CAPSTONE COMPANIES INC

Overview

Capstone Companies, Inc. (“Company” or “CAPC”) is a public holding company organized under the laws of the State of Florida. The Company is a designer, manufacturer and marketer of consumer products that are designed to simplify daily living through technology.

As of the date of the filing of this Form 10-K report, the Company does not have a current product that is being actively produced or is in production. The Company’s former product line, LED consumer lighting products, matured in 2022 and is no longer in production. The Company’s efforts to develop Connected Surface consumer products, specifically a Smart Mirror for residential use, as a new product line did not succeed in attracting sufficient revenues to be a sustainable product line. The inability of the Smart Mirrors to become a viable revenue source was due, in part, to delays in production and launch due to COVID 19 pandemic, changes in consumer preferences in the smart mirror market in the U.S., unwillingness of brick-and-mortar retailers that purchased the LED products in bulk to purchase the Smart Mirrors, and established competition in the smart mirror market from companies with greater brand recognition and marketing resources than the Company. The e-commerce initiatives of the Company did not spur significant sales of the Smart Mirror products and all inventory was written off as expensed as of December 31, 2023.

During 2023, the Company developed a Connected Surface Chef kitchen utility tablet, the “Connected Chef”. The Connected Chef, a purpose-built kitchen tablet with an accessory platform to accommodate food prep accessories such as a cutting board. The Connected Chef has Google mobile service allowing for pre-installation of specific Google applications including Playstore, voice assistant and YouTube to name those highly recognized. The Connected Chef was ready for formal introduction in quarter four of 2023, and Management is actively marketing the Connected Chef tablet to appliance manufacturers and distributors, but the product has no purchase commitments from retailers as of the date of this Form 10-K report. Further, the Company will have to raise funding to fund production costs, which funding may not be available to the Company.

The Connected Surfaces portfolio is designed to tap into consumer’s ever-expanding Internet of Things, wireless connected lifestyles prevalent today. The “Connected Chef”, is a purpose-built tablet form factor with an integrated platform for cooking accessories, being a cutting board, and designed to safely deliver and access content on mobile and web based platforms. The Company received Google Mobile Service (“GMS”) approval during 2023 which allows the tablet integrated in the Connected Chef to operate the Android Operating System and pre install Google’s proprietary applications such as Chrome, Drive, Gmail, Playstore, Youtube directly through the Connected Chef tablet. Youtube food videos have generated nearly 51 billion views. Rather than using and sharing recipes on one’s smartphone in the kitchen, recipes can be looked up directly using the users preferred search engine (for example, Chrome). Access to content online with millions of cooking and food related websites and videos as well as tutorials and cooking classes all in one device. Connected Chef™ becomes a digital recipe bookshelf. The Connected Chef™ also provides a cleaner and safer appliance in the cooking area. A smartphone is covered in germs as it is carried everywhere throughout the day, a smartphone has 25,127 bacteria per square inch. Smartphones harbor more than 3 times the number of germs than doorknobs, 8643 bacteria per sq inch. The Connected Chef is designed to become an anchor in the digital kitchen. Tastefully styled and excellent quality are obvious to the discerning eye while maintaining affordability for mainstream use.

The Connected Chef is not in production and has not received any pre-production orders. The Company is actively seeking potential pre-production orders for the Connected Chef as well as funding for its production and extensive marketing if pre-production orders are received. While there has been some interest in the Connected Surface cutting board from a few potential retail buyers, there have been no orders and the marketing of this product is limited by the Company’s lack of adequate working capital.

Without a product line that can produce sufficient revenues to sustain corporate operations, the Company has relied on funding primarily from Stewart Wallach, Company’s Chief Executive Officer and a Company director, in 2023 and into 2024, to sustain operations. Operations and general overhead of the Company have been reduced in 2023, in response to the lack of significant revenues from product sales and limited working capital. There can be no assurance that funding from Mr. Wallach or other sources will be available in the amounts, or when needed, to adequately fund Company operations or the development of another new product line, or production of any new product line. Since December 2023, the Company has also endeavored to find a new business line capable of generating revenues to adequately fund the Company and to locate funding sources for development, marketing and production of a new product line. The effort to find a new business line includes seeking a possible merger and acquisition opportunities amongst private operating companies and possible sources of working capital funding for existing and possible new business line development. As of the date of the filing of this Form 10-K, the Company has not secured working capital funding or entered into any legally binding agreement for a merger or acquisition of a new business line.

