UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ________________ to ________________
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| Emerging growth company |
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The number of shares of the registrant’s
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TABLE OF CONTENTS
1
PART I
ITEM 1. FINANCIAL STATEMENTS
CAPSTONE HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
| March 31, 2025 | December 31, 2024 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Long-term Assets: | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangible assets | ||||||||
| Right of use assets | ||||||||
| Deferred tax asset | ||||||||
| Other long-term assets | ||||||||
| Total long-term assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES & EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Line of credit | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion, lease liability | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Accrued related party management fee | ||||||||
| Long term debt, net of current portion | ||||||||
| Lease liability, net of current portion | ||||||||
| Total long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| TotalStone, LLC – Class B Preferred Units | ||||||||
| TotalStone, LLC – Special Preferred Units | ||||||||
| Equity: | ||||||||
| Common Stock $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Equity | ( | ) | ||||||
| Total Liabilities, TotalStone, LLC. Preferred Units & Equity | $ | $ | ||||||
See notes to consolidated financial statements
2
CAPSTONE HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended March 31, | ||||||||
| 2025 | 2024 | |||||||
| Sales | $ | $ | ||||||
| Sales returns and allowances | ( | ) | ( | ) | ||||
| Net sales | ||||||||
| Cost of goods sold | ||||||||
| Gross Profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Net loss before taxes | ( | ) | ( | ) | ||||
| Income tax expense | ( | ) | ||||||
| Net Loss | ( | ) | ( | ) | ||||
| Less: Net loss attributable to: | ||||||||
| Special preferred units | ( | ) | ||||||
| Class B units preferred return | ( | ) | ( | ) | ||||
| Net loss attributable to Capstone Holding Corp. stockholders | $ | ( | ) | $ | ( | ) | ||
| Earnings (loss) per share: | ||||||||
| Net loss per share attributable to Capstone Holding Corp. stockholders – basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares outstanding – basic and diluted | ||||||||
See notes to consolidated financial statements
3
CAPSTONE HOLDING CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except Common Stock Shares)
| TotalStone, LLC | ||||||||||||||||||||||||||||
| Common Stock (Shares) | Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Total Equity | Class B Preferred Units | Special Preferred Unit | ||||||||||||||||||||||
| Balance at January 1, 2025 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Accrued Class B Distributions | ( | ) | ( | ) | ||||||||||||||||||||||||
| Conversion of Class B Preferred Units to Common stock | ( | ) | ||||||||||||||||||||||||||
| Conversion of Special Preferred Units to Debt | ( | ) | ||||||||||||||||||||||||||
| Public Offering | ||||||||||||||||||||||||||||
| Nectarine Management, LLC. Subscription Agreement | ||||||||||||||||||||||||||||
| Balance at March 31, 2025 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| TotalStone, LLC | ||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Total Equity | Class B Units | Special Preferred Unit | |||||||||||||||||||
| Balance at January 1, 2024 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||
| Accrued Class B Preferred Units Distributions | ( | ) | ( | ) | ||||||||||||||||||||
| Accrued Special Preferred Units Distributions | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
See notes to consolidated financial statements
4
CAPSTONE HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Non cash items: | ||||||||
| Depreciation and amortization | ||||||||
| Loss on investment | ||||||||
| Gain on extinguishment of debt | ||||||||
| Deferred taxes | ||||||||
| Change in other operating items: | ||||||||
| Accounts receivable and other assets | ( | ) | ( | ) | ||||
| Change in operating leases, net | ( | ) | ||||||
| Accounts payable and other accrued liabilities | ||||||||
| Cash flows used in by operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment, net | ( | ) | ||||||
| Cash flows used in investing activities | ( | ) | ||||||
| FINANCING ACTIVITIES | ||||||||
| Payments on financing lease liabilities | ( | ) | ( | ) | ||||
| Financing fees paid | ( | ) | ( | ) | ||||
| Borrowings under line of credit, net | ||||||||
| Debt payments | ( | ) | ( | ) | ||||
| Deferred IPO Costs | ||||||||
| Funds received from public offering | ||||||||
| Cash payment to special preferred equity members | ||||||||
| Cash flows provided by financing activities | ||||||||
| NET CHANGE IN CASH & CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| SUPPLEIMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Operating cash flows from finance leases (interest) | $ | $ | ||||||
| Financing cash flows from finance leases (principal portion) | ||||||||
| Operating cash flows from operating leases | ||||||||
| Interest Paid | ||||||||
| Taxes Paid | ||||||||
See notes to consolidated financial statements
5
CAPSTONE HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Nature of Operations
Capstone Holding Corp. (the “Capstone”) is a holding company and its operations consist substantially of the operations of its consolidated subsidiary, TotalStone, LLC (“TotalStone”). On April 1, 2020, Capstone obtained controlling interest in TotalStone, a materials distribution company that distributes masonry stone products for residential and commercial construction in the Midwest and Northeast United States under the trade names Instone and Northeast Masonry Distributors (“NMD”).
