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”), a Florida corporation and its wholly-owned subsidiaries (collectively referred to as the “Company”, “we”, “our” or “us”),
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, 2021 and results of operations, stockholders’ equity and cash flows for the three months ended March 31, 2021 and 2020. 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, 2020 (the “2020 Annual Report”) filed with the SEC on March 31, 2021.
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
The Company’s top priority has been to take appropriate actions to protect the health and safety of our employees as a result of the COVID-19 pandemic. We have adjusted standard operating
procedures within our business operations to ensure the continued safety of our employees and we continually monitor evolving health guidelines to ensure ongoing compliance and protection of our employees. These procedures include expanded and more
frequent cleaning within facilities, implementation of appropriate social distancing programs, requiring use of certain personal protective equipment, screening protocols and work from home programs.
In response to COVID-19 and Centers for Disease Control (‘CDC”) guidelines, the Company has practiced the following actions since March 2020:
While all the above-referenced steps were appropriate considering COVID-19, they impacted the Company’s ability to operate the business in its ordinary and traditional course.
Our business operations and financial performance for the period ended March 31, 2021 continued to be adversely impacted by COVID-19. As of March 31, 2021 net revenue was $438 thousand as compared
to $149 thousand in the same period 2020, which was also significantly impacted by the start of the pandemic last year. The net loss for the quarters ended March 31, 2021 and 2020 was approximately $499 thousand and $597 thousand, respectively.
Net revenue for the period continued to be driven by the uncertainty felt by retail buyers as to the impact on the retail market of COVID-19 and its overall long-term negative impact on the U.S.
economy. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the impact of the global pandemic on the Company’s financial condition, liquidity, operations, suppliers, industry,
and workforce. Given the daily evolution of the COVID-19 outbreak and the global response to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for
fiscal year 2021.
The Company has been building its infrastructure to transition into the online retail business by developing an e-commerce website and has invested in developing a social media presence over the
last year and these systems are now ready to launch and ship its Smart Mirror product in the second quarter 2021. Prior to 2021, the Company relied on brick and mortar retail for sale of its products to consumers and sought to piggyback off
retailers’ e-commerce websites as well as dedicated online retailers like Amazon.
The extent to which COVID-19 pandemic will continue to impact the Company’s results will depend primarily on future developments, including the severity and duration of the crisis, the speed and
effectiveness of the national vaccine inoculation program, potential mutations of COVID-19 pandemic, and the impact of future actions that will be taken to contain COVID-19 pandemic or treat its impact. These future developments are highly uncertain
and cannot be predicted with confidence, especially if mutations of the COVID-19 virus become widespread and prove resistant to vaccines.
As a result of the continuing economic uncertainties caused by the COVID-19 pandemic, Management determined sufficient indicators existed to trigger the performance of an interim goodwill
impairment analysis as of March 31, 2021. The analysis concluded that the Company’s fair value of its single reporting unit exceeded the carrying value and a goodwill impairment charge was not required in the quarter ended March 31, 2021 as the fair
value of the reporting unit exceeded the carrying amount based on the Company’s market capitalization.
With the continuing economic uncertainties caused by the COVID-19 pandemic, the capital markets may 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.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, which we refer to as the “CARES Act.” was enacted into law. The CARES Act includes several significant income and other
business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years. The Company was
able to carryback the 2018 and the 2019 NOLs to 2017 tax year and generate an estimated refund of previously paid income taxes at an approximate 34% federal tax rate. As of December 31, 2020, the Company had an income tax refundable of approximately
$862 thousand of which approximately $576 thousand of income tax was refunded on February 3, 2021 leaving approximately $286 thousand remaining balance to be refunded as of March 31, 2021.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business.
The COVID-19 pandemic resurgence in many states or emergence of new vaccine-resistant strains of the virus could have a continuing negative impact on the brick and mortar retail sector, with
consumers’ unwilling to visit retail stores, causing reduced consumer foot traffic and consumer spending. However, with a successful relaunch of the Smart Mirror portfolio using the online retail platform, the Company will not be as dependent on Big
Box retailers for our revenue streams as in previous years.
