that the Company is unablebank decided not to renew the credit agreement weFactoring Agreement. The Company requested to terminate the Agreement on July 31, 2020 which was agreed to by the bank.
The Company will need to seek a new credit facility that will also provide funding options that are suitable to fund our operations and future growth.the e-commerce business model that the Company is transitioning into. The borrowing costs associated with such financing, are dependent upon market conditions and our credit rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future.
As of March 31,June 30, 2020, and December 31, 2019, there was no balance due to Sterling National Bank.
The Company, through Sterling National Bank, applied for a loan under the Paycheck Protection Program (“PPP”). The PPP was enacted on March 27, 2020 as part of the Coronavirus Aid, Relief and Economic SecurityCARES Act (“CARES Act”) and provides for loans for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. On May 11, 2020, the Company received loan proceeds in the amount of approximately $89,600.
The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. As of June 30, 2020, the Company has accrued $133 of interest expense for this PPP loan. The Company intends to use the proceeds for purposes consistent with the PPP. The Company believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, however we cannot be certain that we will not take actions that could cause the Company to be ineligible for forgiveness of the loan. Under Small Business Administration (“SBA”) and U.S. Treasury Department guidelines issued in May 2020, a borrower must apply for the forgiveness of the loans by filing SBA Form 3508, Paycheck Protection Program Loan Forgiveness Application.
NOTE 4 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating lease agreements for offices and showroom facilities in Fort Lauderdale, Florida and in Hong Kong, expiring at varying dates. The Company’s principal executive office is located at 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441.
Effective February 1, 2017, the Company renewed the lease for 3 years ending January 31, 2020, with a base annual rent of $92,256 and with a total rent expense of $281,711 through the term of the agreement. Under the lease agreement, Capstone was responsible for a portion of common area maintenance charges and any other utility consumed in the leased premises.
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
On May 15, 2018, the Company entered into a lease agreement with the previous landlord to provide for a premise’s relocation, lease termination and new sublease agreement. Under the agreement the Company relocated its principal executive offices located at 350 Jim Moran Blvd, Suite 120, Deerfield Beach, Florida 33442 to 4,694 square feet of office space on the second floor of 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441. The original lease terminated on the relocation date, being July 1, 2018, and the parties proceeded under the terms of the sublease which expired on January 31, 2020. The base annual rent in the sublease remained at the same rate as the previous agreement until January 31, 2020. At the expiration of the sublease, the Company had the option to accept the prime lease with another 3 years renewal and with an option to renew for an additional 5-year period. If the Company decided to further extend the sublease after January 31, 2020, the Company would be subject to the terms and conditions of the prime lease. The base monthly rent was $7,312 to January 31, 2019 and then base rent would be $7,514 until January 31, 2020 which includes an estimate for portion of the common area maintenance.
As consideration for the lease amendment, the Company received a rate abatement from the landlord, effective May 1, 2018 and for four months to September 1, 2018. The landlord delivered the relocation premises in a “turnkey” condition with requested renovations made at no expense to the Company. As further consideration, the existing landlord agreed to pay the Company a $150,000 incentive to vacate the existing premises on completion of the relocation, which was fully paid as of December 31, 2018 and was being amortized over the life of the lease amendment and resulted in the recognition of lease incentive income of $870 per month.
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
On May 9, 2019, per the terms of the lease agreement, the current landlord was notified of the Company’s intent to take over the prime lease.
Effective November 1, 2019, the Company entered into a new prime operating lease with the landlord “431 Fairway Associates, LLC” ending June 30, 2023, for the Company’s executive offices located on the second floor of 431 Fairway Drive, Suite 200, Deerfield Beach, Florida 33441 with an annualized base rent of $70,104 and with a base rental adjustment of 3% commencing July 1, 2020 and on July 1st of each subsequent year during the term. Under the lease agreement, Capstone is also responsible for a portion of common area maintenance charges in the leased premises which has been estimated at $12.00 per square foot on an annualized basis of which the premises is approximately 4,694 square feet.
