Capstone Companies, Inc. (OTCQB:CAPC) Q4 2021 Earnings Conference Call April 1, 2022 10:30 AM ET
Company Participants
Aimee Brown – Corporate Secretary
Stewart Wallach – President and Chief Executive Officer
Operator
Greetings and welcome to Capstone Companies’ Year End 2021 Financial Results and Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Aimee Brown, Corporate Secretary for Capstone Companies Inc. Thank you. You may begin.
Aimee Brown
Thank you and good morning to everyone. On the call today is Stewart Wallach, Capstone’s President and Chief Executive Officer. He will be discussing the year end 2021 financial results as well as give us an update on the strategy and outlook. If you do not have the release that was distributed yesterday afternoon, it is available on the company’s website at capstonecompaniesinc.com.
As you are aware, we may make forward-looking statements during today’s presentation. These statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in our earnings release as well as in documents filed by the company with the Securities and Exchange Commission, which can be found at capstonecompaniesinc.com or at www.sec.gov.
With that, I will turn it over to you, Stewart.
Stewart Wallach
Thank you and good morning to everyone. Gerry McClinton is under the weather and will not be in attendance today. To avoid rescheduling, I will be reading his financial report verbatim as presented. Following this presentation of the year end results, I will be expanding upon our adapted planning, ongoing execution of the connected services campaign and what lies ahead for us in ‘22. On that note, I will now present Gerry’s report.
In discussing our 2021 financial performance, it is always a good practice which we encourage for shareholders to review the filed Form 10-K. As operational activity was minimal over the course of 2021 and focused on final product development and completion as opposed to revenue occurrence, today’s financial presentation will be condensed.
I would first like to acknowledge our employees for their continuing commitment to the company’s stated goals during another very difficult year. Capstone Associates faced many operational obstacles, most beyond their control, resulting from the continuing global impact of COVID-19. We started 2021 with a positive economic outlook, particularly with the introduction of vaccine programs throughout the world and the anticipated launch of the Smart Mirror program. While the company announced a plan to launch its e-commerce initiative in March of 2021 that effort was continually delayed due to the global COVID-19 resurgence, which forced factory shutdowns, testing lab and ocean port closure overseas.
As a result, inventories planned to support Q3 2021 e-commerce business were not shipped until December of 2021. These substantial logistic delays impacted many operational areas specifically from securing product components, product testing, certification, manufacturing and ocean freight. The certification process delays with the FCC had the biggest impact in delaying the 2021 launch. These unexpected delays and transition into Thailand OEMs with a new product essentially delayed our launch of the Smart Mirror program an entire year.
The company also experienced limitations and employee resources resulting from travel restrictions and stay-at-home orders due to precautions related to the COVID-19 pandemic and its waves of variants of the virus. Despite these restrictions, the company staff continued to manage the overseas supply chain requirements for the Smart Mirror products. The launch delay combined with declining LED product sales adversely impacted the company’s business and financial performance. In addition to the delayed shipments from Thailand, the initial inventory, which was aired in December, was not only delayed, but the carrier lost parts of the shipment and the inventory was damaged by the logistics company. The limitations on available inventories would further restrict our e-commerce activity into Q1 2022.
With the reduced operational activity resulting from the stated delays, management focused on priorities that would be critical when we launched our e-commerce business, specifically to expedite the transition of the company’s marketing presence to online retail with Amazon and Wayfair, to expand the company’s social media platforms and online visibility, to revamp the company’s website to support online business, to build the logistics and fulfillment structure to support online orders, and to design and expand the connected surfaces product portfolio. These priorities were accomplished so that we would be ready for the 2022 launch.
So, now let’s review the 2021 financials. For the year ended December 31, 2021, net revenues were approximately $686,000, a decrease of approximately $2 million from $2.8 million in fiscal 2020. The decrease in 2021 net revenue was a direct result of the delay in launching the company’s Smart Mirror program. International sales in 2021 were approximately $34,000 as compared to $700,000 in 2020. Gross profit for the year ended December 31, 2021 was approximately $47,000 or 6.9% of net revenues as compared to $504,000 or 18.2% of net revenues for fiscal 2020.