During the period ended March 31, 2021, the Company generated approximately $238 thousand of cash despite a net operating loss of $499 thousand. As of March
31, 2021, the Company had working capital of approximately $955 thousand and an accumulated deficit of $5.0 million. The Company’s cash balance as of March 31, 2021 was $1.5 million.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The short-term loan ends June 30, 2021 (“Initial Period’) but
the Company has the option to extend the Initial Period for an additional six consecutive months, ending December 31, 2021. The unpaid principal amount and all accrued interest at 1% is due and payable in full at the end of the Initial Period or
expiration of the extended date, being December 31, 2021 (the “Maturity Date”). As of March 31, 2021, the $750,000 credit line was fully available.
Since the termination of the factoring agreement with Sterling National Bank, the Company has been in discussions with alternate funding sources that offer extensive programs that are more in line
with the Company’s future business model, particularly a facility that provides funding options that are more suitable for the e-commerce business. The borrowing costs associated with such financing are dependent upon market conditions and our credit
rating. We cannot assure that we will be able to negotiate competitive rates, which could increase our cost of borrowing in the future.
During the period ended March 31, 2021, the Company has been in discussions with an investor group that on April 5, 2021 made an equity investment in the Company that will provide sufficient
funding to purchase the initial Smart Mirror rollout inventory. Management believes that without additional capital or increased cash generated from operations, there is substantial doubt about the Company’s ability to continue as a going concern and
meet its obligations over the next twelve months from the filing date of this report.
As previously reported on Form 8-K dated April 6, 2021, the Company entered into five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667
shares of Company common stock for an aggregate purchase price $1,498,000 (transactions being referred to as the “Private Placement”). The five investors in the Private Placement consisted of four private equity funds and one individual – all being
“accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, (“Securities Act”). The $1,498,000 in proceeds from the Private Placement will be used mostly to purchase start up inventory for the Company’s new
Smart Mirror product line, for a major online e-commerce fulfilment company, and the remainder for advertising and working capital (See Note 7). The Company will most likely need additional outside funding in fiscal year 2021 to support the company
critical launch of the Smart Mirror product line.
At March 31, 2021, the Company remained debt free, except for accounts payable and accrued liabilities, had a cash balance of $1.5 million and an available credit facility of $750,000.
The Company’s factory suppliers in Thailand and China are functioning and shipping orders. However with the resurgence of the COVID-19 pandemic certain parts of the United States, reluctance of
certain segments of the American population to get vaccinated and the threat of vaccine resistant strains of the virus, the future impact on the retail marketplace remains uncertain, which places uncertainty 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 revenue and continued losses.
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.
Nature of Business
Capstone Companies, Inc. is headquartered in Deerfield Beach, Florida.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Since the beginning of fiscal year 2007, the Company through CAPI 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 at the Consumer Electronics Show in early 2020 but its release to the retail market has been delayed due to product
development delays at our suppliers, resulting from the impact of COVID-19 pandemic. The development of the smart interactive mirror or “Smart Mirrors” 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 Smart Mirrors launch was announced in February 2021, but product has not shipped as of
March 31, 2021.
The Company’s products are typically manufactured in Thailand and China by contract manufacturing companies. As of the date of these condensed consolidated financial statements, the Company’s
future product development effort is focused on the Smart Mirrors category 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. Aggressive marketing and pricing by larger competitors in the
smart mirror market could also adversely impact the Company’s efforts to establish Smart Mirrors as its core product line. 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. Previously in the factoring agreement with Sterling National Bank, accounts receivable served as
collateral when the Company borrowed against its credit facilities. With the termination of the factoring agreement, the accounts receivables are unencumbered.
As of March 31, 2021 and December 31, 2020, accounts receivable had not been collateralized against debt.
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, 2021 and December 31, 2020, 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:
The following table summarizes the changes in the Company’s reserve for marketing allowances, cash discounts and other incentives which is included in net accounts receivable:
Marketing allowances include the cost of underwriting an in store instant rebate coupon or a target markdown allowance on a specific product. Cash discounts represent discounts offered to the
retailer off outstanding accounts receivable in order to initiate early payment.