The Company's rent expense is recorded on a straight-line basis over the term of the lease. The rent expense for the periodssix months ended March 31,June 30, 2020 and 2019 amounted to $47,447$88,432 and $21,264,$42,774, respectively. The rent increase in the quartersix months ended March 31,June 30, 2020 resulted from the expiry of a $8,383 monthly rent incentive that ended January 31, 2020. At the commencement date of the new office lease, the Company recorded a right-of-use asset and lease liability under ASU 2016-02, Topic 842.
Supplemental balance sheet information related to leases as of March 31,June 30, 2020 is as follows:
Assets | | | | | | |
Operating lease - right-of-use asset | | $ | 200,619 | | | $ | 186,831 | |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Current portion of operating lease | | $ | 58,514 | | | $ | 60,071 | |
| | | | | | |
Noncurrent | | | | | | |
Operating lease liability, net of current portion | | $ | 155,851 | | | $ | 140,439 | |
Supplemental statement of operations information related to leases for the threesix months ended March 31,June 30, 2020 is as follows:
Operating lease expense as a component of other general and administrative | | $ | 17,46034,918 | |
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
Supplemental cash flow information related to leases for the threesix months ended March 31,June 30, 2020 is as follows:
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flow paid for operating lease | | $ | 11,684 | |
| | | | |
Lease term and Discount Rate | | | | |
Weighted average remaining lease term (months) | | | 39 | |
Operating lease | | | | |
Weighted average Discount Rate | | | | |
Operating lease | | | 7 | % |
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flow paid for operating lease | | $ | 29,210 | |
| | | | |
Lease term and Discount Rate | | | | |
Weighted average remaining lease term (months) | | | 36 | |
Operating lease | | | | |
Weighted average Discount Rate | | | | |
Operating lease | | | 7 | % |
Scheduled maturities of operating lease liabilities outstanding as of March 31,June 30, 2020 are as follows:
Year | | Operating Lease | | | Operating Lease | |
2020, remaining nine months | | $ | 53,628 | | |
2020, remaining six months | | | $ | 36,102 | |
2021 | | 73,290 | | | 73,290 | |
2022 | | 75,492 | | | 75,492 | |
2023 | | | 38,304 | | | | 38,304 | |
Total Minimum Future Payments | | 240,714 | | | 223,188 | |
| | | | |
Less: Imputed Interest | | | 26,349 | | | | 22,678 | |
| | | | | | |
Present Value of Lease Liabilities | | $ | 214,365 | | | $ | 200,510 | |
The Company has one short term lease with a duration of less than twelve months.
Capstone International Hong Kong Ltd, (CIHK), entered into a lease agreement for office space at 303 Hennessy Road, Wanchai, Hong Kong. The original agreement which was effective from February 17, 2014 has been extended various times. On August 17, 2019, the lease was further extended with a base monthly rate of $5,100 for six months until February 16, 2020. As the premises was no longer required as the employees were working remotely, the Company decided not to renew and allowed this lease to expire.
CIHK entered into a six-month rental agreement effective from December 1, 2016 for a showroom space at 3F, Wing Kin Industrial Building, 4-6 Wing Kin Road, Kwai Chung, NT, Hong Kong. This agreement has been extended various times. The lease with a base monthly rent of $1,290 expired August 16, 2019 and was further renewed for six-months expiring on February 16, 2020. Effective February 17, 2020, the Company entered into a new six-month lease expiring on September 30, 2020, with a base rate of $1,285 per month and the space is available to renew as required.
Consulting Agreements
On July 1, 2015, the Company entered into a consulting agreement with George Wolf, whereby Mr. Wolf was paid $10,500 per month through December 31, 2015 increasing to $12,500 per month from January 1, 2016 through December 31, 2017.
On January 1, 2017, the agreement was amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2017 through December 31, 2017.
On January 1, 2018, the agreement was further amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2018 through December 31, 2018.
On January 1, 2019, the agreement was further amended, whereby Mr. Wolf was paid $13,750 per month from January 1, 2019 through December 31, 2020.
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
The agreement can be terminated upon 30 days' notice by either party. The Company may, in its sole discretion at any time convert Mr. Wolf to a full-time Executive status. The annual salary and term of employment would be equal to that outlined in the consulting agreement.
