Capstone Holding Corp.

CAPSTONE HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Nature of Operations

Capstone Holding Corp. (the “Capstone”) is a holding company and its operations consist substantially of the operations of its consolidated subsidiary, TotalStone, LLC (“TotalStone”). On April 1, 2020, Capstone obtained controlling interest in TotalStone, a materials distribution company that distributes masonry stone products for residential and commercial construction in the Midwest and Northeast United States under the trade names Instone and Northeast Masonry Distributors (“NMD”). On August 22, 2025, Capstone purchased all of the issued and outstanding membership interests (the “Holdings 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 Holdings 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.

Note 2 IPO and Restructuring

On March 7, 2025 (the “Restructuring Date”), Capstone closed its Public Offering of 1,250,000 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 $4.00 per share, which generated net proceeds of approximately $3,252,000 after deducting underwriting discounts and commissions and other offering expenses.

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.

On March 10, 2025, TotalStone paid Brookstone Partners IAC, Inc. $200,000 for financial advisory and related services with respect to Capstone’s capital raising transaction as agreed upon in the Restated Management Fee Agreement and Transaction Fee Agreement executed in March 2025.

Outstanding warrants to purchase 1,125 Class A Common Interests in TotalStone were cancelled on the Restructuring Date.

On the Restructuring Date, pursuant to a master exchange agreement (the “Master Exchange Agreement”) entered into by the 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 3,782,641 shares of Common Stock that constitute approximately 96% of the shares of Common Stock outstanding on the Restructuring Date, which were allocated to the Class B and Class C Members as set forth in the Master Exchange Agreement. As consideration for the issuance of 3,782,641 shares of Common Stock, the Class B and Class C Members surrendered their existing TotalStone’s membership interests and withdrew from the membership of TotalStone. Following the restructuring, BP Peptides, LLC, the owner of approximately 77.3% of Capstone’s shares prior to the restructuring, owns approximately 3% of Capstone’s shares on a post restructuring basis. Following the restructuring, the largest holder of Capstone’s shares (approximately 64%) will be BPA XIV, LLC. BP Peptides, LLC is jointly controlled by Matthew Lipman, our chief executive officer and a member of our board of directors, and Michael Toporek, the chairman of our board of directors, and BPA XIV, LLC is controlled by Mr. Lipman. On the Restructuring Date, the Class C Member cancelled his Class A TS Warrants, and his right to receive incentive compensation from TotalStone. TotalStone’s Class C Preferred Interests were historically included in TotalStone’s Class B Preferred Interests on the Company’s consolidated balance sheet.

TotalStone’s Special Preferred Membership Interests were exchanged on the Restructuring Date for loans in an aggregate principal amount of $1,006,377 plus interest.

In connection with the Restructuring, Capstone also increased its authorized shares of Common Stock to 50,000,000 shares and increased the authorized shares of preferred stock to 25,000,000 shares.

Note 3 Summary of Significant Accounting Policies

Basis of Presentation and Preparation

The accompanying consolidated financial statements include the accounts of Capstone and its consolidated subsidiaries (collectively, the “Company”). Intercompany accounts and transactions have been eliminated. Prior-year amounts may include instances of changes to prior-year amounts to achieve comparability to the most recent fiscal year.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the rules and regulations for reporting the Quarterly Report on Form 10-Q (“Form 10-Q”). Accordingly, they do not include all of the information and notes required by GAAP for annual consolidated financial statements.

The consolidated balance sheet at December 31, 2024 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by 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 December 31, 2024 (“2024 Form 10-K”). This report should be read in conjunction with our 2024 Form 10-K filed with the SEC on March 31, 2025.

In our opinion, the accompanying unaudited interim consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates, and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of September 30, 2025 and its results of operations, cash flows, and changes in stockholders’ deficit for the three and nine months ended September 30, 2025 and 2024. The results for the three and nine months ending September 30, 2025, are not necessarily indicative of the results expected for any future period or the full year.

