Capstone Holding Q3 net loss narrows to $632K
In the third quarter, CAPS recorded $406,000 of operating income and $1.071 million in interest expense.
Sentiment and the balance of points
Rhea-AI Sentiment reads the wording of the document, how positive or negative its language is on a 1 to 5 scale. The balance of points shown with the takes weighs what the document actually discloses, so the two can disagree, for example when a trial that missed its main goal is described in upbeat language.
Capstone Holding Corp. (CAPS) reported third-quarter 2026 net sales of $19.956 million, compared with $13.654 million a year earlier, and gross profit of $5.737 million versus $3.254 million. It recorded income from operations of $406,000 and a net loss of $632,000, versus an operating loss of $768,000 and net loss of $2.014 million in the prior-year quarter. A first-half intercompany-sales correction reduced third-quarter gross profit and increased pretax loss by $30,000.
For the nine months, net sales were $54.072 million versus $34.405 million, and net loss was $3.927 million versus $4.442 million. Operating cash use was $2.718 million, compared with $3.992 million. Cash was $574,000 at September 30, and revolving credit balances totaled $12.0 million. The TotalStone revolving facility matures December 31, 2026.
The company collected $438,000 in tariff refunds and $2,300 in statutory interest; a separate $516,600 supplier credit was noncash and applies against future purchases. A 1-for-30 reverse split took effect October 19, after the quarter; common shares outstanding were 935,385 as of November 10.
How this balance works
Rhea-AI gives every point it takes from this document a weight. Minor counts 1, Moderate 3 and Major 9, so one Major point outweighs several Minor ones. The bar adds up the weights on each side, and when neither side holds more than 65% of the total the balance reads Mixed.
It reads the document as published, with the same rules for every company, and it does not look at what the market expected or at how the stock traded, so a point can be objectively good on a day the stock falls.
Rhea-AI Sentiment measures something else, the tone of the wording.
Positive
- Moderate pointThird-quarter net sales were $19.956 million, versus $13.654 million a year earlier.
- Moderate pointThird-quarter net loss narrowed to $632,000 from $2.014 million.
- Moderate pointNine-month operating cash use fell to $2.718 million from $3.992 million.
Negative
- None.
Filing Explained
A proposed related-party exchange of up to 525,000 common shares remains unexecuted and could convert preferred-stock and management-fee obligations into shares.
In the third quarter, Capstone Holding Corp. issued 149,032 common shares through its equity line and 81,561 through senior convertible notes, adding shares to the common-stock base; a separate related-party exchange remained unexecuted as of the report.
The reported share figures are retroactively adjusted for the 1-for-30 reverse split, which took effect after quarter-end.
The board authorized, but did not direct, potential exchanges and approved the settlement in principle; majority voting holders approved it by written consent, but no exchange agreement had been executed and no shares issued as of the report date.
The proposed exchanges could settle remaining Series Z preferred stock and accrued related-party management fees for up to 525,000 common shares in the aggregate, at
Key Figures
Key Terms
contingent consideration financial
Level 3 financial
embedded conversion features financial
Cash Flow Coverage Ratio financial
FAQ
AI-generated questions and answers. How Rhea-AI works. Not financial advice.
What were CAPS’s Q3 2026 sales and net loss?
How much operating cash did CAPS use in the first nine months of 2026?
What tariff-related recoveries did CAPS report?
When does the CAPS revolving credit facility mature?
AI-generated analysis. How Rhea-AI works. Not financial advice.
Table of Contents
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 ________________
Commission file number
Capstone Holding Corp.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction of | (I. R. S. Employer |
| | ||
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes
The number of shares of the registrant’s common stock outstanding as of November 10, 2026 was
TABLE OF CONTENTS
| Page |
||
| PART I |
1 |
|
| ITEM 1: |
FINANCIAL STATEMENTS |
1 |
| Consolidated Balance Sheets as of September 30, 2026 (Unaudited) and December 31, 2025 |
1 |
|
| Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2026 and 2025 (Unaudited) |
2 |
|
| Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2026 and 2025 (Unaudited) |
3 |
|
| Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2026 and 2025 (Unaudited) |
4 |
|
| Notes to Consolidated Financial Statements (Unaudited) |
5 |
|
| ITEM 2: |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
27 |
| ITEM 3: |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
36 |
| ITEM 4: |
CONTROLS AND PROCEDURES |
36 |
| PART II |
37 |
|
| ITEM 1: |
LEGAL PROCEEDINGS |
37 |
| ITEM 1A: |
RISK FACTORS |
37 |
| ITEM 2: |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
38 |
| ITEM 3: |
DEFAULTS UPON SENIOR SECURITIES |
38 |
| ITEM 4: | MINE SAFETY DISCLOSURES | 38 |
| ITEM 5: |
OTHER INFORMATION |
39 |
| ITEM 6: |
EXHIBITS |
40 |
| SIGNATURES |
41 |
|
i
PART I
ITEM 1. FINANCIAL STATEMENTS
CAPSTONE HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| (Unaudited) | (Audited) | |||||||
| September 30, | December 31, | |||||||
| 2026 | 2025 | |||||||
| 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 | ||||||||
| Other long-term assets | ||||||||
| Total long-term assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES & EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Management fee payable, related party | ||||||||
| Line of credit | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion, lease liability | ||||||||
| Income tax payable | ||||||||
| Derivative liability | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Accrued related party management fee | ||||||||
| Accrued Series Z preferred stock dividends, related party | ||||||||
| Series Z preferred stock, related party | ||||||||
| Long term debt, net of current portion | ||||||||
| Lease liability, net of current portion | ||||||||
| Earn-out payable | ||||||||
| Deferred tax liability | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| Equity: | ||||||||
| Series B Preferred Stock, no par value; 2,000,000 shares authorized; 985,063 issued as of September 30, 2026 and December 31, 2025. | ||||||||
| Common Stock $0.0005 par value; 50,000,000 shares authorized; 911,172 and 292,429 issued as of September 30, 2026 and December 31, 2025, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Equity | ||||||||
| Total Liabilities & Equity | $ | $ | ||||||
See notes to consolidated financial statements
CAPSTONE HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (As Restated) | (As Restated) | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Sales returns and allowances | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net sales | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Transaction expenses | ||||||||||||||||
| Change in fair value of contingent consideration | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain on asset disposal, net. | ||||||||||||||||
| Unrealized gain (loss) on derivative and debt instruments | ( | ) | ( | ) | ( | ) | ||||||||||
| Realized foreign currency gain (loss), net. | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from operations before taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ( | ) | ( | ) | ||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Class B units preferred return | ( | ) | ||||||||||||||
| Net Loss attributable to Capstone Holding Corp. stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 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 (post-split) | ||||||||||||||||
See notes to consolidated financial statements
CAPSTONE HOLDING CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except Common Stock Shares)
(unaudited)
| Accumulated | TotalStone, LLC | |||||||||||||||||||||||||||||||||||||||
| Common | Series B | Additional | Other | Class B | Special | |||||||||||||||||||||||||||||||||||
| Stock | Common | Series B | Preferred | Paid-In | Accumulated | Comprehensive | Total | Preferred | Preferred | |||||||||||||||||||||||||||||||
| (Shares) | Stock | (Shares) | Stock | Capital | Deficit | Income (Loss) | Equity | Units | Unit | |||||||||||||||||||||||||||||||
| Balance at January 1, 2026 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of warrants pursuant to Senior Convertible Notes | — | — | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity line of credit, net of fees | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to Senior Convertible Notes | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ||||||||||||||||||||||||||||||||||||||
| Unvested restricted stock awards (March 30, 2026 grant) | ||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2026 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity line of credit, net of fees | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to Senior Convertible Notes | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2026 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity line of credit | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to Senior Convertible Note | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Warrants exercised pursuant to the Senior Convertible Notes | ||||||||||||||||||||||||||||||||||||||||
| Unvested restricted stock awards (August 7, 2026 grant) | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2026 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Accumulated |
TotalStone, LLC |
|||||||||||||||||||||||||||||||||||||||
| Common |
Series B |
Additional |
Other |
Class B |
Special |
|||||||||||||||||||||||||||||||||||
| Stock |
Common |
Series B |
Preferred |
Paid-In |
Accumulated |
Comprehensive |
Total |
Preferred |
Preferred |
|||||||||||||||||||||||||||||||
| (Shares) |
Stock |
(Shares) |
Stock |
Capital |
Deficit |
(Loss) |
Equity |
Units |
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 |
( |
) | ||||||||||||||||||||||||||||||||||||||
| Net public offering proceeds |
||||||||||||||||||||||||||||||||||||||||
| Nectarine Management, LLC. Subscription Agreement |
||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2025 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Net Loss |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Issuance of commitment shares pursuant to equity line of credit |
||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity line of credit |
||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2025 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Net Loss |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to equity line of credit |
||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to Senior Convertible Note |
||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2025 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
See notes to consolidated financial statements
CAPSTONE HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended | Nine Months Ended | |||||||
| September 30, | September 30, | |||||||
| 2026 | 2025 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Non-cash items: | ||||||||
| Depreciation and amortization | ||||||||
| Net, amortization (accretion) to interest expense | ||||||||
| Unrealized gain (loss) on derivative and debt instruments | ( | ) | ||||||
| Provisions for doubtful debt | ||||||||
| Provisions for inventory reserve | ||||||||
| Gain on asset disposal | ( | ) | ||||||
| Remeasurement of contingent consideration | ||||||||
| Restricted stock awards | ||||||||
| Interest and make-whole settled in common stock | ||||||||
| Paid-in-kind interest | ||||||||
| Series Z preferred dividends accrued | ||||||||
| Change in other operating items: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaid and other assets | ( | ) | ( | ) | ||||
| Change in operating leases, net | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Other liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment, net | ( | ) | ( | ) | ||||
| Purchase of intangible assets | ( | ) | ||||||
| Acquisition, net of cash acquired | ( | ) | ||||||
| Acquisition of CSI, net of cash acquired | ( | ) | ||||||
| Proceeds from sale of assets | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from debt issuance | ||||||||
| Payments on financing lease liabilities | ( | ) | ( | ) | ||||
| Financing fees paid | ( | ) | ||||||
| Borrowings under line of credit, net | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Debt payments | ( | ) | ( | ) | ||||
| Cash fee paid on ELOC draw down notice | ( | ) | ||||||
| Proceeds from IPO and stock issuances | ||||||||
| Proceeds from equity line of credit | ||||||||
| Cash paid for IPO and stock issuance costs | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of foreign currency rates on changes in cash | ( | ) | ||||||
| NET CHANGE IN CASH & CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Operating cash flows from finance leases (interest) | $ | |||||||
| Financing cash flows from finance leases (principal portion) | ||||||||
| Conversion of Special Preferred Units to debt | ||||||||
| Conversion of Class B Preferred Units to 126,088 shares of common stock | ||||||||
| Fair value of warrants issued to defer senior secured note installment payment | ||||||||
| Conversion of long-term debt to Series Z Preferred Stock | ||||||||
| Conversion of debt to stock | ||||||||
| TotalStone preferred stock dividends charged to retained earnings | ||||||||
| Operating cash flows from operating leases | ||||||||
| Interest Paid | ||||||||
| Income tax refunds, net of taxes paid | ||||||||
See notes to consolidated financial statements
CAPSTONE HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 Nature of Operations
Capstone Holding Corp. (the "Company") is a holding company that operates through its consolidated subsidiaries: TotalStone, LLC ("TotalStone"), Carolina Stone Holdings, LLC ("Carolina Stone"), and Fraser Canyon Holdings Inc. ("FCHI" and together with its subsidiaries, the "CSI business"). Through these subsidiaries, the Company distributes and installs masonry and stone veneer products for residential and commercial construction across North America.
