Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Quarterly Report, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, potential growth or growth prospects, future research and development, sales and marketing and general and administrative expenses, and our objectives for future operations, are forward-looking statements. Words such as "believes," "may," "will," "estimates," "potential," "continues," "anticipates," "intends," "expects," "could," "would," "projects," "plans," "targets," and variations of such words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors" in our 2025 Form 10-K and in Part II, Item 1A of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report and in other documents we file from time to time with the Securities and Exchange Commission (the "SEC") that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Quarterly Report are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Quarterly Report or to conform statements to actual results or revised expectations, except as required by law.

You should read this Quarterly Report and the documents that we reference herein and have filed with the SEC as exhibits to this Quarterly Report with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

This Quarterly Report also contains or may contain estimates, projections and other information concerning our industry, our business and the markets for our products, including data regarding the estimated size of those markets and their projected growth rates. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived.

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, 2025 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, 2025, included in our 2025 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), Carolina Stone Holdings, LLC, and Canadian Stone Industries (Fraser Canyon Holdings Inc. and its subsidiaries).

All dollar amounts stated herein are in U.S. dollars unless specified otherwise.

Overview

Capstone Holding Corp., incorporated in Delaware in 1987 as a domestic corporation and reincorporated in Nevada on October 9, 2026, is a national, technology-enabled building products distribution and installation platform. Through our three operating subsidiaries - Instone (TotalStone, LLC), Canadian Stone Industries (Fraser Canyon Holdings Inc. and its subsidiaries, "CSI"), and Carolina Stone (Carolina Stone Distributors, LLC) - we distribute and install thin veneer stone, natural stone, manufactured stone, and related masonry and hardscape products for residential and commercial construction markets across 38 U.S. states and two Canadian provinces.

Instone, founded over 30 years ago, is the largest wholesale distributor of thin veneer masonry products in the United States, operating from four distribution centers in the Northeast, Midwest, Mid-Atlantic, and West Coast. CSI is a leading wholesale distributor of natural and manufactured stone products in Canada, operating from two locations in British Columbia and Ontario. Carolina Stone distributes and installs thin veneer stone and related masonry products for residential, commercial, and multi-family projects in the Southeast United States from three locations in North Carolina. Together, our platform offers over 3,000 SKUs across nine warehouse and distribution center locations, serving a diverse base of masonry dealers, contractors, builders, and homeowners.

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 are the exclusive distributor of seven of the brands we sell: Artepiso, Aura™, Beon Stone®, Interloc™, Nature's Edge, Pangaea Stone® and Toro Stone™. Our products include stone veneer, landscape stone, and modular masonry fireplaces. The brands we distribute which we do not control include Cultured Stone®, Dutch Quality®, Eldorado Stone®, Isokern® and Willki Stone.

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 from different manufacturers helps them manage cash and, in turn, allows them to offer a higher level of service to their own customers.

We intend to continue to grow our business organically and through successfully integrating well-timed acquisitions.

Recent Developments

In addition to events previously disclosed, the following significant developments occurred during the financial periods covered by this Quarterly Report:

• Convertible Note, Price Adjustment (April 16, 2026). The Company and the holder of the Senior Secured Convertible Notes entered into a letter agreement to adjust the conversion price on $500,000 of principal outstanding under the October 2025 Convertible Note from $33.00 to $17.10 per share. The adjustment is accounted for as a modification of the embedded conversion feature, with the change in fair value of the bifurcated derivative liability reflected in earnings for the period (see Note 11).

• Convertible Note, Price Adjustment (August 10, 2026). The Company and the holder of the Senior Secured Convertible Notes entered into a Conversion Price Voluntary Adjustment Notice reducing the conversion price of both Notes to $8.847 per share with respect to all $1,900,759.78 of principal then outstanding. At that price the outstanding principal is convertible into approximately 214,848 shares of Common Stock. The adjustment is accounted for as a modification of the embedded conversion features, with the change in fair value of the bifurcated derivative liabilities reflected in earnings in the third quarter of 2026 (see Note 11).

• Convertible Note, Maturity Date Extension (November 6, 2026). The Company and the holder of the October 2025 Convertible Note entered into a first amendment to the October 2025 Convertible Note, which extends the maturity date of the October 2025 Note from October 22, 2026 to December 13, 2027. Before that date, the holder will not enforce or collect on account of any event of default arising on or before the date of this amendment, and no default interest or late charges accrue through that date on account of any such event of default. Interest for any period after October 22, 2026 accrues only on the principal outstanding. This amendment also excludes from the October 2025 Convertible Note covenant prohibiting maturity or acceleration of debt prior to the maturity date of the October 2025 Convertible Note the following agreements: existing indebtedness and existing revolving credit facilities and any extension, renewal, or refinancing of such indebtedness or those facilities that does not increase the principal amount outstanding or the commitment.

• Convertible Note Conversions and Repayment of the July 2025 Note. During the nine months ended September 30, 2026, an aggregate of $2,632,528 of principal and $184,936 of accrued interest and make-whole amounts were converted into 177,912 shares of Common Stock under the Senior Secured Convertible Notes. The July 2025 Note, which matured on July 29, 2026 and was extended to August 29, 2026, was repaid in full on August 28, 2026 after partial conversions and holder optional redemptions funded from equity line proceeds. In September 2026 the holder redeemed $89,640 of principal under the October 2025 Note from equity line proceeds and converted $560,748 of principal, leaving $1,000,000 of principal outstanding at September 30, 2026 (see Note 11).

