UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from _________________ to _________________
Commission
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(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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| None |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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Indicate
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405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Smaller reporting company | |
| Emerging growth company |
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| Class | Outstanding at May 15, 2024 | |
| Common Stock, $0.01 par value per share |
NOVELSTEM INTERNATIONAL CORP.
Quarterly Report on Form 10-Q
for the Quarterly Period Ended March 31, 2024
TABLE OF CONTENTS
| 2 |
PART I
| ITEM 1. | UNAUDITED CONDENSED FINANCIAL STATEMENTS |
NOVELSTEM INTERNATIONAL CORP.
CONDENSED BALANCE SHEETS
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, administrative fees | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Investment in Netco Partners | ||||||||
| Note receivable, NewStem Ltd | ||||||||
| Investment in NewStem Ltd | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Notes payable | ||||||||
| Current portion of long-term notes payable, including accrued interest | ||||||||
| Accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Long-term notes payable, including accrued interest, net | ||||||||
| Derivative liability, guarantee | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 7) | ||||||||
| Shareholders’ deficit: | ||||||||
| Common stock, $ par value, shares authorized, shares issued, and shares outstanding as of March 31, 2024 and December 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost, shares as of March 31, 2024 and December 31, 2023 | ( | ) | ( | ) | ||||
| Total shareholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and shareholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| 3 |
NOVELSTEM INTERNATIONAL CORP.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Administrative fee income | $ | $ | ||||||
| Operating expenses: | ||||||||
| General and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other expenses: | ||||||||
| Gain on derivative instrument | ( | ) | ||||||
| Interest expense | ||||||||
| Total other expenses | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Provision for income tax | ||||||||
| Loss before equity in net income of equity method investees | ( | ) | ( | ) | ||||
| Equity in net loss of equity method investees | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted net loss per share: | ||||||||
| Net loss per share - basic and diluted | $ | ) | $ | ) | ||||
| Weighted average number of shares outstanding - basic and diluted | ||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 4 |
NOVELSTEM INTERNATIONAL CORP.
CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
For the Three Months Ended March 31, 2024:
| Number of | Common | Additional Paid-In | Accumulated | Number of Treasury | Treasury | Total Shareholders’ | ||||||||||||||||||||||
| Shares | Stock | Capital | Deficit | Shares | Stock | Equity | ||||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Stock option compensation | - | - | ||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
For the Three Months Ended March 31, 2023:
| Additional | Number of | Total | ||||||||||||||||||||||||||
| Number of | Common | Paid-In | Accumulated | Treasury | Treasury | Shareholders’ | ||||||||||||||||||||||
| Shares | Stock | Capital | Deficit | Shares | Stock | Equity | ||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Stock option compensation | - | - | ||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| 5 |
NOVELSTEM INTERNATIONAL CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Equity in net loss of equity method investees | ||||||||
| Distribution from NetCo Partners | ||||||||
| Accretion of discount on note payable | ||||||||
| Gain on derivative instrument | ( | ) | ||||||
| Accrued interest added to long-term notes payable | ||||||||
| Stock-based compensation | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable, administrative fees | ( | ) | ||||||
| Prepaid expenses | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Loans made | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from long term notes payable | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| Cash at the beginning of the period | ||||||||
| Cash at the end of the period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| 6 |
NOVELSTEM INTERNATIONAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—NATURE OF OPERATIONS
Description of Business
NovelStem
International Corp. (“NovelStem” or the “Company”) is a holding company whose principal assets are an approximate
% equity interest in NewStem Ltd, an Israeli biotech company (“NewStem”), and a
NewStem focuses on the development and commercialization of diagnostic technology that can predict patients’ anti-cancer drug resistance, allowing for targeted cancer treatments and the potential to reduce resistance to chemotherapy. NewStem is collaborating with life sciences companies for the development of drugs and reagents. NetCo is a legacy media business interest which owns “Net Force”, a book publishing franchise.
Going Concern, Liquidity and Management’s Plans
Since
inception, the Company has accumulated a deficit of approximately $
The Company will need to obtain additional funds to continue its operations. Management’s plans with regard to these matters include additional financing and fundraising until its equity investment in NewStem is profitable. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient cash from financing on terms acceptable to the Company, or that NewStem will be able to continue as a going concern and become profitable (see Note 3).