Note 2 IPO and Restructuring
On March 7, 2025 (the “Restructuring Date”),
Capstone closed its Public Offering of
On March 7, 2025, TotalStone entered into a fifth amended and restated limited liability company agreement to govern its operations and affairs and its relationship with its members, which post restructuring is solely Capstone.
On March 10, 2025, TotalStone paid Brookstone
Partners IAC, Inc. $
Outstanding warrants to purchase
On the Restructuring Date, pursuant to a master
exchange agreement (the “Master Exchange Agreement”) entered into by the Capstone, TotalStone and TotalStone’s Class
B and Class C Members, all of TotalStone’s Class B and Class C Preferred Interests were exchanged for
TotalStone’s Special Preferred Membership
Interests were exchanged on the Restructuring Date for loans in an aggregate principal amount of $
In connection with the Restructuring, Capstone
also increased its authorized shares of Common Stock to
6
Note 3 Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The accompany consolidated financial statements include the accounts of Capstone and its consolidated subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated. Prior-year amounts may include instances of changes to prior-year amounts to achieve comparability to the most recent fiscal year.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the rules and regulations for reporting the Quarterly Report on Form 10-Q (“Form 10-Q”). Accordingly, they do not include all of the information and notes required by GAAP for annual consolidated financial statements.
The consolidated balance sheet at December 31, 2024 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. These financial statements have been prepared on a basis that is consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 (“2024 Form 10-K”). This report should be read in conjunction with our 2024 Form 10-K filed with the SEC on March 31, 2025.
In our opinion, the accompanying unaudited interim consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates, and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of March 31, 2025 and its results of operations, cash flows, and changes in stockholders’ deficit for the three months ended March 31, 2025 and 2024. The results for the three months ending March 31, 2025, are not necessarily indicative of the results expected for any future period or the full year.
Use of Estimates
The preparation of financial statements in accordance with US GAAP requires management to make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, and expenses in our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s assumptions regarding current events and actions that may impact on the Company in the future, actual results may differ from these estimates and assumptions.
Accounts Receivable
Accounts receivable are recorded and carried
at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company estimates expected credit losses
for the allowance for expected credit losses based upon its assessment of various factors, including historical experience, the age of
the accounts receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts
of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. As of March 31,
2025 and December 31, 2024, the allowance for doubtful accounts totaled approximately $
7
Note 3 Summary of Significant Accounting Policies (cont.)
Inventories
Inventories consisting of finished goods are
stated at the lower of cost, determined by the average cost method, or net realizable value. Inventories also include deposits placed
on inventory purchases for shipments not yet received. Significant prepaid inventory may be located overseas. At March 31, 2025 and December 31,
2024, the total prepaid inventory balance was $
Property and Equipment
Property and equipment is stated at cost and
is depreciated over the estimated useful lives ranging from to years. Depreciation is computed by using the straight-line
method for financial reporting purposes and straight-line and accelerated methods for income tax purposes. Property and equipment is
comprised of building, machinery & equipment, computer equipment, leasehold improvements, software, office equipment, vehicles,
and furniture & fixtures. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense
on property and equipment for three months ended March 31, 2025 and 2024 was $
Goodwill and Other Intangible Assets
Goodwill represents costs in excess of fair values
assigned to the underlying net assets of acquired businesses. Goodwill and indefinite lived intangible assets are not amortized but rather
are tested for impairment annually as of the 1st day of the fourth quarter of each year or more frequently if indications
of potential impairment exist. The Company’s goodwill is recognized in
In evaluating potential goodwill impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company determined that no impairment was required for the periods presented.
Intangible assets with finite lives, consist of a distribution agreement, amortized over the term of the agreement.
Long-lived Asset Impairments
Long-lived assets and finite lived identifiable intangibles are reviewed for impairment whenever events of changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the assets is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount of which the carrying amount of the assets exceeds the fair value of the assets. The Company determined that no impairment was required for the periods presented.
Revenue Recognition
Sales are recognized when revenue is realized or becomes realizable and has been earned, net of sales tax. In general, revenue is recognized at a point in time, which is usually upon shipment of the product. Our sales predominantly contain a single delivery element and revenue is recognized at a point in time when ownership, risks and rewards transfer. For the three months ended March 31, 2025 and 2024, there are no estimates of variable consideration represented in revenue.
8
Note 3 Summary of Significant Accounting Policies (cont.)