• Revolving Credit Facility Waiver and Sixteenth Amendment. On May 18, 2026, the Company received a written waiver from Beacon Bank & Trust of the Company's noncompliance with the minimum Cash Flow Coverage Ratio under the Revolving Credit Agreement as of March 31, 2026. On June 17, 2026, the Company entered into the Sixteenth Amendment to the Revolving Credit Agreement, extending the maturity date from June 19, 2026 to December 31, 2026 (see Note 10).

• Stream Finance Mezzanine Loan Extension. On June 17, 2026, the Company entered into the Fourth Amendment to the Stream Finance Credit Agreement, extending the maturity date by one year from September 30, 2027 to September 30, 2028 (see Note 11).

• 2026 Annual Meeting of Stockholders. On June 18, 2026, the Company held its 2026 Annual Meeting of Stockholders. The stockholders approved each proposal set forth in the proxy statement, including the election of Class I and Class II directors, authorization to effect a reverse stock split, approval of an amendment to the 2025 Stock Incentive Plan and ratification of the Company's independent registered public accounting firm (see Note 15).

• Equity Line of Credit Draws. During the three months ended September 30, 2026, the Company submitted 50 VWAP Purchase Notices under the equity line with Tumim Stone Capital, LLC, resulting in the issuance of 149,032 shares of Common Stock for aggregate gross proceeds of approximately $792,587. During the nine months ended September 30, 2026, the Company submitted 70 notices for 200,524 shares and aggregate gross proceeds of approximately $1,412,435.

• 2025 Stock Incentive Plan; Restricted Stock Awards. On August 7, 2026, the Compensation Committee approved, and the Company issued, 160,307 shares of restricted common stock to eleven executive officers and directors under the 2025 Plan, including shares granted under the Master Restricted Stock Agreements entered into with the Company's directors on the same date (see Note 15). Stock-based compensation expense for the March 30 and August 7, 2026 grants was approximately $644.0 thousand for the nine months ended September 30, 2026.

• Warrant Exercise. On July 10, 2026, 3i, LP exercised in full the February 2026 warrant to purchase 13,500 shares of Common Stock at $0.30 per share, and the Company issued 13,500 shares (see Note 14).

• Stockholder Consent and Schedule 14C. On August 7, 2026, the Board of Directors and stockholders holding a majority of the voting power approved by written consent one or more amendments to the Certificate of Incorporation to decrease the number of authorized shares, and the settlement of the Series Z Preferred Stock and accrued management fees payable to related parties through exchanges for up to 525,000 shares of Common Stock. The Company filed a preliminary information statement on Schedule 14C on September 14, 2026 and a definitive information statement on September 30, 2026, which was mailed to stockholders on or about October 6, 2026 (see Note 5 and Note 15). The Board also approved, and the holder consented to, an amendment to the Certificate of Designation of the Series B Preferred Stock, which was filed with the Delaware Secretary of State on August 10, 2026.

• Restatement. On August 12, 2026, the Company filed amendments to its Quarterly Reports for the periods ended June 30, 2025, September 30, 2025 and March 31, 2026 to restate the weighted average share and per share amounts and reported a related material weakness (see Item 4).

• Tariff Refunds. During the three months ended September 30, 2026, the Company collected the $438.0 thousand of IEEPA and reciprocal duty refunds recognized in the second quarter, together with statutory interest. In addition, on September 30, 2026, a supplier that acted as importer of record on merchandise TotalStone bought from it issued TotalStone a credit memo of $516.6 thousand. The credit is unconditional and is applied against amounts TotalStone owes the supplier on future purchases. The Company recognized the credit as a reduction of cost of goods sold and an increase in other current assets. The Company expects to use the credit against purchases within the next twelve months. The Company expects additional credits from another supplier, which it will recognize when issued. See Note 3.

• Staffing Agreement. In September 2026, the Company amended and restated its staffing agreement with Brookstone (see Note 5).

After the end of the quarter, on October 9, 2026, the Company changed its state of incorporation from Delaware to Nevada, and on October 19, 2026, the Company effected a 1-for-30 reverse stock split of its common stock (see Note 19 to the consolidated financial statements included in this Quarterly Report). All share and per share amounts of the Company's common stock in this discussion and in Part II of this Quarterly Report have been adjusted for the reverse stock split.

On March 7, 2025, the Company closed its public offering (the "March 2025 Public Offering") of 41,667 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 $120.00 per share, which generated net proceeds of approximately $3,252,000 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.

On August 22, 2025, the Company completed its membership interest purchase agreement of the Carolina Stone Holdings. The aggregate purchase price of the Holdings Membership Interest is (i) $2,625,000 in cash, subject to adjustment set forth in Section 2.6 of the Membership Purchase Agreement, plus (ii) a seller note in the original principal amount of $1,250,000, plus (iii) the amount payable pursuant to the terms of the earn-out agreement. The Company transferred $2,501,000 in cash to the Seller, representing the aggregate purchase price of $2,625,000 less $124,000 for the preliminary working capital adjustment as set forth in Section 2.6 of the Purchase Agreement.

Equity Line of Credit

On May 14, 2025, we entered into a purchase agreement (as restated and amended, the "Purchase Agreement") with Tumim Stone Capital, LLC (the "Equity Line Investor"), pursuant to which the Equity Line Investor committed to purchase up to $20.0 million in shares of our Common Stock, subject to certain limitations and conditions as described in Note 11.