The
Company has in place a finance agreement with two individuals who are shareholders and directors to borrow $ and an additional
finance agreement with a shareholder to borrow $ for working capital needs (see Note 4). Additionally, the Company entered into
additional finance agreements with unrelated parties in December 2023 and April 2024 to borrow an additional $
In view of the matters described above, the Company’s ability to meet financing requirements is dependent upon the ability to complete additional fundraising or obtain additional financing, and/or monetize its investment in NetCo, along with NewStem continuing as a going concern. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented. Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future period.
The accompanying unaudited condensed financial statements and related disclosures have been prepared with the presumption that users of the unaudited condensed financial statements have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Form 10-K, which was filed with the United States Securities and Exchange Commission (“SEC”) on April 1, 2024, from which the Company derived the balance sheet data at December 31, 2023.
| 7 |
Certain information and footnote disclosures normally included in condensed financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the Company’s Form 10K filed with the Securities and Exchange Commission on April 1, 2024 for the years ended December 31, 2023 and 2022.
Equity Investments
Investee
companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method
of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several
factors, including, among others, representation on the
The Company reviews equity investments for impairment on an annual basis, or earlier if events or changes in circumstances indicate that the carrying amounts might not be recoverable.
The
Company holds a minority investment in an entity, NewStem, which is accounted for pursuant to the equity method of accounting. Additionally,
the Company is a
Derivative Financial Instruments
The
Company has in place a financial instrument, in the form of a note payable, with an identified embedded derivative in the form of a guarantee.
The identified embedded derivative has been bifurcated and accounted for separately. Such derivative financial instruments are measured
at fair value at each financial statement reporting date. If the fair value of a financial liability (the derivative) exceeds the proceeds
received for the issuance of a hybrid instrument in an arms length transaction with no rights or privileges that require separate accounting
recognition as an asset identified, then the embedded derivative is recorded at fair value with the excess of fair value over proceeds
recognized as a loss in earnings. During the three months ended March 31, 2024, the Company recognized a gain on derivative financial
instruments of $
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares outstanding during the period, excluding treasury stock. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares outstanding plus the dilutive potential of common shares which would result from the exercise of stock options and warrants. The dilutive effects of stock options and warrants are excluded from the computation of diluted net income (loss) per share if the effect of doing so would be antidilutive.
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding: | ||||||||
| -Basic | ||||||||
| Add: Warrants | ||||||||
| Add: Stock options | ||||||||
| -Diluted | ||||||||
| Basic and diluted net loss per share | $ | ) | $ | ) | ||||
| 8 |
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Warrants | ||||||||
| Stock options | ||||||||
NOTE 3—EQUITY METHOD INVESTMENTS
Investment in NewStem
In
2018, the Company entered into a Share Purchase Agreement with NewStem and other related parties to provide aggregate funding of up to
$
The
Company accounts for its investment in NewStem under the equity method. As of March 31, 2024 and December 31, 2023, the carrying
value of the investment in NewStem exceeded its portion of the underlying net assets of NewStem by approximately $
The Company assesses its investment in NewStem for impairment on an annual basis or more frequently if indicators of impairment exist.
During the three months ended March 31, 2024, the Company recorded a reimbursement due to NewStem of
approximately $
As
disclosed in Note 8, the Company is in negotiations to acquire the remainder of NewStem in exchange for shares of Company stock. In anticipation
of this transaction, the Company advanced $
NewStem
is in the development stage and has incurred losses since its inception and has generated only minimal revenues under a licensing agreement.
NewStem will need to obtain additional funds to continue its operations. NewStem management’s plans with regard to these matters
include continued development, marketing and licensing of its products, as well as seeking additional financing arrangements. Although
management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient cash from
sales, licensing or financing on terms acceptable to the Company. NewStem obtained additional funding of approximately $
The aforementioned events indicate significant difficulties to continue as a concern. Additionally, Israel declared a state of war in October 2023 which resulted in a decrease in Israel’s economic and business activity. The security situation in Israel led to a disruption in the chain of supply and production, a decrease in the volume of national transportation, and a shortage in manpower as well as a decrease in the value of financial assets. As a result of the movement and work restrictions, NewStem began operating on a limited scale. Additionally, the situation has brought further difficulties in management’s efforts to seek additional financing.