The Company will require third party funding to cover operating overhead and to resume efforts to fund its marketing and product launch campaigns. The future growth will be directly impacted by the level of exposure, messaging and distribution capabilities. Certain members of the Company’s management (“Corporate Insiders and Directors”) have provided short-term funding from time to time to support the Company’s basic operational funding needs, but there is no guarantee that this funding will continue or be adequate to fund operations or Connected Surfaces program production, marketing and inventory needs and, if a new product is launched, to also fund possible enhancements in functions demanded by the consumers. The Company will require third party funding to sustain basic operations and continue efforts to market any Connected Chef product launch.

As of the filing of this Form 10-K, all of the Company’s retail sales are made on an order-by-order basis, rather than through long-term sales contracts. As such, the nature of the Company’s business did not provide visibility of material forward-looking information from its customers and suppliers beyond a few months.

Our Current Strategy

The Company’s looking forward strategy is focused on developing a new Connected Surfaces product, the Connected Chef, that can generate sufficient revenues to sustain the Company’s operations or alternatively, locate a new business line that can accomplish sustainability of operations. These efforts will depend on having adequate working capital from funding to establish a new product line or business line and adequate cash flow from product sales. We may be unable to achieve sufficient working capital when and, in the amounts, required to meet operational needs and overhead or to pursue or establish a new product lines or a new business line or new business line. We have not achieved adequate funding as of the date of the filing of this Form 10-K report and we may be unable to achieve sufficient working capital when and, in the amounts, required to meet operational needs and overhead. The lack of adequate, timely and affordable funding may undermine the efforts of the Company to establish a revenue stream from the Connected Chef product line and efforts to sustain Company operations.

As a consumer product company, the Company competes in competitive consumer market channels that can be affected by volatility from a number of general business and economic factors such as, consumer confidence and preferences, employment levels, new technologies, credit availability, costs and barriers of producing products from foreign original equipment manufacturers (“OEMs”) and commodity costs. Demand for the Company’s products is highly dependent on economic drivers such as consumer spending and discretionary income. The Company faces competition from numerous competitors in the consumer product industry, foreign and domestic, and some of those competitors have substantially greater market share, brand recognition, distribution and financial and technical resources than the Company. The Company’s strategy has been to develop well designed and made products that appeal to a niche market. The Company also relies on the production and engineering resources and technical expertise of its contract manufacturers to compensate for a lack of those resources internally. The lack of working capital hinders the ability of the Company to leverage the development, design and production capabilities of OEMs.

Due to working capital constraints, and results from prior e-commerce marketing efforts, the Company is not investing any significant funds in e-commerce marketing and promotion efforts and is re-evaluating the potential of e-commerce efforts to generate significant revenues. The Company is intending to focus on direct sales or a licensing agreement with appliance manufacturers and distributors with the Connected Chef product line.

Subject to adequate funding and favorable cash flow from Connected Surfaces products, which has not been achieved, the Company is exploring various potential initiatives to execute its traditional organic growth strategy, which is designed to enhance its market presence, expand its customer base and maintain its recognition as an industry leader in new product development, and also alternative business lines and new product lines. Key elements of our traditional organic growth strategy include:

Connected Surfaces. While consistently launching successful lighting programs in years prior to 2022, the Company determined that it needed to develop a new product line with greater profit margin potential than LED Lighting and as a replacement revenue generating source. The Company refocused its development and marketing initiatives and is focused on developing the Connected Surfaces products as its primary business line to replace the LED lighting business, which is no longer being actively promoted by the Company. The discontinuance of the LED lighting product line was due to gross margin reductions as a result of increased tariffs.

The Company’s existing product roadmap outlines a plan for an additional product launch in Q2 of 2024, branded the “Connected Chef”, a kitchen appliance item, which is a purpose-built tablet integrated into a multi-purpose cutting board and designed to safely deliver and access content on mobile and web based platforms a kitchen utility item. The Company received Google Mobile Service (“GMS”) approval during 2023 which allows the tablet integrated in the Connected Chef to operate the Android Operating System and pre install Google’s proprietary applications such as Chrome, Drive, Gmail, Playstore, Youtube directly through the Connected Chef tablet (“Google” is a trademark of Google LLC, a subsidiary of Alphabet, Inc., a SEC reporting company). Youtube food videos have generated nearly 51 billion views. Rather than using and sharing recipes on one’s smartphone in the kitchen, recipes can be looked up directly using the users preferred search engine (like, Chrome). With access to content online with millions of cooking and food related websites and videos as well as tutorials and cooking classes all in one place the Connected chef™ becomes a digital recipe bookshelf. The Connected Chef™ also provides a cleaner and safer appliance in the cooking area. A smartphone is covered in germs as it is carried everywhere throughout the day, a smartphone has 25,127 bacteria per square inch. Smartphones harbor more than 3 times the number of germs than doorknobs, 8643 bacteria per sq inch. The Connected Chef is designed to become an anchor in the digital kitchen. The design is aimed at tastefully styled and coupled with excellent quality in order to appeal to the discerning eye while maintaining affordability for mainstream use.