On June 26, 2025, the Company and the Equity Line Investor entered into a first amendment to the Purchase Agreement. The Purchase Agreement was amended and restated on June 16, 2026, and the amended and restated agreement was amended on July 2, 2026, as described in Note 11 to the consolidated financial statements included in this Quarterly Report.

On November 6, 2026, the Company and the Equity Line Investor entered into the Second Amendment to the Purchase Agreement (the "Purchase Agreement Amendment"), pursuant to which the parties extended the term of the Purchase Agreement from July 1, 2027 to January 1, 2028, subject to the other termination provisions thereof, removed certain restrictions on subsequent waivers and amendments, and waived any rights of the Equity Line Investor arising from actions taken by the Company prior to the date of the Purchase Agreement Amendment that may have violated Sections 6.8 or 8.2 of the Purchase Agreement.

Convertible Note Financing

On July 29, 2025, the Company entered into a securities purchase agreement (the "Purchase Agreement") with an institutional investor (the "Buyer"), pursuant to which the Company authorized the issuance of senior secured convertible notes to the Buyer, in the aggregate original principal amount of up to $10,909,885, which are being issued with a 8.34% original issue discount (each, a "Convertible Note"). The first Convertible Note was issued in the original principal amount of approximately $3,272,966 (the "Convertible Note Financing"). The Convertible Notes are convertible into shares of our common stock, in certain circumstances in accordance with the terms of the Convertible Notes at an initial conversion price per share of $51.60. The Company received gross proceeds of $3,000,000, prior to the deduction of transaction related expenses, from the initial closing of the Convertible Note Financing. Concurrently with the Convertible Note Financing and the Purchase Agreement, the Company entered into a registration rights agreement and a security agreement with the Buyer.

On August 14, 2025, pursuant to Section 7(h) of the Conversion Note, the Company and the Buyer agreed, pursuant to a Conversion Price Voluntary Adjustment Notice executed by both parties, to reduce the Conversion Price of the Convertible Note with regard to $1,363,736 of principal of the Convertible Note to $30.00 per share starting on August 15, 2025 through the maturity date of the Convertible Note.

On October 5, 2025, pursuant to Section 7(h) of the Conversion Note, the Company and the Buyer agreed, pursuant to a Conversion Price Voluntary Adjustment Notice executed by both parties, to reduce the Conversion Price of the Convertible Note with regard to the entire principal of the Convertible Note to $30.00 per share starting on October 6, 2025 through the maturity date of the Convertible Note. The Company recognized an additional $845.0 thousand loss on debt extinguishment in October 2025 for the effect of this change in the conversion price.

On October 22, 2025, the Company issued to the Buyer a second Convertible Note in the original principal amount of $3,545,712.42 (the "October Note"). The October Note is convertible into shares of Common Stock, $0.0005 par value per share (the "Common Stock"), in certain circumstances in accordance with the terms of the Convertible Notes at an initial conversion price per share of $33.00. The Company received gross proceeds of $3,250,000, prior to the deduction of transaction-related expenses, from the closing of the October Note.

Exchange Agreement and Series Z Preferred Stock Certificate of Designation

The Chief Executive Officer of the Company, Matthew Lipman and the Chairman of the Board of Directors of the Company (the "Board"), Michael Toporek, control Brookstone Partners, a private equity group with 25 years of deep expertise in building products investments.

Entities controlled by Messrs. Lipman and Toporek, including Nectarine Management, LLC, held approximately 17% of the voting power of the Company's outstanding voting stock at September 30, 2026. The notes held by BP Peptides, LLC ("BP Peptides") and Brookstone Partners Acquisition XXI Corporation ("Brookstone Acquisition") were exchanged for shares of Series Z 8% Non-Convertible Preferred Stock on September 30, 2025, as described below, and accordingly had no outstanding balance as notes payable as of September 30, 2026 and December 31, 2025. As of September 30, 2026, Stream Finance, LLC was the sole remaining related party note payable.

Carolina Stone Acquisition

On August 22, 2025, the Company, through its subsidiary CS Purchase Holdings LLC, acquired all of the issued and outstanding membership interests of Carolina Stone Holdings, LLC ("Carolina Stone"), which owns Carolina Stone Distributors, LLC.

The aggregate purchase consideration was approximately $4.2 million, consisting of cash, a subordinated seller note, working-capital adjustments and contingent earn-out consideration. The seller note matures on February 22, 2028, and the sellers may receive earn-out consideration of up to $825,000 based on Carolina Stone's EBITDA performance during fiscal years 2025, 2026 and 2027. Carolina Stone contributed revenue of $3.3 million and a net loss of $169,000 to the Company's consolidated results for the period from August 22, 2025 through December 31, 2025.

Fraser Canyon / CSI Acquisition

On December 1, 2025, the Company completed the acquisition of the Fraser Canyon / Canadian Stone Industries ("CSI") business through two transactions: TotalStone, LLC acquired substantially all of the assets and assumed certain liabilities of Continental Stone Industries, Inc., and a subsidiary of TotalStone acquired all of the outstanding shares of Fraser Canyon Holdings Inc.

