Capstone Holding Corp(CAPS) - 2024 Q4 - Annual Report

Part I Business Capstone Holding Corp. distributes building products via Instone, focusing on strategic acquisitions and an integrated supply chain - Capstone Holding Corp. is a building products distribution network, with its primary operations conducted through its subsidiary, Instone, the largest wholesale distributor in the thin veneer masonry products industry[17] - The company's long-term growth strategy is centered on strategic acquisitions within the building products sector, aiming to capitalize on market dynamics and achieve scale[19][20][21] - The operating model features an integrated supply chain and a strategic distribution network with four centers serving 31 states, which contain over 60% of American households[34][35] - The product portfolio includes over 1,980 SKUs across thin veneer stone (manufactured and natural), landscape products, and modular masonry fireplaces[50][58][59] - Following a restructuring on March 7, 2025, which was contingent on a public offering, Capstone Holding Corp. now owns 100% of the equity interests of its operating subsidiary, TotalStone, LLC[72][73] Risk Factors The company faces risks from the cyclical construction industry, supply chain issues, reliance on key parties, and material weaknesses in internal controls - The business is highly sensitive to macroeconomic conditions, with recessions, high interest rates, and lower construction starts posing material risks to operations and financial results[92][93] - The company relies on third-party suppliers, some international, and faces risks of supply chain interruptions, price volatility, and potential loss of key suppliers like Westlake and Pangaea Stone, which could disrupt operations[116][119] - Affiliates of Brookstone Partners (BPA XIV, LLC, Nectarine Management LLC, and BP Peptides LLC) collectively own over 50% of the company's voting stock, giving them significant control over shareholder matters[133] - The company has identified a material weakness in its internal control over financial reporting due to accounting resource constraints, resulting in a lack of segregation of duties and a lack of internal controls structure review[141] - The company's liquidity is largely dependent on its ability to borrow funds under its ABL Facility (Revolver). Failure to meet financial covenants could risk access to this funding[145] Unresolved Staff Comments The company reports that there are no unresolved staff comments from the SEC - Not applicable[165] Cybersecurity The company manages cybersecurity risks through third-party assessments and board oversight, reporting no material impacts for fiscal year 2024 - The company employs third-party information technology providers to conduct periodic risk assessments to identify and manage potential cybersecurity threats[166][167] - The board of directors, primarily through the Audit Committee, is responsible for monitoring and assessing strategic risk exposure from cybersecurity, receiving updates from executive management at least annually[169] - For the fiscal year ended December 31, 2024, the company believes there were no cybersecurity threats that materially impaired its operations or financial conditions[168] Properties The company primarily leases its distribution and office facilities, including a key sale-leaseback property in Navarre, OH, extending through 2047 - The company leases its primary distribution and office facilities in Millstone, NJ; Alsip, IL; and Plainville, MA[170][171] - In December 2022, the company sold its Navarre, OH property for $3.2 million and entered into a long-term leaseback agreement for the same property through December 2047[173] Legal Proceedings The company is not currently aware of any material legal proceedings - The company is not currently aware of any material legal proceedings[174] Mine Safety Disclosures This section is not applicable to the company - Not applicable[175] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "CAPS"; it has not paid dividends and recently raised $3.48 million in a public offering for growth and debt - The company's common stock is listed on the Nasdaq Capital Market under the symbol "CAPS"[177] - The company has not declared or paid any cash dividends and does not anticipate paying them in the foreseeable future[180] - On March 7, 2025, the company closed a public offering of 1,250,000 shares at $4.00 per share, generating net proceeds of approximately $3.48 million[182] - The proceeds from the offering are planned for general corporate purposes, including organic growth, acquisitions, and repayment of debt[183][184] Reserved This section is reserved and contains no information - This item is reserved[186] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2024, net sales decreased by 7%, but gross profit margin improved, and net loss narrowed, with liquidity primarily from operations and an ABL facility Consolidated Results of Operations (in thousands) | | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $ 44,876 | $ 48,354 | $ (3,478) | (7)% | | Gross profit | $ 9,570 | $ 9,611 | $ (41) | (1)% | | Loss from operations | $ (638) | $ (1,256) | $ 618 | 49% | | Net loss | $ (2,563) | $ (3,819) | $ 1,256 | 33% | - Sales decreased by $3.5 million (7%) in 2024 compared to 2023, driven by a decrease in market volume for both owned and non-owned brands[204][205] - Gross profit margin increased to 21.3% in 2024 from 19.9% in 2023, as higher freight costs from prior supply chain disruptions were worked through inventory in 2023[208] - The company's liquidity is primarily funded through cash from operations and an ABL Facility ("Revolver"). The company believes it will have sufficient cash to meet requirements for at least one year[215] Summary of Cash Flows (in thousands) | | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $ 3,821 | $ 1,650 | | Net cash used in investing activities | $ (120) | $ (208) | | Net cash provided by (used in) financing activities | $ (3,742) | $ (1,413) | Quantitative and Qualitative Disclosures About Market Risk This section is not applicable to the company - Not applicable[244] Financial Statements and Supplementary Data This section