Employment Agreements
On February 5, 2016, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach was paid $301,521 per annum. As part of the agreement, the base salary would be reviewed annually by the Compensation Committee for a potential increase, to at least reflect increases in the cost of living, but only if the Company shows a net profit for the year. The initial term of this agreement began February 5, 2016 and ended February 5, 2018.
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
On February 5, 2018, the Company entered into an Employment Agreement with Stewart Wallach, whereby Mr. Wallach was paid $301,521 per annum. The initial term of this agreement began February 5, 2018 and ended February 5, 2020. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed two years in length.
On February 5, 2020, the Company entered into a new Employment Agreement with Stewart Wallach, whereby Mr. Wallach will be paid $301,521 per annum. The initial term of this new agreement began February 5, 2020 and ends February 5, 2023. The parties may extend the employment period of this agreement by mutual consent with approval of the Company's Board of Directors, but the extension may not exceed two years in length.
On February 5, 2016, the Company entered into an Employment Agreement with James McClinton, whereby Mr. McClinton was paid $191,442 per annum. The term of this agreement began February 5, 2016 and ended February 5, 2018.
On February 5, 2018, the Company renewed the Employment Agreement with James McClinton, whereby Mr. McClinton was paid $191,442 per annum. The term of this new agreement began February 5, 2018 and ended February 5, 2020.
On February 5, 2020, the Company entered into a new Employment Agreement with James McClinton, whereby Mr. McClinton will be paid $191,442 per annum. The term of this new agreement began February 5, 2020 and ends February 5, 2022.
There is a common provision in both Mr. Wallach and Mr. McClinton's employment agreements:
If the officer's employment is terminated by death or disability or without cause, the Company is obligated to pay to the officer's estate or the officer, as the case may be an amount equal to accrued and unpaid base salary as well as all accrued but unused vacation days through the date of termination. The Company will also pay sum payments equal to (a) the sum of twelve (12) months base salary at the rate the Executive was earning as of the date of termination and (b) the sum of "merit" based bonuses earned by the Executive during the prior calendar year of his termination. Any payments owed by the Company shall be paid from a normal payroll account on a bi-weekly basis in accordance with the normal payroll policies of the Company. The amount owed by the Company to the Executive, from the effective Termination date, will be payout bi-weekly over the course of the year but at no time will be no more than twenty (26) installments. The Company will also continue to pay the Executive's health and dental insurance benefits for 6 months starting at the Executives date of termination. If the Executive had family health coverage at the time of termination, the additional family premium obligation would remain theirs and will be reduced against the Executive's severance package. The employment agreements have an anti-competition provision for 18 months after the end of employment.
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
Directors Compensation
On May 31, 2019 the Company approved that effective on June 1, 2019, each independent director, namely Jeffrey Guzy and Jeffrey Postal, would each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation would be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee.
On May 31, 2019, the Company also approved that the independent directors would be offered effective from June 1, 2019, the opportunity to participate as a non-employee in the Company’s Health Benefit Plan, subject to compliance with all plan participation requirements and on acceptance into the plan the director will be responsible to pay 100% of their plans participation cost.
On June 10, 2020 the Company approved that effective on August 1, 2020 until August 1, 2021, each independent director, namely Jeffrey Guzy and Jeffrey Postal, would each receive $750 per calendar month, as a Form 1099 compensation, for their continued services as directors of the Company. This compensation would be additional to the stock option grants awarded for their participation on the Audit Committee and Compensation and Nominating Committee.
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
Licensing Agreements
Under a February 4, 2015 Licensing Agreement with a floorcare company, Company markets home lighting products under the licensed brand of the floorcare company, to discount retailers, warehouse clubs, home centers, on-line retailers and other retail distribution channels in the U.S., Canada and Mexico. The initial term of the agreement was for 3 years. The Licensing Agreement did not have a guaranteed royalty stipulation.
On December 29, 2016, the Company finalized the first amendment to the February 4, 2015 Licensing Agreement with the floorcare company in which the initial term was extended through February 3, 2020 and additional renewal terms and periods were also finalized. During this initial extended period through February 3, 2020, if the Company achievesachieved net sales of $5,000,000, then the Licensing Agreement would automatically be extended 2 years until February 3, 2022 and if during this second extended period the Company achievesachieved net sales of $5,000,000, then the Licensing Agreement would automatically be further extended 2 years until February 3, 2024. This license amendment also added an additional product category.