The aggregate consideration was approximately US$6.8 million, consisting of cash, two subordinated seller notes and contingent earn-out consideration of up to CAD $3.0 million based on Average EBITDA during the 2026-2027 and 2027-2028 measurement periods. In connection with the acquisition, Canadian Stone Industries and Klad Envelope Solutions Inc. entered into a TD Bank revolving operating loan with a CAD $5.0 million credit limit for working-capital purposes. CSI contributed revenue of $592,000 and a net loss of $92,000 to the Company's consolidated results for the period from December 1, 2025 through December 31, 2025.

On September 30, 2025, following approval by the Audit Committee of the Board, the Company and each of BP Peptides and Brookstone Acquisition (collectively, the "Brookstone Lenders"), entered into an Exchange Agreement (the "Exchange Agreement") whereby the Brookstone Lenders agreed to exchange their notes for shares of the Company's newly created Series Z 8% Non-Convertible Preferred Stock (the "Series Z Preferred"). Based on the Nasdaq Official Closing Price of the Company's common stock, $0.0005 par value per share (the "Common Stock"), of $1.32, before the reverse stock split, on the day prior to the parties entering into the Exchange Agreement, BP Peptides received 642,364 Series Z Preferred shares as originally issued, or approximately 21,412 shares as adjusted for the reverse stock split, and Brookstone Acquisition received 825,168 shares as originally issued, or approximately 27,506 shares as adjusted. The unaudited interim consolidated financial statements included in this Form 10-Q reflect the issuance of the Series Z shares as of September 30, 2025.

On September 30, 2025, following Board approval, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of Series Z 8% Non-Convertible Preferred Stock (the "Certificate of Designation") with the Secretary of State of the State of Delaware with up to three million five hundred thousand (3,500,000) Series Z Preferred shares being authorized for issuance.

Pursuant to the Certificate of Designation, the Series Z Preferred shares are not convertible into shares of Common Stock, have voting rights of one vote per share and will vote together as a single class with the Common Stock shareholders. Each share of Series Z Preferred will accrue cumulative dividends at a rate of eight percent (8%) per annum based on the stated value of $39.60 per share of the Series Z Preferred ($1.32 before the reverse stock split), accruing daily and payable, at the sole option of the Board, either in cash or payment-in-kind via the issuance of further shares of Series Z Preferred. The Series Z Preferred shares are redeemable upon the earlier of the seven-year anniversary of the issuance of the shares or the occurrence of a fundamental transaction (as defined in the Certificate of Designation).

On January 21, 2026, the Company entered into a conditional fee waiver agreement with Brookstone Partners IAC, Inc. under which Brookstone agreed to waive its $400.0 thousand annual management fee for fiscal year 2026, and the Company's Chief Executive Officer agreed to reduce his annual base cash salary to $1.00 with the fee waiver effective January 1, 2026 and the salary reduction effective February 1, 2026. The waived fees become payable if TotalStone's trailing twelve-month EBITDA, as defined in its senior credit agreement, reaches $4.0 million.

On February 12, 2026, the Company entered into a Letter Agreement with 3i, LP ("3i") modifying the Senior Secured Convertible Note dated October 22, 2025. The Letter Agreement deferred the $606,054 installment payment originally due January 22, 2026 to the maturity date. As consideration for the deferral, the Company issued to 3i a warrant to purchase 13,500 shares of common stock at an exercise price of $0.30 per share, exercisable for five years.

During the nine months ended September 30, 2026, the Company completed eighteen conversions of principal under the October Note; eleven conversions totaling $1,495,325 of principal and $104,673 of accrued interest, which were converted into 71,111 shares of common stock at a conversion price of $22.50 per share, one conversion totaling $213,084 of principal and $14,916 of accrued interest, which were converted into 13,333 shares of common stock at a conversion price of $17.10 per share, and six conversions totaling $560,748 of principal and $39,252 of accrued interest and make-whole amounts, which were converted into 67,820 shares of common stock at a conversion price of $8.847 per share.

During the nine months ended September 30, 2026, the Company completed two conversions of principal under the July Note: $250,372 of principal and $17,526 of accrued interest converted into 11,907 shares of common stock at $22.50 per share on April 16, 2026, and $112,999 of principal and $8,569 of accrued interest converted into 13,741 shares at $8.847 per share on August 12, 2026. The remaining principal of the July Note was redeemed for cash and the note was repaid in full on August 28, 2026 (see Note 11).

The Company completed 70 draws under its Equity Line of Credit during the nine months ended September 30, 2026, generating gross proceeds of approximately $1,412,435 for 200,524 shares of common stock.

On March 30, 2026, the Compensation Committee of the Board of Directors granted 66,500 restricted stock awards to executive officers and non-employee directors under the Company's 2025 Plan, with a grant-date fair value of $1,294,755. The awards generally vest at the third anniversary of the grant date for management recipients (with continued service required) and for non-employee director recipients, only upon the qualifying terminations of Board service described in Note 15; other terminations, including voluntary resignation, result in forfeiture. On August 7, 2026, the Compensation Committee granted a further 160,307 restricted stock awards under the true-up framework described in Note 15.

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 38 U.S. states and two Canadian provinces. For distribution sales the Company recognizes revenue when control over the products has been transferred to the customer, and the Company has a present right to payment. For installation and project-based work, the Company recognizes revenue over time as performance obligations are satisfied. For production and custom residential jobs, revenue is generally recognized upon completion, as substantially all projects are short-term in nature. A small portion of commercial projects are recognized based on progress toward completion, typically through monthly billings.