The Company believes the Connected Chef program could leverage existing relationships with its traditional retail partners and collectively contribute organic growth for the Company, as well as serving as a basis for partnering with appliance manufacturers and distributors. The ability of the Company to promote any of its Connected Surface products and any new, related “connected” consumer products will depend on securing adequate, affordable and timely funding from lenders and investors. As of the date of the filing of this Form 10-K report, the Company has not secured that funding. Chief Executive Officer and Director Stewart Wallach has been providing interim financing of basic operations while the Company pursues other financing options for new product development and marketing.

Perceived or Essential Strengths

Prior to the maturing of the LED product line in 2021-2022, Capstone believes that the following competitive strengths have traditionally served to support its business strategies:

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

The Company’s chief executive officer has over three decades and has successfully built and managed other consumer product companies.

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

Product Quality*:*With prior product lines, the Company has achieved high quality in product’s design and utility through a combination of sourcing quality components, stringent manufacturing quality control and conducting rigorous third-party testing. To deliver cost-competitive products without compromising quality standards, we leveraged purchasing volume and capitalize on strategic vendor relationships. If the Company can obtain the necessary funding to launch the Connected Chef product line, the Company believes that its traditional operating strengths will continue to benefit a new product line based on past performance. This assumption may prove misplaced when and if the Company achieves sufficient working capital to extensively market and produce the Connected Chef. The Company has no marketing studies to support an assumption about the appeal to consumers of the Connected Chef as a viable product line. Positive responses to the concept of the Connected Chef have come from a limited number of potential retail purchasers and strategic partners.

Perceived Weaknesses

The Company lacks a product line generating revenues sufficient to sustain operations. The Company’s lack of a product line generating sufficient revenue to support operations and lack of sufficient working capital funding have delayed the marketing of its new product line, The Connected Chef.

When the Company had a product line generating sufficient revenues and adequate working capital, the Company did not possess the business, marketing, technical and financial resources of larger or mid-sized competitors or the brand recognition, distribution channels or domestic and international markets of some of the larger competitors. The Company will face that same disadvantage with any new product line or new business line. The declining financial performance of the Company due to discontinuation of the LED lighting product line and failure of the Connected Surface Smart Mirrors to replace the LED lighting product line as a viable revenue source has placed the Company in a seriously weakened financial position, which in turn increases the need for working capital funding from investors or lenders. The Company lacks a credit line for long-term general working capital or growth. The Company lacks the hard assets for affordable, sufficient debt financing and the low market price of its Common Stock makes equity funding difficult in terms of finding suitable investors who will provide adequate, affordable, timely working capital funding.

In the past and with any new product line or new business line, the Company’s products will face the risk of new technologies or functionalities shifting consumer demand away from the products produced by the Company. The Company may lack the financial resources or ability to license or acquire new technologies or functionalities in demand by consumers, which failure may undermine the commercial viability of Company’s product line.

The product launch of the Smart Mirrors did not meet projected revenue goals for 2023. The Company’s investment in e-commerce marketing did not produce desired sales or market penetration for Connected Surfaces Smart Mirror. These factors coupled with a lack of bulk orders from Big Box retailers left the Company without a viable product line and a revenue generating source sufficient to sustain the Company.

Any plan to expand the Company’s product portfolio through Connected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits. Expense categories including prototyping, engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred for a period before revenues occur.

Even with revenue sources sufficient to sustain Company operations and support a new product line, the Company lacks the large internal research and development capability of its larger competitors. Even with sufficient working capital, Capstone operates with a small number of employees whose functions are dedicated to executive management, sales and marketing or administrative support. The limited number of employees may hinder or delay the ability of the Company to identify or respond to consumer preferences or new technology developments in a product line. Hiring may be required with any growth and qualified personnel may not be readily available. We cannot match the compensation packages to prospective employees that many larger competitors may offer, and we lack the funding and other resources to change our operational model and its reliance on contractors for many functions and capabilities, including development, production, shipping, warehousing and distribution of products. The weakened financial condition of the Company further undermines the ability of the Company to add essential personnel for any effort to re-establish a viable product line or new business line.

As a smaller reporting company, and with any new product line, we were and are more vulnerable to events like COVID-19 pandemic, production and shipping delays, travel and operational disruptions and restrictions and an accelerated shift to e-commerce from reliance on brick-and-mortar retail sales. We lack the staff, money, internal capabilities and resources and operational experience to significantly or timely respond to significant challenges and adverse changes in business and financial requirements.