During 2020, the Company reclassified an accrued allowance from accounts receivable to accounts payable and accrued liabilities due to the decline in revenues and accounts receivable to offset
these credits. The Company could have to pay cash to settle certain marketing allowances and other incentives issued to customers with no outstanding accounts receivable.
Inventory
The Company's inventory, which consists of finished LED lighting products for resale by Capstone, is recorded at the lower of cost (first-in, first-out) or net realizable value. The Company writes
down its inventory balances for estimates of excess and obsolete amounts. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when the expected realizable value of a specific inventory item falls below its
original cost. Management regularly reviews the Company’s investment in inventories for such declines in value. The write-downs are recognized as a component of cost of sales. During the period ended March 31, 2021 and 2020, inventory write downs
were $0 for each period. As of March 31, 2021, and December 31, 2020, respectively, the inventory was valued at $8,775 for each period.
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, 2021 and
December 31, 2020, prepaid expenses were $43,289 and $75,622, 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.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
As a result of the economic uncertainties caused by the COVID-19 pandemic during the quarter ended March 31, 2021, management determined sufficient indicators existed to trigger the performance of
interim goodwill impairment analysis for the period ended March 31, 2021. The analysis concluded that the Company’s fair value exceeded the carrying value of its single reporting unit and a goodwill impairment charge was not required.
The following table summarizes the changes in the Company’s goodwill asset which is included in the total assets in the accompanying consolidated balance sheets:
With the continuing economic uncertainties caused by the COVID-19 pandemic, the capital markets may 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. The Company’s stock is deemed a “penny stock” under Commission rules.
The Company estimates the fair value of its single reporting unit relative to the Company’s market capitalization which utilizes level 1 inputs.
Fair Value Measurement
The accounting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), “Fair Value Measurements and Disclosures” (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.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 as of March 31, 2021 and 2020. 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, 2021 and 2020, the total number of potentially dilutive common stock equivalents excluded from the diluted earnings per share calculation was 1,989,900 and 900,000, respectively.
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 functionalities Capstone currently operates in the consumer lighting products category and is expanding into the Smart Mirror 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 expenses.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table presents net revenue by geographic location which is recognized at a point in time:
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 customers 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.
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. The reduction of accrued
allowances is included in net revenues and amounted to $7.5 thousand and $30.8 thousand for the periods ended March 31, 2021 and 2020, respectively.
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, 2021 and December 31, 2020 balance sheets:
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 $4,010 and $188,808 for the three months ended March 31, 2021 and 2020, respectively.
Product Development
Our research and development team located in Hong Kong working with our designated 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. With the reduction of revenue during
2020 resulting from the impact of the COVID-19 pandemic and combined with the transfer of manufacturing to Thailand, CIHK eliminated several operational support positions in China.
For the three months ended March 31, 2021 and 2020, research and development expenses were $26,892 and $51,614, respectively.
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 $170 and $13,782
for the three months ended March 31, 2021 and 2020, respectively.
Accounts Payable and Accrued Liabilities
The following table summarizes the components of accounts payable and accrued liabilities as of March 31, 2021 and December 31, 2020, respectively:
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company is subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions and certain other jurisdictions.
The Company accounts for income taxes under the provisions of 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 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 consolidated statements of
operations. 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. 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.
Stock-based compensation expense recognized during the periods ended March 31, 2021 and 2020 was $4,200 and $8,925, respectively.
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
The preparation of the condensed 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, 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.
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)”. 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.
Adoption of New Accounting Standards
In August 2018, the FASB issued ASU No. 2018-13, Fair 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
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 financials 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 the risk of loss. To date, the Company has not experienced any such losses. As of March 31, 2021 and December 31, 2020, the Company has approximately $660.5 thousand and $431.3 thousand, respectively, in excess
of FIDC insurance limits.
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 47% and 32%, respectively, of net revenue during the three months ended March 31, 2021 and two customers who comprised 82% and 18% of net revenue during
the three months ended March 31, 2020. The loss of these customers would adversely impact the business of the Company.
