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CAPSTONE COMPANIES, INC. (CAPC)·Q3 2019 Earnings Summary

Executive Summary

  • Q3 revenue declined 6.5% year over year to $5.35M, but improved sequentially from $3.41M in Q2; net income rose to $0.37M (vs. $0.17M in Q3’18) on materially lower operating expenses, lifting operating margin to 6.9% from 3.1% YoY .
  • Gross margin was 22.7% (vs. 23.2% YoY; 21.5% in Q2), reflecting heavier marketing funds year-to-date but better sequential mix/discipline; operating expenses fell ~$0.30M YoY in the quarter .
  • Management reiterated supply chain transition out of China; Thailand capacity is established and will be activated as the Smart Mirror program scales, with a formal category launch targeted at CES 2020; Smart Mirror shipments missed the holiday window due to development delays .
  • S&P Global Wall Street consensus for CAPC Q3 2019 was unavailable; therefore, we cannot assess beats/misses vs. Street estimates (consensus data not provided by S&P Global for this ticker/period).

What Went Well and What Went Wrong

  • What Went Well

    • Operating leverage: Q3 operating income rose to $0.37M (6.9% margin) from $0.18M (3.1%) in Q3’18 as operating expenses dropped to $0.85M from $1.15M YoY .
    • Successful brand transition/new product sell-through: Licensed product revenue went to $0; Capstone-branded LED drove the quarter, with ~$3.5M from the newly launched battery-powered LED product in Q3 .
    • Strategic positioning: “We have established supply chain and production in Thailand…prepared to exploit this new venture” (Connected Surfaces/Smart Mirror), with CES 2020 launch planned .

  • What Went Wrong

    • Revenue down YoY: Q3 net revenue decreased 6.5% YoY to $5.35M (from $5.73M), reflecting the exit from licensed brands and timing of promotional activity .
    • Slight gross margin compression YoY: GM was 22.7% vs. 23.2% in Q3’18 (though up sequentially vs. 21.5% in Q2) as marketing allowances and mix weighed year-to-date .
    • Smart Mirror delay: Management noted development delays that kept Smart Mirror out of the holiday season; broader consumer electronics launch now slated for CES 2020 .

Financial Results

MetricQ3 2018Q2 2019Q3 2019
Revenue ($USD Millions)$5.73 $3.41 $5.35
Gross Profit ($USD Millions)$1.33 $0.73 $1.21
Gross Margin %23.2% 21.5% 22.7%
Operating Income ($USD Millions)$0.18 $(0.02) $0.37
Operating Margin %3.1% (0.6%) 6.9%
Net Income ($USD Millions)$0.17 $(0.01) $0.37
Basic EPS ($)$0.00 $(0.00) $0.01

Segment/geography revenue breakdown:

Revenue BreakdownQ3 2018 ($M)Q3 2019 ($M)
Capstone Brand – U.S.$2.70 $4.98
Capstone Brand – International$0.07 $0.37
Licensed Brands – Total$2.96 $0.00
Total Revenue$5.73 $5.35

KPIs and operating drivers:

KPIQ2 2019Q3 2019
Marketing funds invested (quarter)$0.504M $0.177M
Product development – Connected Surfaces (quarter)$0.060M $0.045M
Total Operating Expenses$0.753M $0.847M
Cash and Equivalents (quarter-end)$1.233M $2.306M
Accounts Receivable, net (quarter-end)$2.770M $2.152M
International Sales (quarter)$0.100M $0.374M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Company financial guidanceFY/Q4 2019–2020Not providedNo quantitative guidance; CEO highlighted CES 2020 launch for Smart Mirror and Thailand supply chain readiness Maintained (no formal guidance)

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2 2019)Current Period (Q3 2019)Trend
Supply chain shift (tariffs)Planning/early execution to transition from China; backlog strong; Thailand partner identified Thailand supply chain established; to be activated as Smart Mirror scales Progressing; de-risking tariff exposure
LED product performanceQ1: ~$3.0M Light Bars; backlog $9–10M Q2: ~$3.0M of revenue from new LED product Q3: ~$3.5M from new battery-powered LED
Connected Surfaces/Smart MirrorCES 2019 debut; building presale/site; heavy marketing investments Finalization/marketing build; external PR support Development delays; holiday timing missed; CES 2020 launch targeted
Marketing spendQ1: $0.79M Q2: $0.504M Q3: $0.177M
Liquidity/cash flowCash used as AR builds; line renewed; no debt outstanding Continued AR-driven cash use; $2.3M cash at 9/30 AR normalized sequentially; liquidity ample

Management Commentary

  • “We achieved our goals and while the year-to-date revenues declined slightly, our net income significantly improved… [and] supply chain transitions from China to Thailand to mitigate the uncertainty and related tariff penalties” — Stewart Wallach, CEO .
  • “We have established supply chain and production in Thailand…[and] are preparing for our formal [Connected Surfaces] launch at CES 2020…we did see some delays…which limited our ability to deliver the Smart Mirror program in time for the holiday selling season” — Stewart Wallach, CEO .
  • CFO highlights: Q3 revenue ~$5.4M vs. ~$5.7M prior year; gross margin 22.7% vs. 23.2%; operating expenses $0.85M (down ~$0.30M YoY); operating income $0.37M (up 104% YoY) .

Q&A Highlights

  • Tariff exposure and business model (prior quarter context): Management emphasized FOB China model with retailers as importer of record, using marketing funds to support sell-through rather than absorbing tariffs; transition plan designed to move entire supply chain over time to alternative geographies .
  • Q3 call remarks clarified Smart Mirror timing (missed holiday window; CES 2020 launch) and Thailand readiness; no additional quantitative guidance was provided .

Estimates Context

  • Street consensus: We were unable to retrieve S&P Global (Capital IQ) consensus estimates for CAPC Q3 2019; coverage appears limited for this microcap. As a result, we do not present beats/misses vs. estimates for revenue or EPS (consensus data unavailable from S&P Global for this period).

Key Takeaways for Investors

  • Mix shift and opex discipline are driving profitability: Q3 operating margin expanded to 6.9% despite modest YoY revenue decline, with opex down ~$0.30M YoY and GM up sequentially vs. Q2 .
  • New Capstone-branded LED line is the growth engine: ~$3.5M from the new battery-powered LED product in Q3 underscores momentum post-licensed brand exit .
  • Near-term catalyst: CES 2020 Connected Surfaces/Smart Mirror launch; execution and retail adoption will shape 2020 trajectory .
  • Tariff risk mitigation: Thailand supply chain is in place to support pricing competitiveness; timing to scale depends on Smart Mirror ramp .
  • Watch cash conversion: YTD operating cash use was driven by AR build from higher Q3 revenues; quarter-end cash was $2.3M with no bank debt outstanding .
  • Customer concentration remains a structural risk (two customers = 97% of YTD revenue); diversification progress bears monitoring .
  • International sales are growing off a small base (Q3 international $0.37M vs. $0.09M YoY), providing incremental channel upside if sustained .

Citations:

  • Q3 2019 10-Q financials and MD&A .
  • Q3 2019 earnings call transcript .
  • Q2 2019 10-Q and earnings call transcript .
  • Q1 2019 earnings call transcript .