For the years ended December 31, 2021 and 2020, cost of sales was approximately $639,000 and $2.3 million respectively, a decrease of $1.6 million. The reduction was the direct result of the reduced revenue in the year. Costs represented 93% and 81.8% of net revenues for 2021 and 2020 respectively. This increased cost was substantially due to the higher ocean freight logistics costs to the U.S. associated with the shortage of containers and vessels arriving from overseas. The decline in our revenue and earnings during the year ended December 31, 2021 resulted in a need for goodwill impairment assessments for each quarter in 2021, but there were no impairment charges required based on our assessment.
Total operating expenses. For the years ended December 31, 2021 and 2020, total operating expenses were $2.4 million and $3.6 million respectively. This represents a $1.2 million or 33% decrease over fiscal year 2020. With the reduced revenue earlier in the year, management had initiated cost mitigation plans to reduce discretionary expenses where possible, defer executive salary and eliminated some positions overseas. These expense reductions resonated throughout the company.
Selling and marketing expenses were reduced by $271,000, compensation expense by $240,000. Professional fees reduced by $55,000. General admin also was reduced by $56,000 and with no goodwill impairment charge in 2021 as compared to $624,000 in fiscal year 2020, this resulted in the $1.2 million expense reduction. The company also continued to invest during the year.
Product development expenses in 2021 and 2020 were $309,000 and $250,000 respectively, an increase of $59,000 or 23.6% over 2020. In 2021, the company invested $237,000 in the Smart Mirror development compared to $182,000 in 2020, an increase of $55,000 or 30.2%. In 2021, Smart Mirror FCC and ETL and other certification fees of approximately $98,000 were incurred as compared to $0 in 2020. Other expenses such as prototype sample courier charges were increased by approximately $51,000 from $7,000 in 2020 to $58,000 in 2021. We continue to invest in new product design, software development, product prototyping and testing related to the Smart Mirror project.
Operating loss. For the year ended December 31, 2021, the operating loss was approximately $2.4 million as compared to $3.1 million in 2020. Despite the reduced revenue with the expense mitigation plan, we are able to reduce the loss from 2020 by $730,000 and continue to invest in the Smart Mirror program and building the e-commerce infrastructure.
Other income. For fiscal 2021, other income was approximately $456,000 compared to $90,000 in 2020, an increase of $366,000 over 2020. The other income for the year ended December 31, 2021 resulted from the reversal of approximately $340,000 of accrued marketing and promotional allowances against previous sales that is no longer required as of December 31, 2021. Marketing allowances include the cost of underwriting an in-store instant rebate coupon or a targeted markdown allowance on specific products. The company accrues and retains these allowances for a period of 3 to 5 years. In the event, the customer charge back a promotional allowance against future open invoices or submits to us an invoice. These allowances are evaluated when we see selling a specific product to a customer.
We evaluate certain allowances and we are satisfied that these allowances are no longer required based on the age of the allowance and sale of the products for which these allowances relate being significantly reduced. During the year, the company incurred $49,000 of interest expenses compared to zero in 2020 resulting from shareholder loans. For the year ended December 31, 2021, the net expense or income tax was estimated at $15,000 compared to a net benefit of $612,000 in the same period 2020. The benefit in 2020 was a result of the CARES Act, which eliminated the taxable income limit for certain net operating losses and allow businesses to carry back net operating losses arising in 2018, ‘19 and ‘20 to five prior tax years. The company was able to carry back the 2018 and 2019 NOLs to 2017 tax year and generate estimated refund of previously paid income taxes.
Net loss. For fiscal 2020 and – I am sorry for fiscal 2021 and 2020, net loss were approximately $2 million and $2.4 million respectively, a net loss decrease of approximately $420,000 over the previous year.
Liquidity and capital resources. Operational cash flow is significantly influenced by the timing and launch of new products as well as favorable payment terms negotiated with overseas suppliers. With our overseas operational presence, we have built a structure that through relationships with factory suppliers both in Thailand and China, combined with our expertise that under normal operating circumstances can develop and release quality innovative products to the marketplace substantially quicker than in previous years.
