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 Management's Discussion and Analysis of Financial Condition and Results of Operations provides information that CERo Therapeutics Holdings, Inc. ("the Company") management believes is relevant to an assessment and understanding of its results of operations and financial condition. The discussion should be read together with (i) the Company's unaudited condensed consolidated financial statements and related notes that are presented above and (ii) the Company's audited consolidated financial statements and related notes and management's discussion and analysis of financial condition and results of operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 filed with the Securities and Exchange Commission (the "SEC") on April 15, 2025. This Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements resulting from various factors. Please see "Cautionary Note Regarding Forward Looking Statements" and "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 and the subsequent Quarterly Report on Form 10-Q as filed with the SEC. Unless the context otherwise requires, references in this section to "Predecessor" is intended to mean the business and operations of CERo Therapeutics, Inc. prior to the Merger.

Overview

CERo Therapeutics, Inc. (the "Predecessor") was incorporated in Delaware on September 23, 2016, and is based in South San Francisco, California. Predecessor was focused on developing its therapeutic platform to genetically engineer human immune cells to fight cancer and did not begin clinical development or product commercialization. The Company's efforts will focus on continued product development, including clinical development, to support regulatory approval to commercialize and subsequent product commercialization.

On June 4, 2023, Predecessor entered into a Business Combination Agreement (as amended by that certain Amendment No. 1 to the Business Combination Agreement, dated as of February 5, 2024 and Amendment No. 2 to the Business Combination Agreement, dated as of February 13, 2024, the "Business Combination Agreement") by and among PBAX and PBCE Merger Sub, Inc., pursuant to which Merger Sub merged with and into Predecessor, with Predecessor surviving as a wholly-owned subsidiary of PBAX (the "Merger"). In connection with the consummation of the Business Combination on February 14, 2024, PBAX changed its corporate name to "CERo Therapeutics Holdings, Inc."

At the effective time of the Merger, (i) each outstanding share of Predecessor common stock, was cancelled and converted into the right to receive shares of Common Stock; (ii) each outstanding option to purchase Predecessor common stock was converted into an option to purchase shares of Common Stock, par value $0.0001 per share; (iii) each outstanding share of Predecessor preferred stock, was converted into the right to receive shares of Common Stock, and (iv) each outstanding warrant to purchase Predecessor preferred stock was converted into a warrant to acquire shares of Common Stock. In addition, each outstanding Predecessor convertible bridge note was exchanged for shares of Series A Preferred Stock.

In addition, the holders of Predecessor common stock and Predecessor preferred stock have the contingent right to receive the Earnout Shares. At the Closing, the Company issued three pools of shares of Common Stock subject to forfeiture if the applicable conditions to transferability thereof are not satisfied: (i) 12,000 shares of Common Stock (giving retroactive effect to the Reverse Stock Split), which will be fully vested upon the achievement of certain adjusted stock price-based earnout targets or upon a qualifying transaction (ii) 8,750 shares of Common Stock (giving retroactive effect to the Reverse Stock Split), pursuant to a Letter Agreement, dated as of February 14, 2024 which were fully vested at Closing of the Merger and which were issued as an offset to the Sponsor Share Forfeiture Agreement, and (iii) 10,000 shares of Common Stock (giving retroactive effect to the Reverse Stock Split), which were fully vested upon the June 28, 2024 achievement of certain regulatory milestone-based earnout targets.

As consideration for the Merger, the Company issued to Predecessor stockholders an aggregate of 84,483 shares of Common Stock, including 22,000 Earnout Shares and 3,733 shares issuable upon exercise of rollover options or warrants (giving retroactive effect to the Reverse Stock Split).

Going concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company's ability to continue as a going concern is dependent on its ability to raise additional capital to fund its R&D activities and meet its obligations on a timely basis. As of June 30, 2025, the Company reported approximately $3.2 million of cash and cash equivalents, with an accumulated deficit of approximately $81.4 million.

On February 5, 2025, we entered into a securities purchase agreement, with participation from a member of the Board and a single institutional investor, for the purchase and sale of (i) 127,551 shares of Common Stock or Common Stock equivalents in lieu thereof; and (ii) February 2025 Common Warrants to purchase up to 127,551 shares of Common Stock at an exercise price of $39.20. In connection with such offering, we received net proceeds of approximately $4.2 million. Additionally, during the six months ended June 30, 2025, we received net proceeds from the exercise of the remaining Series A Preferred Warrants, the collection of subscriptions receivable and equity line of credit fundings of approximately $2.4 million.

