Estrella Immunopharma, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our results of operations and financial condition should be read together with our audited consolidated financial statements and the notes thereto, which are included elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Overview We are a clinical-stage biopharmaceutical company developing T-cell therapies with the capacity to address treatment challenges for patients with blood cancers and solid tumors. Our mission is to harness the evolutionary power of the human immune system to provide patients fighting cancer with safe, effective therapies. Our lead product candidate, EB103, is a T-cell therapy called “CD19-Redirected ARTEMIS ® T-Cell Therapy,” which utilizes Eureka Therapeutics, Inc.’s (“Eureka”) ARTEMIS ® technology to target CD19. On March 2, 2023, the FDA cleared the Investigational New Drug (“IND”) application for EB103, allowing us to proceed with the Phase I/II STARLIGHT-1 Clinical Trial. We hold an exclusive license from Eureka to develop CD19 and CD22-targeted T-cell therapies using their ARTEMIS ® platform. Under a Services Agreement and a related Statement of Work (“SOW”), Eureka performs clinical trial services for our STARLIGHT-1 trial. As of December 31, 2025, nine patients had been dosed in the trial, and we had accrued approximately $12.4 million in related-party liabilities for the corresponding milestones. To date, we have funded our operations primarily through the issuance of preferred and common stock, including net proceeds from our business combination in September 2023 and a private placement during May through September 2025. We have a limited operating history and have not generated any revenue from product sales. As of December 31, 2025, we had an accumulated deficit of approximately $37.0 million. We expect our expenses and operating losses to increase significantly as we continue to advance our product candidates through clinical development. Change in Fiscal Year On November 25, 2024, our Board of Directors approved a change in our fiscal year end from June 30 to December 31. Results of Operations for the year ended December 31, 2025 Compared with the unaudited twelve-month period ended December 31, 2024 Due to the change in our fiscal year end from June 30 to December 31, the audited consolidated financial statements included in this Annual Report present our financial results for the year ended December 31, 2025, and the six-month transition period ended December 31, 2024. However, to provide a meaningful year-over-year comparison, the following discussion compares our results of operations for the year ended December 31, 2025, against the unaudited twelve months ended December 31, 2024. There are two major expense categories in our operations: (i) research and development expenses and (ii) general and administrative expenses. Research and Development Expenses Research and development expenses consist primarily of costs related to conducting work related to the conduct of the STARLIGHT-1 clinical trial, which was mainly performed by Eureka. For the year ended December 31, 2025 and for the twelve months ended December 31, 2024, we incurred approximately $10.2 million and $6.4 million of research and development expenses, respectively. All research and development expenses incurred for the periods presented above were dedicated to the development of ARTEMIS ® T-cell therapies targeting CD19 and CD22. The increase in research and development expenses was mainly due to Estrella incurring higher service fees during the clinical phase and the dosing of seven patients, and a second site activation under the SOW for the year ended December 31, 2025 compared to two patients dosed during the same period in 2024. In addition, for the twelve months ended December 31, 2024, we have incurred $3.5 million R&D expense from Eureka for achieving the milestones associated with the initiation of the study, the preparation and activation of the first study site, and the First Patient First Visit (FPFV) under the SOW. 89 Our breakdown of research and development expenses by categories for the year ended December 31, 2025 and for the twelve months ended December 31, 2024 are summarized below: For the year ended December 31, 2025 For the twelve months ended December 31, 2024 (Unaudited) Consulting and laboratory related fee $ 10,207,228 $ 6,401,435 Stock based compensation 41,317 7,131 Total research and development $ 10,248,545 $ 6,408,566 General and Administrative Expenses For the year ended December 31, 2025 and for the twelve months ended December 31, 2024, we incurred approximately $2.8 million and $2.4 million in general and administrative expenses, respectively. The increase was primarily driven by higher professional fees and stock-based compensation expense related to stock options granted in October 2024 under our 2023 Omnibus Incentive Plan, partially offset by lower other corporate expenses. Net Loss We incurred a net loss of approximately $13.1 million and $8.8 million for the year ended December 31, 2025 and for the twelve months ended December 31, 2024, respectively. We expect our research and development expenses to continue to increase as we continue to work with Eureka to advance the IND filings, preclinical and clinical development of our product candidates and preclinical programs, seek regulatory approval for any product candidates that successfully complete clinical trials, scale up our clinical and regulatory capabilities, adapt our regulatory compliance efforts to incorporate requirements applicable to marketed products, maintain, expand, and protect our intellectual property portfolio, add operational, financial, and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts, and incur additional legal, accounting, and other expenses in operating as a public company. Liquidity and Capital Resources As of December 31, 2025, we had cash and cash equivalents of approximately $1.4 million and a working capital deficit of approximately $11.9 million. Since our inception, we have expended substantial funds on research and development and have experienced significant losses and negative cash flows from operations. For the year ended December 31, 2025, we reported a net loss of approximately $13.1 million and net cash used in operating activities of approximately $1.8 million. As of December 31, 2025, we had an accumulated deficit of