Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

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

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, 2024 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, 2024, included in our 2024 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).

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

Overview

Capstone Holding Corp., formerly known as Capstone Therapeutics Corp. and OrthoLogic Corp., incorporated in Delaware in 1987 as a domestic corporation, is the parent entity of TotalStone, LLC (dba Instone). Instone has a building products distribution network that services 31 US states (with such states having over 60% of American households). Our over 400 active customers are primarily masonry, building materials and landscape dealers.

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 control five of the eight brands we sell. Our products include stone veneer, landscape stone, and modular masonry fireplaces. The brands we distribute which we do not control are Cultured Stone®, Dutch Quality®, and Isokern®. The brands we distribute which we own or control include Aura™, Pangea Stone®, Toro Stone™, Beon Stone®, and Interloc™.

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 form 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

On March 7, 2025, the Company closed its public offering (the "March 2025 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 $3,250,000 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.

Equity Line of Credit

On May 14, 2025, we entered into a purchase agreement with the Equity Line Investor (as defined in Note 9 to the consolidated financials statements included in this Quarterly Report), 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 4.

On June 26, 2025, the Company and the Equity Line Investor entered into a first amendment to the Purchase Agreement as described in Note 9 to the consolidated financials statements included in this Quarterly Report.

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 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. 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.

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 31 states in the Midwestern and Northeastern United States. The Company recognizes revenue when control over the products has been transferred to the customer, and the Company has a present right to payment.

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 related expenses that are directly attributable to our fabricated 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 expenses on our line of credit and debt.

Results of Operations

The following is management's discussion of the Company's consolidated financial statements and results of operations for the three and six months ended June 30, 2025 and 2024 in thousands:

Results of Operations Comparing Three Months Ended June 30, 2025 to 2024.

		Three Months Ended June 30,
		2025				2024				$ Change				% Change
		(in thousands)
Net Sales		$	12,852			$	12,886			$	(34	)			(0	)%
Cost of goods sold			9,722				10,122				(400	)			(4	)%
Gross profit			3,130				2,764				366				13	%
Operating expenses:
Selling, General and administrative			3,390				2,750				640				23	%
Income (loss) from operations			(260	)			14				(274	)			(1957	)%
Interest and other expense, net			(440	)			(394	)			(46	)			(12	)%
Income tax expense			-				(1	)			1				-	%
Net loss		$	(700	)		$	(381	)		$	(319	)			(84	)%

Sales

Sales were $12.9 million for the three months ended June 30, 2025 compared to $12.9 million for the three months ended June 30, 2024. Revenue slightly decreased between the three months ended June 30, 2025 and 2024 by $34.0 thousand.

Cost of goods sold

Cost of goods sold decreased by $400.0 thousand, or 4%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024.

The decrease in cost of goods sold was driven primarily by product mix, lower outbound freight, and lower landed cost goods.

Gross profit margin increased from 21.4% for the three months ended June 30, 2024 to 24.4% for the three months ended June 30, 2025. The increase in gross profit margin was primarily driven by product mix, lower outbound freight, and lower landed cost goods.

Selling general and administrative expenses

Selling general and administrative expenses increased by $640.0 thousand, or 23.0%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. The increase results primarily from an increase in investor relations of $510.0 thousand.

Interest and other expense

Other expenses, net, increased by $46.0 thousand, or 12%, for the three months ended June 30, 2025 compared to the three months ended June 30, 2024. The increase is largely attributed the amortization of debt costs related to our Mezzanine Term Loan.

Income Tax Expense

Income tax expense decreased by $1.0 thousand or 100% for the three months ended June 30, 2025, compared to the three months ended June 30, 2024.

Results of Operations Comparing Six Months Ended June 30, 2025 to 2024.

		Six Months Ended June 30,
		2025				2024				$ Change				% Change
		(in thousands)
Net Sales		$	20,751			$	22,245			$	(1,494	)			(7	)%
Cost of goods sold			16,296				17,737				(1,441	)			(8	)%
Gross profit			4,455				4,508				(53	)			(1	)%
Operating expenses:
Selling, General and administrative			6,143				5,211				932				18	%
Loss from operations			(1,688	)			(703	)			(985	)			(140	)%
Interest and other expense, net			(740	)			(774	)			34				(4	)%
Income tax expense			-				(17	)			17				-	%
Net loss		$	(2,428	)		$	(1,494	)		$	(934	)			(63	)%

Sales

Sales were $20.7 million for the six months ended June 30, 2025 compared to $22.2 million for the six months ended June 30, 2024. Revenue decreased between the six months ended June 30, 2025 and 2024 by $1.5 million.

Sales decreased in 2025 due to colder winter temperatures experienced when compared to prior year, along with challenging economic conditions attributable to trade policies, interest rates, and concerns about inflation.

The majority of the decline was driven by lower volumes in our veneer products resulting in $2.4 million in lower revenues; offset by an increase in our landscaping products of $760.0 thousand.

We continue to evaluate the potential impact of tariffs and have successfully transitioned the sourcing of higher volume products from China to other parts of the world. We believe the actions taken will minimize the impact of tariffs on our customers and end users.

Cost of goods sold

Cost of goods sold decreased by $1.4 million, or 8%, for the six months ended June 30, 2025 compared to the six months ended June 30, 2024.

The decrease in cost of goods sold was driven primarily by product mix, lower outbound freight, and lower landed cost goods.

Gross profit margin increased from 20.3% for the six months ended June 30, 2024 to 21.5% for the six months ended June 30, 2025. The increase in gross profit margin was primarily driven by product mix, lower outbound freight, and lower landed cost goods.