Capstone’s international purchases can become more expensive if the U.S. Dollar weakens against the foreign currencies. Should the increased U.S. tariffs imposed on Chinese manufactured goods remain it may increase the cost of electronic components used in our products.

While we have established new production capacity in Thailand, there is no final resolution of the U.S. / China trade dispute from which specific components are sourced. Developing a new, efficient OEM relationship in a new country takes time and effort to reach acceptable production efficiencies. We have only a short operational experience with Thai OEM’s and cannot predict long term effectiveness of the relationship. Without working capital funding, we will be unable to fully exploit foreign OEM capabilities or resolve the need for alternative foreign sources of critical components for Connected Surface products.

Like many companies, the Company conducts periodic strategic reviews where the feasibility of significant corporate transactions are considered, including mergers, asset purchases or sales and diversification or change in business lines. The financial condition of the Company has prompted an enhance consideration and search for a significant corporate transaction, including, without limitation, a possible merger and acquisition transaction or reorganization to sustain operations or to acquire a new business line that can support company operations. The Company lacks the financial resources of larger companies to withstand adverse, significant and sustained changes in business and financial condition. This vulnerability necessitates an ongoing consideration of alternatives to current operations. Due to the decline in financial performance of the Company since 2021, and the Company being in transition from a declining product line and not yet establishing a profitable product line, as well as the Company having its shares of Common Stock quoted on The OTC Markets Group, Inc. QB Venture Market and being a “penny stock”, the Company may be unable to consummate a significant corporate transaction that sustains operations or creates a new viable product line or business line.

Products and Customers

Current product lines under development as of this Form 10-K report are as follows: https://www.connected-chef.com/

The following product lines that are discontinued for manufacturing, but available for sale as of the date of this Form 10-K report are as follows:

Connected Surfaces – Smart Mirrors

LED Lighting : Discontinued in 2023

The plan to expand the Company’s product portfolio through Connected Surfaces involves the inherent risk of increased operating and marketing costs without a corresponding increase in operational revenues and profits. Expense categories including prototyping, engineering, advertising, public relations, tradeshows and social media platforms will continue to be incurred before shipments and related revenues occur. Promotion of the Connected Surfaces product line was hampered in 2023 by the lack of adequate, long-term funding and declining revenues from product sales and a lack of bulk orders from brick-and-mortar retailers and e-commerce resellers for a discretionary purchase item like the Smart Mirrors.

Over the past ten years, the Company has established product distribution relationships with numerous leading international, national and regional retailers, including but not limited to: Amazon, Costco Wholesale, Sam’s Club-Walmart, the Container Store and Firefly Buys. These distribution channels may sell the Company’s products through the internet as well as through retail storefronts and catalogs/mail order. The Company is actively marketing the Connected Chef to appliance manufacturers and distributors, though no letter of intent or deal terms have been executed as of the date of this Form 10-K filing. The Company believes it has developed the scale, manufacturing efficiencies, and design expertise that serves as the foundation for aggressive pursuit of niche product opportunities in our largest consumer domestic and international markets. The Company may have to pursue a different market segment if it cannot secure adequate orders from these traditional distribution channels. With the growth of e-commerce, the Company lacks an effective e-commerce capability. Reliance on sales to brick-and-mortar retailers may not produce sufficient orders to allow the Company to become profitable or sustain operations, especially if the Company’s product line is deemed by retailers to be not appealing or in demand with consumers. The Company has a very limited product line and lacks different product lines to offer in lieu of unsuccessful, existing product lines to retailers.

The Company’s products are subject to general economic conditions that impact discretionary consumer spending on non-essential items. Such continued progress depends on a number of assumptions and factors, including ones mentioned in “Risk Factors” below. Critical to growth are economic conditions in the markets that foster greater consumer spending as well as success in the Company’s initiatives to distinguish its brands from competitors by design, quality, and scope of functions and new technology or features. The Company’s ability to fund the pursuit of our goals remains a constant, significant factor and weakness.

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

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

Sales and Marketing

We use direct sales by our Chief Executive Officer and sales agents to sell our products, which effort includes direct sales to home-goods chain retailers. Company’s e-commerce initiatives have not provided significant sales during 2023.

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

The Company has historically promoted its products to retailers and distributors at North American trade shows, such as the Consumer Electronics Show (“CES”) or the International Hardware Show, but also relies on the retail sales channels to advertise its products directly to the end user consumers through various promotional activities. Subject to adequate working capital, this marketing effort will continue as a complement to the social media and e-commerce initiatives.