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 other expenses that are directly attributable to our distributed, fabricated and installed 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 expense on our line of credit and debt, changes in the fair value of derivative instruments, foreign currency gains and losses, and gains and losses on asset disposals.

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 September 30, 2026 and 2025 in thousands:

Results of Operations Comparing Three Months Ended September 30, 2026 to 2025.

		Three Months Ended
		September 30,
		2026				2025				$ Change				% Change
		(in thousands)
Net Sales		$	19,956			$	13,654			$	6,302				46	%
Cost of goods sold			14,219				10,400				3,819				37	%
Gross profit			5,737				3,254				2,483				76	%
Operating expenses:
Selling, General and administrative			5,237				3,370				1,867				55	%
Transaction expense			-				652				(652	)			-	%
Change in fair value of contingent consideration			94				-				94				-	%
Income (loss) from operations			406				(768	)			1,174				(153	)%
Gain (loss) on asset disposal, net.			32				-				32				-	%
Unrealized gain (loss) on derivative and debt instruments			(1	)			(652	)			651				-	%
Realized foreign currency gain, net			3				-				3				-	%
Interest and other expense, net			(1,071	)			(594	)			(477	)			80	%
Provision for Income Taxes			(1	)			-				(1	)			-	%
Net loss		$	(632	)		$	(2,014	)		$	1,382				(69	)%

Sales

Net sales were $20.0 million for the three months ended September 30, 2026 compared to $13.7 million for the three months ended September 30, 2025. The period-over-period change in revenue was $6.3 million, or 46%, primarily driven by the full-period contributions from the Carolina Stone (August 2025) and Fraser Canyon (December 2025) acquisitions; Carolina Stone contributed $1.0 million of revenue in the 2025 period following its acquisition on August 22, 2025. Revenue from the Company's legacy Instone operations increased approximately $0.4 million period-over-period; the change reflects approximately $2.2 million contributed by Carolina Stone and approximately $3.7 million contributed by Fraser Canyon. These amounts are after $1.3 million of intercompany eliminations recorded in the third quarter, of which $792.0 thousand relates to sales in the six months ended June 30, 2026 (see Note 1).

Cost of goods sold

Cost of goods sold increased by $3.8 million or 37%, for the three months ended September 30, 2026 compared to $10.4 million for the three months ended September 30, 2025.

The change in cost of goods sold was driven primarily by the increase in sales attributable to the Carolina Stone and Fraser Canyon acquisitions.

Gross profit margin was 28.7% for the three months ended September 30, 2026 compared to 23.8% for the three months ended September 30, 2025. The $516.6 thousand supplier credit recognized as a reduction of cost of goods sold (see Note 3) contributed approximately 2.6 percentage points of the increase, of which approximately 2.0 percentage points is the part of the credit that management treats as a one-time benefit (see Note 11); excluding the credit, gross margin was 26.2%. The remaining increase reflects the addition of Carolina Stone, whose stone distribution and installation mix carries a higher gross margin of approximately 30.4%, and the intercompany eliminations, which reduced net sales by $1.3 million and gross profit by $52 thousand (see Note 18). Excluding the supplier credit, gross margin in the TotalStone segment was 23.8%, consistent with the three months ended September 30, 2025.

Selling general and administrative expenses

Selling, general and administrative expenses increased by $1.9 million or 55%, for the three months ended September 30, 2026 compared to $3.4 million for the three months ended September 30, 2025, primarily driven by the full-period effect of the Carolina Stone ($645.0 thousand) and Fraser Canyon ($1.0 million) acquisitions and a $200.0 thousand increase in Parent expenses, which include stock-based compensation of $245.0 thousand on the restricted stock awards.

Transaction expenses

The Company recorded no transaction expenses in the three months ended September 30, 2026. The three months ended September 30, 2025 included $652.0 thousand of transaction expenses, $618.0 thousand at the Parent and $34.0 thousand at TotalStone.

Change in fair value of contingent consideration

Change in fair value of contingent consideration was $94.0 thousand for the three months ended September 30, 2026 compared to no change for the three months ended September 30, 2025, related to the remeasurement of the Carolina Stone and Fraser Canyon earn-outs.

Unrealized loss on derivative and debt instruments

Unrealized loss on derivative and debt instruments was $1.0 thousand for the three months ended September 30, 2026 compared to $652.0 thousand for the three months ended September 30, 2025, related to the Company's Senior Secured Convertible Notes.

Realized foreign currency gain, net

Realized foreign currency gain, net, was $3.0 thousand for the three months ended September 30, 2026 compared to none for the three months ended September 30, 2025, related to the Canadian operations acquired in the Fraser Canyon acquisition.

Interest expense

Interest expense increased by $477.0 thousand, or 80%, for the three months ended September 30, 2026 compared to $594.0 thousand for the three months ended September 30, 2025, primarily driven by the amortization of debt discount and issuance costs on the Company's Senior Secured Convertible Notes.

Provision for income taxes

The Company recorded a provision for income taxes of $1.0 thousand for the three months ended September 30, 2026, compared to no provision for the three months ended September 30, 2025. The provision consists of Canadian income taxes on the operations of Canadian Stone Industries Inc., which the Company did not own during the 2025 period. No U.S. tax benefit was recognized on the pretax loss in either period because of the full valuation allowance against U.S. net deferred tax assets.

The following is management's discussion of the Company's consolidated financial statements and results of operations for the nine months ended September 30, 2026 and 2025 in thousands:

Results of Operations Comparing Nine Months Ended September 30, 2026 to 2025.