Shipping and Handling
The Company includes amounts billed to customers related to shipping and handling and shipping and handling expenses in cost of goods sold.
Earnings Per Share
Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to the common stockholders of Capstone Holding Corp. by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive.
For the three months ended March 31, 2025 and 2024, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:
| March 31, 2025 | March 31, 2024 | |||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Total | ||||||||
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires companies to disclose disaggregated information related to the effective tax rate reconciliation and income taxes paid. This guidance is effective for public entities for fiscal years beginning after December 15, 2024. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.
9
Note 3 Summary of Significant Accounting Policies (cont.)
In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses, which requires disclosures about specific types of expenses included in expense captions presented on the face of the Consolidated Statement of Operations. This guidance is effective for public entities for fiscal years beginning after December 15, 2026. We are currently reviewing this guidance and its impact on our consolidated financial statements.
Note 4 Liquidity and Uncertainties
The Company has recognized operating losses and
net losses on a year-to-date basis in 2025 and for the years ended December 31, 2024 and 2023. Although losses have been recognized,
the Company recognized positive operating cash flows for the years ended December 31, 2024 and 2023. Operating results and cash flows
fluctuate based on seasonality with the first quarter typically a slower period in our calendar year. Working capital as of March 31,
2025 is $
The Company primarily funds operations through cash provided from operations and available capacity under our ABL Facility (“Revolver”). In 2024 the Company was not in compliance with certain of the Revolver’s financial covenants which have been waived by our lender. As of March 31, 2025, the Company was not in compliance with the Revolver’s financial covenant which has not been waived as of issuance date of these interim consolidated financial statements. In April 2025, the Company executed an amendment to the Revolver that extended the maturity date from April 2025 through June 2025. The Company and the lender are working on a longer-term extension to the Revolver and future financial covenants that the Company anticipates executing in June 2025. The Company believes the Revolver will continue to be available and the longer-term extension will be executed with financial covenants aligned to the Company’s anticipated future results.
Forecasted future results, the longer-term extension of the Revolver and future compliance with financial covenants are subject to risks and uncertainties which could have a material adverse effect on our business, financial condition and results of operations.
As more fully described in Item
Note 5 Related Party Transactions
TotalStone is party to an agreement with a related
party, Brookstone Partners IAC (“Brookstone”), the Company’s majority shareholder. Pursuant to this agreement, Brookstone
provides annual consulting services totaling $
Stream Finance, LLC, which serves as a creditor
on TotalStone’s mezzanine term loan of $
On March 10, 2025, TotalStone paid Brookstone
Partners IAC, Inc. $
10
Note 6 Line of Credit
TotalStone has a Revolving Credit Note (“Revolver”)
available and outstanding pursuant to a Revolving Credit, Term Loan and Security Agreement, as amended, with Berkshire Bank. TotalStone’s
maximum revolving advance amount is $
Note 7 Debt
As of March 31, 2025, the Company had $
| March 31, 2025 | December 31, 2024 | |||||||
| Long-term Debt | ||||||||
| Note payable to BP Peptides, LLC “Brookstone”. The unsecured loan bears interest at | $ | $ | ||||||
| Mezzanine term loan to Steam Finance, LLC, collateralized by substantially all of TotalStone’s assets and subordinated to the Bank
term notes. Interest accrues at | ||||||||
| Seller’s note with Avelina Masonry, LLC, which required monthly payments of $ | ||||||||
| Term note agreement with Berkshire Bank, due in 48 consecutive monthly payments of $ | ||||||||
| In December 2022, TotalStone sold its facility in Navarre, Ohio to a nonaffiliated third party for a purchase price of $ | ||||||||
| Unsecured promissory note with Brookstone plus accrued interest to acquire a minority interest in DPH. Interest accrues at | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Less unamortized loan origination fees | ( | ) | ( | ) | ||||
| Total Long-term debt | $ | $ | ||||||
11
Note 7 Debt (cont.)
Scheduled maturities of long-term as of March 31, 2025, are as follows:
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total | $ |
Note 8 Leases
As of March 31, 2025, the balance of our
right-of-use (“ROU”) assets was $
| Year | Finance | Operating | ||||||
| 2025 | $ | $ | ||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Thereafter | ||||||||
| Total undiscounted Lease Payments | ||||||||
| Less: Present value discount | ( | ) | ( | ) | ||||
| Total Lease Liability | $ | $ | ||||||
Lease expense recognized on our leases is as follows in (“000’s”):
| Three months Ended March 31, 2025 | Three months Ended March 31, 2024 | |||||||
| Finance leases | ||||||||
| Amortization expense | $ | $ | ||||||
| Interest expense | ||||||||
| Operating leases | ||||||||
| Straight-line rent expense | ||||||||
| Total lease expense | $ | $ | ||||||
The following summarizes additional information related to our leases for 2025 and 2024 in (“000’s”):
| Three months ended March 31, 2025 | Three months ended March 31, 2024 | |||||||||||||||
| Finance | Operating | Finance | Operating | |||||||||||||
| Weighted-average remaining lease terms (years) | ||||||||||||||||
| Weighted-average discount rate | % | % | % | % | ||||||||||||
| ROU assets obtained in exchange for new lease liabilities | $ | $ | $ | $ | ||||||||||||
12
Note 9 Stockholders’ Equity
Prior to 2025, Capstone had no outstanding shares of preferred stock.