In 2021, the operational delays and reduced revenue resulting from COVID-19 hampered our ability to increase operational cash flow. Our ability to generate cash from operations has been one of our historic fundamental strengths and has provided us with flexibility in meeting our operating financing and investing needs in the past without incurring any outsider debt. During the year ended December 31, 2021, the company used cash and operations of approximately $2.4 million, which includes a net operating loss of $1.96 million.
As of December 31, 2021, the company had working capital of approximately $1.9 million and an accumulated deficit of $6.4 million. The company’s cash balance increased by approximately $54,000 from $1.22 million as of December 31, 2020 to $1.27 million as of December 31, 2021. On April 5, 2021, the company entered into five separate securities purchase agreements, whereby the company privately placed an aggregate of 2.5 million shares of common stock for an aggregate purchase price of $1.5 million. The proceeds from the private placement were used mostly to purchase startup inventory for the company’s new Smart Mirror product line and the remainder for advertising and working capital.
On July 2, 2021, the Board of Directors resolved that the company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror business. The Board resolved that certain directors would negotiate the terms of a purchase order funding agreement for up to $1,020,000 with directors, myself and Jeff Postal and E. Fleisig, a natural person. This agreement has finalized and the company received the $1,020,000 funding under this agreement on October 18, 2021. As of December 31, 2021, the company had an outstanding note payable due to related parties on the purchase order funding agreement of $1,030,340, which includes accrued interest of $10,340. The company has an income tax refund pending as of December 31, 2021 of approximately $285,000, which we expect to receive in 2022.
As of December 31, 2021, the company’s working capital was approximately $2 million, of which $1.2 million was cash. Current liabilities were $609,000 and that includes December 31, 2021, the company had $1.03 million of long-term debt outstanding resulting from the PL Funding agreement and had no encumbrances on the assets of the company. This concludes the financial summary as presented by Gerry Clinton for 2021. And I will now transition to my presentation.
Once again, good morning and thank you for today’s participation. While we have experienced much volatility in our share price over the past year, this is not an accurate indication of your management’s achievements in 2021. As longtime shareholders know, we are a disciplined seasoned team of professionals that are committed to following solid business strategies and adapting to uncertainties when presented. We have experienced numerous false starts over the dynamic period, which causes our expectations or results to vary. We planned to launch our Connected Surfaces Smart Mirror campaign in Q2 of 2021 with expected sales to commence in Q3.
Early in ‘21 because of the pandemic, our factories had ongoing shutdowns resulting in continual rescheduling, but the greatest setback was the FCC approvals we required to export our program. As I have shared in previous presentations, this process was not new to us as we have had decades of products submitted for approvals in very much the same way. The process was stated to take approximately 5 weeks allowing us to initiate production and start shipping early July for a Q3 market launch. This was not the case. And regardless of our exhaustive efforts, we did not receive the approvals until this past November.
We immediately initiated the production and attempted to expedite via air to our U.S. fulfillment center. This was a costly decision, but one that I have personally committed to earlier in 2021. To exacerbate the delays and setbacks while we fortunately received inventory earmarked for the CES exhibition, the following aired inventories were entirely mismanaged by our carrier and it took approximately 6 more weeks for the shipment to be completed. At the same time, approximately half of the inventory was damaged in transit. The entire air shipment was a failed effort and very costly. The purpose of emphasizing this information is to make you fully aware that management never stopped moving forward in spite of these unforeseen setbacks.
Fast forward, the first container inventory shipped by sea vessel were scheduled to arrive in late January for Capstone Connected online fulfillment. Once again, the inventories were delayed and did not arrive at our fulfillment facility until the first week of March. It is important to note we could not initiate our e-com Amazon campaigns aggressively until we had inventory available to support the anticipated sales. These are the ground rules.
