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

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

Forward-Looking Statements

Throughout this section, unless otherwise noted, "we," "us," "our," "Company" and similar terms refer to Palomino Laboratories Inc. prior to the closing of the Merger, and to the Company after the closing of the Merger. Following is a discussion and analysis of our financial condition and results of operations. You should read the following together with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading "Forward-Looking Statements" elsewhere in this Report. You should review the disclosure under the heading "Risk Factors" in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Basis of Presentation

The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the statements of consolidated financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited condensed consolidated financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such unaudited condensed consolidated financial statements and the related notes thereto.

Overview

The Company is a fabless semiconductor company pioneering the next generation of high-performance microLED-based optoelectronic solutions for data communication. Our mission is to enable ultra-high-speed, energy-efficient optical interconnects that replace legacy copper-based PCIe and Ethernet links in compute-intensive environments. The Company is commercializing a breakthrough platform built on advanced gallium nitride (GaN) compound semiconductor materials. This proprietary technology enables scalable and cost-efficient manufacturing of ultra-compact, high-speed optical transceivers, with significant improvements in power, size, and bandwidth density over traditional laser-based solutions. Its differentiated value proposition lies in leveraging high-efficiency microLEDs as optical sources in transceiver modules that can be seamlessly integrated into silicon packages or interposers. This approach unlocks the potential for high-density, chip-scale optical I/O-fundamentally reshaping the future of data movement in AI servers, data centers and high-performance computing systems. See "Description of Business" above.

On September 29, 2025, Unite and Private Palomino entered into the Merger Agreement, pursuant to which, among other things and subject to the satisfaction or waiver of the conditions set forth therein, the Merger was consummated. At the Effective Time of the Merger, Palomino survived as a wholly owned subsidiary of Unite and Unite was renamed "Palomino Laboratories Inc." in connection with the Merger.

At the Effective Time, all outstanding shares of Private Palomino's common stock were cancelled and automatically converted into shares of the Company's common stock. Prior to the closing of the Offering the Company's board of directors adopted an equity incentive plan reserving a number of shares of common stock equal to 15% of the shares to be outstanding after completion of the Merger and the final closing of the Offering, on a fully diluted basis (assuming exercise or conversion of all then-outstanding common stock equivalents), for the future issuance, at the discretion of the board of directors, of options and other incentive awards to officers, key employees, consultants and directors of the Company and its subsidiaries.

The sole holder of common stock of the Company prior to the Merger, Lucius Partners, retained 4,000,000 shares of common stock after the Merger, following cancellation of 1,000,000 shares of common stock. The Merger Agreement contained customary representations and warranties and pre- and post-closing covenants of each party and customary closing conditions.

The Offering

Immediately following the effective time of the Merger, we issued, in a private placement offering, 5,344,623 Units, for an aggregate purchase price of approximately $8.0 million, at a purchase price of $1.50 per Unit, with each Unit consisting of (i) one share of common stock, (ii) a Warrant Share.

In connection with the Offering, the Placement Agent (a) was paid at each closing from the Offering proceeds a total cash commission of 10.0% of the aggregate gross purchase price paid by purchasers in the Offering at that closing, (b) was paid at each closing from the Offering proceeds a total non-allocable expense allowance equal to 2.0% of the aggregate gross purchase price paid by purchasers in the Offering at the closing, and (c) received (and/or its designees will receive) the Placement Agent Warrants.

Subsequent to September 30, 2025, there were two additional closings of the private placement offering, 1,159,394 Units, for gross proceeds of $1,739,091, at a purchase price of $1.50 per Unit, with each Unit consisting of (i) one share of common stock, (ii) a warrant representing the right to purchase one share of common stock, exercisable from issuance until one year after the final Closing of the Offering at an exercise price of $1.50 per share. 1,159,394 Warrants were issued in connection with these additional closings.

Description of Warrants

The Warrants will have an exercise price of $1.50 per share and a term of one (1) year after commencement of trading on an Approved Market and will be exercisable solely for cash.