Series B Preferred Stock:
In connection with the IPO and Restructuring. Capstone filed with the Delaware Secretary of State to designate two million shares of the Company’s authorized preferred stock as Series B Preferred Stock (“Series B Preferred Stock”), no par value.
In February 2025, Nectarine Management, LLC,
an entity controlled by Michael Toporek, purchased
The holders of shares of Series B Preferred Stock (“Series B Preferred Stockholders”) have the right to vote, together with the holders of all the outstanding shares of Common Stock on all matters on which holders of Common Stock have the right to vote. The holders of shares of Series B Preferred Stock have the right to cast one vote for each share of Series B Preferred Stock held by them.
Series B Preferred Stock is convertible into
Common Stock at the holder’s option any time after the two-year anniversary of the Company’s February 2025 initial public
offering, provided the Common Stock’s closing price meets or exceeds $
The Series B Preferred Stockholders have certain
protective rights. Until less than 50% of the originally issued Series B Preferred Stock remains outstanding, holders of at least 50%
of such shares may appoint two directors to the Board. Additionally, until less than 20% of shares of Series B Preferred Stock remains
outstanding, the Company cannot take certain actions without the approval of at least 50% of the outstanding Series B Preferred Stock,
including amending governing documents, altering the Board size, issuing or modifying Series B Preferred Stock, engaging in mergers,
consolidations, or asset sales (except in the ordinary course), repurchasing shares (except under employment agreements), adopting equity
incentive plans exceeding
13
Note 10 Segment Information
The Company has
The Company’s chief executive officer is also the Company’s chief operating decision maker (“CODM”). The Company’s chief operating decision maker evaluates the performance of segments based on operating income (loss). Cost of goods sold and selling, general and administrative expenses, as reported on the statement of operations, are the significant segment expenses provided to the CODM on a regular basis.
The following tables present financial information regarding the Company’s reportable segment reconciled to the Company’s consolidated totals.
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||||||||||||||
| TotalStone | Parent | Eliminations | Consolidated | TotalStone | Parent | Eliminations | Consolidated | |||||||||||||||||||||||||
| Income (loss) from operations before taxes: | ||||||||||||||||||||||||||||||||
| Sales | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost of goods sold | ||||||||||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| (Loss) income from operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Other income (expense) net | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Loss from operations before taxes | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Other financial information: | ||||||||||||||||||||||||||||||||
| Depreciation & amortization | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||||||||
| As of March 31, 2025 | As of December 31, 2024 | |||||||||||||||||||||||||||||||
| TotalStone | Parent | Eliminations | Consolidated | TotalStone | Parent | Eliminations | Consolidated | |||||||||||||||||||||||||
| Total assets | $ | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Note 11 Subsequent Events
As more fully described in Item 5 of this Quarterly Report, on May 14, 2025, the Company entered into a common stock purchase agreement
and a registration rights agreement with an accredited investor (the “Equity Line Investor”). Under the terms and subject
to the conditions set forth in the Purchase Agreement, the Company has the right, but not the obligation, to sell to the Equity Line Investor,
and the Equity Line Investor is obligated to purchase, up to the lesser of (a) $
14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. For more information, see “Cautionary Note Regarding Forward-Looking Statements.” When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that impact our business. In particular, we encourage you to review the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2024 and this Quarterly Report on Form 10-Q under the caption “Part II. Item 1A. Risk Factors”. These risks and uncertainties could cause actual results to differ materially from those projected or implied by our forward-looking statements contained in this report. These forward-looking statements are made as of the date of this report, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law.
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included in this Quarterly Report and our audited consolidated financial statements and related notes thereto for the year ended December 31, 2024, included in our 2024 Form 10-K. Throughout this discussion, unless the context specifies or implies otherwise the terms the “Company”, “we”, “us” and “our” refer to the business and operations of Capstone Holding Corp and its operating subsidiary, TotalStone, LLC (dba Instone).
All dollar amounts stated herein are in U.S. dollars unless specified otherwise.