On April 12, 2018, the Company finalized the second amendment to the February 4, 2015 Licensing Agreement in which the license was further expanded to add an additional product category.
As the Company did not achieve the stated net sales volume for the renewal period, the License expired on February 3, 2020.
Public Relations Agreement
On September 27, 2018, the Company executed a public relations services agreement with Max Borges Agency, (“MBA”), a full – service public relations and communications agency with offices in Miami and San Francisco. The Company entered into the Agreement to obtain assistance from a nationally recognized firm, specializing in the development of product branding, marketing and launching of technology products. The agreement was effective on October 1, 2018 with an initial 180-day term, which either party can cancel with 60 days advanced notice in writing on or after the 120th day of the effective date. MBA will receive a monthly fee of $11,250 and $476 subscription fee due on the first of each month.
During 2019 both Companies agreed to temporarily pause the MBA agreement for specific months and restarted the engagement with the same statement of work and terms as originally agreed.
On January 21, 2020, the Company provided MBA with 60 days cancellation notice and the agreement ended March 31, 2020.
NOTE 4 – COMMITMENTS AND CONTINGENCIES (Continued)
During the three months ended March 31, 2020, the Company incurred $33,750 of services fees and $952 of subscription fees. As the agreement has been cancelled there will be no further charges for this project.
NOTE 5 - STOCK TRANSACTIONS
Options
In 2005, the Company authorized the 2005 Equity Plan that made available shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units.
On May 2, 2017, the Company’s Board of Directors amended the Company’s 2005 Equity Incentive Plan to extend the Plan’s expiration date from December 31, 2016 to December 31, 2021.
On August 29, 2018, the Company granted 100,000 stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation Committee, and 10,000 stock options to the Company Secretary. The Director options have an exercise price of $.435 with an effective date of August 6, 2018 and vested on August 5, 2019 and have a term of 5 years. The Company Secretary options have an exercise price of $.435 with an effective date of August 6, 2018 and vested on August 5, 2019 and have a term of 10 years.
NOTE 5 - STOCK TRANSACTIONS (Continued)
On May 31, 2019, the Company granted 100,000 stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation Committee, and 10,000 stock options to the Company Secretary. The Director options have a strike price of $.435 with an effective date of August 6, 2019 and will vest on August 5, 2020 and have a term of 5 years. The Company Secretary options have a strike price of $.435 with an effective date of August 6, 2019 and will vest on August 5, 2020 and have a term of 10 years.
On June 10, 2020, the Company granted 100,000 stock options each to two directors of the Company for their participation as members of the Audit Committee and Nominating and Compensation Committee, and 10,000 stock options to the Company Secretary. The Director options have a strike price of $.435 with an effective date of August 6, 2020 and will vest on August 5, 2021 and have a term of 5 years. The Company Secretary options have a strike price of $.435 with an effective date of August 6, 2020 and will vest on August 5, 2021 and have a term of 10 years.
As of March 31,June 30, 2020, there were 900,000880,000 stock options outstanding and 690,000670,000 stock options vested. The stock options have a weighted average expense price of $0.435.
Stock options were issued under Section 4(a)(2) and Rule 506(b) of Regulation D under the Securities Act of 1933.
For the three-month periodthree months ended March 31,June 30, 2020 and 2019, the Company recognized stock-based compensation expense of $8,925 and $11,025 respectively.
For the six months ended June 30, 2020 and 2019, the Company recognized stock-based compensation expense of $17,850 and $22,050 respectively.
Such amounts are included in compensation expense in the accompanying consolidated statements of operations. A further compensation expense expected to be $12,358$3,433 will be recognized for these options in 2020.
NOTE 5 - STOCK TRANSACTIONS (Continued)
Adoption of Stock Repurchase Plan
On August 23, 2016, the Company's Board of Directors authorized the Company to implement a stock repurchase plan for up to $750,000 worth of shares of the Company's outstanding common stock. The stock purchases can be made in the open market, structured repurchase programs, or in privately negotiated transactions. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number and value of the shares which are repurchased will be at the discretion of management and will depend on a number of factors including the price of the Company's common stock, market conditions, corporate developments and the Company's financial condition. The repurchase plan may be discontinued at any time at the Company's discretion.