The Warrants will have "weighted average" anti-dilution protection, subject to customary exceptions, including but not limited to issuances of awards under the 2025 Equity Incentive Plan.

The Placement Agent Warrants will have an exercise price of $1.80 per share and a term of seven (7) years from the final closing of the Offering and will be exercisable for cash or on a cashless net exercise basis.

The Warrants are equity-classified for accounting purposes.

The Merger was treated as a recapitalization and reverse acquisition for the Company for financial reporting purposes, and the Company is considered the acquirer for accounting purposes. As a result of the Merger and the change in the Company's business and operations, a discussion of the past financial results of the Company is not pertinent, and under applicable accounting principles, the historical financial results of the Company, the accounting acquirer, prior to the Merger will be considered our historical financial results.

Since the Company's inception in 2023, it has devoted substantially all of its efforts and financial resources to building the organization, including raising capital, organizing and staffing the company, business planning, and providing general and administrative support for these operations. Prior to the merger, the Company has funded its operations primarily with proceeds from the sale and issuance of SAFE Notes. From inception through September 30, 2025, the Company raised aggregate net proceeds of $1,845,000 from the issuance and sale of Simple Agreement for Future Equity (SAFE) Liabilities.

During the three and nine months ended September 30, 2025, the Company's net losses were $1,824,837 and $2,420,589, respectively, and for the three and nine months ended September 30, 2024, the Company incurred a net losses of $6,334 and $6,235, respectively. Substantially all of its net losses have resulted from costs incurred from general and administrative costs associated with our operations.

The Company believes that its existing cash and cash equivalents balance, along with the proceeds from the private placement in October 2025, will be sufficient to support operations for at least one year from the issuance date of these unaudited condensed consolidated financial statements.

The Company expects to incur additional losses and negative cash flows for the foreseeable future as it continues to hire additional personnel, protects its intellectual property and grows its business. The Company will need to raise additional capital to support its continuing operations and pursue its long-term business plan. Financing activities may include, but are not limited to, public or private equity offerings, debt financings, or other sources. Such activities are subject to significant risks and uncertainties.

Uncertainty in the global economy presents significant risks to the Company's business. the Company is subject to continuing risks and uncertainties in connection with the current macroeconomic environment, including increases in inflation, fluctuating interest rates, new or increased tariffs and other barriers to trade, changes to fiscal and monetary policy or government budget dynamics, recent bank failures, geopolitical factors, including the ongoing conflicts between Russia and Ukraine and in the Middle East and the responses thereto, and supply chain disruptions. While the Company is closely monitoring the impact of the current macroeconomic and geopolitical conditions on all aspects of the Company's business, including the impacts on its employees, suppliers, vendors and business partners and the Company's future access to capital, the ultimate extent of the impact on the Company's business remains highly uncertain and will depend on future developments and factors that continue to evolve. Most of these developments and factors are outside the Company's control and could exist for an extended period of time. the Company will continue to evaluate the nature and extent of the potential impacts to its business, results of operations, liquidity and capital resources.

Operating Expenses

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance, and other administrative functions. Other significant costs include facilities related expenses, legal fees related to intellectual property and corporate matters, other professional fees for accounting, auditing and consulting services, and other administrative expenses.

The Company expects that its general and administrative expense will increase for the foreseeable future as it continues to support its operations to support the growth of its business. Following the Merger, the Company also expects increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, board of director fees, investor relations costs and other expenses that it did not incur as a private company.

Other Income (Expense)

Change in fair value of SAFE notes

We assessed the SAFEs as liabilities under ASC 480. We carry the SAFEs at their estimated fair value at issuance and remeasure the estimated fair value through earnings until settled. The SAFEs were settled in connection with the Merger.

Interest Income

Interest income consists of interest earned from the Company's cash and cash equivalents.