On April 1, 2020, the Company obtained a controlling interest in TotalStone, a materials distribution company that distributes masonry and stone veneer products for residential and commercial construction across the United States. TotalStone operates under the trade names Instone and Northeast Masonry Distributors ("NMD").
On August 22, 2025, the Company, through its subsidiary CS Purchase Holdings LLC, acquired all the issued and outstanding membership interests (the "Holdings Membership Interests") in Carolina Stone Holdings, which owns all the issued and outstanding membership interests of Carolina Stone Distributors, LLC. Carolina Stone is a stone supplier and installer specializing in both manufactured and natural stone veneer and offering end-to-end services, including material supply, installation, and project management for residential, commercial, and multi-family projects in the Raleigh-Durham and Charlotte, North Carolina markets.
On December 1, 2025, through its indirect subsidiary Instone Canada Corp., the Company acquired
Reverse Split Retroactive adjustment. On October 9, 2026, after the end of the quarter, the Company changed its state of incorporation from Delaware to Nevada, and on October 19, 2026, the Company effected a 1-for-
Intercompany Sales. Net sales and cost of goods sold for the three months ended September 30, 2026 reflect a correction to the prior two quarters to eliminate sales among TotalStone, Carolina Stone and the CSI business within the nine months ended September 30, 2026. Of these eliminations, $
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.
Outstanding warrants to purchase
On the Restructuring Date, pursuant to a master exchange agreement (the “Master Exchange Agreement”) entered into by 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
Note 3 Summary of Significant Accounting Policies
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of Capstone and its consolidated subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated. The preparation of these financial statements and accompanying notes is in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the financial statements include all adjustments necessary for the fair presentation of the Company’s financial position, results of operations, and cash flows. Those adjustments were of a normal recurring nature.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the SEC's Form 10-Q instructions and Article 10 of Regulation S-X (the interim reporting rule). Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual consolidated financial statements.
The consolidated balance sheet on December 31, 2025 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S. 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 on December 31, 2025 (“2025 Form 10-K”). This report should be read in conjunction with our 2025 Form 10-K filed with the SEC on April 16, 2026, as amended on April 17, 2026.
In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments (which consist primarily of accruals, estimates, and assumptions that impact the financial statements, and are of a normal recurring nature) considered necessary to present fairly the Company’s financial position as of September 30, 2026 and its results of operations, cash flows, and changes in stockholders’ equity (deficit) for the three and nine months ended September 30, 2026 and 2025. The results for the three and nine months ended September 30, 2026 are not necessarily indicative of the results expected for any future period or the full year.
Reverse Stock Split. On October 19, 2026, after the balance sheet date and before these financial statements were issued, the Company effected a 1-for-
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make some estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period and accompanying notes. Management bases its estimates on historical experience and other various assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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.
Business Combinations
The Company accounts for business acquisitions using the acquisition method of accounting, in accordance with which assets acquired, and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed at acquisition date.
The Company’s management exercises significant judgments in determining the fair value of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to provisional amounts identified after the end of the measurement period are recognized in the Company's consolidated statements of operations.
Fair Value Measurements
The Company measures certain assets and liabilities at fair value in accordance with ASC 820, Fair Value Measurement. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy that prioritizes the inputs used in measuring fair value at the date of acquisition:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs that are derived principally from or corroborated by observable market data.
Level 3 — Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value measurement. Level 3 inputs reflect the Company's own assumptions about the assumptions market participants would use in pricing an asset or liability, developed based on the best information available in the circumstances.
The categorization of an asset or liability within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between levels are recognized at the end of the reporting period in which the transfer occurs.
The Company's recurring fair value measurements as of September 30, 2026 consist of (i) the embedded conversion features bifurcated from the Senior Secured Convertible Notes, classified as derivative liabilities and measured at fair value using significant unobservable inputs (Level 3); and (ii) the contingent earn-out consideration related to the Carolina Stone (Carolina Stone Distributors, LLC) and (Fraser Canyon Holdings Inc.) acquisitions, measured at fair value (as stated in FASB ASC 805-30-35-1 Subsequent measurement) using a probability-weighted expected payout, discounted at a rate that reflects the risk of the underlying performance metric cash flow model with significant unobservable inputs (Level 3); changes in fair value are recognized in earnings. The Company also performs nonrecurring fair value measurements in connection with business combinations (Note 4) and goodwill impairment testing (Note 7), which involve Level 3 inputs including projected cash flows, discount rates, and market multiples. The Company has no recurring Level 1 or Level 2 fair value measurements as of September 30, 2026 or December 31, 2025.
CAPSTONE HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 Summary of Significant Accounting Policies (cont.)
Cash
Cash consists of balances held in a commercial bank account.
Accounts Receivable
Accounts receivables are recorded and carried at the original invoiced amount less any estimates for allowance for doubtful debts that are potentially uncollectible amounts. The Company estimates the allowance for current expected credit losses (“CECL”) based upon its assessment of various factors, including historical experience, the accounts receivable balances aging, credit quality of its customers, current economic conditions, and other factors that may affect the Company’s ability to collect from customers. Additionally, the Company has elected to assume that current conditions as of the balance sheet date remain unchanged for the remaining life of accounts receivable as it relates to the development of reasonable and supportable forecasts. As of September 30, 2026 and December 31, 2025, the allowance for doubtful accounts totaled approximately $
Certain of the Company’s contracts with customers include retainage provisions. Retainage represents amounts withheld from billings by customers until installation work has been inspected to ensure that performance obligations have been satisfied under the contract. (According to ASC 606). Company invoices are retained and included in contract receivables when obligations have been satisfied and the right to collect is subject only to the passage of time. As of September 30, 2026 and December 31, 2025, retainage receivables were $
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and trade accounts receivable. The Company places cash with high credit quality institutions. During the normal course of business, balances in these accounts may exceed the maximum amount insured by the Federal Deposit Insurance Corporation (“FDIC”). Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s diverse customer base and generally short payment terms. Management believes there is no business vulnerability regarding concentrations of accounts receivable and sales due to the strong relationships and financial strength of our customers.
Inventories
Inventories consisting of finished goods are stated at the lower cost or net realizable value. Cost is determined using the average cost method. Inventories also include deposits placed on inventory purchases for shipments not yet received or for which legal title has not yet been transferred. Significant prepaid inventory may be located overseas. The total prepaid inventory balance as of September 30, 2026 and December 31, 2025, is $
Other Current Assets
In February 2026, the U.S. Supreme Court ruled that tariffs imposed under the International Emergency Economic Powers Act ("IEEPA"), including the reciprocal tariffs, were imposed without statutory authority. Following the ruling, U.S. Customs and Border Protection ("CBP") established an administrative process through which importers of record may claim refunds of IEEPA and reciprocal duties previously paid.
During the period from March 2025 through February 2026, the Company's subsidiary TotalStone, as importer of record, paid $
Accordingly, as of June 30, 2026, the Company initially recorded a tariff refund receivable of $
On June 2, 2026, the U.S. Department of Justice filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit contesting CBP's obligation to refund certain entries that were liquidated and outside the applicable protest window, a category limited to importers pursuing refunds through litigation. The Company's claims were accepted through CBP's administrative refund process and are not within the scope of the appeal; accordingly, management does not expect the appeal to affect the recognized Tariff refund.
Additionally, the Company paid IEEPA and reciprocal duties indirectly through purchases of merchandise from suppliers that acted as importer of record on the related shipments. Through June 30, 2026, the Company did not recognize any recovery of these amounts, because recovery of these amounts depends on the suppliers' receipt of refunds from CBP and the Company's arrangements with those suppliers. Because the Company was not the importer of record on those shipments, it could not file CAPE refund claims for those duties and does not hold the direct legal right to the refunds.
On September 30, 2026, a supplier of the Company's subsidiary TotalStone, LLC ("TotalStone") issued TotalStone a credit memo of $
Property and Equipment
Property and equipment are stated at cost and is depreciated over the estimated useful lives ranging from three to forty years according to asset category. Depreciation is computed by using the straight-line method. Property and equipment is comprised of building, machinery and equipment, computer equipment, leasehold improvements, office equipment, vehicles, and furniture & fixtures. Minor maintenance and repairs are charged to expenses as incurred.
Note 3 Summary of Significant Accounting Policies (cont.)
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 events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Such triggering events or changes in circumstances include, but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; a loss of key personnel; a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of; or a sustained decline in the Company's stock price or overall market capitalization according to ASC 350.
The Company’s goodwill is allocated to the Company’s reporting units for impairment assessment purposes. As of September 30, 2026, the Company has three reporting units: TotalStone (TotalStone, LLC), Canadian Stone Industries (Fraser Canyon Holdings Inc.), and Carolina Stone (Carolina Stone Distributors, LLC). The Company aggregates TotalStone and Canadian Stone Industries into a single reportable segment for ASC 280 segment-reporting purposes (see Note 18).
During the year ended December 31, 2025, the Company performed a quantitative goodwill impairment test for the Instone reporting unit as of October 1, 2025, and recorded a goodwill impairment charge of $
In evaluating potential goodwill impairment, the Company first assesses 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, the Company performs a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, the Company measures any goodwill impairment loss 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.
Based on its qualitative assessment as of September 30, 2026, the Company concluded that it is not more likely than not that the fair value of any reporting unit is less than its carrying amount. Accordingly, an interim quantitative goodwill impairment test was not required, and
Goodwill balances as of September 30, 2026 and December 31, 2025 are $
Intangible assets with finite lives consist of trade names, a distribution agreement, customer relationships and non-compete agreements that are amortized over the terms of the agreements or expected useful lives.
Long-lived Asset Impairments
Long-lived assets and finite lived identifiable intangibles are reviewed for impairment whenever events or 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 by which the carrying amount of the assets exceeds the fair value of the assets. The Company determined that
Convertible Debt
The Company accounts for convertible debt in accordance with ASC 470-20, Debt with Conversion and Other Options, and ASC 815, Derivatives and Hedging. At issuance, the Company evaluates whether embedded conversion features require bifurcation as derivative liabilities under ASC 815-15. If bifurcation is required, the embedded feature is recorded at fair value as of the issuance date, with the initial fair value recognized as a derivative liability and a corresponding debt discount on the host instrument. The derivative liability is remeasured at fair value as of each subsequent balance sheet date, with changes in fair value recognized in earnings as other income or expense. The Company reassesses the classification of its derivative instruments at each balance sheet date. Upon modification of convertible debt, the Company evaluates the transaction under ASC 470-50, Debt Modifications and Extinguishments, and remeasures the bifurcated derivative immediately before and after the modification, with the change in fair value recognized in earnings. Upon conversion, the Company derecognizes the pro-rata carrying amount of the host debt (including unamortized OID, debt issuance costs, and derivative discount) and the corresponding portion of the derivative liability at its then-current fair value.
Revenue Recognition
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
Shipping and Handling
The Company includes amounts billed to customers related to shipping and handling expenses in cost of goods sold.
Advertising Costs
Advertising and promotional expenses are expensed in the period incurred unless there are material costs that benefit future periods. The consolidated financial statements currently do not reflect any prepaid advertising expenses. Advertising expenses were $
Research and Development
Research and development costs are expensed as incurred and were not significant in the periods presented.
Mandatorily Redeemable Preferred Stock
The Company classifies preferred stock that embodies an unconditional obligation to redeem the instrument by transferring assets at a specified or determinable date as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity. Such instruments are initially measured at fair value and subsequently measured at the present value of the amount to be paid at settlement, with interest expense accrued using the rate implicit at inception. Periodic dividend obligations on mandatorily redeemable preferred stock classified as a liability are presented as interest expense in the consolidated statements of operations. The Company's Series Z
Note 3 Summary of Significant Accounting Policies (cont.)
