Capstone Companies, Inc. (OTCQB:CAPC) Q4 2020 Earnings Conference Call April 1, 2021 10:30 AM ET
Aimee Brown - Corporate Secretary
Stewart Wallach - President & CEO
Gerry McClinton - CFO
Conference Call Participants
Eddie Hatter - Hatter Investments
Greetings, and welcome to Capstone Companies, Inc., Year-End 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce Aimee Brown, Corporate Secretary for Capstone Companies, Inc. Thank you. You may begin.
Thank you, Doug, and good morning to, everyone. On the call today is Stewart Wallach, Capstone's President and Chief Executive Officer; and Gerry McClinton, Chief Financial Officer. They will be discussing the year-end 2020 financial results as well as give us an update on the strategy and outlook, followed by a question-and-answer session.
If you do not have the release that was distributed yesterday afternoon, it is available on the Company's website at capstonecompaniesinc.com. As you are aware, we may make forward-looking statements during today's presentation. These statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today.
These factors are outlined in our earnings release as well as in documents filed by the Company with the Securities and Exchange Commission, which can be found at capstonecompaniesinc.com or sec.gov.
With that, I'll turn it over to you, Stewart.
Thank you, Amie, and good morning. Before introducing Gerry McClinton to provide an overview of the 2020 financial performance, I'd like to say that putting this year behind us is welcomed in so many different ways. For me personally, I would like to wish everyone good health as the global pandemic battle continues, but nears its end. And whether you see the future as a new normal or a now normal, I wish you and yours as well going forward. Relative to the company performance, the discussion of 2020 really becomes a discussion of the global pandemic and its impact on all the key financial indicators.
As the single largest shareholder in this company and the head of your management team, in my perspective, this reporting period can only be characterized as frustrated. There are no benchmarks for operating under such conditions. And yet, as many companies have failed to survive, we are preparing for the launch of our best product innovation in our company's history. We not only accomplished this while supply chains were shutdown and working conditions were compromised globally, we did so without incurring additional debt and have funded the product expansion throughout 2020.
I see the company today more like a start-up at this juncture that I do a mature business as we have transitioned the product line to an entirely new emerging category. Unlike a start-up, however, your management team has proven its acumen over a decade of solid business performance and is highly motivated as we anticipate the launch of the Capstone Connected Surfaces portfolio. It is this new direction that serves to support my confidence in this company.
I would like to point out at this point – at this time that based on many inquiries that I've received, I'd like to point out that I have not sold a single share of stock nor has Dr. Jeff Postal. It appears that with the dynamics of the market, there was some concern, but I want you to fully understand the insiders have remained resolute on their position, and we have not traded any stock. We maintain our support of this company and are enthusiastic in moving forward and putting 2020 behind us.
At this time, I'll turn it over to Gerry to discuss the year-end numbers.
Thank you, Stewart, and good morning, everyone. For those new investors attending today for the first time, by way of introduction, I’m Gerry McClinton, the company's CFO, and I've worked at Capstone for the past 20 years.
I would first like to take this opportunity to acknowledge our employees on the commitment during this very difficult year. Of particular importance, I would point out our company's ability to adjust the operations and relative costs through the adoption of flexible systems and protocols put in place both overseas and in the United States.
Turning to our 2020 financial performance, as is always good practice, we encourage you to review the filed Form 10-K as activity was minimal and focused on product development as opposed to revenue building today's financial presentation will be abbreviated. In reviewing the 2020 financial results, we experienced an unprecedented decline in our revenues, earnings and a goodwill impairment adjustment. None of these factors could possibly have ever been anticipated at the start of the year.
As Stewart will be expanding upon following the segment, the company had a successful product introduction at the Consumer Electronics 2020 Show, known as Connected Surfaces. In the weeks that follow, the supply chain was impacted by the global pandemic and the triple down effect to businesses across the globe was in many cases devastating.