The following table represents the Company’s investment in NewStem:
| Three Months Ended March 31, 2024 | Year Ended December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| Investment in NewStem, beginning | $ | $ | ||||||
| Allocation of net loss from NewStem, Ltd. | ( | ) | ( | ) | ||||
| Gain on dilution of equity method investment | ||||||||
| Investment in NewStem, ending | $ | $ | ||||||
| 9 |
The results of operations of the Company’s investment in NewStem is summarized below (unaudited):
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Condensed income statement information: | ||||||||
| Net revenues | $ | $ | ||||||
| Gross margin | $ | $ | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Company’s allocation of net loss from NewStem, Ltd. | $ | ( | ) | $ | ( | ) | ||
The financial position of the Company’s investment in NewStem is summarized below:
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| Condensed balance sheet information: | ||||||||
| Current assets | $ | $ | ||||||
| Non-current assets | $ | $ | ||||||
| Current liabilities | $ | $ | ||||||
| Non-current liabilities | $ | $ | ||||||
Investment in NetCo
NovelStem
owns a
The following table represents the Company’s investment in NetCo:
| Three Months Ended March 31, 2024 | Year Ended December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| Investment in NetCo, beginning | $ | $ | ||||||
| Allocation of net income (loss) from NetCo | ( | ) | ||||||
| Distribution from NetCo | ( | ) | ||||||
| Investment in NetCo, ending | $ | $ | ||||||
The results of operations of the Company’s investment in NetCo is summarized below (unaudited):
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Condensed income statement information: | ||||||||
| Net sales | $ | $ | ||||||
| Gross margin | $ | $ | ||||||
| Net income | $ | ( | ) | $ | ||||
| Company’s allocation of net income from NetCo | $ | ( | ) | $ | ||||
The financial position of the Company’s investment in NetCo is summarized below:
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| Condensed balance sheet information: | ||||||||
| Current assets | $ | $ | ||||||
| Non-current assets | $ | $ | ||||||
| Current liabilities | $ | $ | ||||||
| Non-current liabilities | $ | $ | ||||||
| 10 |
NOTE 4—NOTES PAYABLE
In
December 2023, the Company entered into two short term notes payable with unrelated parties, Hewlett Fund and AIGH Investment
Partners, LLC. The notes are for $
Long-term notes payable are summarized as follows:
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| Notes payable related parties: | ||||||||
| Notes payable director and Executive Chairman | $ | $ | ||||||
| Accrued interest added to note balance | ||||||||
| Total notes payable director and Executive Chairman | ||||||||
| Note payable shareholder, principal amount | ||||||||
| Less unamortized discount | ( | ) | ( | ) | ||||
| Total note payable shareholder | ||||||||
| Note payable, litigation funding agreement: | ||||||||
| Note payable Omni Bridgeway (Fund 4) Invt. 3 L.P. | ||||||||
| Accrued interest added to agreement balance | ||||||||
| Total note payable, litigation funding agreement | ||||||||
| Total notes payable | ||||||||
| Less current portion | ( | ) | ||||||
| Long-term notes payable | $ | $ | ||||||
In
May 2022, the Company entered into note agreements with two individuals who are related parties to borrow up to $
On
May 5, 2023, the Company entered into a long term note payable with a shareholder for $ in financing to be funded $ at
inception and $ in October 2023. This note bears interest at zero percent (
Note Payable, Litigation Funding Agreement
On
February 11, 2022, the Company entered into a nonrecourse litigation funding agreement (the “Agreement”) with Omni Bridgeway
(Fund 4) Invt. 3 L.P. (“Omni”) related to an arbitration proceeding disclosed in Note 7. The Agreement provides for Omni
to fund all costs related to the arbitration up to $
| 11 |
During
July 2023, the arbitration was settled with a partially favorable outcome for the Company. As a result of the ruling disclosed in Note
7, the liability became probable and reasonably estimable, and the Company has recorded the full liability due to Omni as of December
31, 2023. This liability consists of expenses funded by Omni of $
NOTE 5—EQUITY
(a) General
At March 31, 2024 and December 31, 2023, the Company had issued and outstanding shares of its common stock, par value $ per share. Holders of outstanding common stock are entitled to receive dividends when, as and if declared by the Board and to share ratably in the assets of the Company legally available for distribution in the event of a liquidation, dissolution or winding up of the Company.