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

Domestic Sales. The strategy of selling products from a U.S. domestic warehouse enables the Company to provide timely delivery and serve as a domestic supplier of imported goods. With this model the Company imports goods from overseas and is responsible for all related costs including ocean freight, insurance, customs clearance, duties, storage, and distribution charges related to such products and therefore such sales command higher sales prices than direct sales. Domestic orders are for a much smaller size and could be as low as a single unit directly to the end consumer if ordered through an online website. To support an effective e-commerce business model, we were required to warehouse adequate inventory levels enabling the Company to ship orders directly to the end consumer expediently. Due to the poor performance of the Smart Mirrors, the Company wrote off all inventory on hand as of December 31, 2023 and is currently attempting to liquidate the remaining stock.

We have utilized social media platforms and online advertising campaigns to further grow the Company’s online presence. In addition to Facebook, Instagram, Pinterest and LinkedIn, The Company has launched a You Tube channel to host Smart Mirror videos and established a Twitter account. Our Social Media marketing has not resulted in any significant sales of products. We have not been and may not be able to effectively compete in e-commerce and Social Media marketing and sales. The Company has a Social Media presence on the following Social Media platforms, however the Company is not emphasizing Social Media marketing in 2024:

FACEBOOK 1: https://www.facebook.com/capstoneindustries and https://www.facebook.com/capstoneconnected

INSTAGRAM 2: https://www.instagram.com/capstoneconnected

PINTEREST 3: https://www.pinterest.com/capstoneconnected/

LINKEDIN 4: https://www.linkedin.com/company/6251882

TWITTER 5 https://twitter.com/CAPC_Capstone

YOUTUBE 6 https://www.youtube.com/channel/UCMX5W8PV0Q59qoAdMxKcAig

1 Facebook is a registered trademark of Facebook, Inc.

2 Instagram is a registered trademark of Instagram.

3 Pinterest is a registered trademark of Pinterest.

4 LinkedIn is a registered trademark of LinkedIn Corporation.

5 Twitter is a registered trademark of Twitter Corporation.

6 YouTube is a registered trademark of YouTube Corporation.

Competitive Conditions

In terms of the consumer product industry, the Company operates in a highly competitive environment, both in the United States and internationally, in the former LED lighting product segment and in the new Connected Surfaces internet of things product segments. The Company’s consumer products compete with products made by large multinationals with global operations as well as numerous other smaller, specialized national or regional competitors who generally focus on narrower markets, products, or particular categories. Competitors include Gentex Corporation, Seura Solutions, Inc., Magna International, Inc. and Samsung Electronics Co. Ltd. The competitiveness and changes in consumer tastes in smart mirror market is evidenced by lululemon athletica, inc. acquiring a smart mirror company for $500 million in 2020 and then discontinuing the sale of its smart mirror product line in December 2023.

Other competitive factors include rapid technological changes, product availability, credit availability, speed of delivery, ability to tailor solutions to customer needs, quality and depth of product lines and training. The Connected Chef and other Connected Surface products are an emerging industry. The Company’s product line is innovative. The Connected Chef received GMS approval from Google third party testing labs, which allows the Connected Chef to utilize the Google operating system in the tablet. Company may be unable to develop or license emerging new technologies that are dominant and demanded by consumers, retailers, distributors and resellers. Consumer tastes and preferences change and timing the product line with consumer demand is important in establishing a market for the product line.

Research, Product Development, and Manufacturing Activities

The Company’s research and development operations based in Florida and Thailand have designed and engineered many of the Company’s products, with collaboration from its third-party manufacturing partners, software developers and Capstone U.S. engineering advisers. The Company outsources the manufacture and assembly of our products to a select group of OEM manufacturers overseas. With no product line in production, the Company’s research and development efforts have been limited to the Connected Chef. Our research and development focus includes efforts to:

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

Capstone uses its proprietary manufacturing expertise by maintaining control over all outsourced production and critical production molds. To ensure the quality and consistency of the Company’s products manufactured overseas, Capstone uses globally recognized certified testing laboratories such as United Laboratories (UL) or Intertek (ETL) to ensure all products are designed and tested to adhere to each country’s individual regulatory standards. The Company also hires quality control inspectors who examine and test products to Capstone’s specification(s) before shipments are released.

To successfully implement Capstone’s business strategy, the Company must continually improve its current products and develop new product segments with innovative imbedded technologies to meet consumer’s growing expectations. The Connected Surfaces product development is our current effort to achieve those expectations. The continuation of Company’s declining business and financial performance may significantly hinder or undermine efforts to establish a profitable Connected Surface product line capable of sustaining operations. Establishing the Connected Surfaces product line as a viable revenue source is essential to sustaining the Company as a consumer product company. The Company will need adequate funding to sustain that business line and operations.