On April 21, 2025, the Company entered into a Securities Purchase Agreement (the "Fourth Securities Purchase Agreement") with certain accredited investors named therein. Further, on April 22, 2025, the Company filed the Certificate of Designations of Rights and Preferences of the Series D Preferred Stock (the "Series D Certificate of Designations") for the purpose of designating and establishing the Company's Series D Preferred Stock. Pursuant to the Securities Purchase Agreement, up to 10,000 shares of the Company's Series D Preferred Stock shall be purchased for an aggregate purchase price of up to $8 million in one or more closings (each a "Closing").

On April 22, 2025, the Company issued 6,250 shares of its Series D preferred stock to investors in exchange for 1,000,279 shares of Series D preferred stock of Stella Diagnostics. The transaction was completed in lieu of a cash payment. The value of Stella's Series D Preferred Stock received was determined to be $500,000 as of the transaction date, based on the subsequent sale of the 1,000,279 Stella Series D Preferred Stock for $500,000 in cash, pursuant to a Stock Purchase Agreements dated August 20, 2025. Accordingly, the Company recognized the issuance of its Series D preferred stock to investors at a cost of $500,000, which represents the fair value of the consideration received. The difference between the stated value of the Company Series D Preferred Stock ($5.0 million) and the fair value of the consideration received ($500,000) was recorded as a decrease to additional paid-in capital, which amounted to $4.5 million. The investment in Stella's Series D Preferred Stock is classified as an equity security without a readily determinable fair value and is accounted for under the measurement alternative in accordance with ASC 321, Investments - Equity Securities. Under this method, the investment is initially recorded at cost, which was determined to be equal to the fair value of the consideration received, and is subsequently adjusted for observable price changes in orderly transactions for the same or similar securities and for impairment, if any. There was no impairment identified on the investment in equity securities during the period ended June 30, 2025.This non-cash transaction did not impact the Company's cash flows and is disclosed as a non-cash investing and financing activity in the condensed consolidated statement of cash flows in accordance with ASC 230, Statement of Cash Flows. As of June 30, 2025, the value of Stella's Series D Preferred Stock received was determined to be $500,000, based on the subsequent sale of the 1,000,279 Stella Series D Preferred Stock for $500,000 in cash, pursuant to a Stock Purchase Agreements dated August 20, 2025.

Each additional closing of the Private Placement is at the option of the investors upon notice to the Company and subject to satisfaction of customary closing conditions. Additional funds are necessary to maintain current operations and to continue R&D activities. However, there can be no assurance that sufficient funding will be available to allow the Company to successfully continue its R&D activities and planned regulatory filings with the FDA. If the Company is unable to obtain the necessary funds, significant reductions in spending and the delay or cancellation of planned activities may be necessary. These actions would have a material adverse effect on the Company's business, results of operations, and prospects. These conditions raise substantial doubt about the Company's ability to continue as a going concern within one year from the date these accompanying financial statements are issued. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Recent Developments

Reverse Stock Splits

At 12:01 a.m. Eastern time on January 8, 2025, the Company effected the Reverse Stock Split pursuant to which each 100 shares of Common Stock outstanding immediately prior thereto was converted into 1 share of Common Stock outstanding immediately thereafter, and at 12:01 a.m. Eastern time on June 13, 2025, the Company effected the Reverse Stock Split pursuant to which each 20 shares of Common Stock outstanding immediately prior thereto was converted into 1 share of Common Stock outstanding immediately thereafter.

April 2025 PIPE Financing

As discussed above, on April 21, 2025, the Company entered into the Fourth Securities Purchase Agreement, pursuant to which the Company agreed to issue and sell up to 10,000 shares of Series D Preferred Stock for an aggregate purchase price of up to $8 million in one or more closings. On April 22, 2025, the Company consummated a private placement of 6,250 shares of Series D Preferred Stock pursuant to the Fourth Securities Purchase Agreement, by and among the Company and certain investors in exchange for the receipt of 1,000,279 shares of the Stella Series D Preferred in lieu of cash, which is included in investment in equity securities on the accompanying unaudited condensed balance sheet as of June 30, 2025. The fair value of Stella's Series D Preferred Stock received was determined to be $500,000 as of the transaction date, based on the subsequent sale of the 1,000,279 Stella Series D Preferred Stock for $500,000 in cash, pursuant to a Stock Purchase Agreement dated August 20, 2025. On August 20, 2025, the Company and certain investors entered into a Stock Purchase Agreement, pursuant to which the Company sold 1,000,279 Stella Series D Preferred Stock for cash proceeds of $500,000. In accordance with ASC 855-10, Subsequent Events, the Company evaluated this event under ASC 855-10-25-1 and determined that it represents a Type I subsequent event (recognized subsequent event) because the sale provided additional evidence about conditions that existed at the balance sheet date. Accordingly, the Company determined that the fair value of the equity securities on the date of the Fourth Securities Purchase Agreement of April 21, 2025 and June 30, 2025 was equal to $500,000.