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 and the if-converted method for convertible notes. Potential common shares that have anti-dilutive effect are excluded from computation. 3i February 2026 warrants issued with a nominal exercise price of $
For the nine months ended September 30, 2026 and 2025, both the calculations for basic and diluted loss per share are the same as potential dilutive securities would have had an anti-dilutive effect. For the nine months ended September 30, 2026 and 2025, the number of incremental common shares from potentially dilutive securities consisted of the following:
The table below reflects the conversion price of $
| September 30, | September 30, | |||||||
| 2026 | 2025 | |||||||
| Convertible notes | ||||||||
| Unvested restricted stock awards | ||||||||
| Representative's warrant | ||||||||
| Stock options | ||||||||
| BP Peptides warrant | ||||||||
| Total | ||||||||
Reclassifications
Certain reclassifications to prior period information have been made to conform with current period presentation.
Recent Accounting Pronouncements
In November 2024, the FASB issued ASU 2024-03, Income Statement — Reporting Comprehensive Income — Expense Disaggregation Disclosures (Subtopic 220-40), which requires public business entities to disclose disaggregated information about specified categories of expenses. The standard is effective for annual periods beginning after December 15, 2026 and interim periods within annual periods beginning after December 15, 2027, with early adoption permitted. The Company is evaluating the impact of the standard on its consolidated financial statement disclosures.
In November 2024, the FASB issued ASU 2024-04, Debt — Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments, which clarifies the assessment of whether modifications of convertible debt instruments should be accounted for as induced conversions. The Company adopted this guidance effective January 1, 2026 on a prospective basis. Adoption did not have a material effect on the Company’s consolidated financial statements.
On July 30, 2025 the FASB issued ASU 2025-05, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which provides a practical expedient permitting entities to assume current conditions as of the balance sheet date do not change for the remaining life of the asset when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under Topic 606. The amendments are effective for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods, with early adoption permitted. The Company adopted the standard effective January 1, 2026, electing the practical expedient, and the adoption did not have a material impact on its consolidated financial statements.
Note 4 Business Combination
During the fiscal year ended December 31, 2025, the Company completed two acquisitions, each accounted for as a business combination under ASC Topic 805, Business Combinations. The Company engaged Loop Capital Financial Consulting Services, LLC (“Loop Capital”) as an independent third-party valuation firm to assist with the purchase price allocations.
Carolina Stone Distributors, LLC
On August 22, 2025, the Company, through its subsidiary CS Purchase Holdings LLC, completed its acquisition of all the issued and outstanding membership interests in Carolina Stone Holdings, LLC (“Carolina Stone Holdings”), which owns all of the issued and outstanding membership interests of Carolina Stone Distributors, LLC (“Carolina Stone”). Carolina Stone is a Morrisville, North Carolina-based distributor and installer of stone veneer and masonry products serving the Raleigh-Durham and Charlotte metropolitan areas.
Purchase Consideration. The aggregate purchase consideration for the Carolina Stone Companies was approximately $
Note 4 Business Combination (cont.)
The subordinated promissory note was issued to D22L, Inc. in the original principal amount of $
As initially recognized in fiscal year 2025, contingent consideration of up to $
The fair value of contingent consideration at acquisition date of $
The following table presents the purchase price allocation for the Carolina Stone Holdings acquisition as finalized at December 31, 2025, measured in accordance with ASC 805 (in thousands):
| Amount | ||||
| Cash purchase price | $ | |||
| Working capital | ||||
| Seller note | ||||
| Earn-out agreement | ||||
| Aggregate purchase consideration | $ | |||
| Identifiable assets acquired and liabilities assumed: | ||||
| Cash | ||||
| Accounts receivable, net | ||||
| Inventories | ||||
| Prepaid expenses | ||||
| Property and equipment, net | ||||
| Other intangible assets | ||||
| Right of use assets | ||||
| Other long-term assets | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Current portion, lease liability | ( | ) | ||
| Lease liability, net of current portion | ( | ) | ||
| Total identifiable net assets | ||||
| Goodwill | $ | |||
Goodwill of $
Post-Acquisition Results. Carolina Stone contributed revenue of $
Fraser Canyon Holdings Inc. / Canadian Stone Industries
On December 1, 2025, the Company completed the acquisition of Fraser Canyon Holdings Inc. (“FCHI”) and its subsidiaries, including Canadian Stone Industries Inc. (“CSI”), through two simultaneous transactions: (i) TotalStone, LLC acquired substantially all of the assets and assumed certain liabilities of Continental Stone Industries, Inc. (the “Asset Purchase”), and (ii) a subsidiary of TotalStone acquired all of the outstanding shares of FCHI (the “Share Purchase”). CSI is a Langley, British Columbia-based distributor of manufactured and natural stone products serving Western and Eastern Canada.
Purchase Consideration. The Fraser Canyon Acquisition comprises two simultaneous transactions: (i) the CSIA Asset Purchase, in which TotalStone, LLC acquired substantially all of the assets and assumed certain liabilities of Continental Stone Industries, Inc. for cash consideration of approximately US$459.0 thousand (CAD $
Note 4 Business Combination (cont.)
The Company engaged Loop Capital to assist with the valuation of identifiable intangible assets and contingent consideration; the purchase price allocation presented below is based on valuations performed with the assistance of Loop Capital. The purchase price allocation was final at December 31, 2025, other than the working capital adjustment under the purchase agreement, which the Company settled during the six months ended June 30, 2026 as described above. The allocation below reflects that settlement. The aggregate purchase consideration of approximately US$6,299.0 thousand reflected in the purchase price allocation below represents the FCHI Share Purchase only, stated net of the Continental Cash Purchase Price paid separately for the CSIA Asset Purchase and net of the working capital reduction described above, with U.S. dollar amounts translated at the exchange rates used for purchase accounting purposes.
Goodwill of $
The carrying amount of goodwill was $
CSI contributed revenue of $592.0 thousand and net loss of $
The following table presents the final purchase price allocation for the FCHI acquisition, updated for the working capital settlement described above, measured in accordance with ASC 805 (in thousands):
| Amount | ||||
| Cash purchase price | $ | |||
| Seller notes | ||||
| Earn-out agreements | ||||
| Aggregate purchase consideration | $ | |||
| Identifiable assets acquired and liabilities assumed: | ||||
| Accounts receivable, net | ||||
| Inventories | ||||
| Income tax receivable | ||||
| Prepaid expenses | ||||
| Property and equipment, net | ||||
| Other intangible assets | ||||
| Right of use assets | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Income tax payable | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Current portion, lease liability | ( | ) | ||
| Lease liability, net of current portion | ( | ) | ||
| Total identifiable net assets | ||||
| Goodwill | $ | |||
Pro Forma Financial Information
The following unaudited pro forma information presents the Company’s consolidated results of operations for the nine months ended September 30, 2025 as though both acquisitions had been completed as of January 1, 2025:
| Nine Months Ended | ||||
| September 30, | ||||
| 2025 | ||||
| Revenue | $ | |||
| Net income (loss) | ( | ) | ||
| Earnings (loss) per common share: | ( | ) | ||
The Company prepared this unaudited pro forma information under ASC 805-10-50-2(h), presenting consolidated results as if the Carolina Stone Holdings and the Fraser Canyon acquisitions had closed on January 1, 2025. Pro forma loss per share uses the restated weighted average number of common shares outstanding of
Note 4 Business Combination (cont.)
The pro forma results include the following adjustments directly attributable to the acquisitions, consistent with the Company's prior pro forma disclosures in Forms 8-K/A filed with the SEC:
(a) Acquisition-related transaction expenses — The pro forma results include $
(b) Depreciation and amortization —A net increase in selling, general and administrative expenses of $
| ● | Carolina Stone $ |
| ● | Fraser Canyon $ |
(c) Financing costs — Additional interest expense of $
| ● | $ |
| ● | $ |
| ● | $ |
(d) Income taxes — No incremental tax effect has been recognized on the Carolina Stone or other U.S. pro forma adjustments, because the Company maintains a full valuation allowance against its U.S. net deferred tax assets. Canadian income tax effects of the Fraser Canyon adjustments are not material and have not been separately reflected.
The pro forma results do not represent what the Company would have reported had the acquisitions closed on the assumed date, nor do they predict future performance.
Note 5 Related Party Transactions
TotalStone is party to a management agreement with Brookstone Partners IAC, Inc. ("Brookstone"), an entity controlled by the Company's Chief Executive Officer and Chairman of the Board. Pursuant to this agreement, Brookstone provides annual consulting services totaling $
In connection with the Carolina Stone acquisition, Brookstone earned a
Amounts accrued for consulting services for Brookstone management fees totaled $
Effective February 1, 2026, in connection with the cost rationalization program implemented by the Board, the Company’s Chief Executive Officer reduced his annual base cash salary to $
Stream Finance, LLC, which serves as a creditor on TotalStone’s mezzanine term loan, is managed by Brookstone. As of September 30, 2026 and December 31, 2025, the Company’s outstanding principal was $
On March 10, 2025, TotalStone paid Brookstone Partners IAC, Inc. $
In connection with the Fraser Canyon acquisition, Nectarine Management, LLC, an entity whose voting of Company securities is solely controlled by Mr. Toporek, earned a consent fee of $
Promissory Note — Brookstone Partners Acquisition XXI Corporation. The $
Series Z
Authorization of Related Party Exchanges. On August 7, 2026, the Board of Directors authorized, but did not direct, the Company to enter into exchange agreements with BP Peptides, LLC and Brookstone Partners Acquisition XXI Corporation, entities affiliated with Matthew Lipman, the Company’s Chief Executive Officer, and Michael Toporek, the Chairman of the Board, pursuant to which such holders would surrender shares of Series Z Preferred Stock in exchange for shares of common stock at a price per share representing a premium to the market price of the common stock. No exchange agreement has been executed, and no shares have been issued thereunder. The Board also approved in principle, and stockholders holding a majority of the voting power of the Company’s outstanding voting stock approved by written consent in lieu of a special meeting, the settlement of the remaining shares of Series Z Preferred Stock and accrued management fees payable to Brookstone Partners IAC, Inc. through one or more further exchanges. Each exchange would be at a price per share equal to
Staffing Agreement. The Company, for itself and its subsidiaries TotalStone, LLC (d/b/a Instone) and Carolina Stone Holdings, LLC, is party to a staffing agreement with Brookstone dated June 9, 2025, which was amended and restated in September 2026 (the “Staffing Agreement”). Under the Staffing Agreement, Brookstone employs, through its representative office in Bosnia and Herzegovina, the personnel it assigns to perform accounting, finance and technology functions for the Company and its subsidiaries on a remote basis, and is responsible for their payroll, payroll taxes, benefits and compliance with local labor law. The Company pays monthly fees for assigned employees and hourly rates for other personnel. Fees under the Staffing Agreement were $
Note 6 Property and Equipment, Net.