approximately $37.0 million. Going Concern and Management’s Assessment of Liquidity We expect our expenses and operating losses to increase significantly as we continue to advance our product candidates through clinical development, particularly in connection with the Phase I/II STARLIGHT-1 clinical trial of EB103. Our recurring losses from operations, accumulated deficit, and need for additional financing to fund future operations, raise substantial doubt about our ability to continue as a going concern. Accordingly, our independent registered public accounting firm has included an explanatory paragraph in its report on our consolidated financial statements for the year ended December 31, 2025, expressing substantial doubt about our ability to continue as a going concern. To fund our operations, we recently completed a private placement between May and September 2025, receiving gross proceeds of approximately $2.4 million. Subsequent to the end of the fiscal year, on January 6, 2026, we consummated a registered direct offering and concurrent private placement resulting in gross proceeds of approximately $8.0 million. Despite these recent financing activities, management is of the opinion that we will not have sufficient funds to meet our working capital requirements and debt obligations as they become due starting from one year from the date of this report. If we are unable to obtain adequate financing or generate significant revenue, we may be required to curtail or cease our operations. Material Cash Requirements and Capital Sources Our primary use of cash is to fund operating expenses, primarily consisting of clinical trial activities and related research and development costs. Pursuant to the SOW) with Eureka for the STARLIGHT-1 clinical trial, we agreed to pay total non-refundable net fees of $33.0 million for the achievement of all projected milestones. As of December 31, 2025, we have cumulatively incurred approximately $16.4 million to Eureka for milestones achieved, and we hold an accrued liability to related parties of approximately $12.4 million for corresponding milestones. Our ability to fund our operations is dependent on our cash on hand, our ability to raise debt or additional equity financing, and ultimately our ability to generate sufficient revenue. We plan to raise additional capital in the future; however, there is no assurance that such financing will be available on acceptable terms, or at all. Furthermore, while we have tradeable warrants outstanding, it is unlikely that holders will exercise these warrants to provide additional liquidity in the near term, as the current market price of our Common Stock ($1.25 per share as of March 12, 2026) is significantly lower than the $11.50 per share exercise price. Additionally, our Common Stock Purchase Agreement with White Lion Capital LLC expired on December 30, 2025, and is no longer available as a source of liquidity. 90 Cash Flows Operating Activities Net cash used in operating activities was approximately $1.8 million for the year ended December 31, 2025, and was primarily attributable to (a) a net loss of approximately $13.1 million, offset by (i) approximately $9.6 million increase in accrued liability - related party as additional service charges were incurred from Eureka following the completion of seven patient dosings, (ii) approximately $0.6 million non-cash item of stock-based compensation under the 2023 Plan, and approximately $38,000 loss from change in fair value of derivative liabilities, (iii) approximately $0.4 million decrease in prepaid expenses and other receivable primarily due to the utilization of previously recorded prepaid expenses during the year ended December 31, 2025, (iv) approximately $0.6 million increase in accounts payable - related party primarily due to the receipt of billing from Eureka of $0.5 million related to the second site activation., and (v) approximately $37,000 increase in other payables and accrued liabilities primarily due to additional accrued expense. Net cash used in operating activities was approximately $3.1 million for the six-month transition period ended December 31, 2024, and was primarily attributable to (a) a net loss of approximately $4.4 million, (b) approximately $1.5 million prepaid expense to Eureka for patient treatment expenses, which will be applied to the final invoice, with any unused portion refunded once all fees are settled, and (c) approximately $0.4 million increase in prepaid expense as we prepaid various service providers which we expect to be amortized within the next 12 months, offset by (a) an approximately $0.1 million increase in other payables and accrued liabilities, due to additional professional fees accrued during the period, (b) approximately $2.8 million increase in accrued liability - related party as additional service charges were incurred from Eureka following the completion of two patient dosings, and (c) approximately $0.4 million non-cash item of stock-based compensation related to the stock options granted our employees, board of directors, and other consultants under the 2023 Plan in October 2024. Financing Activities Net cash provided by financing activities was approximately $2.3 million for the year ended December 31, 2025, primarily from the proceeds of the private placement of $2.4 million, offset by approximately $117,000 of transaction cost and approximately $29,000 of cash used for stock repurchases under our stock repurchase program. Net cash used in financing activities was approximately $0.1 million for the six-month transition period ended December 31, 2024, and was primarily attributable to approximately $0.2 million payment in stock repurchase, offset by approximately $79,000 net proceeds received from issuance of common stock through stock purchase under the Common Stock Purchase Agreement. Commitments and Contractual Obligations In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450-20, “Loss Contingencies”, we will record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. License Agreement Pursuant to the License Agreement, we were obligated to make and may be required to make, as applicable, (i) a one-time, non-refundable, non-creditable payment of $1.0 million, payable in twelve equal monthly installments, (ii) certain one-time, non-refundable, non-creditable development “milestone” payments upon the occurrence of certain events related to development and sales, with potential aggregate multi-million dollar payments upon FDA approval, and (iii) royalty payments of a single digit percentage on net sales during any consecutive 12-month period. As of December 31, 2025, we have fully paid the $1.0 million license fee to Eureka. As of December 31, 2025, two development milestones related to the IND submission of EB103 to the FDA (“Milestone 1”) and first patient dosed in the first clinical trial of a licensed product (“Milestone 2”) have been earned by Eureka under the Agreement. The $50,000 milestone payment related to Milestone 1 was paid on October 10, 2023. The $50,000 milestone payment related to Milestone 2 was paid on September 3, 2024. No other development milestones, except those mentioned above, sales milestone, or royalty payment has been earned as we do not have any product candidates approved for sale and have not generated any revenue from product sales. 