On June 5, 2025, the Company sold an additional 938 shares of Series D Preferred Stock for gross cash proceeds of $750,400 in an additional closing of the Fourth PIPE Financing.

On June 25, 2025, the Company entered into an amendment to the Fourth Securities Purchase Agreement pursuant to which the Company added certain new institutional investors to the schedule of buyers in the Fourth Securities Purchase Agreement, to issue and sell to such investors, in one or more closings shares of the Company's Series D Preferred Stock. Also, on June 25, 2025, the Company sold an additional 2,315 shares of Series D Preferred Stock for gross cash proceeds of $1,852,000 in an additional closing of the Fourth PIPE Financing. On July 18, 2025, the Company sold an additional 497 shares of Series D Preferred Stock for gross cash proceeds of $432,600 in an additional closing of the Fourth PIPE Financing.

July 2025 ELOC Transaction

On July 11, 2025, the Company entered into an agreement to issue and sell 12,500,000 shares of Common Stock under the New Keystone Purchase Agreement. As the New Keystone Purchase Agreement constitutes a continuation of the equity line program commenced under the February 2024 Purchase Agreement, the Commitment Shares issued to the Investor pursuant to the February 2024 Purchase Agreement shall satisfy in full the Company's obligation to deliver any additional shares of Common Stock to the Investor as consideration for entering into the New Keystone Purchase Agreement.

Orphan Drug Designation

In July 2025, CER-1236 received an FDA Orphan Drug Designation for the treatment of acute myeloid leukemia.

Nasdaq Notices of Non-compliance and Nasdaq Panel Decision

As previously disclosed, on January 17, 2025, the Company received a letter setting forth the determination of a panel convened by Nasdaq (the "Nasdaq Panel") granting the Company's request for an extension (the "Extension") to regain compliance with certain continued listing requirements of the Nasdaq Stock Market until April 22, 2025. The Company presented its plan (the "Plan") for regaining compliance with such requirements at a hearing conducted on December 17, 2025. The Company's Plan included completion of a reverse stock split, which occurred on January 8, 2025, and transferring the listing of its securities to the Nasdaq Capital Market, which was completed on February 12, 2025, and certain other conditions, including the satisfaction of the $2.5 million minimum stockholders' equity requirement for continued listing on the Nasdaq Capital Market.

In addition, as previously disclosed, from November 2024 through June 30, 2025, the Company raised approximately $3.1 million of net proceeds from its equity line of credit entered into November 2024, and an additional approximately $4.3 million of net proceeds from its public offering of shares of common stock, pre-funded warrants and warrants to purchase shares of common stock that closed on February 7, 2025 (the "February 2025 Offering"). As a result of such capital raising activities and the proceeds of the Private Placement received on the First Closing Date, as well as successful negotiations with certain service providers to reduce outstanding balances payable, the Company received a notification letter from Nasdaq on May 7, 2025, stating that the Company had regained compliance with the Nasdaq continued listing standard under Nasdaq Listing Rule 5550(b)(1), which requires, among other things, that the Company maintain at least $2.5 million in stockholders' equity.

On June 11, 2025, we received a Bid Price Requirement Letter notifying us that, for the 30 consecutive business day period between April 25, 2025 through June 9, 2025, the closing bid price for our Common Stock was below the minimum $1.00 per share required for continued listing on The Nasdaq Capital Market set forth in Nasdaq Listing Rule 5550(a)(2), which is required for continued listing of the Common Stock on Nasdaq. We timely appealed the delisting determination by requesting a hearing before the Nasdaq Panel. Such request for a Nasdaq Panel hearing stayed the suspension of the Company's securities. On July 7, 2025, Nasdaq informed us that they had determined that we have regained compliance with the Bid Price Requirement and were therefore in compliance with the continued listing requirements. As a result, Nasdaq canceled the hearing and the Common Stock will continue to be listed and traded on the Nasdaq Capital Market, subject to maintaining all listing standards.

Results of Operations

Revenue

Predecessor and the Company have not recognized any revenue from any sources, including from product sales, and the Company does not expect to generate any revenue from the sale of products in the foreseeable future. If the development efforts for the Company's product candidates, each of which is a specific product and indication combination, are successful and result in regulatory approval, or if the Company executes license agreements with third parties, the Company may generate revenue from R&D services, from the achievement of development milestones or from milestones and royalties related to product sales. However, there can be no assurance as to when any revenues will be generated, if at all.