Use of Estimates

The preparation of financial statements in accordance with US GAAP requires management to make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, and expenses in our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. 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.

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 the fair value of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results.

Accounts Receivable

Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. The Company estimates expected credit losses for the allowance for expected credit losses based upon its assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the Company’s ability to collect from customers. As of September 30, 2025 and December 31, 2024, the allowance for doubtful accounts totaled approximately $104.0 thousand.

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 obligations have been satisfied under the contract. Company invoices retainage and includes it in contract receivables when obligations have been satisfied and the right to receipt is subject only to the passage of time. As of September 30, 2025, retainage receivables were $162.0 thousand. There were no retainage receivables as of December 31, 2024.

Note 3 Summary of Significant Accounting Policies(cont.)

Inventories

Inventories consisting of finished goods are stated at the lower of cost, determined by the average cost method, or net realizable value. Inventories also include deposits placed on inventory purchases for shipments not yet received. Significant prepaid inventory may be located overseas. At September 30, 2025 and December 31, 2024, the total prepaid inventory balance was $219.0 thousand and $163.0 thousand, respectively. The reserve for obsolete inventory at September 30, 2025 and December 31, 2024, totaled $608.0 and $576.0 thousand, respectively.

Property and Equipment

Property and equipment is stated at cost and is depreciated over the estimated useful lives ranging from three toforty years. Depreciation is computed by using the straight-line method for financial reporting purposes and straight-line and accelerated methods for income tax purposes. Property and equipment is comprised of building, machinery & equipment, computer equipment, leasehold improvements, software, office equipment, vehicles, and furniture & fixtures. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense on property and equipment for the three and nine months ended September 30, 2025 and 2024 were $63.0 and $71.0 thousand and $192.0 and $209.0 thousand, respectively.

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 1 st day of the fourth quarter of each year or more frequently if indications of potential impairment exist. The Company’s goodwill is recognized intwo reporting units, TotalStone and Carolina Stone.

In evaluating potential goodwill impairment, we first assess 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, we perform a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses 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. The Company determined that no impairment was required for the periods presented.

Intangible assets with finite lives, consist of 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 of 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 of which the carrying amount of the assets exceeds the fair value of the assets. The Company determined that no impairment was required for the periods presented.

Convertible Debt

The Company accounts for convertible debt in accordance with ASC 470-20, Debt – Debt with Conversion and Other Options. Convertible debt instruments are evaluated at issuance to determine whether they contain embedded features that require bifurcation as derivatives or equity components. If the embedded conversion feature meets the criteria for derivative accounting under ASC 815, Derivatives and Hedging, it is bifurcated and recorded separately at fair value, with subsequent changes in fair value recognized in earnings. Upon modification, conversion or repurchase of convertible debt, the Company evaluates the potential of a gain or loss in accordance with ASC 470-20 and ASC 470-50, Debt Modifications and Extinguishments.

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 32 states in the Midwestern, Northeastern and Southeastern United States. 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.

Note 3 Summary of Significant Accounting Policies(cont.)

Shipping and Handling

The Company includes amounts billed to customers related to shipping and handling and shipping and handling expenses in cost of goods sold.

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 are excluded from the computation when their effect is antidilutive.

For the nine months ended September 30, 2025 and 2024, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The number of incremental common shares from potentially dilutive securities consisted of the following:

Recent Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires companies to disclose disaggregated information related to the effective tax rate reconciliation and income taxes paid. This guidance is effective for public entities for fiscal years beginning after December 15, 2024. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses, which requires disclosures about specific types of expenses included in expense captions presented on the face of the Consolidated Statement of Operations. This guidance is effective for public entities for fiscal years beginning after December 15, 2026. We are currently reviewing this guidance and its impact on our consolidated financial statements.