		Nine Months Ended
		September 30,
		2026				2025				$ Change				% Change
		(in thousands)
Net Sales		$	54,072			$	34,405			$	19,667				57	%
Cost of goods sold			39,366				26,696				12,670				47	%
Gross profit			14,706				7,709				6,997				91	%
Operating expenses:
Selling, General and administrative			15,213				9,513				5,700				60	%
Transaction expense			-				652				(652	)			-	%
Change in fair value of contingent consideration			152				-				152				-	%
Loss from operations			(659	)			(2,456	)			1,797				(73	)%
Gain (loss) on asset disposal, net.			32				-				32				-	%
Unrealized gain (loss) on derivative and debt instruments			641				(652	)			1,293				-	%
Realized foreign currency loss, net			(11	)			-				(11	)			-	%
Interest and other expense, net			(3,924	)			(1,334	)			(2,590	)			194	%
Provision for Income Taxes			(6	)			-				(6	)			-	%
Net loss		$	(3,927	)		$	(4,442	)		$	515				(12	)%

Sales

Net sales were $54.1 million for the nine months ended September 30, 2026 compared to $34.4 million for the nine months ended September 30, 2025. The period-over-period change in revenue was $19.7 million, primarily driven by the full-period contributions from the Carolina Stone (August 2025) and Fraser Canyon (December 2025) acquisitions; Carolina Stone contributed $1.0 million of revenue in the 2025 period following its acquisition on August 22, 2025. Revenue from the Company's legacy Instone operations increased approximately $1.3 million period-over-period; the change reflects approximately $7.7 million contributed by Carolina Stone and approximately $10.7 million contributed by Fraser Canyon.

Cost of goods sold

Cost of goods sold increased by $12.7 million or 47%, for the nine months ended September 30, 2026 compared to $26.7 million for the nine months ended September 30, 2025.

The change in cost of goods sold was driven primarily by the increase in sales attributable to the Carolina Stone and Fraser Canyon acquisitions.

Gross profit margin was 27.2% for the nine months ended September 30, 2026 compared to 22.4% for the nine months ended September 30, 2025. Gross margin for the nine months ended September 30, 2026 benefited from the $438.0 thousand tariff refund recorded as a reduction of cost of goods sold in the second quarter and the $516.6 thousand supplier credit recognized as a reduction of cost of goods sold in the third quarter (see Note 3), which together contributed approximately 1.8 percentage points of the increase. The remaining increase reflects the addition of the CSI business, whose gross margin was approximately 28%, the addition of Carolina Stone, whose stone distribution and installation mix carries a higher gross margin of approximately 34%, and the intercompany eliminations, which reduced net sales by $1.3 million and gross profit by $52 thousand (see Note 18). Excluding the tariff refund and the supplier credit, gross margin in the legacy Instone business was approximately 21.7%, compared to 22.3% for the nine months ended September 30, 2025.

Gross margin excluding the supplier credit, and for the nine months also excluding the tariff refund, is a non-GAAP financial measure. The most directly comparable GAAP measure is gross margin. For the three months ended September 30, 2026, consolidated gross profit was $5,737 thousand, or 28.7% of net sales of $19,956 thousand. Excluding the $517 thousand supplier credit, it was $5,220 thousand, or 26.2%. Gross profit in the TotalStone segment was $4,836 thousand, or 26.6% of segment net sales of $18,157 thousand. Excluding the credit, it was $4,319 thousand, or 23.8%, compared with $3,017 thousand, or 23.8% of segment net sales of $12,697 thousand, for the three months ended September 30, 2025. For the nine months ended September 30, 2026, gross profit of the legacy Instone business was $8,604 thousand, or 24.4% of its net sales of $35,277 thousand. Excluding the $438 thousand tariff refund and the $517 thousand supplier credit, it was $7,649 thousand, or 21.7%, compared with $7,472 thousand, or 22.3% of net sales of $33,448 thousand, for the nine months ended September 30, 2025, before the acquisition of the CSI business. Management presents these measures because it treats the tariff recoveries as a one-time benefit (see Note 11), and excluding them shows gross margin on a basis comparable with the prior year. These measures should not be considered in isolation or as a substitute for gross margin determined in accordance with U.S. GAAP, and they may not be comparable to similarly titled measures of other companies.

Selling general and administrative expenses

Selling, general and administrative expenses increased by $5.7 million or 60%, for the nine months ended September 30, 2026 compared to $9.5 million for the nine months ended September 30, 2025, primarily driven by the full-period effect of the Carolina Stone ($2.3 million) and Fraser Canyon ($2.8 million) acquisitions and stock-based compensation of $0.6 million.

Transaction expenses

The Company recorded no transaction expenses in the nine months ended September 30, 2026. The nine months ended September 30, 2025 included $652.0 thousand of transaction expenses, $618.0 thousand at the Parent and $34.0 thousand at TotalStone.

Change in fair value of contingent consideration

Change in fair value of contingent consideration was $152.0 thousand for the nine months ended September 30, 2026 compared to no change for the nine months ended September 30, 2025, related to the remeasurement of the Carolina Stone and Fraser Canyon earn-outs.

Unrealized gain (loss) on derivative and debt instruments

Unrealized gain on derivative and debt instruments was $641.0 thousand for the nine months ended September 30, 2026 compared to an unrealized loss of $652.0 thousand for the nine months ended September 30, 2025, related to the Company's Senior Secured Convertible Notes.