A summary of the Company’s property and equipment is as follows in (“000’s”):
| September 30, | December 31, | |||||||
| 2026 | 2025 | |||||||
| Property and Equipment, Net. | ||||||||
| Land and buildings | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Computer equipment | ||||||||
| Computer software | ||||||||
| Furniture and fixtures | ||||||||
| Vehicles | ||||||||
| Leasehold Improvements | ||||||||
| Total property and equipment | $ | $ | ||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property and equipment | $ | $ | ||||||
Depreciation and amortization expense on property and equipment for the three months ended September 30, 2026 and 2025 was $
Note 7 Goodwill and Other Intangible Assets
The following tables summarize the Company’s other intangible assets in (“000’s”):
| Balance at September 30, 2026 | ||||||||||||
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| Non-compete agreements | $ | $ | ( | ) | $ | |||||||
| Customer lists | ( | ) | ||||||||||
| Tradenames | ( | ) | ||||||||||
| Distribution agreements | ( | ) | ||||||||||
| Total definite-lived intangible assets | ( | ) | ||||||||||
| Trademark | — | |||||||||||
| Indefinite-lived intangible assets | — | |||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | |||||||
| Balance at December 31, 2025 | ||||||||||||
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| Non-compete agreements | $ | $ | ( | ) | $ | |||||||
| Customer lists | ( | ) | ||||||||||
| Tradenames | ( | ) | ||||||||||
| Other | ( | ) | ||||||||||
| Total definite-lived intangible assets | ( | ) | ||||||||||
| Trademark | — | |||||||||||
| Indefinite-lived intangible assets | — | |||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | |||||||
Finite-lived intangible assets are amortized over the estimated useful lives of the respective assets on a straight-line basis. Total amortization expense was $
Total future amortization expense for finite-lived intangible assets was estimated as follows in (“000’s):
| Future | ||||
| Amortization | ||||
| Year | Expenses | |||
| Remainder of 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| Thereafter | ||||
| Total | $ | |||
The future amortization schedule above excludes $
Note 7 Goodwill and Other Intangible Assets (cont.)
The changes in the carrying amount of goodwill for the nine months ended September 30, 2026 are as follows in (“000’s”):
| Balance – December 31, 2025 | $ | |||
| Measurement-period adjustment | ||||
| Foreign currency translation | ( | ) | ||
| Balance – September 30, 2026 | $ |
2025 Impairment Assessment
During the year ended December 31, 2025, the Company engaged Loop Capital and performed a quantitative goodwill impairment test for the Instone reporting unit as of October 1, 2025. The estimated fair value of the reporting unit was determined using a weighted blend of the income approach (discounted cash flow method, 50% weight), the guideline public company method (25% weight), and the guideline merged and acquired company method (25% weight). The blended enterprise value of approximately $
Note 8 Fair Value Measurements
The Company’s fair value hierarchy policy is described in Note 3. The following table presents assets and liabilities measured at fair value by level:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| September 30, 2026 — Recurring | ||||||||||||||||
| Derivative liabilities — embedded conversion features | $ | $ | ||||||||||||||
| Earn-out Payable | ||||||||||||||||
| December 31, 2025 — Recurring | ||||||||||||||||
| Derivative liabilities — embedded conversion features | ||||||||||||||||
| Earn-out Payable | ||||||||||||||||
| December 31, 2025 — Non-recurring (equity-premise) | ||||||||||||||||
| Goodwill — Instone reporting unit | ||||||||||||||||
On September 30, 2026, the Company’s Level 3 recurring fair value measurements consisted of derivative liabilities of $
Note 8 Fair Value Measurements (cont.)
Derivative Liability
The Level 3 derivative liabilities, representing the embedded conversion features bifurcated from the Senior Secured Convertible Notes, decreased from $
The fair value was remeasured at each conversion date and at period end using the Black-Scholes option-pricing model with the inputs described above, including the effects of the April 16, 2026 and August 10, 2026 conversion price adjustments under the Senior Secured Convertible Notes, each of which was accounted for as a modification of the embedded derivatives (see Note 11), and the derecognition of the derivative liability associated with the July 2025 Note on its repayment on August 28, 2026. Each adjustment is accounted for as a modification of the embedded conversion features, with the resulting change in the fair value of the bifurcated derivative liabilities reflected in earnings of the quarter in which the adjustment occurred.
Significant unobservable inputs used in the Level 3 measurement of the derivative liabilities (Black-Scholes option-pricing model) are summarized below:
| SSN #1 at | SSN #2 at | |||||||||||||||
| Issuance | Issuance | September 30, | December 31, | |||||||||||||
| (7/29/2025) | (10/22/2025) | 2026 | 2025 | |||||||||||||
| Expected term (years) | ||||||||||||||||
| Risk-free rate | % | % | ||||||||||||||
| Annualized volatility | % | % | % | % | ||||||||||||
Earn-out Payable
In addition to the embedded derivative liabilities described above, the fair value of each earn-out was determined at the respective acquisition date using an option-pricing model implemented through a Monte Carlo simulation of the underlying EBITDA of each acquired business.
The significant unobservable inputs used in the Carolina Stone earn-out valuation included EBITDA volatility of
The fair value of the contingent earn-out consideration is most sensitive to changes in projected EBITDA, EBITDA volatility, and the risk-adjusted discount rate. Significant increases (decreases) in expected EBITDA would result in a higher (lower) fair value measurement. Significant increases (decreases) in EBITDA volatility generally result in a higher (lower) fair value given the option-like payoff structure. Increases (decreases) in the risk-adjusted discount rate would result in a lower (higher) fair value. Changes in the fair value of the earn-out liabilities are recognized within operating expenses in the consolidated statements of operations.
The fair value of the embedded derivative liabilities is highly sensitive to changes in the expected volatility input. Significant increases (decreases) in the expected annualized volatility would result in a significantly higher (lower) fair value measurement of the derivative liabilities, which would be recognized as a non-operating loss (gain) in the consolidated statements of operations.
As of September 30, 2026, the Company's Level 3 recurring fair value measurements include total contingent earn-out consideration of $
Note 9 Commitments and Contingencies
The Company is subject, from time to time, to certain legal proceedings and claims arising out of its business, which cover a wide range of matters, including product liability, advertising, contracts, environment, patent and trademark matters, labor and employment matters and tax. While considerable uncertainty exists, in the opinion of management, the ultimate resolution of the various lawsuits and claims will not materially affect our financial position, results of operations or cash flows.
Note 10 Line of Credit
On December 20, 2017, TotalStone executed a Revolving Credit, Term Loan and Security Agreement with Berkshire Bank (the “Revolving Credit Agreement”). The Revolving Credit Agreement has been amended fifteen times through the fiscal year ended December 31, 2025. In connection with the Carolina Stone acquisition, CS Purchase Holdings LLC, Carolina Stone Holdings, LLC, and Carolina Stone Distributors, LLC were added as co-borrowers under the Fourteenth Amendment, dated August 22, 2025. Under the Fifteenth Amendment, executed December 19, 2025, the lender is now Beacon Bank & Trust (successor by merger to Berkshire Bank), and the maturity date was extended to June 19, 2026. TotalStone’s maximum revolving advance amount is $
In connection with the Fraser Canyon acquisition, on November 7, 2025, Canadian Stone Industries and Klad Envelope Solutions Inc. entered into a Letter of Agreement with The Toronto-Dominion Bank ("TD Bank") providing Canadian Stone Industries with a revolving operating loan with a credit limit of CAD $
The combined outstanding balance under the Company's revolving credit facilities was $
Note 11 Debt
As of September 30, 2026, the Company had $
A summary of the Company’s long-term debt is as follows in (“000’s”):
| September 30, | December 31, | |||||||
| 2026 | 2025 | |||||||
| Long-term Debt | ||||||||
| Mezzanine term loan to Stream Finance, LLC, a related party, collateralized by substantially all of TotalStone’s assets and subordinated to the Bank term notes. Interest is calculated monthly as the Base Rate divided by an Adjustment Factor of 0.75, not to exceed 15% per annum (see further details below), with a maturity date of September 30, 2028. On March 7, 2025, the Special Preferred Membership Interests were exchanged for loans in an aggregate principal of $1,143,646 and an amendment fee of $695,000 payable on the deferral date of September 30, 2028, as extended on June 17, 2026, which are included in this amount. At September 30, 2026 and December 31, 2025, $753.0 thousand and $524.0 thousand of accrued interest remains unpaid and is included within this amount, respectively. | $ | $ | ||||||
| Seller’s note with Avelina Masonry, LLC, which required monthly payments of $48.0 thousand. The original maturity date was November 13, 2022 but the loan has not been paid in full and is in default. The loan bears interest at one-month SOFR plus 4.5% plus 3.0% default (11.53% and 11.29%) at September 30, 2026 and December 31, 2025, respectively. At September 30, 2026 and December 31, 2025, $377.0 thousand and $283.0 thousand of accrued interest remains unpaid and is included within this amount, respectively. | ||||||||
| Seller's note with D22L, Inc., which requires quarterly interest payments commencing December 31, 2025 and quarterly principal payments of $100,000 commencing December 31, 2026. This Subordinated Promissory Note has a maturity date of February 22, 2028 and bears interest of 1.25% plus SOFR (5.15% and 5.59% at September 30, 2026 and December 31, 2025, respectively). At September 30, 2026 and December 31, 2025, $32.0 thousand and $25.0 thousand of accrued interest remains unpaid and is included within this amount, respectively. | ||||||||
| Senior Convertible Note with 3i, LP. issued on July 29, 2025 with a principal amount of $3,272,966 and accrued interest of $229,108. This note was issued with an 8.34% original issue discount and bears interest at the rate of 7.0% per annum, with a maturity date of August 29, 2026 as extended effective July 29, 2026. At September 30, 2026 and December 31, 2025, $0.0 and $18.0 thousand of accrued interest remains unpaid and is included within this amount, respectively. | ||||||||
| Seller’s note with Fraser Canyon Holdings Inc., which requires quarterly principal payments of CAD $400,000 commencing July 31, 2026, with the remaining principal due on maturity. This Subordinated Promissory Note has a maturity date of March 31, 2027 and bears interest at TD Bank’s prime rate plus 1.00% through November 30, 2026 and prime plus 3.00% after November 30, 2026. In the event of a default, the holders can add 200 bps to the interest rates while the default continues. At September 30, 2026 and December 31, 2025, $19.2 and $5.0 thousand of accrued interest remains unpaid, respectively. | ||||||||
| Seller’s note with Fraser Canyon Holdings, Inc., which requires quarterly principal payments of CAD $50,000 commencing March 31, 2027. This Subordinated Promissory Note has a maturity date of December 1, 2028 and bears interest at 30-day average SOFR plus 1.25%, stepping up to SOFR plus 2.50% after November 30, 2026 and SOFR plus 3.75% after November 30, 2027. At September 30, 2026 and December 31, 2025, $17.3 and $6.0 thousand of accrued interest remains unpaid and is included within this amount, respectively. | ||||||||
| Senior Convertible Note with 3i, LP, issued on October 22, 2025 with a principal amount of $3,545,712. This note was issued with an 8.34% original issue discount and bears interest at the rate of 7.0% per annum, with a maturity date of December 13, 2027 as extended by an amendment dated November 6, 2026. At September 30, 2026 and December 31, 2025, $70.0 and $46.0 thousand of accrued interest remains unpaid and is included within this amount, respectively. | ||||||||
| In December 2022, TotalStone sold its facility in Navarre, Ohio to a nonaffiliated third party for a purchase price of $3.2 million and concurrently entered into a leaseback transaction. The transaction is treated as a failed sale in accordance with U.S. GAAP. The Company therefore recorded a financing liability related to the sale-leaseback in the amount of the sale price. The obligation matures in January 2048 and requires monthly payments of principal and interest. With the sale leaseback, TotalStone signed a lease agreement with a 25-year lease term. The initial annual lease payment of $259.0 thousand increases 2% per annum. The imputed interest rate is 8.10%. | ||||||||
| Less: unamortized premiums, discounts, and issuance costs | ( | ) | ( | ) | ||||
| Total debt, net unamortized premiums, discounts, and issuance costs | $ | $ | ||||||
| Current portion of principal outstanding | ||||||||
| Less: current portion of unamortized premiums, discounts, and issuance costs | ( | ) | ( | ) | ||||
| Total current portion of long-term debt | ||||||||
| Long-term portion of principal outstanding | ||||||||
| Less: long-term portion of unamortized premiums, discounts, and issuance costs | ( | ) | ( | ) | ||||
| Total long-term debt, net of current portion | ||||||||
| Total long-term debt | $ | $ | ||||||
Note 11 Debt (cont.)