Results of Operations

The three months ended September 30, 2025, compared to the three months ended September 30, 2024

		Three Months Ended September 30,
		2025				2024				$ Change
Operating expenses:
General and administrative		$	1,604,922			$	1,234			$	1,603,688
Total operating expenses			1,604,922				1,234				1,603,688
Loss from operations			(1,604,922	)			(1,234	)			(1,603,688	)
Other income:
Change in fair value of SAFE notes			(219,952	)			(6,450	)			(213,502	)
Interest income			37				1,350				(1,313	)
Net loss		$	(1,824,837	)		$	(6,334	)			(1,818,503	)

General and Administrative Expenses

General and administrative expenses were $1,604,922 for the three months ended September 30, 2025, compared to $1,234 in the same period of last year. The increase was primarily due to the increase in stock compensation expense due to issuance of restricted stock to the chief executive officer and director and various consultants of $1,256,750, increase in professional fees to assist the Company with public company readiness of approximately $80,000, University of California commitment to the engineering department of approximately $145,833 and increase in payroll expenses related to the chief executive officer and director of approximately $68,319.

Change in fair value SAFE notes

We recognized a change in fair value of $219,952 related to the SAFE Notes for the three months ended September 30, 2025 versus $6,450 for the three months ended September 30, 2024. This change was mainly attributable to an increase in value given the conversion of the SAFE notes upon the success completion of the Merger.

Interest Income

For the three months ended September 30, 2025, and 2024, Company recognized $37 and $1,350, respectively, of interest income related to certain cash and cash equivalents.

The nine months ended September 30, 2025, compared to the nine months ended September 30, 2024

		Nine Months Ended September 30,
		2025				2024				$ Change
Operating expenses:
General and administrative		$	1,960,195			$	2,118			$	1,958,077
Total operating expenses			1,960,195				2,118				1,958,077
Loss from operations			(1,960,195	)			(2,118	)			(1,958,077	)
Other income:
Change in fair value of SAFE notes			(461,252	)			(7,100	)			(454,152	)
Interest income			858				2,983				(2,125	)
Net loss		$	(2,420,589	)		$	(6,235	)			(2,414,354	)

General and Administrative Expenses

General and administrative expenses were $1,960,195 for the nine months ended September 30, 2025, compared to $2,118 in the same period of last year. The increase was primarily due to the increase in stock compensation expense due to issuance of restricted stock to the chief executive officer and various consultants of $1,423,380, increase in professional fees to assist the Company with public company readiness of approximately $200,000, University of California commitment to the engineering department of approximately $145,833 and increase in payroll expenses related to the chief executive officer of approximately $122,000.

Change in fair value SAFE notes

We recognized a change in fair value of $461,252 related to the SAFE Notes for the nine months ended September 30, 2025 versus $7,100 for the nine months ended September 30, 2024. This change was mainly attributable to an increase in value given the conversion of the SAFE notes upon the success completion of the Merger.

Interest Income

For the nine months ended September 30, 2025, and 2024, Company recognized $858 and $2,983, respectively, of interest income related to certain cash and cash equivalents.

LIQUIDITY AND CAPITAL RESOURCES

Source of Liquidity

Company has incurred net losses and negative cash flows from operations since its inception. Through September 30, 2025, Company has primarily funded its operations through the sale and issuance of SAFE notes, issuance of common stock through the private placement. The Company's current capital resources, consisting of cash and cash equivalents, are expected to be sufficient to fund operations for at least the next twelve months from the issuance date of its condensed consolidated financial statements. Company's future viability depends on its ability to generate cash from operating activities or to obtain additional capital to finance its operations. There can be no assurance that Company will be able to secure sufficient funding on acceptable terms, or at all, to continue its operations.

Cash flows for the nine months ended September 30, 2025 and 2024

		Nine Months Ended September 30,
		2025				2024
Net cash (used in) provided by operating activities		$	(390,793	)		$	830
Net cash provided by financing activities			8,152,705				-
Net increase in cash and cash equivalents		$	7,761,912			$	830

Operating Activities

Net cash used in operating activities was $390,793 for the nine months ended September 30, 2025. Cash used in operating activities reflected the Company's net loss of $2,420,589 which was offset by non-cash charges of $461,252 related to the change in fair value of SAFE notes, $1,423,417 of stock-based compensation and changes in operating assets and liabilities of $145,127.