Overview
Capstone Holding Corp., formerly known as Capstone Therapeutics Corp. and OrthoLogic Corp., incorporated in Delaware in 1987 as a domestic corporation, is the parent entity of TotalStone, LLC (dba Instone). Instone has a building products distribution network that services 31 US states (with such states having over 60% of American households). Our over 400 active customers are primarily masonry, building materials and landscape dealers.
Historically, the product mix for Instone was heavily concentrated on Cultured Stone®, in 2018 Cultured Stone® comprised almost 80% of our total revenue. Through acquisition and product expansions, we have increased our product offering to our customers. This expansion has made Instone a more attractive supplier to new and existing dealers.
We provide value to our dealers by making the procurement and logistics process easy for product lines that are otherwise challenging for dealers to manage if they were to purchase directly with a manufacturer or quarry. Our website provides efficiency, and we believe our product offering provides options and ability for vendor consolidation and our logistical capabilities provide cost effective and efficient delivery, typically within a week or less.
A key differentiating factor for our strategy is that we own or control five of the eight brands we sell. Our products include stone veneer, landscape stone, and modular masonry fireplaces. The brands we distribute which we do not control are Cultured Stone®, Dutch Quality®, and Isokern®. The brands we distribute which we own or control include Aura™, Pangea Stone®, Toro Stone™, Beon Stone®, and Interloc™.
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We operate in a market environment where there are about 7,000 building products dealers, most of which are privately held. Many of these dealers are not able to efficiently purchase or optimize storage space, which constrains their ability to sell the diverse range of products we offer. Our website enables dealers to buy in the quantities they require thus driving a more optimal level of inventory while also significantly reducing logistical challenges. We believe the ability for customers to buy in the quantities they need across many product lines instead of buying single product lines form different manufacturers helps them manage cash and, in turn, allows them to offer a higher level of service to their own customers. According to a December 2023 study jointly released by the management consulting firm, Roland Berger, and the financial advisory firm, Lazard, “Trends in the Building Envelope Industry,” the sector has recently grown by 5 – 7%. Given the recent peak of the interest rate cycle constraining the revenue of building products companies (due to fewer housing starts and less commercial construction) we believe current conditions are the ideal backdrop for us to execute value-creating, accretive acquisitions.
We intend to continue to grow our business organically and through successfully integrating well-timed acquisitions.
Recent Developments
On March 7, 2025, the Company closed its public offering (the “March 2025 Public Offering”) of 1,250,000 shares of common stock (the “Public Offering Shares”), which were registered under the Rule 424(b) of the Securities Act of 1933, as amended, pursuant to the Registration Statement on Form S-1 (File No. 333-284105) which was declared effective by the SEC on February 14, 2025. The Public Offering Shares were sold at a public offering price of $4.00 per share, which generated net proceeds of approximately $3,250,000 after deducting underwriting discounts and commissions and other offering expenses.
In addition to its March 2025 Public Offering, the Company also executed various debt and equity restructuring transactions in the quarter ended March 31, 2025 that are described in Note 2 to the consolidated financial statements included in this Quarterly Report.
Components of Results of Operations
Sales
Our sales primarily consist of distributing manufactured and natural stone cladding products, natural stone landscape products, and related goods for residential and commercial construction through a dealer network in 31 states in the Midwestern and Northeastern United States. The Company recognizes revenue when control over the products has been transferred to the customer, and the Company has a present right to payment.
Cost of Goods Sold and Gross Profit
Cost of goods sold includes the purchase price of material, freight, miscellaneous import fees (if applicable), warranty and related expenses that are directly attributable to our fabricated products. The Company also includes amounts billed to customers related to shipping and handling and shipping and handling expenses in cost of goods sold.
Gross profit is equal to revenue less cost of goods sold. Gross profit margin is equal to gross profit divided by revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel-related costs, including salaries and benefits, advertising and marketing expenses, travel and entertainment, facility-related costs, investor relations, legal and consulting fees.
Other Income and Expenses
Other income and expenses consist primarily of interest expenses on our line of credit and debt.