Operating Expenses

Research and Development Expenses

R&D expenses consist of discovery activities, manufacturing development and production, preclinical and clinical development, and regulatory filing for product candidates. R&D expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in R&D are capitalized until the goods or services are received. Costs incurred in obtaining technology licenses through asset acquisitions, if incurred, will be charged to R&D expense if the licensed technology has not reached technological feasibility and has no alternative future use. R&D expenses include or could include:

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employee-related expenses, including salaries, bonuses, benefits, stock-based compensation and other related costs for those employees involved in R&D efforts;

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external R&D expenses incurred under agreements with preclinical research organizations, clinical research organizations, investigative sites, centralized clinical laboratories, and consultants to conduct preclinical and clinical studies;

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costs related to manufacturing material for preclinical studies and clinical trials, including fees paid to contract development and manufacturing organizations;

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product-liability insurance for clinical development product(s);

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laboratory supplies and research materials;

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software and systems related to R&D activities;

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costs related to regulatory filing and compliance; and

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facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, and equipment.

Product candidates in later stages of development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. The Company plans to substantially increase its R&D expenses for the foreseeable future as it continues the development of its product candidates through clinical development. The Company cannot determine with certainty the timing of initiation, the duration or the costs of current or future preclinical studies and clinical trials required for regulatory approval due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. The Company anticipates that it will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and ongoing assessments as to each product candidate's commercial potential. The Company will need to, and plans to, raise substantial additional capital in the future. Future R&D expenses may vary significantly between periods and from current expectations based on factors such as:

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expenses incurred to conduct preclinical studies required to advance product candidates into clinical trials;

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per patient clinical trial costs based on a number of factors, including number of patient clinical visits, clinical laboratory testing, and potential medical imaging;

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the number of clinical trials required for approval, the number of patients who enroll in each clinical trial, and the number and geographic locations of sites included in the clinical trials;

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the length of time required to screen and enroll eligible patients, screen-failure rate, or the discontinuation rates of enrolled patients;

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potential additional safety monitoring requested by regulatory agencies;

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the cost of insurance, including product liability insurance, in connection with clinical trials; and

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suspension or termination of clinical development activities by regulators or institutional review boards for various reasons, including regulatory noncompliance or a finding that the participants are being exposed to unacceptable health risks.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive and administrative functions, including stock-based compensation, travel expenses and recruiting expenses. Other general and administrative expenses include professional fees for legal, accounting and tax-related services, consulting fees, insurance costs, and investor relations fees.

The Company anticipates that its general and administrative expenses will increase in the future as the Company increases headcount and contracted services for operational support for expanded operations and infrastructure. The Company also anticipates that general and administrative expenses will increase as a result of expenses for accounting, audit, legal and consulting services, as well as costs associated with maintaining compliance with Nasdaq listing rules and SEC requirements, director and officer liability insurance, investor and public relations activities and other expenses associated with operating as a public company.

Other Income (Expense), Net

Other income (expense), net consists predominantly of interest income from interest bearing bank accounts, interest expense on payables, gains recorded on settlements reached with vendors on payables, and the gain or loss on the revaluation of earnout and derivative liabilities, which represents the change in fair value of earnout liabilities or outstanding warrants between periods.

Results of Operations for the Three Months Ended June 30, 2025 and 2024

		For the Three Months Ended June 30,
		2025 (Successor)				2024 (Successor)				Difference				Percentage Change
Operating expenses:
Research and development		$	2,753,963			$	2,714,344			$	39,619				1.5	%
General and administrative			1,969,828				2,433,893				(464,065	)			(19.1	)%
Total operating expenses			4,723,791				5,148,237				(424,446	)			8.2	%
Loss from operations			(4,723,791	)			(5,148,237	)			(424,446	)			8.2	%
Other income (expense):
Gain from settlement of liabilities with vendor			-				447,335				(447,335	)			(100.0	)%
Other expenses			-				(630,775	)			630,775				100.0	%
Change in fair value of derivative liabilities and earnout liabilities			-				2,900,000				(2,900,000	)			(100.0	)%
Stock-based inducement expense			(707,300	)			-				(707,300	)			(100.0	)%
Interest income (expense), net			13,776				(16,977	)			30,753				181.1	%
Total other income (expense), net			(693,524	)			2,699,583				(3,393,107	)			(125.7	)%
Net loss			(5,417,315	)			(2,448,654	)			(2,968,661	)			121.2	%
Deemed dividend on Series A, Series B and C Preferred Stock			(24,700,374	)			-				(24,700,374	)			100.0	%
Net loss attributable to common stockholders		$	(30,117,689	)		$	(2,448,654	)		$	(27,669,035	)			1,130.0	%