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

Raw Materials

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

Raw materials used in manufacturing include plastic resin, copper, LED bulbs, batteries, and corrugated paper. Prices of materials have remained competitive in the last year. The Company believes that adequate supplies of raw materials required for its operations are available at the present time. The Company cannot predict the future availability or prices of such materials. These raw materials are generally available from a number of different sources, and the prices of those raw materials are susceptible to currency fluctuations and price fluctuations due to transportation, government regulations, price controls, economic climate, or other unforeseen circumstances. In the past, the Company has not experienced any significant interruption in availability of raw materials. We believe we have extensive experience in manufacturing and have taken positions to assure supply and to protect margins on anticipated sales volume.

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

Distribution and Fulfillment

Since January 2015, the Company has outsourced its U.S. domestic warehousing and distribution needs to a third-party warehousing facility situated in Anaheim, California. The warehouse operator provides full inventory storage, packaging and logistics services including direct to store and direct to consumer shipping capabilities that electronically interface to our existing operations software. The warehouse operator provides full ERP (Enterprise Resource Planning), Inventory Control and Warehouse Management Systems.

These fulfillment services can be expanded to the east coast in Charleston, South Carolina, if the Company needed to establish an east coast distribution point. This relationship, if required, will allow us to fully expand our U.S. distribution capabilities and services. As the Company moved into the e-commerce and direct to consumer marketplace, the Company developed a new website with full shopping cart capabilities. The Company has negotiated contracts for secured credit card processing capability, state sales tax compliance services and order fulfillment and logistics services, at a very competitive rate.

Seasonality

In general, sales for household products and electronics are seasonally influenced. Certain gift products cause consumers to increase purchases during key holiday winter season of the fourth quarter, which requires increases in retailer inventories during the third quarter.

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

Intellectual Property

CAPC owns a number of patents and trademarks as denoted below:

While the Company may license third party technologies for its products, or may rely on other companies, especially OEMs, for design, engineering and testing, the Company believes that its oversight of design and function of its products and its marketing capabilities are significant factors in the ability of the Company to sell its products.

Value of Patents

The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. Issued patents or patents based on pending patent applications or any future patent applications may not exclude competitors or may not provide a competitive advantage to us. In addition, patents issued or licensed to us may not be held valid if subsequently challenged and others may claim rights in or ownership of such patents. The validity and breadth of claims in technology patents involve complex legal and factual questions and, therefore, the extent of their enforceability and protection is highly uncertain.

Reverse engineering, unauthorized copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without paying us. We cannot assure shareholders that our competitors have not developed or will not develop similar products, will not duplicate our products, or will not design around any patents issued to or licensed by us. We will assess any loss of these rights and determine whether to litigate to protect our intellectual property rights on a case by case basis.

We rely on trademark, trade secret, patent, and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license intellectual property rights from others to support new product introductions. There can be no assurance that we can acquire licenses under patents belonging to others for technology potentially useful or necessary to us and there can be no assurance that such licenses will be available to us, if at all, on terms acceptable to us. Moreover, there can be no assurance that any patent issued to or licensed by us will not be infringed or circumvented by others or will not be successfully challenged by others in lawsuits. We do not have a reserve for litigation costs associated with intellectual property matters. The cost of litigating intellectual property rights claims may be beyond our financial ability to fund.

As is customary in the retail industry, many of our customer agreements require us to indemnify our customers for third-party intellectual property infringement claims. Such claims could harm our relationships with customers and might deter future customers from doing business with us. With respect to any intellectual property rights claims against us or our customers, we may be required to cease manufacture of the infringing product, pay damages and expend significant Company resources to defend against the claim and or seek a license.

Information Technology

The efficient operation of our business is dependent on our information technology systems. We rely on those systems to manage our daily operations, communicate with our customers and maintain our financial and accounting records. In the normal course of business, we receive information regarding customers, associates, and vendors. Since we do not collect significant amounts of valuable personal data or sensitive business data from others, our internal computer systems are under a light to moderate level of risk from hackers or other individuals with malicious intent to gain unauthorized access to our computer systems. Cyberattacks are growing in number and sophistication and are an ongoing threat to business computer systems, which are used to operate the business on a day to day basis. Our computer systems could be vulnerable to security breaches, computer viruses, or other events. The failure of our information technology systems, our inability to successfully maintain our information or any compromise of the integrity or security of the data we generate from our systems or an event resulting in the unauthorized disclosure of confidential information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors, results of operations, product development and make us unable or limit our ability to respond to customers’ demands.