(b) Summary Employee Option Information
The Company’s stock option plan provides for the grant to officers, directors, third party contractors and other future key employees of options to purchase shares of common stock. The purchase price may be paid in cash or, if the option is “in-the-money”, it is automatically exercised “net”. In a net exercise of an option, the Company does not require a payment of the exercise price of the option from the optionee but reduces the number of shares of common stock issued upon the exercise of the option by the smallest number of whole shares that has an aggregate fair market value equal to or in excess of the aggregate exercise price for the option shares covered by the option exercised. Each option is exercisable to one share of the Company’s common stock. Most options expire within six years from the date of the grant and generally vest on the first anniversary date of their issuance. Pursuant to the Equity Incentive Plan the Company’s board of directors approved on November 12, 2018, an aggregate of options have been issued to directors and investor relations professionals as of March 31, 2024. An additional options were issued to directors on April 1, 2024.
| Risk-free interest rate | % | |||
| Expected term of options, in years | ||||
| Expected annual volatility | % | |||
| Expected dividend yield | % | |||
| Determined weighted average grant date fair value per option | $ |
The expected term of the options represents an estimate of the length of time until the expected date of exercising the options. Options granted have a maximum life of years. With respect to determining expected exercise behavior, the Company has grouped its option grants into certain groups to track exercise behavior and establish historical rates. The Company estimated volatility by considering historical stock volatility over the expected term of the option. The risk-free interest rates are based on the U.S. Treasury yields for a period consistent with the expected term. The dividend yield of % is based on the Company’s history and expectation of dividend payout. The Company has not paid and does not anticipate paying dividends in the near future.
| 12 |
(c) Summary Option Information
| Number | Weighted | |||||||
| of | Average | |||||||
| Options | Exercise | |||||||
| (in shares) | Price | |||||||
| Outstanding, December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Outstanding, March 31, 2024 | $ | |||||||
| Exercisable, March 31, 2024 | $ | |||||||
Stock-based compensation expense was approximately $ and $ in the three months ended March 31, 2024 and 2023, respectively.
The total compensation cost related to non-vested awards not yet recognized was approximately $ as of March 31, 2023. As of March 31, 2023, options were unvested. These options vested during March 2024.
(d) Warrants
The Company has issued warrants at exercise prices equal to or greater than the market value of the Company’s common stock at the date of issuance. A summary of warrant activity follows (unaudited):
| Number of | Weighted | |||||||
| shares | Average | |||||||
| underlying | Exercise | |||||||
| warrants | Price | |||||||
| Outstanding, December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited or expired | ||||||||
| Outstanding, March 31, 2024 | $ | |||||||
The
warrant agreements were amended on May 12, 2023 to extend the expiration date to
| 13 |
NOTE 6—INCOME TAXES
The Company’s income tax provision differs from the expense that would result from applying statutory rates to income (loss) before taxes. A reconciliation of the provision (benefit) for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows (unaudited):
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Computed tax at the federal statutory rate of | $ | ( | ) | $ | ( | ) | ||
| State income taxes, net of federal income tax benefit | ( | ) | ( | ) | ||||
| Change in federal valuation allowance | ||||||||
| Foreign rate differential | ( | ) | ( | ) | ||||
| Total provision for income tax | $ | $ | ||||||
NOTE 7—COMMITMENTS AND CONTINGENCIES
The
Company was the claimant in an arbitration proceeding against their
The Arbitrator ruled in NovelStem’s favor on the issue of contract interpretation of the Netco Partners JV Agreement. The Arbitrator also found that the Company’s joint venture partner failed to use “reasonable, good faith efforts” to license and exploit the Net Force concept, in breach of its contractual obligations under the Netco Partners’ Joint Venture Agreement. The Arbitrator confirmed NovelStem’s contractual right to use Tom Clancy’s name as a possessory credit in the Net Force title (Tom Clancy’s Net Force).