Research and Development Expenses

Research and development expenses were $2,754,000 for the three months ended June 30, 2025 as compared to $2,714,000 for the three months ended June 30, 2024, reflecting an increase of $40,000. The increase was primarily attributable to an increase in clinical expenses of approximately $1,056,000 and an increase in scientific consulting fees of $93,000, offset by a decrease in salaries and benefits of $893,000 primarily due to a decrease in stock-based compensation of $728,000 attributable to a decrease in accretion of stock option expense, and a decrease in lab and other expenses of $216,000. During the first quarter of 2025, we began clinical trials related to the IND for CER-1236.

The Company anticipates that its R&D expenses will significantly increase in the future as the Company increases headcount, compensation expense, and contracted services for preclinical and clinical development of its product candidates, as well as for manufacturing of clinical product to be used in clinical development.

General and Administrative Expenses

General and administrative expenses were $1,970,000 for the three months ended June 30, 2025 as compared to $2,434,000 for the three months ended June 30, 2024, reflecting a decrease of approximately $464,000. The decrease during the three months ended June 30, 2025 as compared to the three months ended June 30, 2024, was primarily due to a decrease in salaries and benefits of $505,000 primarily due to a decrease in stock-based compensation of $478,000 attributable to a decrease in accretion of stock option expense. This decrease was offset by an increase in other general and administrative expenses of $41,000.

Other Income (Expense), Net

Other expense was $693,000 for the three months ended June 30, 2025 as compared to other income of $2,700,000 for the three months ended June 30, 2024, reflecting a negative change of $3,393,000. The negative change was primarily due to (1) the recording of a $2.9 million gain from change in value of the Company's earnout liability during the three months ended June 30, 2024 as compared to $0 during the three months ended June 30, 2025, (2) the recording of a gain on settlement of vendor liabilities of $447,000 during the three months ended June 30, 2024 as compared to $0 during the three months ended June 30, 2025, and (3) the recording of stock-based inducement expense of $707,300 during the three months ended June 30, 2025 related to the conversion of Series C Preferred Stock as compared to $0 during the three months ended June 30, 2024. These negative changes in other expenses, net were offset by the recording of other expense of $631,000 during the three months ended June 30, 2024 related to registration rights penalties recorded compared to $0 during the three months ended June 30, 2025, and an increase in interest income, net of $30,000.

Net loss and net loss attributable to common stockholders

For the three months ended June 30, 2025 and 2024, net loss amounted to $5,417,000 and $2,449,000, respectively, which represents an increase in net loss of $2,968,000, or 121.2%. During the three months ended June 30, 2025, in connection with our Series A, Series B and Series C preferred stock conversions, we recorded deemed dividends of $24,700,000. Accordingly, for the three months ended June 30, 2025 and 2024, net loss attributable to common stockholders amounted to $30,117,000, or $(61.71) per common share, and $2,449,000, or $(302.32) per common share, respectively.

Results of Operations for the Six Months Ended June 30, 2025 and 2024

The results of operations for the six months ended June 30, 2024 are pro forma as the period presented in the following table and discussion includes the Predecessor for the period from January 1, 2024 through February 13, 2024 and the Company for the period from February 14, 2024 through June 30, 2024. This pro forma period from January 1, 2024 to June 30, 2024 does not include the Merger transactions that occurred on-the-line.

		For the Six Months Ended June 30,
						2024
		2025 (Successor)				(Pro forma) (Predecessor and Successor)				Difference				Percentage Change
Operating expenses:
Research and development		$	5,661,790			$	4,382,551			$	1,279,239				29.2	%
General and administrative			4,012,532				5,317,756				(1,305,224	)			(24.5	)%
Total operating expenses			9,674,322				9,700,307				(25,985	)			(0.3	)%
Loss from operations			(9,674,322	)			(9,700,307	)			(25,985	)			(0.3	)%
Other income (expense):
Gain from settlement of liabilities with vendor			-				589,223				(589,223	)			(100.0	)%
Other expenses			-				(630,775	)			630,775				(100.0	)%
Change in fair value of derivative liabilities and earnout liabilities			-				5,020,117				(5,020,117	)			(100.0	)%
Share-based inducement expense			(863,550	)			-				(863,550	)			(100.0	)%
Interest income (expense), net			14,626				(26,606	)			41,232				155.0	%
Total other income (expense), net			(848,924	)			4,951,959				(5,800,883	)			(117.1	)%
Net loss			(10,523,246	)			(4,748,348	)			(5,774,898	)			121.6	%
Deemed dividend on Series A, B and C Preferred Stock			(24,964,518	)			-				(24,964,518	)			100	%
Deemed dividend related to Series C Common Warrants			(84,083	)			-				(84,083	)			100	%
Net loss attributable to common stockholders		$	(35,571,847	)		$	(4,748,348	)		$	(30,823,499	)			649.1	%

