Capstone Holding Corp(CAPS) - 2025 Q1 - Quarterly Report

PART I FINANCIAL STATEMENTS Capstone Holding Corp. reported a net loss of $1.7 million on net sales of $7.9 million for Q1 2025, improving equity to $27.0 million post-public offering despite liquidity challenges and covenant non-compliance Consolidated Balance Sheets Total assets increased to $52.2 million by March 31, 2025, while total equity transformed from a $3.1 million deficit to a positive $27.0 million due to restructuring and a public offering Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $16,707 | $12,800 | | Total Assets | $52,208 | $47,221 | | Total Current Liabilities | $14,657 | $12,550 | | Total Liabilities | $25,236 | $20,661 | | Total Equity | $26,972 | $(3,058) | - TotalStone, LLC's Class B and Special Preferred Units, valued at $28.5 million and $1.1 million respectively at the end of 2024, were eliminated from the balance sheet by March 31, 2025, following the company's restructuring[10] Consolidated Statements of Operations For Q1 2025, net sales decreased 15.6% to $7.9 million, gross profit fell 24.1% to $1.3 million, and net loss attributable to stockholders widened to $2.4 million Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net sales | $7,899 | $9,359 | | Gross Profit | $1,325 | $1,745 | | Loss from operations | $(1,428) | $(717) | | Net Loss | $(1,728) | $(1,113) | | Net loss attributable to Capstone Holding Corp. stockholders | $(2,433) | $(2,034) | | Net loss per share – basic and diluted | $(0.47) | $(12.91) | | Weighted average number of common shares outstanding | 5,190,251 | 157,610 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity dramatically increased from a $3.1 million deficit to a positive $27.0 million in Q1 2025, driven by Class B Preferred Units conversion and $3.3 million net proceeds from a public offering - The company executed a public offering of 1,250,000 common shares, raising $3.25 million[14] - TotalStone's Class B and Special Preferred Units were converted into common stock and debt, respectively, as part of the restructuring[14] Consolidated Statements of Cash Flows Q1 2025 saw $2.3 million net cash used in operating activities, offset by $4.0 million from financing activities, resulting in a $1.7 million net cash increase and a quarter-end cash balance of $1.7 million Summary of Cash Flows (in thousands) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Cash flows used in operating activities | $(2,286) | $(1,242) | | Cash flows used in investing activities | $0 | $(100) | | Cash flows provided by financing activities | $4,019 | $1,321 | | Net Change in Cash | $1,733 | $(21) | | Cash at End of Period | $1,744 | $30 | Notes to Consolidated Financial Statements Notes detail a March 2025 IPO and restructuring, which raised $3.3 million and converted preferred units, while highlighting liquidity uncertainties due to operating losses, non-compliance with a financial covenant, and a subsequent $20 million equity line of credit - 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 $3.25 million[19] - As of March 31, 2025, the company was not in compliance with a financial covenant on its ABL Facility. The facility's maturity was extended to June 2025, with negotiations for a longer-term extension underway[43] - On May 14, 2025, the company entered into a common stock purchase agreement (Equity Line) allowing it to sell up to $20 million of its common stock to an accredited investor[61][45] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management attributes the 16% year-over-year decline in Q1 2025 sales to challenging economic conditions, with gross profit margin contracting from 18.6% to 16.8% and SG&A expenses rising 12%, while liquidity is constrained by non-compliance with revolving credit facility covenants despite improved working capital and a new equity line of credit Overview Capstone Holding Corp. operates a building products distribution network across 31 U.S. states, serving over 400 active dealers, with a strategy focused on organic growth and accretive acquisitions and owning five of the eight brands it distributes - The company operates a building products distribution network servicing 31 US states, with over 400 active customers, primarily masonry and building materials dealers[64] - The company's strategy includes both organic growth and integrating well-timed acquisitions[69] - A key strategic differentiator is that the company owns or controls five of the eight brands it sells, including Aura™, Pangea Stone®, and Beon Stone®[67] Results of Operations Comparing Q1 2025 to Q1 2024, net sales decreased by 16% to $7.9 million, gross profit fell 24% to $1.3 million, loss from operations nearly doubled to $1.4 million, and net loss increased by 55% to $1.7 million, primarily due to lower veneer product volumes Results of Operations Comparison (in thousands) | Metric | Q1 2025 | Q1 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $7,899 | $9,359 | $(1,460) | (16)% | | Gross profit | $1,325 | $1,745 | $(420) | (24)% | | Loss from operations | $(1,428) | $(717) | $(711) | (99)% | | Net loss | $(1,728) | $(1,113) | $(615) | (55)% | - The decrease in sales was attributed to challenging economic conditions (trade policies, interest rates, inflation) and colder winter temperatures compared to the prior year[78] - Gross profit margin decreased from 18.6% to 16.8% primarily due to lower volumes and higher fixed freight costs[81] - Selling, general and administrative expenses increased by $291,000 (12%), mainly from a $172,000 increase in investor relations and $111,000 in audit and legal fees[82] Liquidity and Capital Resources Working capital improved to $2.1 million as of March 31, 2025, but liquidity remains dependent on its ABL Facility, with non-compliance with the Revolver's financial covenants leading to a short-term extension and ongoing negotiations - Working capital increased by $1.9 million to $2.1 million as of March 31, 2025[87] - The company was not in compliance with its Revolver's financial covenant as of March 31, 2025. An amendment extended the maturity date to June 2025, and a longer-term extension is being negotiated[89] - The company's liquidity is highly dependent on its ability to borrow on its Revolver[90] QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK This section is not applicable for the reporting period - The company has indicated that quantitative and qualitative disclosures about market risk are not applicable[100] CONTROLS AND PROCEDURES Management concluded that as of March 31, 2025, the company's disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting, specifically a lack of segregation of duties and limited review controls stemming from accounting resource constraints - Management concluded that disclosure controls and procedures were not effective as of March 31, 2025[101] - Material weaknesses were identified due to limited accounting resource constraints, resulting in a lack of segregation of duties and limited internal control structure review[102] - To help remedy the material weakness, the company hired a controller subsequent to March 31, 2025[103] PART II LEGAL PROCEEDINGS The company is not currently aware of any legal proceedings that would have a material adverse effect on its business, financial condition, or results of operations - The company reports that it is not currently aware of any material legal proceedings[105] RISK FACTORS There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to the risk factors disclosed in the Form 10-K have occurred[106] UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company reported no unregistered sales of its equity securities during the three months ended March 31, 2025 - There were no unregistered sales of equity securities during the quarter[107] DEFAULTS UPON SENIOR SECURITIES None reported - None reported[108] OTHER INFORMATION On May 14, 2025, the company entered into an Equity Line Financing agreement allowing it to sell up to $20 million of its common stock to an accredited investor, subject to an issuance cap of 19.99% of outstanding shares (1,038,050 shares) without shareholder approval - On May 14, 2025, the company entered into a common stock purchase agreement (Equity Line Financing) with an accredited investor[111] - The company has the right to sell up to $20 million in common stock, subject to an issuance cap of 1,038,050 shares (19.99% of outstanding stock) without shareholder approval[111][113] - As consideration, the company will issue $400,000 worth of 'Commitment Shares' to the investor[115] EXHIBITS The report includes several exhibits, most notably the forms for the Common Stock Purchase Agreement and the Registration Rights Agreement related to the Equity Line Financing, as well as Sarbanes-Oxley certifications from the CEO and CFO - Key exhibits filed include the Form of Common Stock Purchase Agreement (10.1) and Form of Registration Rights Agreement (10.2)[121] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Act Sections 302 and 906 are also included as exhibits[121]