Our mature financial discipline has enabled us to continue investment and internally fund 100% of our ongoing product development, online platform infrastructure, the expansion of our social media presence and establishing a fully certified electronic supplier in Thailand, while incurring no company debt. The OEM factory, we partnered with in Thailand for the Smart Mirror manufacturing is uniquely qualified. It is experienced in the development of production and products similar to the Smart Mirror program, such as televisions, displays and monitors.
As Thailand has a free trade agreement with the United States, transitioning production to Thailand will help stabilize our pricing we anticipate will be a strategic competitive advantage looking forward. So let's take a look at the numbers. For the year ended December 31, 2020, net revenues were approximately $2.8 million, a decrease of $9.6 million from $12.4 million in 2019.
The decrease in net revenue was driven by the initial supply issues resulting from the global lockdown and then compounded by the uncertainty felt by retailers due to the reduction in consumer foot traffic. International sales in 2020 were approximately $700,000 as compared to $1.2 million in 2019. Gross profit for the years ended December 31, 2020 and 2019 was approximately $504,000, or 18.2% of net revenue and $2.4 million, or 19.6% of net revenue.
For the years ended December 31, 2020 and 2019, cost of sales were approximately $2.3 million and $10 million, respectively, that's a decrease of $7.7 million from 2019. This reduction in cost of sales was a direct result of the reduced revenue in the year. Costs represented 81.8% and 80.4% of net revenue for 2020 and 2019.
Total operating expenses for the year ended December 31, 2020 and 2019 were $3.6 million and $3.4 million, respectively. This represents a $223,000, or 6.6% increase over 2019.
As a result of the reduced revenue and economic uncertainties caused by COVID-19 pandemic, sufficient financial indicators existed to trigger the performance of interim goodwill impairment analysis for each reporting quarter. This resulted in a $624,000 impairment charge for 2020 and is included in the total operating expenses. If we actually eliminate the effect of the impairment charge, total operating expenses in 2020 would have been $3 million, that's a reduction of $400,000, or 11.8% from 2019 expense levels.
Now in respect to the impact of COVID-19 and the conserve cash, management initiated an expense containment plan. It resulted in four positions being eliminated in the Hong Kong operation, executive management deferring 50% of their income since September 2020. At the same time, the company continued to invest $30,000 in social media marketing, $25,000 in web design and maintenance and a further $182,000 in the Smart Mirror portfolio.
So despite the cost containment initiative, the Company still invested $237,000 of operating expense in support of our future online business. For the year ended December 31, 2020, the operating loss was $3.1 million as compared to $933,000 in 2019, a loss increase of $2.2 million over 2019. For fiscal 2020, other income was $90,000 compared to $26,000 in 2019. The other income resulted from the forgiveness of a $90,000 loan received as part of the small business administration Paycheck Protection Program.
The Company had zero interest in 2020 and 3,200 in 2019. Also as a result of the CARES Act, the Company was able to carry back the 2018 and 2019 net operating losses to 2017 tax year and generated an estimated refund of previously paid income taxes. For the years ended December 31, 2020 and 2019, net benefit from income tax was estimated at $612,000 compared to $15,000 in 2019. In fiscal 2020 and 2019, the net loss was approximately $2.4 million and $892,000, a net loss increase of $1.5 million over 2019.
So let's talk a little bit about the liquidity and capital resources. In 2019, we took great strides to improve our cash balance and accumulated cash position. We started 2020 with $3.1 million in cash and ended the year with $1.2 million. During the year, our factoring facility was terminated as it was not being utilized and really was only conducive for -- was not conducive for direct import program with a big rock box retailer. The initial phase of developing the Smart Mirror market will be focused on direct online sales.
Gross profit margins generated by the e-commerce model are strong, but the Company's funding model will be significantly changed. The Company will now need to fund domestic warehouse inventory to meet consumer expectations of a one or two day delivery. We currently are having discussions with institutions that facilitate funding for e-commerce but we have not yet finalized any agreements at this time.
As in the past, in the early days of Capstone's history, insiders provided great financing while conventional financing was not readily available in capital markets, which too toxic for the Company and its shareholders.