Realized foreign currency loss, net

Realized foreign currency loss, net, was $11.0 thousand for the nine months ended September 30, 2026 compared to none for the nine months ended September 30, 2025, related to the Canadian operations acquired in the Fraser Canyon acquisition.

Interest expense

Interest expense increased by $2.6 million or 194%, for the nine months ended September 30, 2026 compared to $1.3 million for the nine months ended September 30, 2025, primarily driven by the amortization of debt discount and issuance costs on the Company's Senior Secured Convertible Notes.

Provision for income taxes

The Company recorded a provision for income taxes of $6.0 thousand for the nine months ended September 30, 2026, compared to no provision for the nine months ended September 30, 2025, for the same reasons.

Segment Results

The Company has two reportable segments - TotalStone (which includes the legacy Instone distribution business together with Fraser Canyon, acquired December 1, 2025) and Carolina Stone (acquired August 22, 2025). The Company also has corporate-level SG&A expenses, included in Capstone Holding Corp. ("Capstone" or the "Parent"), consisting primarily of board fees, investor relations, filing, legal, insurance, accounting and consulting expenses not identifiable to either reportable segment.

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 September 30,
		2026																				2025
Income (loss) from operations before taxes:		TotalStone				Carolina Stone Holdings				Parent				Eliminations				Consolidated				TotalStone				Carolina Stone Holdings				Parent				Eliminations				Consolidated
Sales		$	18,157			$	3,136			$	-			$	(1,337	)		$	19,956			$	12,697			$	957			$	-			$	-			$	13,654
Cost of goods sold			13,321				2,183				-				(1,285	)			14,219				9,680				720				-				-				10,400
Gross Profit			4,836				953				-				(52	)			5,737				3,017				237				-				-				3,254
Selling, general and administrative expenses			3,491				943				802				1				5,237				2,470				298				602				-				3,370
Transaction Expenses			-				-				-				-				-				34				-				618				-				652
Change in fair value of contingent consideration			40				54				-				-				94				-				-				-				-				-
Income (loss) from operations		$	1,305			$	(44	)		$	(802	)		$	(53	)		$	406			$	513			$	(61	)		$	(1,220	)		$	-			$	(768	)
Other financial information:
Depreciation & amortization included in SG&A expenses		$	79			$	63			$	-			$	-			$	142			$	111			$	7			$	-			$	-			$	118

		Nine Months Ended September 30,
		2026																				2025
		TotalStone				Carolina Stone Holdings				Parent				Eliminations				Consolidated				TotalStone				Carolina Stone Holdings				Parent				Eliminations				Consolidated
Income (loss) from operations before taxes:
Sales		$	46,733			$	8,676			$	-			$	(1,337	)		$	54,072			$	33,448			$	957			$	-			$	-			$	34,405
Cost of goods sold			34,923				5,728				-				(1,285	)			39,366				25,976				720				-				-				26,696
Gross Profit			11,810				2,948				-				(52	)			14,706				7,472				237				-				-				7,709
Selling, general and administrative expenses			10,236				2,634				2,342				1				15,213				7,414				298				2,011				(210	)			9,513
Transaction Expenses			-				-				-				-				-				34				-				618				-				652
Change in fair value of contingent consideration			40				112				-				-				152				-				-				-				-				-
Income (loss) from operations		$	1,534			$	202			$	(2,342	)		$	(53	)		$	(659	)		$	24			$	(61	)		$	(2,629	)		$	210			$	(2,456	)
Other financial information:
Depreciation & amortization included in SG&A expenses		$	268			$	198			$	-			$	-			$	466			$	341			$	7			$	-			$	-			$	348

Liquidity and Capital Resources

Working capital was $1,130.0 thousand as of September 30, 2026 compared to positive $98.0 thousand as of December 31, 2025. Excluding the current portion of long-term debt, working capital was $5.0 million and $3.8 million as of September 30, 2026 and December 31, 2025, respectively. The $1.2 million increase was primarily driven by a $4.8 million increase in accounts receivable, offset by a $1.4 million increase in accounts payable and a $1.7 million increase in borrowings under 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 generally expect positive operating cash flows as we bring down accounts receivables and inventory levels from seasonal high periods and pay down our Revolver.

As of September 30, 2026, the Company had a combined balance of $12.0 million outstanding under its revolving credit facilities. Our Revolving Credit Agreement with Beacon Bank & Trust matures on December 31, 2026, as extended by the Sixteenth Amendment to the Credit Agreement dated June 17, 2026. As of September 30, 2026, the Company was in compliance with the minimum Cash Flow Coverage Ratio covenant under the Revolving Credit Agreement. The minimum Tangible Net Worth covenant is measured as of June 30 and December 31. The Company was in compliance with it as of June 30, 2026. The next measurement date is December 31, 2026. See Note 10. Management is in discussions with Beacon Bank & Trust regarding a longer-term extension of the Revolver 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 September 30, 2026 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.