During the nine months ended September 30, 2024, cash provided by operating activities was $830. Cash provided by operating activities reflected the Company's net loss of 6,235 and changes in operating assets and liabilities of $35, which was offset by non-cash charges of $7,100 related to the change in fair value of SAFE notes.

Financing Activities

During the nine months ended September 30, 2025 cash provided by financing activities primarily relates to issuance of SAFE notes resulting in proceeds of $1,695,000, issuance of common stock and warrants in the Offering resulting in proceeds of $8,016,937, offset by the payment of transaction costs of $1,559,252.

There were no financing activities for the nine months ended September 30, 2024.

Contractual Obligations and Commitments

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

Critical Accounting Policies and Significant Judgements and Estimates

Management's discussion and analysis of Company's financial condition and results of operations is based on its financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires Company to make estimates and judgments that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities in its financial statements, as well as the reported expenses incurred during the reporting periods. Company bases its estimates on historical experience and on various other factors that Company's management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

While Company's significant accounting policies are described in more detail in Note 2 to its unaudited condensed consolidated financial statements included elsewhere in this document, Company believes that the accounting policies discussed below are critical to understanding its historical and future performance, as these policies relate to the more significant areas that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on its financial condition or results of operations.

Simple agreement for future equity ("SAFE") notes

SAFE notes represent instruments that provide a form of financing to the Company and possess characteristics of both debt and equity instrument. The Company accounts for the SAFE note in accordance with the guidance in ASC 480, Distinguishing Liabilities from Equity. The Company first assessed whether the instrument meets the definition of a liability under ASC 480. The SAFE note includes terms that would affect the conversion of the note into shares based on the next round of financing. The SAFE instruments issued have the potential for cash settlement upon the occurrence of certain liquidity events. Accordingly, The SAFE note was determined to be a liability and recorded at fair value.

This liability is subject to re-measurement at each balance sheet date until a triggering event, equity financing, change in control or dissolution occurs, and any change in fair value is recognized in the Company's statements of operations. The SAFE notes converted into common stock in connection with the Merger.

The fair value estimate includes significant inputs not observable in market, which represents a Level 3 measurement within the fair value hierarchy. The valuation uses probabilities considering pay-offs under various scenarios as follows: (i) an equity financing where the SAFE notes will convert into preferred stock; (ii) a liquidity event where the SAFE notes will convert into the greater of the cash-out amount or amount payable on the number of shares of common stock equal to the purchase amount divided by the liquidity price and (iii) a dissolution event where the SAFE notes holders will receive a portion of the cash payout.

Share-based compensation

The Company measures equity classified share-based awards granted to employees, non-employees and directors based on the estimated fair value on the date of grant and recognizes compensation expense of those awards over the requisite service period, which is the vesting period of the respective award. The Company accounts for forfeitures as they occur. For share-based awards with service-based vesting conditions, the Company recognizes compensation expense on a straight-line basis over the service period. For share-based awards with performance conditions, the Company recognizes compensation when the performance condition is met. For share-based awards with accelerated provisions upon change in control, the Company recognizes the compensation expense when a change in control event occurs. The Company classifies share-based compensation expense in its unaudited condensed consolidated statements of operations in the same manner in which the award recipient's payroll costs are classified or in which the award recipient's service payments are classified. The share-based compensation is recorded in general and administrative expense in the condensed consolidated statement of operations. Fair value is determined using a combination of the probability weighted expected return method and option pricing model. The Company's share-based awards comprise of restricted stock awards (RSA), fair value of which is measured based on the grant-date fair value of the restricted stock awards.

Estimating the fair value of share-based awards requires the input of subjective assumptions, including the estimated fair value of the Company's common stock. The assumptions used in estimating the fair value of share-based awards represent management's estimate and involve inherent uncertainties and the application of management's judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards.

Recent Accounting Pronouncements

See Note 2 to Company's unaudited condensed consolidated financial statements found elsewhere in this document for a description of recent accounting pronouncements applicable to its unaudited condensed consolidated financial statements.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2025.