Our initial Capstone Connected online orders were filled with the limited damage free inventory shipped by the initial air shipment. So, we had little to celebrate in 2021. Other than our resilience, the cost mitigation efforts and insider financing support that allowed us to build an estimated $1.5 million of retail inventories. I raised this point as insiders, myself included, have always risen to meet the company’s needs even in the most difficult of times. The equity raise we did in April of 2021 was expected to be adequate to drive the plan through the year with the anticipation of retail sales starting in Q3. That did not occur due to the aforementioned FCC delays. And at the same time, to exacerbate matters further, cash was needed to be advanced to suppliers to procure inventories that were now in short supply, another unanticipated obstacle. We did not flinch and three insiders provided the necessary capital to continue with the plan. In summation, we fought like hell, put our money where our mouths were and survived the daily ongoing threats to the business.
Let’s look ahead. We cannot forget where we came from and why we chose to be in this business segment back in 2019. It seems the last 2 years have been a discussion of COVID-19 and the collateral damage we experienced as a company. Frankly, there is nothing more to say about these past 2 years other than we are still standing while many companies are not. We are also poised to meet the market needs with inventories on hand. And while the e-com business process is slower than anticipated, our digital marketing initiative is being adapted and improved daily. We recently e-mailed a polling survey to an estimated 8,000 participants from our database to gauge the buying motivations and what might be preventing the conversion from the cart to a sale. We have an estimated 500 website visitors that have placed the Mirror in their cart, but have not finalized the purchase. Our goal is to learn how to improve the conversion rate and take action accordingly.
Additionally, we are going to Phase 2 of our Connected Surfaces strategy and have initiated our talks with big box customers. On the product front, engineering is proceeding with the next Smart Connected product concept within the Connected Surfaces program. I will be able to expand further on this product in the weeks ahead as fine points in the development and manufacturing process are being defined. In addition, engineering is involved in an assessment to move production to Mexico for future growth and to hedge against the increasing logistical expense long-term. We know the reason we are all invested in Capstone Companies as it represents a huge untapped potential within the emerging category of smart home products. Household penetration within the United States is projected to be 20% totaling an estimated $140 billion in 2022. Smartphone ownership exceeds $270 million in the U.S. as the expansion of technology into our daily lives continues to rise.
Our Connected Surfaces strategy has positioned well to benefit from this growth, awareness and consumer investment. The worldwide population’s digital modern lifestyles are surrounded by smart devices and are experiencing increased use in daily activities. We believe the company will regain the market momentum loss this past year as sales traction builds. While I would like to be able to flood the cable channels with advertising to expand the awareness, we have much to learn from the digital marketing effort underway. We are often compared to companies like Tonal and the Mirror by our shareholders. But the comparison is only valid when gauging innovativeness. Consider that these businesses have huge financial support for their market launches and ongoing equity for growth. Literally, hundreds of millions of dollars have been invested in the product development and marketing initiatives of these companies.
Do I believe that our Connected Surfaces campaign has the potential of these other companies? I absolutely do. More than 110 million homes have fixed broadband subscriptions in the U.S. alone. 5G will allow for expanded device use without compromising performance and the smart home category is forecasted to generate as stated earlier an approximate $140 billion this year.
Additionally, our Connected Surfaces product portfolio will reach several areas of the smart home as we creatively integrate technology into other areas of the home through newer device ideas. For example, the market for smart kitchen appliance is a prime target in our Connected Surfaces strategy. The leading kitchen appliance brands are just beginning to educate and entice consumers with new smart concepts. Just as we did for many years in the LED category, we believe we will be a part of this expansive growth through our innovative approaches to affordable product designs and market approaches that are sensitive to today’s consumer paradigms. Companies that incorporate messaging and produce innovativeness that align with value-driven expectations and digital infused lifestyles will achieve acceptance by millennial and Gen Z consumers, which will continue to play a vital and growing role in the consumer markets. Do I believe that we have the potential? I absolutely do.
In closing, at the risk of sounding quixotic, as the largest shareholder of CAPC and reflecting on its recent volatility, I still believe holding on to our family’s chairs will prove to have been the right decision long-term. My expectations for this company are so great. And while I personally may have missed the opportunity to sell a few million dollars of stock early in 2021, I still believe that decision to be sound.
Once again, thank you for your time today and to our longtime shareholders. As always, thank you for your ongoing support and to our newer shareholders, welcome and thank you. Be well.
Operator
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
Question-and-Answer Session
[No Q&A session for this event]
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