As
a result of this ruling, the costs related to the litigation funding agreement disclosed in Note 4 were recognized and a total liability
of $
NOTE 8—SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date these financial statements were available to be issued and filed with the SEC.
During
the fourth quarter of 2023, the Company entered into negotiations with NewStem stockholders for the acquisition of the shares not held
by the Company. The negotiations are ongoing for the transaction in which the Company would acquire all outstanding shares in exchange
for shares of NovelStem stock. Company management anticipates the transaction to conclude in the second quarter of 2024. In anticipation
of the Company acquiring the remaining ownership of NewStem, the Company has loaned $
An additional options were issued to directors on April 1, 2024 pursuant to the Company’s Equity Incentive Plan.
In
April 2024, the Company borrowed $
| 14 |
NOVELSTEM INTERNATIONAL CORP.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements in the following discussion and throughout this Form 10-Q that are not historical in nature are “forward-looking statements.” You can identify forward-looking statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this Form 10-Q because of numerous factors, many of which are beyond our control. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect actual outcomes.
Overview
We are a development stage company and reported net losses of approximately $303,000 and $269,000 for the three months ended March 31, 2024 and 2023, respectively. We had current assets of approximately $36,000 and current liabilities of $3,297,000 as of March 31, 2024. As of December 31, 2023, our current assets and current liabilities were approximately $87,000 and $346,000, respectively. The significant increase in current liabilities is primarily due to the litigation funding agreement liability classification changing from noncurrent to current in January 2024.
We have prepared our financial statements for the three months ended March 31, 2024 assuming that we will continue as a going concern. Our continuation as a going concern is dependent upon NewStem’s ability to successfully develop and commercialize its products, improving our profitability and the continuing financial support from our shareholders as well as obtaining additional outside funding. Our sources of capital in the past have included the sale of equity securities, which include common stock sold in private transactions, large alternative minimum tax refunds, and related party debt as well as debt from unrelated parties.
NewStem is a development stage Israeli biotech limited liability company focused on pioneering intellectual property related to haploid human embryonic stem cells for the development of personalized diagnostics and therapeutics for genetic and epigenetic diseases. NewStem has incurred losses related to in process research and development since inception and the Company records our percentage allocation of these net losses as incurred. We have included the condensed financial statements of NewStem as an exhibit to this Form 10-Q.
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto and other financial information appearing elsewhere in this Form 10-Q. In the discussion below, general and administrative expenses are referred to as “G&A expenses”.
| Three Months Ended March 31, | ||||||||||||
| 2024 | 2023 | Change | ||||||||||
| Administrative fee income | $ | 3,000 | $ | - | $ | 3,000 | ||||||
| Operating expenses: | ||||||||||||
| G&A expenses | 183,306 | 164,792 | (18,514 | ) | ||||||||
| Total operating expenses | 183,306 | 164,792 | (18,514 | ) | ||||||||
| Loss from operations | (180,306 | ) | (164,792 | ) | (15,514 | ) | ||||||
| Other expenses: | ||||||||||||
| Gain on derivative instrument | (25,000 | ) | - | (25,000 | ) | |||||||
| Interest expense | 94,764 | 7,313 | 87,451 | |||||||||
| Total other expenses | 69,764 | 7,313 | 62,451 | |||||||||
| Net loss before equity in net | ||||||||||||
| loss of equity method investees | (250,070 | ) | (172,105 | ) | (77,965 | ) | ||||||
| Equity in net loss of equity method investees | (53,210 | ) | (96,716 | ) | 43,506 | |||||||
| Net loss | $ | (303,280 | ) | $ | (268,821 | ) | $ | (34,459 | ) | |||
We are a holding company whose primary assets are our ownership of equity interests in NewStem and NetCo. We conduct no other business and as a result, we have no revenue or cost of revenue. We do charge annual administrative fees to an affiliated entity.