Mezzanine Term Loan — Stream Finance, LLC.
TotalStone, LLC is party to the Second Amended and Restated Credit Agreement, dated March 8, 2023, with Stream Finance, LLC (a related party), as agent (as amended, the "Stream Finance Credit Agreement"). The mezzanine term loan bears interest at
The following table summarizes the activity in the Stream Finance mezzanine term loan for the nine months ended September 30, 2026:
| Balance, December 31, 2025 | $ | |||
| PIK interest | ||||
| Balance, September 30, 2026 | $ |
(1) The table above presents principal activity only; accrued and deferred interest and the $
Prior to the Fourth Amendment, the interest rate on the Credit Facility was determined on a performance-based sliding scale, with the applicable rate set each quarter by reference to trailing Adjusted EBITDA of TotalStone as measured under the two tables below (Table A excluding the Northeast operations and Table B including them):
| Table A | Table B | |||||||||||||
| Adjusted EBITDA of TotalStone | Adjusted EBITDA of TotalStone | |||||||||||||
| Level | (exclusive of Northeast) | Rate | Level | and Northeast | Rate | |||||||||
| I | Greater than $2,500,000 | % | I | Greater than $4,000,000 | % | |||||||||
| II | Less than or equal to $2,500,000, but greater than or equal to $2,000,000 | % | II | Less than or equal to $4,000,000, but greater than or equal to $3,500,000 | % | |||||||||
| III | Less than $2,000,000 | % | III | Less than $3,500,000 | % | |||||||||
Subordinated Promissory Note — Carolina Stone. In connection with the acquisition of Carolina Stone Holdings, LLC on August 22, 2025, CS Purchase Holdings LLC issued a subordinated promissory note to the seller in the original principal amount of $
Seller Notes — Fraser Canyon. In connection with the acquisition of Fraser Canyon Holdings Inc. and the assets of Continental Stone Industries, Inc. on December 1, 2025, Instone Canada Corp. issued two subordinated promissory notes to the sellers:
The First Seller Note was issued in the original principal amount of CAD $
The Second Seller Note was issued in the original principal amount of CAD $
Note 11 Debt (cont.)
Liquidity and NASDAQ Listing Compliance
For the three months ended September 30, 2026, net sales were $
The Company has nonetheless generated recurring net losses, including a net loss of $
The principal conditions are the following: a net loss of $
These conditions, together with the Company’s accumulated deficit and near-term debt maturities, initially indicated that substantial doubt existed about the Company’s ability to meet its obligations and to continue as a going concern within one year after the date these condensed consolidated financial statements are issued. Management has concluded that the following plans and resources, in the aggregate, alleviate that doubt:
| i. | Management expects the operating subsidiaries to generate cash from operations in the fourth quarter as accounts receivable and inventory are reduced from seasonal highs and has identified further reductions in inventory at TotalStone and at the CSI business that can be realized if required. Management expects a portion of the cash generated at TotalStone to be available to fund holding company obligations. Management does not expect cash generated at the CSI business to fund holding company obligations; | |
|
| ||
| ii. | Management forecasts that TotalStone and Carolina Stone will generate cash in excess of what the Cash Flow Coverage Ratio covenant under the Revolving Credit Agreement requires. Management plans to transfer part of that cash to the holding company. Each transfer requires the written consent of Beacon Bank & Trust, and management expects Beacon Bank & Trust to consent to transfers that leave the borrowers in compliance with that covenant; | |
|
| ||
| iii. | As described in Note 3, U.S. Customs and Border Protection accepted all of TotalStone’s claims for refund of $ | |
|
| ||
| iv. | The Company sold shares for gross proceeds of $ | |
|
| ||
| v. | The U.S. revolving credit facility with Beacon Bank & Trust (successor by merger to Berkshire Bank), with approximately $
| |
|
| Based on this evaluation, management has concluded that these plans alleviate the substantial doubt about the Company’s ability to continue as a going concern. |
CAPSTONE HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Secured Convertible Notes.
The embedded conversion features are bifurcated as derivative liabilities and measured at fair value at each reporting date with changes in fair value recognized in earnings, in accordance with ASC 815-15. In July 2025, the Company issued a Senior Secured Convertible Note to 3i, LP (the "July Note") in the original principal amount of $
During the year ended December 31, 2025, the Company entered into three amendments to the July Note and one amendment to the October Note that reduced the applicable conversion prices, from $
On April 16, 2026, pursuant to a unanimous written consent dated April 16, 2026, the Company and the Buyer entered into a Letter Agreement (the “April 2026 Letter Agreement”) reducing the Conversion Price applicable to $
On July 29, 2026, the July 2025 Note matured with an outstanding principal balance of $
On August 10, 2026, the Company and the holder of the Senior Secured Convertible Notes entered into a Conversion Price Voluntary Adjustment Notice under Section 7(h) of each Note reducing the conversion price of both Notes to $
During the three months ended September 30, 2026, the July 2025 Note was settled in full through four sequential transactions:
| ● | August 12, 2026 — Partial Conversion. On August 12, 2026, the Holder elected to convert $ |
| ● | August 13, 2026 — First Holder Optional Redemption. Pursuant to Section 8(b) of the July 2025 Note, the holder exercised its Holder Optional Redemption right and required the Company to apply 50% of the $ |
| ● | August 20, 2026 — Second Holder Optional Redemption. The holder exercised a second Holder Optional Redemption right based on aggregate VWAP Purchase Notices issued under the Equity Line between August 13, 2026 and August 20, 2026 totaling $ |
| ● | August 28, 2026 — Full Payoff and Extinguishment. On August 28, 2026, the Company paid in full all remaining outstanding obligations under the July 2025 Note, including all outstanding principal of $ |
During the three months ended September 30, 2026, the October 2025 Note was partially redeemed through the following transactions:
| ● | September 8, 2026 — First Holder Optional Redemption. Between August 31, 2026 and September 4, 2026, the Company generated aggregate proceeds of $ |
| ● | September 14, 2026 — Second Holder Optional Redemption. On September 14, 2026, the Holder exercised a second Holder Optional Redemption right requiring the Company to apply 50% of the $ |
| ● | September 23, 2026 — Six Fixed Conversions. On September 23, 2026, the Holder elected to convert an aggregate of $ |
| ● | September 28, 2026 — Third Holder Optional Redemption. Between September 14 and September 24, 2026, the Company generated aggregate proceeds of $ |
As of September 30, 2026, the outstanding principal balance of the October 2025 Note is $
Conversion activity for the nine months ended September 30, 2026 and the resulting principal balances are set out below.
| July 2025 Note | October 2025 Note | Total | ||||||||||
| Balance, December 31, 2025 | $ | $ | $ | |||||||||
| Converted to common stock | ( | ) | ( | ) | ( | ) | ||||||
| Repaid in cash | ( | ) | ( | ) | ( | ) | ||||||
| Balance, September 30, 2026 | $ | $ | $ | |||||||||
| Note | Conversion Price | Principal | Accrued Interest | Shares Issued | ||||||||||||
| July 2025 Note | $ | $ | $ | |||||||||||||
| July 2025 Note | $ | |||||||||||||||
| October 2025 Note | $ | |||||||||||||||
| October 2025 Note | $ | |||||||||||||||
| October 2025 Note | $ | |||||||||||||||
| Total | $ | $ | ||||||||||||||
The following table summarizes the carrying value of the Company's senior secured convertible notes by note as of September 30, 2026:
| SSN #1 | SSN #2 | Total | ||||||||||
| Stated principal | $ | $ | $ | |||||||||
| Less: unamortized OID | ( | ) | ( | ) | ||||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||||||
| Less: unamortized derivative discount | ( | ) | ( | ) | ||||||||
| Net carrying value | $ | $ | $ | |||||||||
The following table summarizes the carrying value of the Company’s senior secured convertible notes as of each period end:
| September 30, | December 31, | |||||||
| 2026 | 2025 | |||||||
| Stated principal | $ | $ | ||||||
| Less: unamortized original issue discount | ( | ) | ( | ) | ||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Less: unamortized derivative discount | ( | ) | ( | ) | ||||
| Net carrying value | $ | $ | ||||||
The following table presents a roll forward of the derivative liabilities associated with the embedded conversion features for the nine months ended September 30, 2026:
| SSN #1 | SSN #2 | Total | ||||||||||
| Balance, December 31, 2025 | $ | $ | $ | |||||||||
| Change in fair value — amendments | ||||||||||||
| Derecognition to APIC | ( | ) | ( | ) | ( | ) | ||||||
| Change in fair value — conversions | ( | ) | ( | ) | ( | ) | ||||||
| Change in fair value — remeasurement | ||||||||||||
| Balance, September 30, 2026 | $ | $ | $ | |||||||||
As of September 30, 2026, the following shares of common stock were issuable upon conversion of the outstanding senior secured convertible notes:
| Conversion Price | Principal | Shares Issuable | ||||||||||
| July Note | $ | |||||||||||
| October Note — Tranche 4 | ||||||||||||
| Total | $ | |||||||||||
Scheduled maturities of long-term debt as of September 30, 2026, are as follows:
| Remainder of 2026 | $ | |||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 2030 | ||||
| Thereafter | ||||
| Total | $ |
Note 12 Leases
As of September 30, 2026, the balance of our right-of-use (“ROU”) assets was $
In connection with the acquisitions of Carolina Stone ( August 22, 2025) and Fraser Canyon Holdings/CSI ( December 1, 2025), the Company assumed operating leases for distribution, showroom, and warehouse facilities.
The Carolina Stone leases include: (i) approximately
Moreover, the CSI leases include: (i) approximately
Toronto Facility Lease Extension. Canadian Stone Industries Inc. ("CSI"), a wholly-owned subsidiary of the Company, leases approximately
The 2026 Extension constitutes a lease modification under ASC 842, Leases, as it grants an additional right of use not included in the original lease or prior extensions. Accordingly, the Company remeasured the operating lease right-of-use ("ROU") asset and operating lease liability as of September 25, 2026, the modification effective date, using an incremental borrowing rate of
The maturity of our lease liabilities as of September 30, 2026 is as follows in (“000’s”):
| Year | Finance | Operating | ||||||
| Remainder of 2026 | $ | $ | ||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| 2030 | ||||||||
| Thereafter | ||||||||
| Total undiscounted Lease Payments | ||||||||
| Less: Present value discount | ( | ) | ( | ) | ||||
| Total Lease Liability | $ | $ | ||||||
Lease expense recognized on our leases for the three and nine months ended September 30, 2026 and 2025 is as follows in (“000’s”):
| Nine Months Ended | Nine Months Ended | Three months Ended | Three months Ended | |||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| 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 the nine months ended September 30, 2026 is as follows in (“000’s”):
| Nine Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2026 | September 30, 2025 | |||||||||||||||
| Finance | Operating | Finance | Operating | |||||||||||||
| Weighted-average remaining lease terms (years) | ||||||||||||||||
| Weighted-average discount rate | % | % | % | % | ||||||||||||
| ROU assets obtained in exchange for new lease liabilities | $ | $ | $ | $ | ||||||||||||
Note 13 TotalStone Preferred Units
The Company owns
On the Restructuring Date ( March 7, 2025), all outstanding Class B and Class C Preferred Interests in TotalStone were exchanged for
Note 14 Warrants
TotalStone Class A Warrants. In April 2020,
Representative's Warrant. In connection with the March 7, 2025, Public Offering, the Company issued warrants to the underwriters to purchase
February 2026 Warrant (3i, LP). On February 12, 2026, in connection with the Letter Agreement deferring the $
Note 15 Stockholders’ Equity
As of September 30, 2026, the Company had
Share activity for the nine months ended September 30, 2026 — including
Amendment to Certificate of Incorporation. On August 7, 2026, the Board of Directors approved, and stockholders holding a majority of the voting power of the Company’s outstanding voting stock approved by written consent in lieu of a special meeting, one or more amendments to the Company’s Certificate of Incorporation, as amended, to decrease the number of authorized shares of common stock and/or preferred stock, at such time and in such amounts as the Board of Directors may determine, including in connection with any reverse stock split. The holder of the Company’s Series B Preferred Stock consented to the amendments pursuant to Section 1.5 of the Certificate of Designation of the Series B Preferred Stock. The approval authorizes the amendments but does not effect them. As of the date of this report, the Company has not determined the reduced number of authorized shares, and no amendment decreasing the authorized shares has been filed. Any such amendment will be effective, if at all, at such time and in such amounts as the Board of Directors may determine, and not before a definitive information statement on Schedule 14C has been mailed to stockholders and the applicable waiting period has elapsed. The Company filed a preliminary information statement on Schedule 14C with the SEC on September 14, 2026 and a definitive information statement on September 30, 2026, which was mailed to stockholders on or about October 6, 2026.