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 certain settlements of convertible debt instruments should be accounted for as an inducement conversion or extinguishment of convertible debt. The new guidance is effective for annual reporting periods beginning after December 15, 2025, and interim periods within those annual periods. We are currently reviewing this guidance and its impact on our consolidated financial statements.

Note 4 Business Combination

On August 22, 2025, Capstone completed its membership interest purchase to purchase all of 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, ( the “Business Combination”). The aggregate purchase price is (i) $2,625,000 in cash, subject to adjustment, a seller note in the original principal amount of $1,250,000, and an amount payable pursuant to the terms of the earn-out agreement of up to $825,000. The Company transferred $2,501,500 in cash to the Seller, representing the aggregate purchase price of $2,625,000 less $123,500 for the preliminary working capital adjustment. The Company has 120 days from closing to complete the final calculation of the net working capital adjustment, after which any required payment or adjustment will be made pursuant to the terms of the Acquisition agreement. The Company has retained the working capital holdback amount of $201,500 which is accrued in current liabilities on the consolidated balance sheet as of September 30, 2025.

Note 4 Business Combination(cont.)

The following table presents the preliminary purchase price allocation of the identifiable assets acquired and liabilities assumed and goodwill recognized, measured in accordance with ASC 805 (“000’s”):

The purchase price allocation for the Business Combination is preliminary and subject to revision as additional information about the fair value of the assets to be acquired and liabilities to be assumed becomes available. Management has not completed a full, detailed valuation analysis. Management will continue to refine its identification and valuation of assets to be acquired and liabilities to be assumed as further information becomes available.

The final determination of the purchase price allocation will be completed as soon as practicable but not one year beyond the date of the closing date of the Business Combination and will be based on the fair values of the assets acquired and liabilities assumed as of the closing date. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the preliminary purchase price allocation.

The table below represents the pro forma revenue and net income (loss) for the nine months ended September 30, 2025 and 2024, assuming the acquisition had occurred on January 1, 2024, pursuant to ASC Subtopic 805-10-50. This pro forma information does not purport to represent what the actual results of our operations would have been had the acquisition occurred on this date nor does it purport to predict the results of operations for future periods.

Note 5 Liquidity and Uncertainties

The Company has recognized operating losses and net losses on a year-to-date basis in 2025 and for the years ended December 31, 2024 and 2023. Although losses have been recognized, the Company recognized positive operating cash flows for the years ended December 31, 2024 and 2023. Operating results and cash flows fluctuate based on seasonality with the first and fourth quarter typically slower periods in our calendar year. Working capital as of September 30, 2025 excluding the current portion of long-term debt is $2.8 million. Our long-term debt classified as current liabilities in our balance sheet as of September 30, 2025 based on contractual maturity dates includes $2.6 million related to our Senior Convertible Note with 3i, LP. and $1.0 million related to the seller note with Avelina Masonry. The Company anticipates that the Senior Convertible Note will be converted to common stock. The seller note is subordinated to our line of credit agreement and payments on that note are restricted while the line of credit is outstanding.

The Company primarily funds operations through cash provided from operations and available capacity under our ABL Facility (“Revolver”). In 2024 the Company was not in compliance with certain of the Revolver’s financial covenants which have been waived by our lender. As of September 30, 2025, the Company was in compliance with the Revolver’s financial covenants. In June 2025, the Company executed an amendment to the Revolver that extended the maturity date from June 2025 through December 2025. The Company believes the Revolver will continue to be available and the longer-term extension will be executed with financial covenants aligned to the Company’s anticipated future results.

Forecasted future results, the longer-term extension of the Revolver, future compliance with financial covenants and expecting regarding the conversion of the convertible notes are subject to risks and uncertainties which could have a material adverse effect on our business, financial condition and results of operations.

As more fully described in Note 10, on May 15, 2025, the Company entered into a common stock purchase equity line agreement with an accredited investor. Under that agreement, the Company has the right, but not the obligation, to sell to the Equity Line Investor, and the Equity Line Investor is obligated to purchase the Company’s common stock.