On December 21, 2016, the Company's Board of Directors approved an extension of the Company's stock repurchase plan through December 31, 2017, subject to an earlier termination at the discretion of the Company's Board of Directors.
On February 13, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 1,000,000 shares of Company common stock from Involve, LLC., under the Option Agreement dated June 27, 2016, at an exercise price of $.15 per share.
On May 1, 2017, as authorized under the Company's stock repurchase plan, the Company repurchased 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.
On May 2, 2017, the Company's Board of Directors authorized at the Company's discretion to either retain repurchased shares in the treasury or to retire the repurchased shares and these shares were retired on June 1, 2017.
On December 15, 2017, the Company's Board of Directors approved an extension of the Company's stock repurchase plan for up to $750,000 through June 30, 2018.
On August 29, 2018, the Company’s Board of Directors approved a further extension of the Company’s stock repurchase plan through August 31, 2019. The Board of Directors also approved an increase of the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program from $750,000 to $1,000,000 during the renewal period.
NOTE 5 - STOCK TRANSACTIONS (Continued)
On August 29, 2018, the Company’s Board of Directors authorized and directed the Company’s management to establish a trading account at a brokerage firm for the Company to conduct open market purchases of the Company’s Common Stock in accordance with the terms and conditions of the Company’s current stock repurchase program and to fund said account from available cash of the Company but not to exceed such amount that would cause the Company to be unable to pay its bona fide debts.
On December 19, 2018, Company entered into a Purchase Plan pursuant to Rule 10b5-1 under the Exchange Act, with Wilson Davis & Co., Inc., a registered broker-dealer. Under the Purchase Plan, Wilson Davis & Co., Inc will make periodic purchases of up to an aggregate of 750,000 shares at prevailing market prices, subject to the terms of the Purchase Plan.
On May 31, 2019, the Company’s Board of Directors approved a further extension of the Company’s stock repurchase plan through August 31, 2020. The Board of Directors also approved that the maximum amount of aggregate funding available for possible stock repurchases under the stock repurchase program remained at $1,000,000 during the renewal period.
On September 23, 2019 the Company signed a revised stock Purchase Plan to reflect an extension of the plan to repurchase up to an aggregate of 750,000 shares at prevailing market prices, subject to the terms of the Purchase Plan.
On March 30, 2020, Wilson Davis & CO., Inc., advised the Company that 750,000 of the Company’s Common Stock had been repurchased to complete the authorized Purchase Plan.
NOTE 5 - STOCK TRANSACTIONS (Continued)
On June 10, 2020, the Company’s Board of Directors approved a further extension of the Company’s stock repurchase plan through August 31, 2021.
During the quarter ended March 31, 2020 a total of 283,383 of the Company’s Common Stock has been repurchased at a total cost of $36,333.
As of March 31, 2020, since the start of the program, a total of 750,000 of the Company’s Common Stock has been repurchased at a total cost of $107,740.
As of June 30, 2020, there have been no further repurchase of the Company’s Common Stock in the quarter and further Stock repurchases have been placed on hold in order to conserve cash during the COVID-19 pandemic.
NOTE 6 - INCOME TAXES
As of December 31, 2019, the Company had net operating loss carry forwards of approximately $1,654,000, available to the Company indefinitely and up to 80% of the operating loss can be used against future taxable income.
As of March 31,June 30, 2020, the Company had $0$186,022 net operating loss carry forward available to the Company.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic SecurityCARES Act (“CARES Act”) was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years. The Company was able to carryback the NOL to 2017 tax years and generate an estimated refund of previously paid income taxes at an approximate 34% federal tax rate. This resulted in a net benefit of $573,685 which has been recorded in the first quarter 2020.
The Company has recorded a further net benefit of $210,253 in the second quarter 2020. For the six months ended June 30, 2020 the Company has recorded $783,938 in net tax benefits.