The Company incurs G&A expenses primarily related to professional fees, insurance and stock based compensation. We incurred G&A expenses of approximately $183,000 and $165,000 for the three months ended March 31, 2024 and 2023, respectively. Specifically, professional fees increased by approximately $22,000 in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. Primarily due to an increase in audit fees and general counsel legal fees. Other miscellaneous G&A expenses decreased by approximately $2,000.
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Stock compensation expense, included in G&A expenses, decreased by approximately $2,000 in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 due to a smaller number of options awarded in the current period as compared to the prior period.
Interest expense increased by approximately $87,000 in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 due to the increased debt incurred through March 31, 2024.
The Company has recorded no income tax expense as we have incurred operating losses and all deferred tax assets are fully offset by an income tax valuation allowance.
We reported net losses from equity method investees in all periods presented. The net losses reported for the three months ended March 31, 2024 included a loss from NetCo of $1,351 and a loss from NewStem of $51,859. The net losses reported for the three months ended March 31, 2023 included net income of $7,875 from NetCo which was offset by net loss of $104,591 from NewStem.
Liquidity and Capital Resources
We have not paid dividends on our common stock since our name change and business focus shift in 2018. Our present policy is to apply cash to investments in product development at NewStem, acquisitions or expansion; consequently, we do not expect to pay dividends on common stock in the foreseeable future.
We expect to continue to incur greater expenses in the near future as we expand our business, including funding NewStem, or enter into strategic partnerships. We also expect our G&A expenses to increase as we expand our administrative staff and add infrastructure.
The Company will need to obtain additional funds to continue its operations. Management’s plans with regard to these matters include additional financing and fundraising until our equity investment in NewStem is profitable. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient cash from financing on terms acceptable to the Company, or that NewStem will become profitable.
In May 2022, the Company entered into note agreements with Jan Loeb, our Executive Chairman and Jerry Wolasky, a member of the Board, to borrow up to an aggregate of $600,000 for working capital needs. The note agreements were amended in March 2024 to increase the total borrowing to $650,000 and extend the maturity date. The agreements provide for interest at a rate of 8% per annum, increased to 10% per annum for advances subsequent to November 11, 2022, and mature September 1, 2025. As of the date of this Quarterly Report, the full amount of $650,000 has been funded pursuant to these agreements.
During the year ended December 31, 2023, the Company entered into a note agreement with a shareholder to borrow $300,000 for continued working capital. This note bears interest at zero percent (0%) and matures on May 5, 2025. The note includes a guarantee which has been identified as an embedded derivative with a fair value of a liability of $535,000 at March 31, 2024 and December 31, 2023.
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In December 2023, the Company entered into two short term notes payable with unrelated parties for a total of $250,000 in borrowings utilized for the funding of NewStem. The notes bear interest at 12% per annum and mature December 21, 2024, at which time all principal and accrued interest are due and payable. The note agreements include a provision whereby, in the event of a capital raise transaction by the Company, the note holders would be entitled to participate in the transaction in an amount equal to 133% of the amounts owed on the note agreements at the closing of the transaction.
In April 2024, the Company borrowed $100,000 from unrelated parties pursuant to convertible debt agreements. These agreements bear interest at $10% per annum and mature December 30, 2025. The unpaid principal balance of these notes and any accrued interest may be converted into shares of the Company’s common stock at a conversion price of $0.13 per share.
Net Cash Used In Operating Activities.
For the three months ended March 31, 2024, net cash used in operating activities was approximately $73,000, which consisted primarily of a net loss of approximately $303,000, offset by noncash equity in loss of equity method investees of approximately $53,000, accretion of discount on notes payable of approximately $44,000, stock based compensation of approximately $14,000 and interest added to notes payable of approximately $42,000 and reduced by gain on derivative instrument of $25,000. Additionally, cash was used in operations related to an increase in current assets of approximately $3,000 and an increase in accrued liabilities and other payables of approximately $95,000.