Stock Compensation
Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant vesting period. The Company generally estimates the fair value of each stock-based award on the measurement date using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate and dividend yield.
In June 2015, our stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”) and reserved
The Capstone Holding Corp. 2025 Stock Incentive Plan (the “2025 Plan”), which the Company’s stockholders adopted on November 18, 2025, as amended by the First Amendment approved by the stockholders on June 18, 2026, authorizes awards of up to
Total unrecognized compensation cost related to these grants was approximately $
Master Restricted Stock Agreements. On August 7, 2026, the Company entered into Master Restricted Stock Agreements (the "True-Up Agreements") with each of its seven directors, including Matthew Lipman, the Company’s Chief Executive Officer, and Michael Toporek, the Company’s Chairman, pursuant to the Company’s 2025 Stock Incentive Plan. Each True-Up Agreement fixes an Aggregate Reference Percentage for the recipient, ranging from 1.00% to 7.25%, with 7.25% for each of Mr. Lipman and Mr. Toporek, and provided for the initial grant of restricted shares made on August 7, 2026 described below. In addition, each True-Up Agreement provides that the Company will issue to the recipient, on an annual basis beginning January 31, 2027 and continuing until the earliest of March 31, 2031, the recipient’s separation from service, or such earlier date as approved by at least 80% of the Board, additional shares of restricted common stock equal to the recipient’s Aggregate Reference Percentage of the aggregate number of shares of the Company’s Common Stock issued during the applicable measurement period, plus the Aggregate Reference Percentage of that number of shares (the "True-Up Shares"). The True-Up Shares are issuable under, and subject to the share reserve limitations of, the 2025 Stock Incentive Plan, and are subject to vesting conditions substantially consistent with those described below with respect to restricted stock awards held by the Company’s executive officers and directors, as applicable.
Restricted Stock True-Up Awards. On August 7, 2026, the Compensation Committee approved, and the Company issued,
Note 15 Stockholders’ Equity (cont.)
As of September 30, 2026 and December 31, 2025, there were
Preferred Stock
On February 20, 2025, following the Company’s controlling shareholder’s approval, the Company filed an amendment to its Restated Certificate of Incorporation to increase the authorized shares of preferred stock to
The Tax Benefit Preservation Plan adopted by the Board on April 18, 2017 between the Company and Computershare, which had been extended in May 2024 through December 31, 2027, was cancelled on March 3, 2025 pursuant to the Master Exchange and Other Transaction Agreement.
Series B Preferred Stock: In February 2025, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred Stock with the Delaware Secretary of State, designating
Amendment to the Series B Certificate of Designation. On August 7, 2026, the Board of Directors approved, and the holder of the Series B Preferred Stock consented to, an amendment to the Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred Stock, which the Company filed with the Delaware Secretary of State on August 10, 2026. The amendment provides that, upon any stock split, reverse stock split, combination or similar recapitalization of the Common Stock, the number of votes per share of the Series B Preferred Stock and the price conditions applicable to its conversion adjust proportionately, so that the relative voting power and the conversion economics of the Series B Preferred Stock are unchanged by any such transaction.
The Representative's Warrant issued in connection with the March 2025 Public Offering is described in Note 14.
At September 30, 2026, the remaining October 2025 Note (see Note 11) was convertible into shares of Common Stock at a conversion price of $
The February 2026 Letter Agreement and the related warrant to purchase
2026 Annual Meeting of Stockholders
On June 18, 2026, the Company held its 2026 Annual Meeting of Stockholders. At the meeting, the stockholders approved each of the proposals set forth in the Company’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on May 7, 2026, including: (i) the election of Fredric J. Feldman, Ph.D. and Elwood D. Howse, Jr. as Class I directors to serve until the 2027 Annual Meeting of Stockholders or until their respective successors are duly elected and qualified; (ii) the election of John M. Holliman, III and Gordon Strout as Class II directors to serve until the 2028 Annual Meeting of Stockholders or until their respective successors are duly elected and qualified; (iii) authorization of the Board of Directors, in its discretion, to effect a reverse stock split of the Company’s Common Stock at a ratio to be determined by the Board to satisfy the minimum bid price requirement to comply with Nasdaq Listing Rule 5550(a)(2); (iv) approval of an amendment to the Company’s 2025 Stock Incentive Plan; (v) the ratification of the appointment of GBQ Partners LLC as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2026; and (vi) the adjournment of the Annual Meeting, if necessary or advisable, to solicit additional proxies. Detailed voting results were reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on June 22, 2026.
Note 15 Stockholders’ Equity (cont.)
Stock-Based Compensation Expense
At the Annual Meeting held on June 18, 2026, stockholders elected Class I directors to serve until the 2027 Annual Meeting of Stockholders and Class II directors to serve until the 2028 Annual Meeting of Stockholders, in each case until their successors are duly elected and qualified.
Note 16 TotalStone 401(K) Retirement Savings Plan
TotalStone maintains a defined contribution pension plan, which covers all employees electing to participate after completing certain service requirements. Employer contributions are made at the Company’s discretion. Generally, the Company makes safe harbor matching contributions equal to
Carolina Stone Distributors, LLC maintained a SIMPLE IRA plan covering eligible employees after 90 days of service. Under the plan, Carolina Stone matched employee contributions up to
Canadian Stone Industries Inc. sponsors a Group Registered Savings Plan ("Group RSP") through RBC covering all employees after three months of continuous service. Under the plan, CSI matches employee contributions at
Note 17 Income Taxes
For the three and nine months ended September 30, 2026, the Company recorded an income tax provision of $
The Company continues to maintain a full valuation allowance against its U.S. net deferred tax assets, as it is not more likely than not that the Company will realize these deferred tax assets in future periods based on available positive and negative evidence, including the Company's recent history of losses. The deferred tax liability of $
The Company applies an estimated annual effective tax rate to year-to-date pretax results in accordance with ASC 740-270. As of September 30, 2026 the Company had no unrecognized tax benefits and no accrued interest or penalties related to uncertain tax positions.
The Company has substantial U.S. federal net operating loss carryforwards. Utilization of those carryforwards may be limited under Section 382 of the Internal Revenue Code if the Company experiences an ownership change as defined in that section. Shares of common stock outstanding increased significantly during the nine months ended September 30, 2026 through conversions of the Senior Secured Convertible Notes, issuances under the Equity Line of Credit and the restricted stock awards described in Note 15, and additional shares were issued after the balance sheet date as described in Note 19.
Note 18 Segment Information
The Company’s reportable segments are unchanged from those identified in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2025: the TotalStone segment (which includes the legacy Instone distribution business together with Fraser Canyon / Canadian Stone Industries, acquired December 1, 2025) and the Carolina Stone segment (acquired August 22, 2025). Capstone Holding Corp. corporate-level expenses are reported separately as the “Parent” caption. Intersegment transactions, where applicable, are reported in the “Eliminations” caption and (intercompany transactions and events) consist of intercompany sales, intercompany receivables and payables that are eliminated in consolidation.
The Company has two reportable segments: (i) the TotalStone segment, which includes the operations of TotalStone, LLC and the legacy Instone distribution business, together with Canadian Stone Industries Inc. and Continental Stone Industries, Inc. (collectively, "Fraser Canyon"), acquired in December 2025; and (ii) the Carolina Stone segment, which includes the operations of Carolina Stone Distributors, LLC and its affiliated installation business, acquired in August 2025. The TotalStone segment distributes natural and manufactured stone and related building products. The Carolina Stone segment distributes and installs stone veneer and related masonry products. The Company also incurs corporate-level SG&A expenses at Capstone Holding Corp. ("Capstone" or the "Parent"), consisting primarily of board fees, investor relations, filing, legal, insurance, accounting and consulting expenses not identifiable or allocated to the operating segments.
The Company's Chief Executive Officer serves as the chief operating decision maker ("CODM"). The CODM evaluates segment performance based on segment revenue, gross profit, and income (loss) from operations. Corporate overhead and certain shared services costs not directly attributable to a segment are reported within the Parent/Eliminations column. The tables also present interest expense and other non-operating items by segment and parent to reconcile income (loss) from operations to consolidated income (loss) before taxes. The accounting policies of the reportable segments are the same as those described in Note 3.
The following tables present financial information regarding the Company's reportable segments, reconciled to the Company's consolidated totals.
| Three 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 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Sales returns and allowances | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net sales | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Cost of goods sold | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||||||||||||||||
| Transaction Expenses | ||||||||||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | ||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||
| Gain (loss) on asset disposal, net. | — | — | ||||||||||||||||||||||||||||||||||||||
| Realized foreign currency gain (loss), net. | $ | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on derivative and debt instruments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Income (loss) from operations before taxes | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Other financial information: | ||||||||||||||||||||||||||||||||||||||||
| Depreciation & amortization (excluding amortization of finance lease right-of-use assets) | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Sales returns and allowances | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net sales | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Cost of goods sold | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Transaction Expenses | ||||||||||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration | ||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||
| Gain (loss) on asset disposal, net. | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on derivative and debt instruments | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Realized foreign currency gain (loss), net. | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other income (expense) net | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations before taxes | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Other financial information: | ||||||||||||||||||||||||||||||||||||||||
| Depreciation & amortization (excluding amortization of finance lease right-of-use assets) | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||||||||||||||||||
Note 18 Segment Information (cont.)
| As of September 30, 2026 | As of December 31, 2025 | |||||||||||||||||||||||||||||||||||||||
| TotalStone | Carolina Stone Holdings | Parent | Eliminations | Consolidated | TotalStone | Carolina Stone Holdings | Parent | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||
Note 19 Subsequent Events
The Company has evaluated subsequent events through November 12, 2026, the date these unaudited condensed consolidated financial statements were issued. Other than the events disclosed below, no other subsequent events occurred that would require recognition or disclosure in the unaudited condensed consolidated financial statements.
Subsequent Equity Line of Credit Draws. Between October 1, 2026 and November 12, 2026, the Company submitted five VWAP Purchase Notices under the Equity Line of Credit agreement with Tumim Stone Capital, LLC (see Note 11), resulting in the issuance of an aggregate of
Fraser Canyon Seller Notes. The Company did not make the CAD $
Schedule 14C. On September 30, 2026, the Company filed a definitive information statement on Schedule 14C describing the stockholder consent of August 7, 2026, and mailed it to stockholders on or about October 6, 2026. The twenty-day period after the mailing ended on October 26, 2026. As of the date of this report, no exchange agreement has been executed and no certificate of amendment decreasing the authorized shares has been filed.