For the three months ended March 31, 2021 and 2020, approximately 68% and 68%, respectively, of the Company's net revenue resulted from international sales.
As of March 31, 2021, approximately $83 thousand or 50% of net accounts receivable was from one customer and approximately $71 thousand or 42% came from a second customer. As of December 31, 2020,
approximately $120.1 thousand or 100% of accounts receivable was from one customer.
Major Vendors
The Company had two vendors from which it purchased 47% and 31%, respectively, of merchandise during the three months ended March 31, 2021, and two vendors from which it purchased 66% and 18%,
respectively, of merchandise during the three months ended March 31, 2020. The loss of these suppliers could adversely impact the business of the Company.
As of March 31, 2021, approximately $159 thousand or 45% of accounts payable was due to two vendors. As of December 31, 2020, approximately $115 thousand or 47% of accounts payable were due to one
vendor.
NOTE 3 – NOTES PAYABLE
Sterling National Bank
On July 31, 2020 the credit facility at Sterling National Bank was terminated. The Company has retained its cash operating account at Sterling National Bank.
NOTE 3 – NOTES PAYABLE (continued)
The Company has been in discussions with alternate sources of funding, that can provide finance options that are more 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 could increase our cost of borrowing in the future or
that we will secure affordable funding. The decline in the financial condition and performance of the Company in fiscal year 2020 has adversely impacted efforts to find traditional bank financing.
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 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. On May 11, 2020, the Company received loan proceeds in the amount of $89,600.
The Company used the proceeds for purposes consistent with the PPP. The Company submitted a loan forgiveness application with the Small Business Administration (“SBA’) on September 16, 2020, which
was accepted by the bank and processed to the SBA. . On October 30, 2020, the SBA notified the Company that the PPP loan principal of $89,600 and $428 of accumulated interest had been fully forgiven which was recorded in Other Income on the
Consolidated Statement of Operations for the year ended December 31, 2020.
On December 27, 2020, the U.S. administration approved the Consolidated Appropriations Act, 2021.This second stimulus package provided aid to eligible small businesses through a second round of PPP
loans (”PPP2”). Like the initial PPP program 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 if 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 during the eight-week period.
On January 21, 2021, the Company submitted a PPP2 loan application for $139,350 through our bank’s loan processor for consideration by the SBA and is still pending approval as of the filing date of
this report.
The unforgiven portion of the PPP2 loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. If approved, the Company will use the proceeds for
purposes consistent with the PPP forgiveness rules.
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES
Notes Payable to Officers, Directors and Related Parties
For the periods ended March 31, 2021 and December 31, 2020, there have been no outstanding loan balances with a Company Officer, Director or related parties and the Company had $0 notes payable to
officers, directors and related parties.
On December 31, 2020, the Board of Directors approved and authorized James McClinton, the Company’s Chief Financial Officer to sign a Loan Agreement with Directors Stewart Wallach and Jeff Postal
as joint lenders (the “Lenders”) whereby Lenders would make a maximum of Seven Hundred and Fifty Thousand Dollars and No Cents ($750,000) (principal) available as a short-term credit line to the Company for working capital purposes.
NOTE 4 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal. The term of the loan started January 4, 2021 and ends June 30,
2021 (“Initial Period’). The Company may extend the Initial Period for an additional six consecutive months, ending December 31, 2021, under the same terms and conditions of the Initial Period, by providing written notice of the election to extend to
the lenders prior to the expiration of the Initial Period. The Company may borrow and reborrow under the agreement up to $750,000 and prepay wholly or partially the unpaid principal amount at any time and do so without pre-pay penalty or charge. The
unpaid principal amount and all accrued interest is due and payable in full at the end of the Initial Period or expiration of the extended date, being December 31, 2021 (the “ Extended Maturity Date”).
Interest shall accrue on the unpaid balance of all loan advances at a simple annual interest rate of one percent (1%) (“Interest”) based on a 360 day year. Accrued and unpaid Interest on principal
will be due and payable in full on the Maturity Date or Extended Maturity Date, as the case may be.