The effective tax rate as of March 31,June 30, 2020 was 49.0%38.5% and 3.4%3.3% as of March 31,June 30, 2019 and the statutory tax rate was 25.2%25.3% in 2020 and 24.4%24.5% in 2019.
NOTE 6 - INCOME TAXES (Continue)
The income tax (benefit) for the three months ended March 31,June 30, 2020 and 2019 consists of:
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Current: | | | | | | | | | | | | |
Federal | | $ | (745,972 | ) | | $ | - | | | $ | (60,828 | ) | | $ | - | |
State | | - | | | - | | | 840 | | | - | |
| | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | |
Federal | | 167,538 | | | (11,340 | ) | | (150,378 | ) | | - | |
State | | | 4,749 | | | | (660 | ) | | | 113 | | | | - | |
Income Tax (Benefit) | | $ | (573,685 | ) | | $ | (12,000 | ) | | $ | (210,253 | ) | | $ | - | |
NOTE 6 - INCOME TAXES (Continued)
The income tax (benefit) for the six months ended June 30, 2020 and 2019 consists of:
| | 2020 | | | 2019 | |
Current: | | | | | | |
Federal | | $ | (806,800 | ) | | $ | - | |
State | | | 840 | | | | - | |
| | | | | | | | |
Deferred: | | | | | | | | |
Federal | | | 17,160 | | | | (11,340 | ) |
State | | | 4,862 | | | | (660 | ) |
Income Tax (Benefit) | | $ | (783,938 | ) | | $ | (12,000 | ) |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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, 2019, as filed with the Commission on March 30, 2020.
Cautionary Statement 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 in "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. All statements other than statements of historical facts contained, or incorporated by reference, in this report, including, without limitation, those regarding our business strategy, financial position, results of operations, plans, prospects, actions taken or strategies being considered with respect to our liquidity position, valuation and appraisals of our assets and objectives of management for future operations, our ability to weather the impacts of the COVID-19 pandemic, financing opportunities, and future cost mitigation and cash conservation efforts and efforts to reduce operating expenses and capital expenditures are forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" in our latest annual report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC.SEC on March 30, 2020, and in this Form 10-Q report. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions (including the negative and variants of such words). Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to various risks and uncertainties. Given these uncertainties, a reader of this Form 10-Q quarterly report should not place undue reliance on these forward-looking statements. Examples of these risks, uncertainties and other factors include, but are not limited, to the impact of:
The COVID-19 pandemic on our financial condition and operations, which could adversely affect our ability to obtain acceptable financing in an amount equal to the resulting reduction in cash from operations, and the current, and uncertain future, other impacts of the COVID-19 outbreak, including its effect on the retail market place and the closure of retail stores and its effect on consumer confidence and on the ability or desire of consumers to purchase nonessential goods, which are expected to continue to adversely impact our results, operations, outlook, plans, goals, growth, cash flows, liquidity, demand for consumer products and share price.
our success in reducing operating expenses and the impact of any such reductions.
our ability to work with Sterling National Bank to renew our existingnegotiate a new credit facility and maintainprovide sufficient collateral.
adverse general economic and related factors, such as fluctuating or increasing levels of unemployment, declines in the securities and real estate markets, and perceptions of these conditions that decrease the level of disposable income of consumers or consumer confidence.
the spread of epidemics, pandemics, and viral outbreaks.
our anticipated need for additional financing, which may not be available on favorable terms, or at all, and may be dilutive to existing shareholders.
our ability to raise sufficient capital and/or take other actions to improve our liquidity position or otherwise meet our liquidity requirements that are sufficient to eliminate the substantial doubt about our ability to continue as a going concern.
an impairment of our goodwill, including in connection with the preparation of our financial statements as of March 31,June 30, 2020 and in future reporting periods.
the risks and increased costs associated with operating internationally.
fluctuations in foreign currency exchange rates.
our expansion into and investments in new categories.
our inability to obtain adequate insurance coverage.
volatility and disruptions in the credit and financial markets, which may adversely affect our ability to borrow.
our inability to recruit or retain qualified personnel or the loss of key personnel.
our inability to keep pace with developments in technology.
other factors are set forth under “Risk Factors” in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019.