We have incorporated into our data network various on and off-site data backup processes which should allow us to mitigate any data loss events, however our information technology systems are vulnerable to damage or interruption from:

Environmental Regulations

We believe that the Company is in compliance with environmental protection regulations and will not have a material impact on our financial position and results of operations. The Company is not aware of any national, state or local environmental laws or regulations that will materially affect our earnings or competitive position or result in material capital expenditures. However, the Company cannot predict the effect on our operations due to possible future environmental legislation or regulations. During 2023, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.

Climate Change. With no products in ongoing production in 2023 from OEMs, and only limited sales of product from existing inventory in 2023, the Company did not experience any direct, material impact on business and financial condition in 2023 from pending or existing climate-change related legislation, regulations, and international accords in the U.S., the physical impacts of climate change, or perceived indirect material impact from business trends. On March 6, 2024, the Commission adopted final rules to require registrants to disclose certain climate-related information in registration statements and Form 10-K annual reports. The Company is uncertain as of the date of the filing of this Form 10-K on the impact of these new rules on the Company. On March 15, 2024, the U.S. Fifth Circuit Court of Appeals granted an administrative stay of the Commission’s new climate change disclosure rules. This judicial stay was lifted on March 22, 2024, due to court challenges to Commission’s new climate change disclosure rules being consolidated in the Eighth Circuit court.

Employees

As of December 31, 2023, we employed 5 employees and consultants: 2 in our U.S. office and 3 individual consultants, 2 of which resided in Hong Kong, formerly employees of our Hong Kong operation. We consider our relations with our employees to be good. None of our employees are covered by a collective bargaining agreement. We believe that our staff is adequate to handle the current operations, but we recognize that the new product line and social media marketing may require additional personnel. Our ability to hire additional personnel is subject to adequate revenue flow and funding.

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

Corporate Information

Our principal executive offices are located at #144-V, 10 Fairway Drive Suite 100, Deerfield Beach, Florida USA 33441. Our telephone number is (954)570-8889 and our website is at URL: www.capstonecompaniesinc.com. Our U.S. subsidiaries operate out of our principal executive offices.

We file our financial information and other materials required under the Exchange Act electronically with the SEC. These materials can be accessed electronically via the Internet at www.sec.gov. Such materials and other information about the Company are also available through our corporate website: https://www.capstonecompanies.com. Any URL referenced in this Form 10-K report does not incorporate by reference or otherwise the contents of the website pages accessed through the referenced URL.

Government Regulation

Our operations are subject to regulation by federal and state securities authorities as well as various federal, state, foreign and local laws and regulations governing a consumer products company and a for-profit business. We are not subject to any U.S. federal, state or local regulation that poses, in our opinion, any special or unusual burden or obstacle to conducting our business and financial affairs. Our main concern, although greatly diminished in terms of government regulation is the changing regulatory environment in China and greater Asia and its impact on our ability to access manufacturing sources and obtain our specific consumer products. Despite some political uncertainty, Thailand continues to encourage foreign direct investment as a means of promoting economic development, employment, and technology transfer. We established Thailand as an alternative to China. While the general trend in China has to be conducive to trade and commerce in terms of U.S. companies conducting business with domestic companies, China is a still a single-party nation-state in which the central government has the power to dramatically and immediately change its trade and commercial policies and laws.

The Company’s Hong Kong SAR subsidiary is dormant and the Company does not have a corporate presence in Hong Kong as of 2023. Hong Kong and China remain a possible source for research and development for products and product production in the future. As such, Chinese and Hong Kong legal developments remain a potential, pertinent issue for the Company.

The Chinese government has also imposed its laws, policies and directives in Hong Kong SAR, which has created uncertainty about whether Hong Kong SAR will continue to encourage and enable foreign companies to conduct business in Hong Kong SAR without undue interference from the Chinese government. Chinese government intervention in Hong Kong’s political and legal affairs since 2020, which has taken the form of unilaterally imposing Chinese laws and policies in Hong Kong, create a heightened threat of Hong Kong’s traditional pro-foreign business policies, regulation and economic environment being altered to suit national security concerns and international objectives of the Chinese government and becoming untenable for foreign businesses, especially U.S. companies conducting business in Hong Kong in light of growing U.S.-Chinese tensions in international affairs and global economic competition. Chinese government’s imposition of the National Security Law in Hong King on June 30, 2020, undermined Hong Kong’s autonomy and introduced heightened uncertainty for foreign and local firms operating in Hong Kong. On March 5, 2022, Chinese Premier Li Keqiang asserted that Beijing intends to exercise “overall jurisdiction over the two SARs,” referring to Hong Kong and Macau. Political or military conflict between the United States and China, who are rivals for power and influence in Asia and to an increasing extent all along the Pacific Rim as well as being diametrically opposed to one another over the status of Taiwan, could provoke an even more strident, anti-U.S. change in Chinese trade or commercial laws and regulation, including Hong Kong trade and commercial laws, that makes it more difficult or expensive for us to obtain consumer products.