To that point, the directors, Jeffrey Postal and Stewart Wallach recently provided a $750,000 working capital line to be used to cover potential working capital shortfall during this transition period. With the product expansion of the Connected Surfaces portfolio, the Company's future capital requirements will increase. The Company will continue to invest additional funding to support the domestic inventories and marketing campaigns for Q3 and Q4. Cash used in operating activities was approximately $1.86 million in 2020 compared to approximately $586,000 in 2019.
The negative cash impact of the net loss of approximately $2.4 million and an increase in accounts receivable of $106,000 was partially offset by $624,000 goodwill impairment charge. Cash flows used in investing activities in 2020 was approximately 13,000 compared to 34 in 2019. The Company continued to invest in prototyping and tooling. Cash used in financing activities for the year ended December 31, 2020 and 2019, was approximately $36,000 and $71,000, respectively.
These funds were used to repurchase $283,000 -- or 283,000 shares of company stock. During 2020 and 2019, the Company repurchased a total of 750,000 shares at a cost of $107,700. The Company will continue resuming stock repurchase programming when cash flow permits. As of December 31, 2020, the Company has zero debt outstanding and no encumbrances on the assets of the Company. This concludes my financial summary for 2020.
I will now turn the call back to you, Stewart.
Thank you, Gerry. As there is little to expand upon relating to the numbers Gerry just shared with us. I would like to take advantage of this time with all of you to discuss Capstone today and tomorrow. The one comment I will make before we put 2020 behind us is regarding the conservative nature of the Company's management and directors. Taking the conservative path can yield results that are less favorable in reporting at times, but it speaks volumes to transparency and our respect for business fundamentals.
I can comfortably state that if it were not for management's consistent and disciplined management style over the years, we would not have been in a strong cash position, which enabled us to operate during the pandemic without incurring debt. Moreover, it is because of the Company's disciplined management that insiders like myself and Dr. Postal, continue to invest in the Company and provide support when needed. That being said, let's move on.
Capstone today, first and foremost, I want to emphasize that the Smart Mirror program is finished. All development work is done. All prototyping is done. We are currently going to the next level, which is certification and testing.
The planned launch will include two styles of Smart Mirror, our standard size mirror and our full-length wardrobe fitness mirror. Supply chains have been solidified and production will commence immediately upon completion of the aforementioned required testing and certifications that mirrors must undergo before shipping to North American market.
I want you to know that we have done everything feasibly possible to expedite the laboratory testing and will continue to pressure the labs such that if an opportunity opens up and somebody cancels time slot becomes available, we are ready to move ahead immediately, regardless, the testing laboratories are simply backed up due to the large number of businesses that are now resuming normal activities after a year of dormancy.
The testing phase of the development process is the only thing holding us up at this time. I want to emphasize that. We are ready to go to market. The testing phase is the only thing holding us up at this time.
Capstone tomorrow, immediately upon production, we will be airing in initial quantities for stocking in an Amazon facility. At that point in time, our Smart Mirror will be available on the Capstone Connected website and through Amazon Direct. We will have production orders placed with the factory for June and July deliveries, which will be based upon the analytics we have collected over the past six to nine months.
The determinations to air these in or ship by sea will be made at that time, depending on the backlog situation and the related demand. Currently, we expect 75% of sales to be at the entry-level standard size mirror and 25% in our full-length wardrobe fitness mirror. Once the analytics and research are further validated, we will be in a better position to adjust our ordering by style based on actual rates of sale.
With the start-up of production, Capstone also plans to resume its PR campaign effort, which was suspended early last year due to the pandemic and company's expense containment initiatives mentioned earlier. I want to clarify that we will continue to issue internal PR as material information is available. In addition to this Capstone managed PR, we plan to resume the Company's PR campaign that was managed by the Max Borges Agency.