Redomiciliation — Merger into Nevada Corporation. At 12:01 a.m. Pacific Time on October 9, 2026, Capstone Holding Corp., a Delaware corporation, merged with and into Capstone Holding Corp., a Nevada corporation and wholly owned subsidiary of the Company, under an Agreement and Plan of Merger dated as of October 8, 2026 (the "Nevada Redomiciliation"). The Nevada Redomiciliation was approved by the Company's stockholders at the annual meeting of stockholders held on November 18, 2025. Each outstanding share of common stock, Series B Preferred Stock and Series Z Preferred Stock of the Delaware corporation was converted into one share of the same class or series of the Nevada corporation. As a result, the rights of the Company's stockholders are now governed by Nevada law and by the Nevada articles of incorporation and bylaws, which differ in some respects from the rights stockholders had under Delaware law. The holder of the Series B Preferred Stock consented to the Nevada Redomiciliation and waived any consent fee for it under its letter agreement with the Company, and the holders of the Series Z Preferred Stock consented to the Nevada Redomiciliation and waived, for the Nevada Redomiciliation only, the redemption of their shares that the certificate of designation would otherwise have required. Each such holder retained the same number of shares of the same respective series in the surviving Nevada corporation, and no preferred equity converted into common stock. No consideration other than shares of the surviving Nevada corporation was paid to any stockholder. All outstanding options, warrants, convertible notes, and other convertible securities of the Company, including the October 2025 Note described in Note 11, were assumed by the surviving Nevada corporation at the effective time of the merger on the same terms. The Nevada articles of incorporation authorize
Reverse Stock Split. On October 6, 2026, the Board of Directors of the Company, pursuant to the authority granted by the Company's stockholders on June 18, 2026, approved a reverse stock split of the Company's issued and outstanding shares of common stock at a ratio of 1-for-30, and on October 15, 2026, after the Nevada Redomiciliation, the Board approved it again. The Reverse Stock Split was effected by a certificate of amendment to the Company's articles of incorporation filed with the Secretary of State of the State of Nevada on October 16, 2026 and effective at 12:01 a.m. Eastern Time on October 19, 2026, and the common stock began trading on a split-adjusted basis, under a new CUSIP number, at the open of trading on October 19, 2026. It reduced the shares of common stock outstanding from
October 2025 Note. The October 2025 Note matured on October 22, 2026 with $
Equity Line Amendment. On November 6, 2026, the Company and Tumim Stone Capital, LLC entered into a second amendment to the Amended and Restated Common Stock Purchase Agreement, which extends the term of the ELOC to January 1, 2028. The amendment also removes the agreement’s restrictions on later waivers and amendments and waives any rights of the investor arising from actions of the Company before the date of the amendment that may have violated Sections 6.8 or 8.2 of the agreement. The amendment and the amendment to the October 2025 Note were reported on a Current Report on Form 8-K filed with the SEC on November 9, 2026.
October 2025 Note — Redemption Notice #4. On October 5, 2026, the Company received a Holder Optional Redemption Notice from 3i, LP (the "Holder") pursuant to Section 8(b) of the October Note. The notice was triggered by aggregate proceeds of $
ITEM 2. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of 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 and in light of the remediation action plan that has been designed and implemented by the management as described below, our principal executive officer and principal financial officer concluded that as of September 30, 2026, our disclosure controls and procedures were not effective, due to the previously identified material weaknesses, which remain under remediation and the additional material weakness described below.
Remediation of the Material Weakness Identified in Connection with the Restatement. In connection with the restatement reported in the Company’s amended Quarterly Reports on Form 10-Q/A filed on August 12, 2026, management identified an additional material weakness in the Company’s internal control over financial reporting. The Company’s controls over the computation and review of the weighted average number of common shares outstanding used to compute net loss per share did not operate effectively. The Company has implemented an independent re-computation of the weighted average number of common shares outstanding from the share register each reporting period.
Our management has historically been composed of a small team, which resulted in limitations on segregation of duties. During the second quarter of 2026, management began a remediation action plan restructuring the accounting and financial reporting function and addressing the reported internal control weaknesses including the following steps:
| ● |
Expanding the accounting staff across our operating entities, including the hiring of a controller and additional qualified accounting personnel, so that the preparation of financial statements is no longer dependent on a single individual; |
|
| ● |
Reorganizing the financial reporting function under a defined organizational structure with documented reporting lines and named owners for each key position in the financial reporting chain; |
|
| ● |
Implementing segregation of duties across the close, financial reporting, and reconciliation processes, so that the initiation, review, and approval of transactions and journal entries are performed by varied individuals; |
|
| ● |
Establishing multi-level review controls over journal entries, account reconciliations, and the preparation of the consolidated financial statements and related disclosures; and |
|
| ● |
Investing in training, supervision, and systems supporting the financial reporting function, supplemented by external accounting, tax, and audit specialists engaged for complex and unusual transactions. |
While management believes the foregoing actions address the underlying causes of material weaknesses, the material weaknesses will not be considered fully remediated until the remediated controls have operated for a sufficient period of time and management has concluded, through testing, that they are operating effectively. Management expects to complete this evaluation during the remainder of the fiscal year 2026.
Process and review enhancements. The Company has implemented additional review procedures over journal entries, account reconciliations, and the consolidation process. Management is documenting key accounting policies, formalizing close calendars and review checklists, and engaging multiple external accounting, tax, and audit consultants to supplement internal staffing during the remediation period.
Post-acquisition disclosure controls. Following the acquisitions of Carolina Stone Holdings on August 22, 2025 and Fraser Canyon Holdings on December 1, 2025, the Company has integrated each acquired business into its quarterly disclosure controls and procedures, including expanding the close calendar to incorporate the acquired entities, aligning the chart of accounts and reporting packages, and extending review and certification responsibilities to the acquired-entity finance leads.
Expected timing. The Company expects the remediation action plan described above, taken together with the completion of the additional accounting staff hired across the organization and the continuing engagement of external accounting consultants, to substantially remediate the identified material weaknesses by the end of the fiscal year 2026, subject to the operating effectiveness of the new controls being demonstrated for a sufficient period of time.
The Company will continue to evaluate the design and operating effectiveness of its internal control over financial reporting, and management will reassess and test the remediation status quarterly until the remediation is complete and the relevant controls have operated effectively for a sufficient period of time.
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2026, we continued to implement the remediation actions described above, including the independent re-computation of the weighted average number of common shares outstanding from the share register implemented following the restatement reported in the Company’s amended Quarterly Reports on Form 10-Q/A filed on August 12, 2026. These changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act, have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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
This Quarterly Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this Quarterly Report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Quarterly Report.
You should carefully consider the risk factors disclosed in Annual Report on Form 10-K for the fiscal year ended December 31, 2025 (the "2025 Form 10-K"), together with all other information in this Quarterly Report, including our unaudited condensed financial statements and notes thereto, and in our other filings with the Securities and Exchange Commission. If any such risks, including the risk set out below, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected. If that happens, the market price of our common stock could decline, and stockholders may lose all or part of their investment.
In addition to the risk factors set forth in the 2025 Form 10-K, the following risk factors represent material updates to our risk factor disclosures. The risk factors set forth in the 2025 Form 10-K, as updated by the foregoing, should be read in conjunction with the other information set forth in this Quarterly Report.
The Company was in compliance with its financial covenants under our Revolving Credit Agreement as of September 30, 2026, and although we received a written waiver from our lender for the first quarter of 2026, there can be no assurance that we will maintain compliance in future periods or that our lender will grant additional waivers, which could result in acceleration of our outstanding indebtedness and materially impair our liquidity.
As of September 30, 2026, the Company was in compliance with the minimum Cash Flow Coverage Ratio covenant under our Revolving Credit Agreement with Beacon Bank & Trust. 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. We were not in compliance with the Cash Flow Coverage Ratio covenant as of March 31, 2026. On May 18, 2026, we received a written waiver limited to that specific violation; the waiver did not extend to any future defaults or events of default. On June 17, 2026, we entered into the Sixteenth Amendment to the Revolving Credit Agreement, which extended the maturity date from June 19, 2026 to December 31, 2026. Beacon Bank & Trust has informed us that it expects to approve an extension of the Revolving Credit Agreement beyond December 31, 2026, but no extension has been approved or signed, and there can be no assurance that it will be. There can be no assurance that we will maintain compliance with the financial covenants of the amended Revolving Credit Agreement in future periods or that our lender will grant additional waivers if we do not.
Any future waiver, if obtained, may be conditioned upon terms less favorable to the Company, including increased interest rates, additional collateral requirements, or other operational restrictions. If we fail to obtain a necessary waiver, our lender could declare an event of default, accelerate all outstanding amounts under the Revolving Credit Agreement, and exercise its remedies against pledged collateral. Acceleration could also trigger cross-default provisions in our other debt agreements, including the October Note, and could materially impair our financial condition and our ability to continue as a going concern. Recurring covenant non-compliance may also impair our ability to access additional financing and may be viewed unfavorably by investors and counterparties.
The reduction of the conversion price under the October Note and the resulting conversion of a substantial portion of the principal and accrued interest into shares of common stock resulted in significant dilution to our existing stockholders, and future conversions at the reduced conversion price or further reductions in the conversion price could result in additional substantial dilution.
On April 16, 2026, we reduced the conversion price applicable to $500,000 of the principal amount outstanding under the October Note to $17.10 per share. On the same date, the buyer converted an aggregate of $1,725,136 of principal and $120,762 of accrued interest into 85,240 shares of common stock, increasing our outstanding share count by approximately 22% in a single day. On August 10, 2026, we further reduced the conversion price of both Notes to $8.847 per share with respect to all $1,900,759.78 of principal then outstanding. On August 12, 2026, the holder converted $112,999 of principal and $8,569 of accrued interest into 13,741 shares of Common Stock at $8.847 per share, and the July 2025 Note was repaid in full on August 28, 2026. At September 30, 2026, the $1,000,000 of principal outstanding under the October Note was convertible into approximately 113,033 shares of Common Stock at $8.847 per share, compared with approximately 70,505 shares issuable under both Notes at the conversion prices in effect at June 30, 2026. On October 19, 2026, the 1-for-30 reverse stock split adjusted the conversion price of the October Note to $8.85 per share, and on November 10, 2026, under its terms, the conversion price reset to $2.03 per share. At $2.03 per share, the $894,946.30 of principal outstanding is convertible into approximately 440,860 shares of Common Stock. On October 29, 2026, after the initial maturity date of the October Note, which was extended to December 13, 2027, the holder converted $25,000.30 of the note into 10,688 shares of Common Stock at $2.3391 per share, the alternate conversion price that applies after an Event of Default (see the risk factor that follows).
These conversions have resulted in significant dilution to existing stockholders with respect to earnings, book value, and voting power per share, and may depress the market price of our Common Stock. If additional principal or interest is converted at the reduced price, or if we further reduce the conversion price, stockholders will experience additional material dilution. The shares of common stock issuable upon conversion of remaining unconverted principal may exert continued downward pressure on our stock price, which could impair our ability to raise capital through equity offerings or our Equity Line of Credit and could make any future conversions even more dilutive.
The October 2025 Note matured on October 22, 2026 and was not repaid, and the holder has treated an Event of Default as having occurred. On November 6, 2026, its maturity date was extended to December 13, 2027.