New Hong Kong Security Law. On March 19, 2024, effective March 23, 2024, Hong Kong Legislative Council unanimously passed the Safeguarding National Security Ordinance under Article 23 of the Basic Law ("NSO Act"). The NSO Act greatly expands the authority of the Hong Kong government to respond to and govern: treason, insurrection, sedition, theft of state secrets, espionage, sabotage and foreign interference in Hong Kong political affairs. As of the filing of this Form 10-K, the Company is uncertain on the impact of the 212-page NSO Act on the Company's business and financial condition and impact of regulation thereon. Many aspects of the NSO Act, in terms of enforcement and implementing rules and policy, are unclear or not in existence as of the filing of this Form 10-K.

While Thailand has experienced a degree of political instability for decades, due to the influence and intervention of the Thai military in political affairs, the trade and commercial environment in Thailand has been generally receptive to and encouraging foreign commerce in Thailand. U.S. State Department 2023 assessment of Thailand concluded that Thailand remains encouraging to foreign investment and commerce. Due to uncertainties associated with conducting business in China and Hong Kong, the Company established manufacturing capabilities in Thailand through a local contract manufacturing concern in order to reduce reliance on China and Hong Kong for products and engineering.

Working Capital Requirements and Financing

In order to successfully launch the online Connected Surfaces business, the Company was required to maintain sufficient on hand available inventory levels, to allow for immediate fulfilment of an online order. This required additional investment combined with investments in new product expansion of Connected Surfaces, new product molds, product testing and outside certifications, package design work, and further expansion of its capabilities in Thailand, the Company may require additional working capital.

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

On July 2, 2021, the Board of Directors (“Board”) resolved that the Company required a purchase order funding facility to procure additional inventory to support the online Smart Mirror product. The Board resolved that certain Directors could negotiate the terms of a Purchase Order Funding Agreement for up to $1,020,000 with Directors Stewart Wallach and J. Postal and E. Fleisig, a natural person. On October 18, 2021 the Company received the $1,020,000 funding under this agreement. The note payable is due on September 13, 2024. These loans may be prepaid in full or partially without any penalty.

On May 1, 2022, the Company negotiated three $200,000 working capital funding agreements, to provide $600,000 in funding for daily operations. The Board resolved that certain Directors could negotiate the terms of a Working Capital Funding Agreement for up to a total of $600,000, with Directors S. Wallach (through Group Nexus, a company controlled by Mr. Wallach), J. Postal and Mouhaned Khoury, a natural person. Under these agreements the interest terms are 5% based on a 365-day year, maturing May 1, 2024. These loans may be prepaid in full or partially without any penalty.

On October 13, 2022, the Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations (the “Working Capital Funding Agreement”). The term of this agreement is 18 months and principal accrues simple interest at a rate of 5 percent per annum. The loan may be prepaid in full or partially without any penalty.

On December 1, 2022, the Company negotiated a $50,000 Working Capital Funding agreement with Jeffrey Postal, a director, to provide funding for daily operations (the “Working Capital Funding Agreement”). The term of this agreement is 18 months and principal accrues simple interest at a rate of 5 percent per annum, maturing June 1, 2024. The loan may be prepaid in full or partially without any penalty.

On January 3, 2023, the Company negotiated a $40,000 Working Capital Funding agreement with Director S. Wallach (through Group Nexus, a company controlled by Mr. Wallach), to provide funding for daily operations. Principal accrues simple interest at a rate of 5 percent per annum, maturing June 15, 2024. The loan may be prepaid in full or partially without any penalty.

On March 27, 2023, the Company negotiated a Working Capital Funding agreement with Director S. Wallach to provide funding for daily operations. Total funding under the agreement amounted to $592,500 as of December 31, 2023. Principal accrues simple interest at a rate of 5 percent per annum, maturing June 15, 2024. The loan may be prepaid in full or partially without any penalty.

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

In addition, we intend to seek alternative sources of liquidity, including but not limited to accessing the capital markets, or other alternative financing measures. However, instability in, or tightening of the capital markets, could adversely affect our ability to access the capital markets on terms acceptable to us. An economic recession or a slow recovery could adversely affect our business and liquidity.

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