refers to the consolidated financial statements and the auditor's unqualified opinion, noting a critical audit matter regarding inventory reserve estimation - This item directs the reader to the Index to Financial Statements and Financial Statement Schedules starting on page F-1 of the annual report[245] - The independent auditor, GBQ Partners LLC, issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2024 and 2023[323] - A critical audit matter was identified concerning the reserve for slow-moving, excess, and obsolete inventory, which was approximately $576,000 as of December 31, 2024. This was due to the subjective nature of management's estimates regarding future demand[328][329] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section is not applicable to the company - Not applicable[246] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2024, due to material weaknesses in internal control over financial reporting - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were not effective as of December 31, 2024[247] - The ineffectiveness was due to material weaknesses in the company's internal control over financial reporting[247] - No management report on internal control over financial reporting is included, as permitted for newly public companies[248] Other Information This section is not applicable to the company - Not applicable[250] Disclosures Regarding Foreign Jurisdictions that Prevent Inspections This section is not applicable to the company - Not applicable[251] Part III Directors, Executive Officers and Corporate Governance This section outlines the company's executive officers, board composition, committee structure, director independence, and the adopted Code of Business Conduct and Ethics - The company's executive officers are Matthew E. Lipman (CEO), Michael Toporek (Chairman), and Edward Schultz (CFO)[253] - The Board of Directors has determined that Charles Dana, Fredric J. Feldman, Ph.D., Elwood D. Howse, Jr., and John M. Holliman, III are independent directors under Nasdaq rules[266] - The company has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee, with specified members and chairs[267][269][271] - A Code of Business Conduct and Ethics applicable to all officers, directors, and employees has been adopted[272] Executive Compensation This section details Named Executive Officer compensation for 2023-2024, noting no new equity awards, a new CEO employment agreement, and a director compensation plan post-offering Summary Compensation Table (2024 & 2023) | Name and Principal Position | Year | Salary | Other Annual Compensation | Total Compensation | | :--- | :--- | :--- | :--- | :--- | | Matthew Lipman, CEO | 2024 | $0 | $48,000 | $48,000 | | | 2023 | $0 | $48,000 | $48,000 | | Michael Toporek, Chairman | 2024 | $0 | $48,000 | $48,000 | | | 2023 | $0 | $48,000 | $48,000 | | Edward Schultz, CFO | 2024 | $216,161 | $0 | $216,161 | | | 2023 | $192,210 | $0 | $192,210 | - No new equity awards were granted to Named Executive Officers in 2024, and there were no outstanding unexercised options at fiscal year-end[278][279] - Effective March 7, 2025, CEO Matthew Lipman entered into an executive employment agreement with a base salary of $250,000 and a potential performance bonus[288] - Following its Public Offering, the company adopted a director compensation plan with an annual cash retainer of $20,000 for directors[290] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 31, 2025, 5,190,251 common shares were outstanding, with executive officers and directors collectively owning 71.84%, indicating strong insider control - As of March 31, 2025, there were 5,190,251 shares of common stock outstanding[291] Beneficial Ownership of Common Stock (as of March 31, 2025) | Name of Beneficial Owner | Shares | Percentage | | :--- | :--- | :--- | | 5% Shareholders: | | | | BPA XIV, LLC | 2,528,662 | 48.66% | | Named Executive Officers and Directors: | | | | Matthew E. Lipman | 2,698,508 | 51.93% | | Gordon Strout | 863,628 | 16.62% | | All executive officers and directors as a group (8 persons) | 3,733,077 | 71.84% | Certain Relationships and Related Transactions, and Director Independence The company discloses material related-party transactions, primarily with Brookstone Partners affiliates, including consulting agreements, a mezzanine loan, and a $7.2 million debt forgiveness - TotalStone, LLC is party to a consulting agreement with Brookstone Partners IAC (a related party) for services totaling $400,000 per year, plus potential performance and transaction fees[296] - In November 2023, the company unwound its investment in Diamond Products Holdings (DPH). This resulted in an $8.0 million write-off of the investment and a $7.2 million gain on debt extinguishment from Brookstone XXI, an affiliated entity[299][302] - Stream Finance, LLC, which is managed by Brookstone Partners, is a creditor on TotalStone's mezzanine term loan, which had a balance of $1.3 million plus accrued interest as of year-end[297] - In March 2025, the company paid a $200,000 advisory fee to Brookstone Partners related to the Public Offering[307] Principal Accounting Fees and Services This section details fees billed by GBQ Partners LLC, with total fees increasing from $132,267 in 2023 to $194,291 in 2024 due to higher audit and new audit-related fees Fees Billed by GBQ Partners LLC | Fee Type | 2024 | 2023 | | :--- | :--- | :--- | | Audit Fees | $159,931 | $107,782 | | Audit-related fees | $11,050 | $0 | | Tax fees | $23,310 | $24,485 | | Total | $194,291 | $132,267 | Part IV Exhibits and Financial Statement Schedules This section references financial statements indexed on page F-1 and lists all exhibits filed with the Form 10-K, including corporate governance and material contracts - Refers to the financial statements and the Report of Independent Registered Public Accounting Firm, which are listed in the "Index to Financial Statements and Schedules" on page F-1[314] - A comprehensive list of exhibits is provided, including the Restated Certificate of Incorporation, Bylaws, various credit and loan agreements, and management contracts[315][316][317] Form 10-K Summary This section is not applicable to the company - Not Applicable[318]