Selling general and administrative expenses

Selling general and administrative expenses increased by $932.0 thousand, or 18.0%, for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The increase results primarily from an increase in investor relations of $681.0 thousand.

Interest and other expense

Other expenses, net, decreased by $34.0 thousand, or 4%, for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. The decrease is primarily attributed to our revolving line of credit.

Income Tax Expense

Income tax expense decreased by $17.0 thousand or 100% for the six months ended June 30, 2025, compared to the six months ended June 30, 2024.

Segment Results

The Company has one operating and reportable segment which consists of the operations of TotalStone. The Company also has corporate-level SG&A expenses which are included in Capstone Holding Corp. ("Capstone" or "the Parent") and consist primarily of board fees and, investor relations, filing, legal, insurance, accounting and consulting expenses not identifiable and allocated to TotalStone.

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 June 30,
		2025																2024
		TotalStone				Parent				Eliminations				Consolidated				TotalStone				Parent				Eliminations				Consolidated
Income (loss) from operations before taxes:
Sales		$	12,852			$	-			$	-			$	12,852			$	12,886			$	-			$	-			$	12,886
Cost of goods sold			9,722				-				-				9,722				10,122				-				-				10,122
Gross Profit			3,130				-				-				3,130				2,764				-				-				2,764
Selling, general and administrative expenses			2,545				845				-				3,390				2,718				92				(60	)			2,750
Income (loss) from operations		$	585			$	(845	)		$	-			$	(260	)		$	46			$	(92	)		$	60			$	14
Other financial information:
Depreciation & amortization included in SG&A expenses		$	114			$	-			$	-			$	114			$	121			$	-			$	-			$	121

		Six Months Ended June 30,
		2025																2024
		TotalStone				Parent				Eliminations				Consolidated				TotalStone				Parent				Eliminations				Consolidated
Income (loss) from operations before taxes:
Sales		$	20,751			$	-			$	-			$	20,751			$	22,245			$	-			$	-			$	22,245
Cost of goods sold			16,296				-				-				16,296				17,737				-				-				17,737
Gross Profit			4,455				-				-				4,455				4,508				-				-				4,508
Selling, general and administrative expenses			4,944				1,409				(210	)			6,143				5,153				178				(120	)			5,211
Income (loss) from operations		$	(489	)		$	(1,409	)		$	210			$	(1,688	)		$	(645	)		$	(178	)		$	120			$	(703	)
Other financial information:
Depreciation & amortization included in SG&A expenses		$	230			$	-			$	-			$	230			$	242			$	-			$	-			$	242

The above discussion of consolidated operating results through operating income (loss) is in substance the operating results of TotalStone for the comparable periods presented. The elimination of selling, general and administrative expenses reflect the elimination of management fees incurred by TotalStone and earned by Parent. The Parent classifies the management fee income earned as a component of net non-operating income (expense) and the corresponding income is also eliminated in the Company's consolidated results.

Liquidity and Capital Resources

Working capital excluding the current portion of long-term debt was $2.5 million and $2.1 million as of June 30, 2025 and December 31, 2024, respectively. The $400.0 thousand increase in working capital is primarily attributable to an increase in accounts receivable and cash; offset by an increase in 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 generate positive operating cash flows as we bring down accounts receivables and inventory levels from seasonal high periods and pay down our 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 June 30, 2025, the Company was in compliance with the Revolver's financial covenant as of the issuance date of these interim consolidated financial statements. In June 2025, the Company executed an amendment to the Revolver that extended the maturity date from April 2025 to 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.

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 June 30,2025 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.

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:

(in thousands)		Six Months Ended June 30, 2025				Six Months Ended June 30, 2024
Net cash used in operating activities		$	(3,992	)		$	(1,135	)
Net cash used in investing activities			(2	)			(121	)
Net cash provided by financing activities			4,756				1,205
Net increase (decrease) in cash		$	762			$	(51	)

Cash Flows from Operating Activities

Net cash used in operating activities was $4.0 million for the six months ended June 30, 2025, primarily resulting from our net loss of $2.4 million and $1.8 million used in changes in our non-cash working capital and non-cash expenses.

Net cash used in operating activities was $1.1 million for the six months ended June 30, 2024, primarily resulting from our net loss of $1.5 million; offset by $117.0 thousand provided by changes in our non-cash working and non-cash expenses.

Cash Flows from Investing Activities

Net cash used in investing activities was $2.0 thousand for six months ended June 30, 2025 compared to $121.0 thousand for the six months ended June 30, 2024. These cash outflows were related to purchases of property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities was $4.8 million for the six months ended June 30, 2025. The cash inflow was a result of funds received from our public offering of $3.3 million and a net increase in our line of credit of $2.5 million, offset by the repayment of term debt of $910.0 thousand. Net cash provided by financing activities was $1.3 million for the six months ended June 30, 2024. The cash inflow was a result of a $1.8 million net increase in our line of credit, offset primarily by the repayment of term debt of $500.0 thousand.

Funding Requirements

We currently expect to use some of the net proceeds of our March 2025 Public Offering primarily for organic growth, by expanding the breadth of our distribution network by both geography and new products, and inorganic growth via rapid acquisition program of building products distributors and manufacturers whose distribution core can be fortified to expand their footprint.

The Company, as described in Note 9 to the consolidated financials statements included in this Quarterly Report and in the Recent Developments section of this Management's Discussion and Analysis, received $3 million in gross proceeds pursuant to the Convertible Note Financing. In addition, as described in Note 4, the Company may receive up to $20.0 million from the sale of the Equity Line Securities to the Equity Line Investor. 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 by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted.

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, 2024, filed with the SEC on March 31, 2025, have not materially changed.