On July 29, 2025, the Company entered into a securities purchase agreement with an institutional investor pursuant to which the Company authorized the issuance of senior secured convertible notes in the aggregate original principal amount of up to $10,909,885. The first Convertible Note was issued in the original principal amount of approximately $3,272,966. 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 (see Note 10).

Additionally, on October 22, 2025, a second Convertible Note was issued in the original principal amount of approximately $3,545,712. The Company received gross proceeds of $3,250,000, prior to the deduction of transaction related expenses (see Note 10).

The Company currently believes that it will have sufficient liquidity to operate for a period of at least one year from the issuance date of the September 30, 2025 interim consolidated financial statements.

Note 6 Related Party Transactions

TotalStone is party to an agreement with a related party, Brookstone Partners IAC, Inc. (“Brookstone”), the Company’s majority shareholder. Pursuant to this agreement, Brookstone provides annual consulting services totaling $400.0 thousand. The agreement also provides for an additional management fee equal to 5% of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) in excess of $4.0 million,plus a special services fee in cash equal to two percent (2%) of total consideration of any acquisition of a majority of the equity interests of any entity. Amounts accrued for such consulting services totaled $351.0 thousand as of September 30, 2025 and December 31, 2024. The management fees expensed for the nine months ended September 30, 2025 and 2024 were $300.0 thousand and included in selling, general and administrative expenses. The special services fees expensed for nine months ended September 30, 2025 were $94.0 thousand and are included in selling, general and administrative expenses. There were no special services fees for nine months ended September 30, 2024.

Stream Finance, LLC, which serves as a creditor on TotalStone’s mezzanine term loan of $2.5 million, accrued interest of $448.0 thousand and an accrued amendment fee of $153.0 thousand as of September 30, 2025, is managed by Brookstone.

On March 10, 2025, TotalStone paid Brookstone $200,000 for financial advisory and related services with respect to Capstone’s capital raising transaction (the “Capstone Capital Raising Transaction”). Additionally, in connection with the Carolina Stone acquisition, Brookstone earned a 2% management fee of $94,000 that is accrued on the September 30, 2025 consolidated balance sheet and included in transaction expenses in the consolidated statement of operations for the periods ended September 30, 2025.

Note 7 Line of Credit

TotalStone has a Revolving Credit Note (“Revolver”) available and outstanding pursuant to a Revolving Credit, Term Loan and Security Agreement, as amended, with Berkshire Bank. TotalStone’s maximum revolving advance amount is $11.5 million for working capital purposes. Advances under the credit agreement are limited to a formula-based amount of up to eighty-five (85%) percent of the face amount of the TotalStone “Eligible Accounts Receivable” plus approximately fifty (50%) percent of the face amount of the TotalStone, “Finished Goods Inventory” up to a maximum amount of $8.0 million. Interest charged on the unpaid principal amount of the Credit Agreement bears a rate per annum of SOFR plus 3.0% (7.43% and 7.19% at September 30, 2025 and December 31, 2024, respectively). The balance outstanding on the line of credit was $8.3 million and $6.3 million as of September 30, 2025 and December 31, 2024, respectively, with a maturity date of December 17, 2025.

Note 8 Debt

As of September 30, 2025, the Company had $7.2 million in long-term debt, with $3.7 million payable within 12 months. A summary of the Company’s long-term debt is as follows in (“000’s”):

Note 8 Debt(cont.)

Scheduled maturities of long-term as of September 30, 2025, are as follows:

Note 9 Leases

As of September 30, 2025, the balance of our right-of-use (“ROU”) assets was $3.9 million, net and lease liabilities were $4.0 million, included in current portion, lease liability andlease liability, net of current portion. The maturity of our lease liabilities as of September 30, 2025 is as follows in (“000’s”):

Lease expense recognized on our leases is as follows in (“000’s”):

The following summarizes additional information related to our leases for 2025 and 2024 in (“000’s”):

Note 10 Stockholders’ Equity

Prior to 2025, Capstone had no outstanding shares of preferred stock.