In consideration for the Lenders allowing for loan advances under this agreement, a below market rate of interest and the loan made on an unsecured basis and as payment of a finance fee for the
loan, the Company issued a total of seven thousand five hundred shares of Company’s Series B-1 Convertible Preferred Stock, $0.0001 par value per share, (“Preferred Shares”) to each of the Lenders (the “Finance Fee”). Each preferred share converts
into 66.66 shares of common stock at option of Lender. The Preferred Shares and any shares of common stock issued under the loan agreement are “restricted” securities under Rule 144 of the Securities Act of 1933, as amended. The Preferred Shares have
no further rights, preferences or privileges. The fair value of the Preferred Shares was determined to be $48,996 based on the number of shares of common stock to be issued upon conversion and the market price of the Company’s stock on the date the
working capital loan agreement was executed. The Company will amortize the Finance Fee over the Initial Period of the agreement. During the period ended March 31, 2021, $24,498 of the Finance Fee was recognized as expense and included in other
expense on the condensed consolidated statements of operations. The remaining $24,498 has been included in prepaid expenses and will be expensed during the second quarter ending June 30, 2021.
As of March 31, 2021 there was $0 loan balance due and the Company has the full $750,000 credit line available to use.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has operating lease agreements for offices 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.
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 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 approximately 4,694 square feet of common area maintenance charges in the leased premises which has been estimated at $12.00 per square foot on an annualized basis.
The Company's rent expense is recorded on a straight-line basis over the term of the lease. The rent expense for the period ended March 31, 2021 and 2020 amounted to $35,600 and $47,447,
respectively. At the commencement date of the office lease, the Company recorded a right-of-use asset and lease liability under ASU 2016-02, Topic 842.
NOTE 5 – COMMITMENTS AND CONTINGENCIES (continued)
Scheduled maturities of operating lease liabilities outstanding as of March 31, 2021 are as follows:
The Company had two short storage rentals with durations of less than twelve months which expired at varying times through December 31, 2020. For the three months ended March 31, 2021 and 2020,
rent expense amounted to $749 and $4,522, respectively which is included in other general and administrative on the statements of operations.
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 from
their homes, the Company decided not to renew and allowed this lease to expire.
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.
NOTE 5 – COMMITMENTS AND CONTINGENCIES (continued)
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.
On January 1, 2021, the sales operations consulting agreement with George Wolf, was further extended, whereby Mr. Wolf will be paid $13,750 per month from January 1, 2021 through December 31, 2021.
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.
Effective September 1, 2020 through March 31, 2021, payment for fifty percent or $6,875 of the monthly consulting fee or approximately $48,125 for the effective period, was deferred until later in
2021.
Employment Agreements
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, 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.
Effective September 1, 2020 through March 31, 2021, payments equivalent to fifty percent of both Mr. Wallach and Mr. McClinton’s salary or approximately $92,206 and $58,542 respectively, has been
deferred until later in 2021.
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, 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
The following table summarizes potential payments upon termination of employment:
NOTE 5 – 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 plan’s 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.
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 would 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 in May 2019 the engagement restarted 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.
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 have been no further charges for this project as of March 31, 2021.
NOTE 6 - STOCK TRANSACTIONS
Series “B-1” Preferred Stock
In 2009, the Company authorized 3,333,333 shares of Series B-1 preferred stock. The Series B-1 preferred stock are convertible into common shares, at a rate of 66.66 of common stock for each share
of series B-1 convertible preferred stock. The par value of the Series B-1 preferred shares is $0.0001.
On January 4, 2021, the Company entered a $750,000 working capital loan agreement with Directors, Stewart Wallach and Jeffrey Postal (“Lenders”). In consideration for the Lenders allowing for loan
advances under the loan agreement, a below market rate of interest and the loan made on an unsecured basis, as payment of a finance fee for the loan, the Company issued a total of seven thousand five hundred shares of Company’s Series B-1 Convertible
Preferred Stock, $0.0001 par value per share, (“Preferred Shares”) to each of the Lenders. Each preferred share converts into 66.66 shares of common stock at option of Lender. The Preferred Shares and any shares of Common Stock issued under the loan
agreement are “restricted” securities under Rule 144 of the Securities Act of 1933, as amended (See Note 4).