Research and Development Expenses

Research and development expenses were $5,662,000 for the six months ended June 30, 2025 as compared to $4,383,000 for the six months ended June 30, 2024, reflecting an increase of $1,279,000. The increase was primarily attributable to an increase in clinical expenses of $2,362,000, and an increase in scientific consulting fees of $496,000. In the first quarter of 2025, we began clinical trials related to the IND for CER-1236. This increase was primarily offset by a decrease in lab expenses of $461,000 primarily attributable to a decrease in toxicology studies performed in the 2025 period as compared to the 2024 period, a decrease in research and development salaries and benefits of approximately $989,000 which included a decrease in stock-based compensation expense of $723,000 primarily attributable to a decrease in accretion in stock-based option expense and a decrease in bonuses paid of $132,000, and a decrease in other research and development costs of $129,000.

The Company anticipates that its R&D expenses will significantly increase in the future as the Company increases headcount, compensation expense, and contracted services for preclinical and clinical development of its product candidates, as well as for manufacturing of clinical product to be used in clinical development.

General and Administrative Expenses

General and administrative expenses were $4,013,000 for the six months ended June 30, 2025 as compared to $5,318,000 for the six months ended June 30, 2024, reflecting a decrease of $1,305,000. The decrease during the six months ended June 30, 2025 as compared to the six months ended June 30, 2024, was primarily due to a decrease of $1,750,000 in underwriting fees from the PBAX initial public offering, which were incurred upon the consummation of the business combination in February 2024, and a decrease in executive salaries and benefits of $68,000. This decrease was offset by an increase in professional fees of $516,000 primarily due to an increase in auditing, accounting and legal fees which were offset by a decrease in recruiting fees. The additional professional fees were all driven by the increased expenses of operational compliance as a public company.

Other Income (Expense), Net

Other expense was $(849,000) for the six months ended June 30, 2025 as compared to other income of $4,952,000 for the six months ended June 30, 2024, reflecting a negative change in other income, net of $5,801,000. The negative change was primarily due to (1) the recording of a $4,700,000 gain from change in value of the Company's earnout liability and a $320,000 gain recorded for the change in value of the Predecessor's preferred stock warrant liability during the six months ended June 30, 2024 as compared to $0 during the six months ended June 30, 2025, (2) the recording of a gain on settlement of vendor liabilities of $589,000 during the six months ended June 30, 2024 compared to $0 during the six months ended June 30, 2025, and (3) the recording of stock-based inducement expense of $864,000 during the six months ended June 30, 2025 as compared to $0 during the six months ended June 30, 2024. These decreases in other income, net were offset by the recording of other expense of $631,000 during the six months ended June 30, 2024 related to registration rights penalties recorded compared to $0 during the six months ended June 30, 2025, and an increase in interest income, net of $41,000.

Net loss and net loss attributable to common stockholders

For the six months ended June 30, 2025 and 2024, net loss amounted to $10,523,000 and $4,748,000, respectively, which represents an increase in net loss of $5,775,000, or 121.6%. During the six months ended June 30, 2025, in connection with our Series A, Series B and Series C preferred stock conversions, and the redemption of Series C Preferred Stock, we recorded deemed dividends of $24,965,000, and in connection with the adjustment in the exercise price of Series C Common Warrants, we recorded deemed dividends of $84,000. Accordingly, for the six months ended June 30, 2025 and 2024, net loss attributable to common stockholders amounted to $35,572,000, or $(107.60) per common share, and $4,748,348, or $(604.19) per common share, respectively.

Liquidity and Capital Resources

Capital Requirements

Predecessor and the Company have not generated any revenue from any source and the Company does not expect to generate revenue for at least the next few years. If the Company fails to complete the timely development of, or fails to obtain regulatory approval for, its product candidates, the ability of the Company to generate future revenue will be adversely affected. The Company does not know when, or if, it will generate any revenue from its product candidates, and does not expect to generate revenue unless and until the Company obtains regulatory approval and commercialization of its product candidates.

