CAPS

Business Context and Reporting Period

Capstone Holding Corp. (CAPS) is a holding company operating through subsidiaries TotalStone, Carolina Stone, and Fraser Canyon Holdings (CSI), distributing and installing masonry and stone veneer products across North America. This Form 10-Q covers the quarterly period ended June 30, 2026. The company is classified as a non-accelerated filer, smaller reporting company, and emerging growth company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 67% year-over-year for the quarter and 64% for the six-month period, driven primarily by the full-period contribution of the Carolina Stone (acquired Aug 2025) and Fraser Canyon/CSI (acquired Dec 2025) acquisitions.
• Margin Expansion: Gross margin improved to 27.9% (Q2) and 26.3% (YTD) from 24.4% and 21.5% in the prior year periods. This was aided by a $0.44 million tariff refund recorded as a reduction in cost of goods sold.
• Operating Performance: The company reported operating income of $0.43 million for the quarter, a turnaround from an operating loss of $(0.26) million in the prior year quarter. However, the six-month operating loss widened slightly to $(1.07) million from $(1.69) million.
• Interest Expense: Interest expense surged 346% for the quarter and 286% for the six months, primarily due to the amortization of debt discounts and issuance costs associated with Senior Secured Convertible Notes.
• Derivative Gains: The company recognized an unrealized gain of $0.64 million on derivative instruments (embedded conversion features) for the six months ended June 30, 2026.

Guidance, Outlook, Risks, and Unusual Items

• Going Concern: Management has concluded that substantial doubt regarding the company's ability to continue as a going concern has been alleviated based on cost rationalization, expected operating cash flows in H2, and access to capital via an Equity Line of Credit (ELOC) and debt extensions.
• Nasdaq Compliance: The company received an additional 180-day compliance period (through Jan 4, 2027) to meet the $1.00 minimum bid price requirement. Stockholders have authorized a reverse stock split to regain compliance.
• Debt Maturities & Extensions:
  • U.S. Revolving Credit Facility extended to Dec 31, 2026.
  • Stream Finance Mezzanine Loan extended to Sept 30, 2028.
  • July 2025 Senior Convertible Note extended to Aug 29, 2026.
• Convertible Note Dilution: On August 10, 2026 (subsequent to period end), the conversion price for outstanding Senior Secured Convertible Notes was reduced to $0.2949 per share, significantly increasing potential dilution (approx. 6.45 million shares issuable).
• Internal Controls: The company disclosed material weaknesses in internal controls over financial reporting, specifically regarding the computation of weighted average shares for EPS. Remediation is underway.
• Tariff Refunds: A $0.44 million receivable for IEEPA and reciprocal duties was recognized as a reduction of COGS. $0.10 million was received subsequent to the period end.

Investor Verification Checklist

• Debt Covenant Compliance: Verify continued compliance with the Cash Flow Coverage Ratio and Tangible Net Worth covenants under the Beacon Bank & Trust Revolver, given the recent waiver history.
• Convertible Note Terms: Review the impact of the August 10, 2026 conversion price reduction to $0.2949 on future dilution and earnings per share.
• Nasdaq Listing Status: Monitor the company's ability to regain compliance with the $1.00 minimum bid price or successfully execute a reverse stock split before the Jan 4, 2027 deadline.
• Internal Control Remediation: Assess the progress of remediation plans for material weaknesses in financial reporting controls.
• Acquisition Integration: Evaluate the performance of the Carolina Stone and Fraser Canyon acquisitions against earn-out targets and pro forma expectations.