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Results of Operations
The following is management’s discussion of the Company’s consolidated financial statements and results of operations for the three months ended March 31, 2025 and 2024 in thousands:
Results of Operations Comparing Three Months Ended March 31, 2025 to 2024.
| Three Months Ended March 31, | ||||||||||||||||
| 2025 | 2024 | $ Change | % Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net Sales | $ | 7,899 | $ | 9,359 | $ | (1,460 | ) | (16 | )% | |||||||
| Cost of goods sold | 6,574 | 7,614 | (1,040 | ) | (14 | )% | ||||||||||
| Gross profit | 1,325 | 1,745 | (420 | ) | (24 | )% | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, General and administrative | 2,753 | 2,462 | 291 | 12 | % | |||||||||||
| Loss income from operations | (1,428 | ) | (717 | ) | (711 | ) | (99 | )% | ||||||||
| Interest and other expense, net | (300 | ) | (380 | ) | 80 | 21 | % | |||||||||
| Income tax expense | — | (16 | ) | 16 | 100 | % | ||||||||||
| Net loss | $ | (1,728 | ) | $ | (1,113 | ) | $ | (615 | ) | (55 | )% | |||||
Sales
Sales were $7.9 million for the three months ended March 31, 2025 compared to $9.4 million for the three months ended March 31, 2024. Revenue decreased between the three months ended March 31, 2025 and 2024 by $1.5 million.
The first quarter of 2025 was slower due to challenging economic conditions attributable to trade policies, interest rates, concerns about inflation as well as colder winter temperatures experienced when compared to prior year.
The majority of decline was driven by lower volumes in our veneer products resulting in $1.3 million in lower revenues.
We continue to evaluate the potential impact of tariffs and have successfully transitioned the sourcing of higher volume products from China to other parts of the world. We believe the actions taken will minimize the impact of tariffs on our customers and end users.
Cost of goods sold
Cost of goods sold decreased by $1.0 million, or 14%, for the three months ended March 31, 2025 compared to the three months ended March 31, 2024.
The decrease in cost of goods sold was driven primarily by lower volumes and higher fixed freight costs. We experienced lower volumes on our veneer products with a slight increase in volume on our landscape products.
Gross profit margin decreased from 18.6% for the three months ended March 31, 2024 to 16.8% for the three months ended March 31, 2025. The decrease in gross profit margin was primarily driven by lower volumes and higher fixed freight costs.
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Selling general and administrative expenses
Selling general and administrative expenses increased by $291.0 thousand, or 12.0%, for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The increase results primarily from an increase in investor relations of $172.0 thousand and audit and legal fees of $111.0 thousand.
Interest and other expense
Other expenses, net, decreased by $80.0 thousand, or 21%, for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The decrease consists of lower interest expense of $80.0 thousand, largely attributed to our revolving line of credit.
Income Tax Expense
Income tax expense decreased by $16.0 thousand or 100% for the three months ended March 31, 2025, compared to the three months ended March 31, 2024. The decrease is largely attributed to financial performance.
Segment Results
The Company has one operating and reportable segment which consists of the operations of TotalStone. The Company also has corporate-level SG&A expenses which are included in Capstone Holding Corp. (“Capstone” or “the Parent”) and consist primarily of board fees and, investor relations, filing, legal, insurance, accounting and consulting expenses not identifiable and allocated to TotalStone.
The following table is a summary of TotalStone’s operating results through operating income (loss) reconciled to the Company’s consolidated totals with the inclusion of Parent and eliminating amounts:
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||||||||||||||
| TotalStone | Parent | Eliminations | Consolidated | TotalStone | Parent | Eliminations | Consolidated | |||||||||||||||||||||||||
| Income (loss) from operations before taxes: | ||||||||||||||||||||||||||||||||
| Sales | $ | 7,899 | $ | — | $ | — | $ | 7,899 | $ | 9,359 | $ | — | $ | — | $ | 9,359 | ||||||||||||||||
| Cost of goods sold | 6,574 | — | — | 6,574 | 7,614 | — | — | 7,614 | ||||||||||||||||||||||||
| Gross Profit | 1,325 | — | — | 1,325 | 1,745 | — | — | 1,745 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 2,398 | 564 | (210 | ) | 2,752 | 2,436 | 85 | (60 | ) | 2,461 | ||||||||||||||||||||||
| (Loss) income from operations | $ | (1,074 | ) | $ | (564 | ) | $ | 210 | $ | (1,428 | ) | $ | (691 | ) | $ | (85 | ) | $ | 60 | $ | (716 | ) | ||||||||||
| Other financial information: | ||||||||||||||||||||||||||||||||
| Depreciation & amortization included in SG&A expenses | $ | 116 | $ | — | $ | — | $ | 116 | $ | 120 | $ | — | $ | — | $ | 120 | ||||||||||||||||
The above discussion of consolidated operating results through operating income (loss) is in substance the operating results of TotalStone for the comparable periods presented. The elimination of selling, general and administrative expenses reflect the elimination of management fees incurred by TotalStone and earned by Parent. The Parent classifies the management fee income earned as a component of net non-operating income (expense) and the corresponding income is also eliminated in the Company’s consolidated results.