The Company expects its expenses to increase significantly in connection with its ongoing activities, particularly as it continues and expands research, preclinical development, and clinical development to support marketing approval for its product candidates. In addition, if the Company obtains approval for any of its product candidates, the Company expects to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution. Furthermore, the Company expects to incur additional costs associated with operating as a public company.

The Company, therefore, anticipates that substantial additional funding will be needed in connection with its continuing operations. As of June 30, 2025, the Company had approximately $3.2 million in cash and cash equivalents. The Company intends to devote most of the available cash to the preclinical and clinical development of its product candidates and public company compliance costs. Based on current business plans, the Company believes that the cash available as of June 30, 2025 will not fund its operations and capital requirements for 12 months after the filing of these unaudited condensed financial statements for the period ended June 30, 2025. The Company has arranged two equity lines of credit, one providing for the sale of up to 25,000,000 newly issued shares of Common Stock and the other providing for the purchase of up to $17.5 million of Common Stock on the satisfaction of certain conditions. The Company has no guarantee that the conditions will be satisfied to require the purchase of all, or any additional amount, of the ELOC funds. On February 5, 2025, the Company entered into the SPA, with participation from a member of the Company's Board and a single institutional investor, for the purchase and sale of (i) 127,551 shares of our common stock or common stock equivalents in lieu thereof; and (ii) February 2025 Common Warrants to purchase up to 127,551 shares of common stock, at a combined public offering price of $39.20 per share and warrant. In connection with this offering, the Company received net proceeds of approximately $4.2 million. Additionally, during the six months ended June 30, 2025, the Company received net proceeds from the exercise of the remaining Series A Preferred Warrants, the collection of subscriptions receivable and ELOC fundings of approximately $2.9 million. Furthermore, during the six months ended June 30, 2025, we received net proceeds from the sales of Series D Preferred Stock of $2.2 million. Any estimate as to how long the Company expects the net proceeds from the ELOC and Series D Preferred Stock funding may fund the Company's operations is based on assumptions that may prove to be wrong, and the Company could use its available capital resources sooner than its current expectations. Changing circumstances, some of which may be beyond the Company's control, could result in less cash and cash equivalents available to fund operations or cause the Company to consume capital significantly faster than currently anticipated, and the Company may need to seek additional funds from additional sources sooner than planned.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drug products, the Company is unable to estimate the exact amount of its operating capital requirements. The Company's future funding requirements will depend on many factors, including, but not limited to those listed under "Factors Affecting Our Performance" above.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and the Company may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, the Company's product candidates, if approved, may not achieve commercial success. Commercial revenues, if any, will be derived from sales of product candidates that the Company does not expect to be commercially available in the near term, if at all. Accordingly, the Company will need to continue to rely on additional financing to achieve its business objectives. Adequate additional financing may not be available to the Company on acceptable terms, or at all. To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the terms of these equity securities or this debt may restrict the Company's ability to operate. Any future debt financing and equity financing, if available, may involve covenants limiting and restricting the ability to take specific actions, such as incurring additional debt, making capital expenditures, entering into profit-sharing or other arrangements or declaring dividends. If the Company raises additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, it may be required to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to the Company. If the Company is unable to raise capital when needed or on acceptable terms, the Company could be forced to delay, reduce or eliminate its R&D programs or future commercialization efforts.

Cash Flows

		For the Six Months Ended June 30,
						2024
		2025 (Successor)				(Pro forma, Predecessor and Successor)				Difference
Net cash used in operating activities		$	(9,068,702	)		$	(8,617,285	)		$	(451,417	)
Net cash provided by financing activities:			9,044,316				9,748,916				(704,600	)
Net (decrease) increase in cash, restricted cash and cash equivalents		$	(24,386	)		$	1,131,631			$	(1,156,017	)

Net cash used in operating activities

Net cash used in operating activities for the six months ended June 30, 2025 primarily reflected a net loss of $10,523,000, adjusted for the reconciliation of non-cash items such as depreciation expense of $146,000, stock-based compensation of $488,000, stock-based inducement expense of $864,000, and amortization of right-of-use asset of $391,000, and changes in operating asset and liabilities primarily consisting of an increase in prepaid expenses and other current assets of $169,000, an increase in accounts payable of $562,000, a decrease in accrued liabilities of $404,000, and a decrease in operating lease liabilities of $423,000.