91 Services Agreement Pursuant to the Services Agreement, we agreed to (i) pay Eureka $10.0 million in connection with the services thereunder payable in 12 equal monthly installments and (ii) reimburse Eureka on a monthly basis for reasonable pass-through costs incurred or paid to providers by Eureka in providing the services. In addition, we will be charged for other services performed by Eureka outside the scope of the services set forth in the Services Agreement, at a flat rate, by time or materials or as mutually agreed upon the parties in writing. As of December 31, 2025, we had remitted to Eureka a total of $10.0 million pursuant to the Services Agreement. Statement of Work Pursuant to the SOW, Estrella agreed to pay Eureka total fees of $33.0 million in connection with the Phase I/II clinical trial of Estrella’s product candidate, EB103, a T-cell therapy targeting CD19 using ARTEMIS ® T cell technology licensed by Estrella from Eureka. As of December 31, 2025, we had paid $3.5 million to Eureka for covering the fees associated with milestones achieved, and deposited $1.5 million for patient treatment expenses, which will be applied to the final invoice, with any unused portion refunded once all fees are settled. Nine patient dosings and a second site activation milestones have been completed as of December 31, 2025, and the Company has accrued approximately $12.4 million in accrued liability - related party and recorded $0.5 million in accounts payable – related party, for the corresponding milestones as of December 31, 2025. Off-Balance Sheet Arrangements As of December 31, 2025 and 2024, we did not have any off-balance sheet arrangements (as defined in Item 303 of Regulation S-K) that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources. Critical Accounting Policies and Estimates Our consolidated financial statements accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements and accompanying notes requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We have identified certain accounting estimates that are significant to the preparation of our consolidated financial statements. These estimates are important for an understanding of our financial condition and results of operations. Certain accounting estimates are particularly sensitive because of their significance to consolidated financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe no critical accounting estimate was identified other than the below-listed significant estimate and accounting policies. 92 Derivative Liabilities We evaluate all of our financial instruments, including the True-Up Shares in connection with the Securities Purchase Agreement, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and FASB ASC 815, Derivatives and Hedging (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. As of December 31, 2025, the fair value of the derivative liability related to the True-Up Shares was valued at $356,505 using a Monte Carlo Simulation model. Key inputs included a volatility of 107% to 115%, a risk-free rate of 3.5% to 3.6%, and a spot price of $1.56 per share. The model captured the path-dependent payoff structure of the True-Up obligation and incorporated the terms of the contingent settlement feature, including the $0.99 to $1.08 True-Up Price and the Contractual Floor Price of $0.20 per share. Stock-Based Compensation We recognize compensation costs resulting from the issuance of stock-based awards to employees, non-employees, and directors as an expense in the consolidated statements of operations over the requisite service period based on a measurement of fair value for each stock-based award. The fair value of each option granted is estimated as of the date of grant using the Black-Scholes-Merton option-pricing model, net of actual forfeitures. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. The Black-Scholes-Merton option-pricing model includes various assumptions, including the fair market value of Estrella Common Stock, expected life of stock options, the expected volatility, and the expected risk-free interest rate, among others. These assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, stock-based compensation expense, as determined in accordance with authoritative guidance, could have been materially impacted. Furthermore, if we use different assumptions on future grants, stock-based compensation expense could be materially affected in future periods. We account for the fair value of equity instruments issued to non-employees using either the fair value of the services received or the fair value of the equity instrument, whichever is considered more reliable. We utilize the Black-Scholes-Merton option-pricing model to measure the fair value of options issued to non-employees. We record compensation expense for the awards with graded vesting using the straight-line method. We recognize compensation expense over the requisite service period applicable to each individual award, which generally equals the vesting term. Forfeitures are recognized when realized. Emerging Growth Company and Smaller Reporting Company Status As an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards as permitted by the JOBS Act, which allows us to delay the adoption of these standards until they apply to private companies. For further details on our emerging growth company status and related exemptions, see Note 2 to our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not required for smaller reporting companies. 93