Never beyond repair. This is going to be adorable!
You want to divide at the marked sts and continue to work on the back. It looks like you may have done that and cast off for the neck in the back? What I don't see are the newly cast on sts which will form the sleeves. You should have extensions of the back on each tide, sort of forming a T.
Did you do that and are the newly cast on sts loose enough or are they puckering the sleeve at the underarm?