The agency's goal will be to highlight Capstone's activities with the tech and lifestyle journals and magazines. You will note on our Capstone Connected website, we have been featured in several publications earlier in our development. We recovered it Android authority, Ad Pro, which is architectural digest, Forbes, to name a few. These placements were the direct result of the PR agency.
So in essence, we will have a dual-pronged approach as we enter Q3. Furthermore, as revenues increase, so will the investment in exposure campaigns and digital advertising to support growth later in this year. It is becoming clear that the loud impact on the market will be Qs three and four of 2021. Production will be ramping up in preparation for these periods over the summer. Our social media reach will be expanded.
The website will continually be updated in video and photography and digital advertising campaigns will be in full force to stimulate retail interest. Additional opportunities will be explored later in this year as well. We are receiving numerous inquiries from the hospitality industry, the home development industry, as well as conventional big box retail, which have expressed interest in our Connected Surfaces portfolio.
One of the governing criteria that will determine our pace, at which we pursue these channels, will be manufacturing capacities and possible customizations that could be required to meet specific channel needs. We will strive to tune our capacities to meet the demand on a cost-effective, just-in-time basis.
Before we get into the Q&A session and at the risk of being redundant, I would like to take a few moments to highlight the data points that are driving the optimism and the enthusiasm management holds for the Connected Surfaces program.
The Smart Home market, revenues in the Smart Home segment, about to approximately $85 billion in 2020. Revenues in the Smart Home segment is expected to show an annual growth rate from 2018 to '22 of approximately 18%, resulting in a market volume of an estimated $140 billion in 2023.
Household penetration in 2018 was 7.5%, it's expected to hit 19.5% by 2022. Smartphone, smartphone users in the U.S. exceeds 270 million and projected a 290 million in 2024. This clearly confirms the expansion of technology into our daily lives.
And most importantly, fixed broadband subscriptions, fixed broadband subscriptions in the U.S. exceed the 110 million, and this represents the significant potential for Smart Mirrors in Smart Homes. In conclusion, essentially, people want to remain connected as content and device capabilities advance, entertainment, communications, scheduling, learning are all available at once fingertips.
Surface, computing is finding its way into the home on refrigerators, on furniture, et cetera. It's hard to imagine a home five years from now that will not have numerous computing platforms operating seamlessly and affordably throughout the home. The Mirror as a tech device is a logical addition to the emerging digital home environment.
Our entry into the market could not be more timely and our vision could not be any more clear. I want to thank you for your time. And I look forward to scheduling future discussions as our progress continues in the areas of testing, product placement, initial shipments, Amazon launch and what have you. We will keep you informed, but rest assured, everything is being done by our management team to leverage our strengths and get this into the marketplace as soon as possible.
Great. Doug, if you want to open up the lines.
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Kay, a Private Investor. Please proceed with your question.
Yes. Thank you for taking my call. I had a question about the proprietary aspect of it because I see on the website that is mentioned that there's proprietary uses for your guys is technology. Can I get any kind of info on that?
Yes. David, this is Stewart Wallach speaking. Thanks for the question.
Thank you, sir.
Let me put a little color to that. It's important, and I really appreciate the fact that you've obviously studied the website, which is early in our development. There were a number of approaches, methodologies that we were exploring on the initial mirror. And one of those proprietary aspects was actually utilizing a tablet format that was docked to the mirror.
Subsequent to that time, we were able to integrate the product inside. So that proprietary opportunity is no longer something that was necessary. I will say this, however, there are other proprietary aspects to the product that we are exploring. But again, we cannot proceed until the certifications are complete because we need to be sure that the legal side reviews the product as a finished product.
There is one or two aspects of the product that we do believe are proprietary in the way we develop the product, the way we sync up the product and that should all be dealt within the next 60 to 90 days. But today, I'm not in a position to declare any one thing in particular that is particularly related to the one that you're talking about earlier in the year.
Thank you for your time.
You bet, David. Thank you.
Our next question comes from the line of Mike Cory, a Private Investor. Please proceed with your question.