The Senior Secured Convertible Note issued to 3i, LP on October 22, 2025 matured on October 22, 2026, with $918,281.38 of principal outstanding. Under the terms of the note, the failure to repay the outstanding amounts at maturity constitutes an Event of Default (as defined in the note) on the sixth trading day after the maturity date. Subject to the standstill described below, upon an Event of Default, 3i, LP may exercise its rights and remedies under the note and the related transaction documents, including delivering a conversion notice or a redemption notice or initiating foreclosure proceedings against the assets that secure the note. 3i, LP has treated an Event of Default as having occurred. On October 29, 2026, it converted $25,000.30 of the note into 10,688 shares of Common Stock at the alternate conversion price that applies after an Event of Default, which is 90 percent of the lowest daily volume-weighted average price of our Common Stock in the ten trading days before conversion. That price was $2.3391 per share, against a conversion price of $8.85 per share. 3i, LP has not demanded payment of the note. On November 6, 2026, we entered into an amendment to the note with 3i, LP that extends its maturity date to December 13, 2027. Under the amendment, before the new maturity date, 3i, LP may not, on account of any Event of Default arising from circumstances that existed on or before the date of the amendment, or, under Section 13(d) of the note, from payments on our existing indebtedness, require redemption of the note, demand or collect any amount under it or exercise any remedy. 3i, LP keeps its right to convert the note at the alternate conversion price. See Note 19 to the consolidated financial statements for the other terms of the amendment. If we are unable to satisfy our obligations under the note when they become due, or if an Event of Default occurs that the standstill does not cover, 3i, LP may exercise its rights and remedies, which could result in substantial dilution to our existing stockholders, significant cash payment obligations, or the loss of assets securing the note. At the date of this report the note remained outstanding with $894,946.30 of principal, matures on December 13, 2027 and is subject to the standstill described above.
The Company regained compliance with the $1.00 Nasdaq minimum bid price requirement, but its Common Stock could be delisted if the bid price falls below $1.00 again. The minimum bid price is the only listing deficiency for which the Company has received notice from Nasdaq.
In January 2026, the Company received a notification from the Nasdaq Stock Market indicating that the closing bid price of its Common Stock had been below $1.00 per share for 30 consecutive business days, and that the Company was therefore not in compliance with Nasdaq Listing Rule 5550(a)(2). The Company had until July 6, 2026, to regain compliance, which required the closing bid price of its Common Stock to be at least $1.00 per share for a minimum of 10 consecutive business days. The Company did not regain compliance within that period, and Nasdaq granted the Company an additional 180-day compliance period through January 4, 2027. If the Company fails to maintain compliance, its Common Stock may be subject to delisting from Nasdaq, which could materially adversely affect the liquidity and trading price of its Common Stock and its ability to raise capital. In January 2025, the SEC approved amendments to Nasdaq Listing Rule 5810(c)(3)(A) that restrict the ability of listed companies to use reverse stock splits as a compliance tool. Under the amended rules, if a company effects a reverse stock split and subsequently fails to maintain the minimum bid price requirement within one year, the company will not be eligible for any compliance period and Nasdaq will issue a delisting determination. In addition, companies that effect reverse stock splits with a cumulative ratio of 250-to-1 or greater over any two-year period are subject to immediate delisting without a compliance period. At the 2026 Annual Meeting held on June 18, 2026, the Company’s stockholders authorized the Board of Directors to effect a reverse stock split as a potential measure to regain compliance, and on October 19, 2026, the Company effected a 1-for-30 reverse stock split. On November 2, 2026, Nasdaq notified the Company that it had regained compliance. However, the reverse stock split may not result in sustained compliance with the minimum bid price requirement, and the amended Nasdaq rules would preclude the Company from relying on an additional compliance period if the stock price subsequently falls below $1.00 within one year of the reverse stock split.
Nasdaq has adopted a new minimum market value requirement for continued listing that could apply to us.
In July 2026, the SEC approved new Nasdaq continued listing standards that require automatic delisting if the market value of a company's listed securities remains below $5 million for 30 consecutive business days (the “MVLS Rule”). The new MVLS Rule eliminates any cure period, precludes any automatic stay of suspension pending an appeal, and results in an immediate trading suspension upon Nasdaq's determination of non-compliance. On July 29, 2026, the SEC stayed the effectiveness of that approval order pending its consideration of notices of intent to petition for review. On September 11, 2026, the SEC granted petitions for review of the approval order and ordered that it remain stayed pending further order of the SEC, and the amendments are not currently operative. On September 25, 2026, Nasdaq filed a rule change, effective on filing, under which the MVLS Rule would become operative only when the stay ends, with the 30 consecutive business days counted from the next business day. Accordingly, it is currently uncertain when the stay will be lifted, or the MVLS Rule delayed, modified, or set aside. If the MVLS Rule becomes effective and the market value of our listed securities remains below $5 million for 30 consecutive business days, Nasdaq would immediately issue a delisting determination and suspend trading in our Common Stock. As of October 29, 2026, the market value of our listed securities was approximately $2.5 million. Our reverse stock split did not, by itself, increase the market value of our listed securities, and any actions we take to address the requirement, including issuances of additional securities, could dilute existing stockholders. If our Common Stock were delisted, the liquidity of our Common Stock and our ability to raise capital, including under the ELOC, would be materially impaired.
Changes in foreign currency translation and transaction risks that could adversely affect our reported financial results and the cost of servicing our Canadian dollar-denominated obligations.
Our Canadian operating subsidiary, Canadian Stone Industries Inc., generates revenues and incurs expenses in Canadian dollars, and we have outstanding debt and seller notes denominated in Canadian dollars. These exposures subject us to foreign currency translation risk when consolidating the subsidiary's results into U.S. dollars, and to transaction risk affecting the U.S. dollar cost of servicing our Canadian dollar-denominated obligations.
Fluctuations in the CAD/USD exchange rate may cause variability in our reported financial results independent of underlying operating performance. While this risk was not material in prior periods, it could become increasingly material if our Canadian operations or Canadian dollar-denominated indebtedness grow or as exchange rate volatility increases.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 10, 2026, the Company issued 13,500 shares of Common Stock to 3i, LP upon the exercise in full, at an exercise price of $0.30 per share, of the warrant issued on February 12, 2026 in connection with the Letter Agreement described in Note 14 to the consolidated financial statements included in this Quarterly Report. The shares were issued in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering, and the Company has filed a registration statement on Form S-1 registering their resale.
During the nine months ended September 30, 2026, in connection with the Senior Secured Convertible Notes, the Company issued 11,111 shares of Common Stock in the first quarter, 85,240 shares in the second quarter (on April 16, 2026), and 81,561 shares in the third quarter upon conversions of principal and accrued interest by the holder. The shares were issued in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended.
On August 7, 2026, the Company issued 160,307 shares of restricted common stock as restricted stock awards to eleven executive officers and directors under the Capstone Holding Corp. 2025 Stock Incentive Plan, as amended (see Note 15 to the consolidated financial statements included in this Quarterly Report). The shares were issued in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. The shares have not been registered as of the date of this filing.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION.
Insider trading arrangements and policies.
During the quarter ended September 30, 2026, no director or officer of the Company adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6: EXHIBITS
| Exhibit |
||
| Number |
Exhibit Description |
|
| 2.1 |
Agreement and Plan of Merger, dated as of October 8, 2026, by and between Capstone Holding Corp., a Delaware corporation, and Capstone Holding Corp., a Nevada corporation (incorporated by reference to exhibit 2.1 to current report on Form 8-K filed with the SEC on October 13, 2026) |
|
| 3.1 |
Articles of Incorporation of Capstone Holding Corp. (Nevada) (incorporated by reference to exhibit 3.1 to current report on Form 8-K filed with the SEC on October 13, 2026) |
|
| 3.2 |
Bylaws of Capstone Holding Corp. (Nevada) (incorporated by reference to exhibit 3.2 to current report on Form 8-K filed with the SEC on October 13, 2026) |
|
| 3.3 |
Certificate of Amendment to Articles of Incorporation of Capstone Holding Corp., filed with the Nevada Secretary of State on October 16, 2026 (incorporated by reference to exhibit 3.1 to current report on Form 8-K filed with the SEC on October 21, 2026) |
|
| 3.4 |
Amendment to the Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred Stock (incorporated by reference to exhibit 3.1 to quarterly report on Form 10-Q filed with the SEC on August 12, 2026) |
|
| 3.5 | Certificate of Conversion filed with the Delaware Secretary of State (incorporated by reference to Exhibit 3.3 to current report on Form 8-K filed with the SEC on October 13, 2026) | |
| 3.6 | Articles of Merger filed with the Nevada Secretary of State (incorporated by reference to Exhibit 3.4 to current report on Form 8-K filed with the SEC on October 13, 2026) | |
| 10.1 |
Amended and Restated Common Stock Purchase Agreement, dated as of June 16, 2026, by and between Capstone Holding Corp. and Tumim Stone Capital, LLC (incorporated by reference to exhibit 10.2 to current report on Form 8-K filed with the SEC on November 9, 2026) |
|
| 10.2 |
First Amendment to Amended and Restated Common Stock Purchase Agreement, dated July 2, 2026, by and between Capstone Holding Corp. and Tumim Stone Capital, LLC (incorporated by reference to exhibit 10.1 to current report on Form 8-K filed with the SEC on July 6, 2026) |
|
| 10.3 |
First Amendment, effective July 29, 2026, to Senior Secured Convertible Note dated July 29, 2025 (incorporated by reference to exhibit 10.1 to current report on Form 8-K filed with the SEC on August 3, 2026) |
|
| 10.4 |
Form of Master Restricted Stock Agreement, dated August 7, 2026, by and between Capstone Holding Corp. and each of the recipients named in the schedule filed therewith, together with a schedule of omitted agreements filed pursuant to Instruction 2 to Item 601(b)(10) of Regulation S-K (incorporated by reference to exhibit 10.9 to quarterly report on Form 10-Q filed with the SEC on August 12, 2026) |
|
| 10.5 |
Master Restricted Stock Agreement, dated August 7, 2026, by and between Capstone Holding Corp. and Matthew Lipman (incorporated by reference to exhibit 10.10 to quarterly report on Form 10-Q filed with the SEC on August 12, 2026) |
|
| 10.6 |
Conversion Price Voluntary Adjustment Notice, dated August 10, 2026, between Capstone Holding Corp. and 3i, LP (incorporated by reference to exhibit 10.11 to quarterly report on Form 10-Q filed with the SEC on August 12, 2026) |
|
| 10.7*# |
Staffing Agreement, effective September 11, 2026, by and between Capstone Holding Corp., for itself and its subsidiaries, and Brookstone Partners IAC, Inc., amending and restating the Staffing Agreement dated June 9, 2025 |
|
| 10.8 |
First Amendment to Senior Secured Convertible Note dated October 22, 2025, dated as of November 6, 2026, by and between Capstone Holding Corp. and 3i, LP (incorporated by reference to exhibit 10.1 to current report on Form 8-K filed with the SEC on November 9, 2026) |
|
| 10.9 |
Second Amendment to Amended and Restated Common Stock Purchase Agreement, dated as of November 6, 2026, by and between Capstone Holding Corp. and Tumim Stone Capital, LLC (incorporated by reference to exhibit 10.3 to current report on Form 8-K filed with the SEC on November 9, 2026) |
|
| 31.1* |
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
| 31.2* |
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
| 32.1** |
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
| 32.2** |
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
| 101.INS* |
Inline XBRL Instance Document |
|
| 101.SCH* |
Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.DEF* |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
| 101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
| 104* |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * |
Filed herewith. |
| ** |
Furnished herewith. |
| # |
Certain portions of this exhibit, indicated by [***], have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because they are not material and are the type of information the Company treats as private or confidential. |
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: November 12, 2026 |
By: |
/s/ Matthew E. Lipman |
| Matthew E. Lipman |
||
| Chief Executive Officer |
||
| Date: November 12, 2026 | /s/ Edward Schultz |
| Edward Schultz |
|
| Chief Financial Officer |
|
| (Principal Financial and |