In conclusion, the Company's ability to continue as a going concern depends on its ability to generate sufficient cash flows from operations, access additional capital, and manage its debt maturities. The July 2025 Senior Secured Convertible Note was settled in full by August 28, 2026. The October 2025 Note matured on October 22, 2026. 3i, LP has treated an Event of Default as having occurred, has converted part of the note at the alternate conversion price that applies after an Event of Default, and has not demanded payment. On November 6, 2026, the Company and 3i, LP entered into an amendment to the October 2025 Note that extends its maturity date to December 13, 2027. The Company's U.S. revolving credit facility with Beacon Bank & Trust (successor by merger to Berkshire Bank) matures in December 2026, as extended by the Sixteenth Amendment, and Canadian Stone Industries' operating loan with TD Bank is uncommitted, repayable on demand and subject to annual renewal. The mezzanine term loan with Stream Finance, LLC matures in September 2028, as extended by the Fourth Amendment dated June 17, 2026. The equity line of credit with Tumim Stone Capital, LLC (the "ELOC") runs to January 1, 2028, as extended by a second amendment dated November 6, 2026. In the three months ended September 30, 2026, the Company sold $792.6 thousand of shares under the ELOC, more than the $619.8 thousand it sold in the six months ended June 30, 2026, and principal of the Senior Secured Convertible Notes fell from $3,859.5 thousand at December 31, 2025 to $1,000.0 thousand at September 30, 2026. Management is evaluating alternatives to refinance or extend these obligations and believes that the Company's existing cash, proceeds from sales under the ELOC, and expected operating cash flows will be sufficient to fund operations for at least the next twelve months from the date of this filing.

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:

		Nine Months Ended				Nine Months Ended
		September 30,				September 30,
(in thousands)		2026				2025
Net cash used in operating activities		$	(2,718	)		$	(3,992	)
Net cash used in investing activities			(158	)			(2,441	)
Net cash provided by financing activities			2,730				7,152
Effect of foreign currency rates on changes in cash			(7	)			-
Net increase (decrease) in cash		$	(153	)		$	719

Cash Flows from Operating Activities

Net cash used in operating activities was $2,718 thousand for the nine months ended September 30, 2026, primarily resulting from the Company's net loss of $3,927 thousand and a $2.0 million build in working capital, partially offset by $3.3 million of non-cash items including depreciation, amortization, and accrued interest.

Net cash used in operating activities was $4.0 million for the nine months ended September 30, 2025, primarily resulting from our net loss of $4.4 million and a $0.9 million build in working capital, partially offset by $1.4 million of non-cash items, including the $652.0 thousand unrealized loss on derivative and debt instruments.

Cash Flows from Investing Activities

Net cash used in investing activities was $158.0 thousand for the nine months ended September 30, 2026, consisting of $133.0 thousand of property and equipment purchases and $38.0 thousand paid to settle the working capital adjustment under the Fraser Canyon purchase agreement (see Note 4), partially offset by $12.5 thousand of proceeds from the sale of assets.

Net cash used in investing activities was $2.4 million for the nine months ended September 30, 2025, consisting primarily of $2.4 million paid for the Carolina Stone acquisition, net of cash acquired, together with $16.0 thousand of intangible asset purchases and $2.0 thousand of property and equipment purchases.

Cash Flows from Financing Activities

Net cash provided by financing activities was $2.7 million for the nine months ended September 30, 2026, primarily consisting of net borrowings under our revolving line of credit of $1.8 million and net proceeds from our equity line of credit of $1.3 million, partially offset by $227.0 thousand of principal repaid on the Senior Secured Convertible Notes.

Net cash provided by financing activities was $7.2 million for the nine months ended September 30, 2025, primarily consisting of net proceeds from our March 2025 public offering of $3.3 million, $3.0 million of proceeds from the issuance of the July 2025 Senior Secured Convertible Note and net borrowings under our revolving line of credit of $2.0 million, partially offset by debt repayments of $975.0 thousand and financing fees of $320.0 thousand.

Funding Requirements

The Company used the net proceeds of its March 2025 Public Offering and its Senior Secured Convertible Notes to fund a portion of the cash consideration for the Carolina Stone Holdings acquisition (closed August 22, 2025) and the Fraser Canyon Holdings acquisition (closed December 1, 2025), and for general corporate and working capital purposes.

Through October 22, 2025, the Company received an aggregate of $6,250,000 in gross proceeds pursuant to its Senior Secured Convertible Notes financings (the July 29, 2025 issuance and the October 22, 2025 issuance), as described in Note 11 to the consolidated financial statements included in this Quarterly Report and in the Recent Developments section of this Management's Discussion and Analysis. In addition, as described in Note 11 and Note 15, the Company may receive up to $18.3 million from the sale of the Equity Line Securities to the Equity Line Investor. Actual proceeds depend on an effective resale registration statement, the trading price and volume of the Common Stock and the other conditions of the agreement, which, as extended by a second amendment dated November 6, 2026, runs to January 1, 2028. After the November 9, 2026 purchase, 45,055 shares remained available under the existing resale registrations. The registration statement filed on October 30, 2026 covers a further 333,333 shares and was declared effective by the SEC on November 10, 2026. At the October 29, 2026 closing price of $2.73, the 378,388 shares would represent approximately $1.0 million before purchase price discounts and placement agent fees, and sales beyond those shares would require a further registration statement. 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 through the issuance of equity, equity-related or debt securities, those securities may have rights, preferences or privileges senior to the rights of our existing Common Stock, and our existing stockholders may experience dilution.

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.

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, 2025, filed with the SEC on April 16, 2026, as amended on April 17, 2026, have not materially changed. In the second quarter of 2026, we added the following two critical accounting policies and Significant Judgments and Estimates to Note 3 in the footnotes to the consolidated financial statements: Business Combinations and Convertible Notes.