Hi, thanks for taking my call. My question to you is the directors of the company, is there any changes that might be coming someone maybe with some -- that's been through this process. So I just want to know, if there's someone or changes that might be coming that shareholders could expect in that regard? Thank you.
You bet. Mike, this is Stewart Wallach speaking again. Let me comment on that. Absolutely, let me say this that management and the Board of Directors has recognized that we want to expand our independence, but we also wanted to bring in some board members that may be able to contribute directly to the growth of the company and how we're proceeding.
It's not easy to attract quality board members and directors at a time when, of course, the company's revenues plummeted, and we were faced with so many other challenges. But now that 2020 is behind us, and management enthusiastically embraces the future, I would imagine that the Board is going to be looking considerably different than it looks today, probably by Q3, Q4 at the latest.
Okay. Thank you.
Our next question comes from the line of Eddie Hatter with Hatter Investments. Please proceed with your question.
Yes. Good morning. Do you anticipate on hiring a member that can possibly create additional relations overseas, such as like the Middle East and the Asia countries for the Smart Mirror?
Eddie, this is Stewart Wallach speaking. Let me give you a little background if you're not aware of how we've gone to market in the past globally. We typically do not try to hire and increase overheads as it relates to sales and marketing activities other than programming. What we have found worked very successfully is consultants and agents that are paid on transactions. They then have a vested interest in making things happen, and it's a more meaningful relationship.
Now we particularly internally, myself, George Wolfe and others have always maintained the key relationships with the primary accounts. But when we go abroad, we will be using agents and representatives that are proven, they'll be properly vetted and are, in most cases, connected into the cultural aspects of doing business in those markets.
Thank you very much.
You bet, Eddie. Thank you.
Our next question comes from the line of Eric Ralph with a Private Investor. Please proceed with your question.
Thank you. Thanks for taking time here. Have a question as far as I know the Smart Mirror is the up and coming thing. Are you guys going to continue and spread out into other areas of Smart Technology? And I say this as down the road. I realize that the mirror is the most important thing. And then the other products that you do so, are you going to continue on with those also?
Eric, this is Stewart speaking. If you'll notice, when we initially started discussing and introducing the category, we pointed as Capstone Connected Surfaces, which is a very broad -- relatively non-description with reason. As the market -- and this might be something you'd be interested in looking into is this notion of ambient computing. And ambient computing is the theory that we are going to be completely surrounded by content in our living spaces. You'll walk into your home, it will be seamless.
You won't really even see it at times. You'll just be talking to it. You may be walking in and saying, what are my bills that have to pay today and the voice will tell you, you have to pay this, this, this and you'll say, go ahead and pay it. This is the future living space. This is what our vision was when we started thinking relative to Connected Surfaces. Today, the entry into that market was through the Mirror. And the Mirror was an obvious entry because mirrors haven't changed in hundreds of years.
So basically, while every home in America has six, seven mirrors, those mirrors are all opportunities to upgrade, particularly as trends change in digital lifestyles. However, beyond the mirror, once we are positioned well, in the area of technology, ambient computing and delivering content through various computer platforms, the mirror will be part of a program. There will be other things that we're exploring, and hopefully, we'll be able to develop in the years to come.
That will speak to you in your home in your living space, and deliver the content that you want without having to carry around a smartphone in your home. And we feel very strongly about those opportunities. But the most key thing is that we will be at the ground floor. We will be bringing technology to the walls of your home early on through a product that is generally accepted as a basic product in every home, and that is a mirror.
But to answer your question without being able to -- without suggesting any kind of dog whistle here or putting out anything that could be perceived differently, today, our focus is the Smarter. Now when I say that, styles are ramp. We could be bringing styles out as the market dictates. Right now, we -- entry-level mirror is essentially a rectangular design. The full-length wardrobe mirror is basically wardrobe mirror that can be used for fitness purposes as well.
We have a round mirror in design. But we will deliver the styles to the market as the market can absorb them. And so far as the other products that we have built the business on over the years, i.e., LED, these things have become commodities. And the margin possibilities and the points of differentiation for a company are greatly diminished. When we started in the LED business, just as a point of reference, light bulbs were selling at $9.99 for a light bulb.