NOTE 6 - STOCK TRANSACTIONS (continued)
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.
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, 2021, there were 990,000 stock options outstanding, and 780,000 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 periods ended March 31, 2021 and 2020, the Company recognized stock-based compensation expense of $4,200 and $8,925, respectively, related to these stock options. Such amounts are included
in compensation expense in the accompanying consolidated statements of income. A further compensation expense expected to be $5,813 will be recognized for these options in 2021.
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 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.
NOTE 6 - STOCK TRANSACTIONS (continued)
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.
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. Since the Board of Director approval there have been
no further repurchase of the Company’s Common Stock during 2020 and further Stock repurchases have been placed on hold in order to conserve cash during the COVID-19 pandemic.
As of March 31, 2021 and December 31, 2020 a total of 750,000 of the Company’s Common Stock has been repurchased since the program was initiated at a total cost of $107,740.
NOTE 7- SUBSEQUENT EVENTS
Employment Agreements
Since September 1, 2020 through March 31, 2021, compensation payments equivalent to fifty percent of Mr. Wallach, Mr. McClinton and Mr. Sloven’s salary was deferred until later in 2021. Effective
April 3, 2021, their salaries have been restored to previously approved levels. An amount of approximately $92.2 thousand, $58.5 thousand and $58.0 thousand respectively, has been deferred for future payment.
Consulting Agreements
Effective April 1, 2021, the sales operations consulting fee with G. Wolf was restored to the contract amount. Since September 1, 2020 through March 31, 2021, payment of fifty percent or $6,875 of
the monthly consulting fee or approximately $48,125 for the effective period, had been deferred for future payment.
Directors Compensation
On May 6, 2021, the Company modified and approved the stock participation for each independent director, namely Jeffrey Guzy and
Jeffrey Postal. Effective on August 6, 2021 until August 5, 2022, the directors pay value was approved at $15,000 each for the term. Each director would receive $750 per calendar month or $9,000 per term, as a Form 1099 compensation and the $6,000
balance would be provided in stock options at the market value on August 6, 2021, minus a 20% discount, for their continued services as directors of the Company.
NOTE 7- SUBSEQUENT EVENTS (continued)
Stock Purchase Agreements
On April 5, 2021, the Company entered into a Private Equity Placement with five separate securities purchase agreements (“SPAs”) whereby the Company privately placed an aggregate of 2,496,667
shares (“Shares”) of its Common Stock, $0.0001 par value per share, (“Common Stock”) for an aggregate purchase price $1,498,000. The five investors in the Private Placement consisted of four private equity funds and one individual – all being
“accredited investors” (under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended,(“Securities Act”). The $1,498,000 in proceeds from the Private Placement will be used mostly to purchase start up inventory for the Company’s new
Smart Mirror product line, and the remainder for advertising and working capital. Under the SPA, each investor is granted five-year piggyback, ‘best efforts’ registration rights with no penalties. The Shares are ‘restricted securities” under Rule 144
of the Securities Act and are subject to a minimum six month hold period. Based on representations made to the Company, the five investors do not constitute a “group” under 17 C.F.R. §240.13d-3 and have purchased the Shares solely as an investment
for each investor’s own account. No individual investor owns more than 2% of the issued and outstanding shares of Common Stock.
The Private Placement was required to raise needed working capital to purchase U.S. domestic inventory, to support the Company’s new Smart Mirror product line that will be sold online in the second
quarter 2021.
The Company engaged Wilmington Capital Securities, LLC, a FINRA and SEC registered broker to act as a placement agent to assist to raise capital through a private placement from one or more
accredited investors. As compensation for their services Wilmington was paid 7% of the gross proceeds or $104,860 as a placement fee and in addition on the closing date the Company shall issue to Wilmington warrants equal to 8% the Securities issued
or 199,733 warrants. The Warrants shall be a five (5) year warrant, exercisable at a price per share equal to 110% or $0.66 of the price per share paid by the Investors.