Series B Preferred Stock:

In connection with the IPO and Restructuring. Capstone filed with the Delaware Secretary of State to designate two million shares of the Company’s authorized preferred stock as Series B Preferred Stock (“Series B Preferred Stock”), no par value.

In February 2025, Nectarine Management, LLC, an entity controlled by Michael Toporek, purchased 985,063 shares of Series B Preferred Stock for a purchase price of $30,000.

The holders of shares of Series B Preferred Stock (“Series B Preferred Stockholders”) have the right to vote, together with the holders of all the outstanding shares of Common Stock on all matters on which holders of Common Stock have the right to vote. The holders of shares of Series B Preferred Stock have the right to cast one vote for each share of Series B Preferred Stock held by them.

Series B Preferred Stock is convertible into Common Stock at the holder’s option any time after the two-year anniversary of the Company’s February 2025 initial public offering, provided the Common Stock’s closing price meets or exceeds $40 per share on the date of conversion. The number of shares of Common Stock issuable upon conversion of each share of Series B Preferred Stock is based on a specified formula as set forth in the Series B Certificate of Designation.

The Series B Preferred Stockholders have certain protective rights. Until less than 50% of the originally issued Series B Preferred Stock remains outstanding, holders of at least 50% of such shares may appoint two directors to the Board. Additionally, until less than 20% of shares of Series B Preferred Stock remains outstanding, the Company cannot take certain actions without the approval of at least 50% of the outstanding Series B Preferred Stock, including amending governing documents, altering the Board size, issuing or modifying Series B Preferred Stock, engaging in mergers, consolidations, or asset sales (except in the ordinary course), repurchasing shares (except under employment agreements), adopting equity incentive plans exceeding 10% of outstanding Common Stock, issuing additional shares (except under an approved plan), acquiring other entities, or incurring new indebtedness beyond refinancing existing debt.

Series Z Preferred Stock:

A number of Brookstone entities controlled by Messrs. Lipman and Toporek control over 50% of the Company’s voting stock. In addition, as of September 30, 2025, one Brookstone entity, BP Peptides, LLC (“BP Peptides”), held a note from the Company in the combined principal and interest amount of $847,920. As of September 30, 2025, another Brookstone entity, Brookstone Partners Acquisition XXI Corporation (“Brookstone Acquisition”), held a note from the Company in the combined principal and interest amount of $1,089,222. Both notes had a maturity date of June 30, 2026.

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 on the day prior to the parties entering into the Exchange Agreement, BP Peptides will receive 642,364 Series Z Preferred shares and Brookstone Acquisition will receive 825,168 Series Z Preferred shares. Although the accompanying unaudited interim consolidated financial statements reflect the issuance of the Series Z shares, the formal share issuance process was not completed 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 ofone 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 $1.32 stated value per share of the Series Z Preferred, 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 theseven year anniversary of the issuance of the shares or the occurrence of a fundamental transaction (as defined in the Certificate of Designation).

Note 10 Stockholders’ Equity(cont.)

Recent Transactions

The Company entered into a common stock purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Equity Line Investor”), dated May 14, 2025. Under the terms and subject to the conditions set forth in the Purchase Agreement, the Company has the right, but not the obligation, to sell to the Equity Line Investor, and the Equity Line Investor is obligated to purchase, up to the lesser of (a) $20,000,000 in aggregate gross purchase price of the Company’s common stock (the “Equity Line Securities”) and (b) the Exchange Cap (as defined in the Purchase Agreement). The Equity Line Securities to be issued by the Company and purchased by the Equity Line Investor, if any, will be sold at a purchase price equal to 97% of the lowest daily volume-weighted average price of the Company’s common stock on the Nasdaq Capital Market during the three consecutive trading days immediately following the trading date on which a valid purchase notice is delivered to the Equity Line Investor by the Company.