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Liquidity and Capital Resources
Working capital was $2.1 million as of March 31, 2025, an increase of $1.9 million as compared to $250.0 thousand as of December 31, 2024. The increase in working capital is primarily attributable to an increase in accounts receivable and cash and a reduction in the current portion of long-term debt; offset by an increase in accounts payable and our revolving line of credit.
The Company primarily funds our operations through cash provided from operations of our building products distribution network and available capacity under our ABL Facility (“Revolver”). Our operating cash flows fluctuate based on seasonality with the first quarter typically a slower period in our calendar year resulting in negative operating cash flows from the building of accounts receivables and inventory levels. During the second half of the year we generate positive operating cash flows as we bring down accounts receivables and inventory levels from seasonal high periods and pay down our Revolver.
In 2024 the Company was not in compliance with certain of the Revolver’s financial covenants which have been waived by our lender. As of March 31, 2025, the Company was not in compliance with the Revolver’s financial covenant which has not been waived as of the issuance date of these interim consolidated financial statements. In April 2025, the Company executed an amendment to the Revolver that extended the maturity date from April 2025 to June 2025. The Company and the lender are working on a longer-term extension to the Revolver and future financial covenants that the Company anticipates executing in June 2025. The Company believes the Revolver will continue to be available and the longer-term extension will be executed with financial covenants aligned to the Company’s anticipated future results.
The liquidity of the Company is largely dependent on our ability to borrow funds on our Revolver. The longer-term extension of the Revolver and future compliance with financial covenants are subject to risks and uncertainties which could have a material adverse effect on our business, financial condition and results of operations. The Company currently believes that it will have sufficient working capital to operate for a period of at least one year from the issuance date of the March 31,2025 interim consolidated financial statements based on future expected results. Future acquisitions may be financed through other forms of financing that will depend on existing conditions
Seasonality
The Company historically experiences higher sales during our second and third quarters due to the favorable weather in the Midwestern and Northeastern United States for new construction and remodeling.
Summary of Cash Flows
The following table summarizes our cash flows for each of the periods presented:
| (in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | ||||||
| Net cash used in operating activities | $ | (2,286 | ) | $ | (1,242 | ) | ||
| Net cash used in investing activities | — | (100 | ) | |||||
| Net cash provided by financing activities | 4,019 | 1,321 | ||||||
| Net increase (decrease) in cash | $ | 1,733 | $ | (21 | ) | |||
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Cash Flows from Operating Activities
Net cash used in operating activities was $2.3 million for the three months ended March 31, 2025, primarily resulting from our net loss of $1.7 million and 674.0 thousand used in changes in our non-cash working and non-cash expenses.
Net cash used in operating activities was $1.2 million for the three months ended March 31, 2024, primarily resulting from our net loss of $1.1 million.
Cash Flows from Investing Activities
There were no cash flows used in investing activities for three months ended March 31, 2025 compared to $100.0 thousand for the three months ended March 31, 2024. These cash outflows were related to purchases of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities was $4.0 million for the three months ended March 31, 2025. The cash inflow was a result of funds received from our public offering of $3.3 million and a net increase in our line of credit of $1.5 million, offset by the repayment of term debt of $910.0 thousand. Net cash provided by financing activities was $1.3 million for the three months ended March 31, 2024. The cash inflow was a result of a $1.6 million net increase in our line of credit, offset primarily by the repayment of term debt of $250.0 thousand.
Funding Requirements
We currently expect to use some of the net proceeds of our March 2025 Public Offering primarily for organic growth, by expanding the breadth of our distribution network by both geography and new products, and inorganic growth via rapid acquisition program of building products distributors and manufacturers whose distribution core can be fortified to expand their footprint.
The Company plans to raise additional funds to finance the growth of our operations through equity financing or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted.
Off-Balance Sheet Arrangements
During the periods presented we did not have, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
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Critical Accounting Policies and Significant Judgments and Estimates
The Critical Accounting Policies and Significant Judgments and Estimates included in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 31, 2025, have not materially changed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of March 31, 2025, our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses in our internal control over financial reporting.
Due to accounting resource constraints, we have had limited review controls. These constraints have resulted in (1) a lack of segregation of duties, since we have a limited administrative staff, and (2) lack of internal controls structure review.
Our management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. All responsibility for accounting entries and the creation of financial statements has historically been held primarily by a single person, though the Company engages multiple accounting consultants for accounting, tax and audit support. To remedy this situation, we need to hire additional staff or financial consultant support. Subsequent to March 31, 2025, the Company hired a controller.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting, as defined in Rules 13a-15(f) of the Exchange Act, during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
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PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. We are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations.
ITEM 1A: RISK FACTORS
For information regarding the risk factors that could affect the Company’s business, results of operations, financial condition and liquidity, see the information under Part I, Item 1A. “Risk Factors” in the Form 10-K, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Form 10-K.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of our equity securities during the three months ended March 31, 2025.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION.