For the three months ended March 31, 2023, net cash used in operating activities was approximately $28,000, which consisted primarily of a net loss of approximately $269,000, offset by noncash equity in loss of equity method investees of approximately $97,000 and distributions from equity method investees of approximately $8,000, stock based compensation of approximately $15,000 and interest added to notes payable of approximately $7,000. Additionally, cash was used in operations related to an increase in current assets of approximately $13,000 and an increase in accrued liabilities and other payables of approximately $101,000.
Net Cash Used In Investing Activities.
During the three months ended March 31, 2024, $250,000 was loaned to NewStem in an investing activity. For the three months ended March 31, 2023, no net cash was used in investing activities.
Net Cash Provided By Financing Activities.
For the three months ended March 31, 2024, net cash provided by financing activities was $275,000, consisting of long-term borrowings from two directors and a significant stockholder totaling $275,000.
For the three months ended March 31, 2023, net cash provided by financing activities was $62,000, consisting of long-term borrowings from two directors.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
This section is not applicable.
| ITEM 4. | CONTROLS AND PROCEDURES |
Our Principal Executive Officer and Chief Financial Officer conducted an evaluation of our controls and procedures. We have identified material weaknesses in our internal control and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. We have re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of March 31, 2024 and we concluded there was a material weakness in the design of our internal control over financial reporting as it relates to insufficient resources to employ proper segregation of duties over the processing of transactions and financial reporting.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
| ITEM 1. | LEGAL PROCEEDINGS |
As noted above, NetCo owns all rights to the “Tom Clancy’s Net Force” intellectual property in all media, including film, television, and video games. As part of the joint venture, NetCo has published more than a dozen books and had an ABC miniseries.
After Tom Clancy passed away in 2013, his estate and business partners refused to cooperate in exploiting the intellectual property. After trying to amicably resolve the dispute, the Company initiated arbitration proceedings with the American Arbitration Association. The Company’s arbitration demand asserted claims for breach of the joint venture agreement and breach of fiduciary duty. Both claims arise from C.P. Group’s failure to make reasonable, good faith efforts to exploit the full array of media rights relating to Net Force. The Company’s goal is to maximize the total potential value of the NetCo intellectual property across video games, streaming, digital media, merchandising and other ancillary markets. The Company believes that the value of the intellectual property is significant.
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The arbitration evidentiary hearing concluded on October 20, 2022, and the arbitrator ordered the parties to submit post-hearing briefs. Final briefs were filed in January 2023. The Arbitrator ruled in the Company’s favor on two key issues of the arbitration and ruled against the Company in other key issues.
The Arbitrator ruled in NovelStem’s favor on the issue of contract interpretation of the Netco Partners JV Agreement. The Arbitrator also found that the Company’s joint venture partner failed to use “reasonable, good faith efforts” to license and exploit the Net Force concept, in breach of its contractual obligations under the Netco Partners’ Joint Venture Agreement. The Arbitrator confirmed NovelStem’s contractual right to use Tom Clancy’s name as a possessory credit in the Net Force title (Tom Clancy’s Net Force). However, the arbitrator did not award any damages to the Company and did not cede operating control of the joint venture to the Company as requested. As such, the Company continues to struggle to maximize the potential of the NetCo asset.
To fund efforts to maximize the value of NetCo, NovelStem has secured non-recourse litigation funding. As a result of this ruling, the costs related to the litigation funding agreement were recognized. All costs related to the litigation and the related litigation funding agreement were recorded by the Company for a total liability of $2,819,196.
| ITEM 1A. | RISK FACTORS |
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.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
| (a) | Not applicable. | |
| (b) | Not applicable. | |
| (c) | Not applicable. |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBITS |
#101.1 The following financial statements from NovelStem International Corp.’s Form 10-Q for the quarter ended March 31, 2024, filed on May 15, 2025, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Changes in Shareholders’ Equity, (iv) Condensed Statements of Cash Flows and (v) Notes to Condensed Financial Statements, tagged as blocks of text.
104 Cover Page Interactive Data File (embedded within the Inline XBRL document).
| # | This exhibit is filed or furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
| NOVELSTEM INTERNATIONAL CORP. | ||
| Date: May 15, 2024 | By: | /s/ Jan Loeb |
| Name: | Jan Loeb | |
| Title: | Executive Chairman | |
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