On June 26, 2025, the Company and the Equity Line Investor entered into a first amendment to the Purchase Agreement (the “First Amendment to Purchase Agreement”), which amended the definition of “VWAP Purchase Maximum Amount” in the Purchase Agreement to (a) remove the volume limitation on the number of Equity Line Securities that may be purchased pursuant to a single VWAP Purchase (as defined in the Purchase Agreement) based on 100% of the five-day average trading volume, and (b) increase the dollar-based limitation on the number of Equity Line Securities that may be purchased pursuant to a single VWAP Purchase from $2 million to $3 million. As amended, the term “VWAP Purchase Maximum Amount” now means the maximum number of Equity Line Securities that can be purchased in a single VWAP Purchase is equal to the lesser of (a)40% of the trading volume in the Company’s common stock on the relevant exchange on the day the VWAP Purchase is exercised, or (b) $3 million divided by the volume-weighted average price of the common stock on the trading day immediately preceding the date the VWAP Purchase is exercised.

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 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 $1.72. 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. The Convertible Notes bear interest at a rate of 7.0% per annum. Principal and interest will be repaid in a series of equal quarterly installments.

Effective August 14, 2025, the conversion price per share of the Convertible Notes was amended to decrease the conversion price to $1.00 with regard to $1,363,736 of principal of the Convertible Note. The Company evaluated the amendment to the conversion price of the Convertible Notes accordance with ASC 470-50 and concluded that the amendment should be accounted for as a debt extinguishment because of a substantial change to the conversion feature. The total fair value of the portion of the Convertible Notes with amendment to the conversion price on the date of the amendment was $1,759,219 which resulted in the recognition of a loss on extinguishment of $652,161 in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2025.

On October 22, 2025, the Company issued to the Buyer a second Convertible Note in the original principal amount of $3,545,712 (the “Second Note”). The Second Note is convertible into shares of common stock, $0.0005 par value per share, in certain circumstances in accordance with the terms of the Convertible Notes at an initial conversion price per share of $1.10. The Company received gross proceeds of $3,250,000, prior to the deduction of transaction-related expenses, from the closing of the Second Note.

The Second Note bears interest at a rate of 7.0% per annum. Principal and interest under the Second Note will be repaid in a series of equal quarterly installments.

Note 11 Segment Information

The Company hastwo operating and reportable segments which consists of the operations of TotalStone and Carolina Stone Holdings. The Company also has corporate-level activity, which is included in Capstone Holding Corp. (“Capstone” or “the Parent”) which consists primarily of board fees and, investor relations, filing, legal, insurance, accounting and consulting expenses and other non-operating income and expenses not identifiable and allocated to TotalStone or Carolina Stone Holdings. The Parent balance sheet information includes cash and cash equivalents, net deferred tax asset, debt and other assets and liabilities which are also not identifiable to the operations of TotalStone.

The Company’schief executive officer is also the Company’s chief operating decision maker (“CODM”). The Company’s chief operating decision maker evaluates the performance of segments based on operating income (loss). Cost of goods sold and selling, general and administrative expenses, as reported on the statement of operations, are the significant segment expenses provided to the CODM on a regular basis.

The following tables present financial information regarding the Company’s reportable segment reconciled to the Company’s consolidated totals.

Note 12 Subsequent Events

On October 5, 2025, the conversion price with regard to the entire principal of the convertible note issued on July 29, was decreased to $1.00 per share starting on October 6, 2025 through the maturity date. The Company recognized an additional $845,000 loss on debt extinguishment in October 2025 for the effect of this change in the conversion price.

As more fully disclosed in Note 10, on October 22, 2025 the Company issued a convertible note in the original principal amount of $3,545,712 The Company received gross proceeds of $3,250,000, prior to the deduction of transaction-related expenses.