Today, light bulbs are back to $0.79. So that gives you some indication as to the value proposition as it relates to LED and what we could do to be recognized as unique and innovative. So yes, our whole approach and our whole dedication is to the Connected Surfaces portfolio that probably more than you needed to hear. But I get off on tangents, when I start to talk about this.
Our next question comes from the line of James Altman, a Private Investor. Please proceed with your question.
Thank you for taking the call and good luck in the future. One of the questions I had, the -- looking at the uses of this mirror production-wise, the home use is certainly big, but what about hotels, casino places and around the world? Is that something that we're working towards already lining stuff up to be able to market that way?
Absolutely, I actually mentioned earlier, and maybe I just glanced over it. But I mentioned the fact that we are already receiving numerous inquiries from two particular areas: the building industry, developers and hospitality industry. We're doing some groundwork. We're learning about those markets.
They would not be an out of the box product, if you will. So that's why I referenced that certain customizations may be required, et cetera. And they need to fit into an overall strategy, whereby our volumes and scale are not compromised for a small opportunity. We don't know the magnitude of it, but I can tell you this. We absolutely see the fit.
We've had interest expressed from luxury condominium towers to health spas, fitness centers and, of course, the hotel industry in their remodeling campaigns. At this point, we don't know where we'll fit into that, but I can't envision a future without being part of that landscape.
There are no further questions in the queue at this time. I'd like to hand the call back to management for closing remarks.
A - Stewart Wallach
All right. Well, thank you very much, and it's been a long time since we had an opportunity to talk to somebody to our shareholders and be so open and get an interaction going. I plan on doing more of this. And just bear with us for the next 60, 90 days, we are putting all of our energy into getting this product to market.
At the risk of sounding too enthusiastic, which I have to sometimes temper our enthusiasm, we're laughing because we're all very excited about this. It's been long and coming, and the market is so ready for it. And for a company like ourselves to be at the ground floor of this is more than exciting.
Just to reference, I don't know how many of you are familiar, I'm sure most of you have heard of the Mirror company, which while it's a single application product. It's a fitness product that company was bought last year by Lululemon for over $500 million. This company evolved out of the pandemic, people sheltering in place, taking their fitness with them because studios are closed, et cetera.
Our platform is so far more expansive than that and touches many aspects of people's lives, not just fitness. Our model is not driven by delivering content. It's just the opposite. We're delivering technology through hardware that accesses content. That means our energy, our time our intelligence will not be about building content.
We will constantly deliver that content and make our platforms reach that content in a way that's meaningful for the user. I might also comment the fact that we have a 30-plus year experience in building products. We also have experience in software. I was one of the founders of exam soft worldwide. I don't know if many of you are aware of that.
But today, that's the largest assessment technology, computer assessment technology in the education field. We started that business. And today, they get probably 75 million exams worldwide. So we've had backgrounds in software. We understand it. But frankly, our niche and our strength is taking technology and embedding it into hardware. This is what we do well.
I think that the mirror fact that companies like the Mirror company who I applaud what they've done amazing, amazing job. But their cost of entry is pretty high. They raise hundreds of millions of dollars to get to the market. And here we are, building our product, getting ready for delivery and our only focus is raising money to support inventory levels. And we've been able to fund this internally up until this point, we will need to address the issues of being able to ship in one to two days because things have changed.
But at the same time, our knowledge of how to put a product together, how to build the product effectively, I think, uniquely qualifies us to deliver significant profits in the months to come. So we're excited. We see the opportunities as analysts. We have to pace ourselves. We have to be sure that we don't oversell our capabilities.
We want to be sure that we ship on time, that we get a good user experience because that's where the viral growth will come from that organic growth. I don't need to remind everybody that we start with one Mirror, but every home has many walls in it. So we're excited. We look forward to it. And again, I look forward to talking to you in the not-too-distant future.
Thanks again for all your time.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.