Net cash used in operating activities for the six months ended June 30, 2024 primarily reflected a net loss of $4,748,000, adjusted for the reconciliation of non-cash items such as a gain of settlement of liabilities with vendors of $589,000, depreciation expense of $228,000, stock-based compensation of $1,489,000, amortization of right-of-use asset of $353,000 and a gain on revaluation of earnout liability and the preferred stock warrant liability of $5,020,000, and changes in operating asset and liabilities primarily consisting of an increase in prepaid expenses and other current assets of $269,000, a decrease in accounts payable of $551,000, an increase in accrued liabilities of $941,000, and a decrease in operating lease liabilities of $450,000.

Net cash provided by financing activities

Net cash provided by financing activities for the six months ended June 30, 2025 amounted to $9,045,000 as compared to $9,749,000 for the six months ended June 30, 2024.

During the six months ended June 30, 2025, net cash provided by financing activities of $9,045,000 was primarily attributable to the receipt of net proceeds of $500,000 from the exercise of Series A Preferred Warrants, net proceeds of $2,426,000 from the sale of common stock under the ELOC, net proceeds of $2,240,000 from the sale of Series D Preferred Stock, and net proceeds from sale of common stock and pre-funded warrants of $4,273,000, offset by the cash redemption of Series C Preferred Stock of $395,000.

During the six months ended June 30, 2024, net cash provided by financing activities of $9,749,000 was primarily attributable to the receipt of net proceeds of $6,758,000 from the sale of Series A Preferred Stock, $408,000 from short-term borrowings, net proceeds of $500,000 from the sale of Series B Preferred Stock, and net proceeds of $2,238,000 from the sale of common stock under the ELOC, offset by the repayment of short-term borrowings of $149,000.

Critical Accounting Estimates

Investment in equity securities - The Company's investment in equity securities consists of Series D Preferred Stock of Stella Diagnostics, Inc. Investments in equity securities are initially measured at cost. Cost is based upon either the cost of the investment or the estimated market value of the investment at the time it was acquired, whichever can be more clearly determined. The Company has elected the measurement alternative for equity securities without readily determinable fair values. Under this alternative, if the Company identifies an observable price change in an orderly transaction for an identical or similar investment of the same issuer, the Company measures the equity security at fair value as of the date that the observable transaction occurred. Any adjustments resulting from observable price changes are recognized in earnings. The Company monitors these investments for changes in observable prices from orderly transactions and assesses them for impairment. If an equity security is deemed to be impaired, an impairment loss is recognized in earnings, measured as the difference between the investment's cost and its fair value at the impairment assessment date.

Earnout liability - As a result of the Merger in February 2024, the Company recognized an earnout liability of $4.9 million on the merger date. The earnout liability is measured using unobservable (Level 3) inputs and was included in current liabilities on balance sheet. The Company estimated the fair value of the earnout liability by applying a Monte-Carlo simulation method using the Company's projection of future operating results and the estimated probability of achievement of the earnout target metrics. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of the fair value of the earnout liability. The liability is remeasured to fair value using the Monte-Carlo simulation method at each reporting period, and the change in fair value is recognized in other income (expense) until the contingency is resolved. During the three and six months ended June 30, 2024, the Company recorded a gain from change of fair value of the earnout liability of $2,900,000 and $4,700,000, which is included in other income (expenses), net on the accompanying consolidated statement of operations, respectively.

Stock-based compensation - The Company periodically issues common stock and stock options to officers, directors, and consultants for services rendered. Stock-based compensation accounting requires the recognition of stock-based compensation expense, using a grant date fair value-based method, for costs related to all share-based payments including stock options and restricted stock awards granted to employees and non-employees. Companies are required to estimate the fair value of all share-based payment awards on the date of grant using an option pricing model, and the Company uses a Black-Scholes option pricing model ("Black-Scholes") to estimate option award fair value. The assumptions used in calculating the fair value of stock-based awards represent management's best estimates and involve inherent uncertainties and the application of management's judgment. The fair value of restricted stock awards is based upon the estimated share price of the common shares on the date of grant. Forfeitures are accounted for as they occur, and the Company applies the simplified method to estimate expected term of "plain vanilla" options. All options and restricted stock awards granted since inception are expensed on a straight-line basis over the requisite service period, which is usually the vesting period, or upon the completion of certain performance-based vesting terms and the related amounts are recognized in the consolidated statements of operations.

The accounting for stock options granted to outside consultants is consistent with the accounting for stock-based payments to officers and directors, as described above, by measuring the cost of services received in exchange for equity awards utilizing the grant date fair value of the awards, with the cost recognized as stock-based compensation expense on the straight-line basis in the Company's financial statements over the vesting period of the awards.

Recent Accounting Standards

See the section titled in Note 2 to the Company's condensed consolidated financial statements for the quarter ended June 30, 2025, appearing elsewhere herein.