We are reporting the following information in lieu of reporting on a Current Report on Form 8-K under Item 1.01 Entry into a Material Definitive Agreement.
On May 14, 2025, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with an accredited investor (the “Equity Line Investor”). Under the terms and subject to the conditions set forth in the Purchase Agreement, the Company has the right, but not the obligation, to sell to the Equity Line Investor, and the Equity Line Investor is obligated to purchase, up to the lesser of (a) $20,000,000 in aggregate gross purchase price of the Company’s common stock (the “Equity Line Securities”) and (b) the Exchange Cap (as defined in the Purchase Agreement) (the “Equity Line Financing”).
The shares of common stock to be issued by the Company and purchased by the Equity Line Investor will be sold at a purchase price equal to 97% of the lowest daily volume-weighted average price of the common stock on the Nasdaq Capital Market during the three consecutive trading days immediately following the trading date on which a valid purchase notice is delivered to the Equity Line Investor by the Company.
Consistent with certain applicable Nasdaq rules, the Company may not issue to the Equity Line Investor more than 1,038,050 shares of its common stock (the “Exchange Cap”) under the Purchase Agreement, which number of shares is equal to 19.99% of the shares of the Company’s common stock issued and outstanding immediately prior to the execution of the Purchase Agreement, unless the Company obtains stockholder approval to issue shares of its common stock in excess of such limit in accordance with applicable rules of Nasdaq.
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Moreover, the Company may not issue or sell any shares of common stock to the Equity Line Investor which, when aggregated with all other shares of common stock then beneficially owned by the Equity Line Investor and its affiliates (as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule 13d-3 promulgated thereunder), would result in the Equity Line Investor beneficially owning more than 4.99% of the issued and outstanding shares of common stock, unless such limit is increased or waived by the Equity Line Investor.
As consideration for the Equity Line Investor’s irrevocable commitment to purchase shares of common stock, upon execution of the Purchase Agreement, the Company became obligated to issue to the Equity Line Investor a number of shares of common stock equal to $400,000 divided by the lower of (i) the Nasdaq official closing price on the trading day immediately prior to the Company’s initial filing of the registration statement, or (ii) the average Nasdaq official closing price over the five consecutive trading days ending on the day immediately prior to such filing (the “Commitment Shares”). The Commitment Shares are to be issued following the effective date of the registration statement. In certain circumstances, the Company may become obligated to pay to the Equity Line Investor a cash fee equal to $400,000 in lieu of issuing such shares of common stock, under the terms and subject to the conditions described in the Purchase Agreement.
The Purchase Agreement provides customary representations, warranties, and covenants of the Company and the Equity Line Investor.
Pursuant to the Registration Rights Agreement, the Company agreed to file a resale registration statement covering the resale of the Equity Line Securities with the Securities and Exchange Commission (the “SEC”) within 30 calendar days after the date of the Registration Rights Agreement (the “Filing Deadline”), and to use commercially reasonable efforts to cause such resale registration statement to be declared effective by the SEC as soon as reasonably practicable following the filing thereof, no later than (i) with respect to the initial registration statement, the earlier of (A) the seventy-fifth (75th) calendar day after the earlier of (1) the date on which the initial registrations statement is filed and (2) the Filing Deadline, if such registration statement is subject to review by the SEC, and (B) the thirtieth (30th) calendar day after the earlier of (1) the date on which the initial registration statement is filed and (2) the Filing Deadline, if the Company is notified by the SEC that such registration statement will not be reviewed; and (ii) with respect to any subsequent registration statements that may be required to be filed by the Company, the earlier of (A) the sixtieth (60th) calendar day following the date on which the Company was required to file such additional registration statement, if such registration statement is subject to review by the SEC, and (B) the thirtieth (30th) calendar day following the date on which the Company was required to file such subsequent registration statement, if the Company is notified by the SEC that such registration statement will not be reviewed.
The foregoing descriptions of the Purchase Agreement and Registration Rights Agreement are qualified in its entirety by reference to the Purchase Agreement and the Registration Rights Agreement, forms of which are filed as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by reference.
Insider trading arrangements and policies.
During the quarter ended
March 31, 2025, no director or officer of the Company
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ITEM 6: EXHIBITS
| * | Filed herewith. |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CAPSTONE HOLDING CORP. | ||
| Date: May 15, 2025 | ||
| By: | /s/ Matthew E. Lipman | |
| Matthew E. Lipman | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 15, 2025 | /s/ Edward Schultz |
| Edward Schultz | |
| Chief Financial Officer | |
| (Principal Financial and Principal Accounting Officer) |
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