Item 1A. RISK FACTORS 8
Item 1B. UNRESOLVED STAFF COMMENTS 12
Item 2. PROPERTIES 12
Item 3. LEGAL PROCEEDINGS 12
Item 4. MINE SAFETY DISCLOSURES 12
PART II
Item 6. [RESERVED] 13
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 17
Item 9A. CONTROLS AND PROCEDURES 18
Item 9B. OTHER INFORMATION 18
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 18
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 19
Item 11. EXECUTIVE COMPENSATION 21
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 26
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 27
Certain
statements contained in this report are forward-looking in nature. These statements can be identified by the use of forward-looking terminology
such as “believes”, “expects”, “may”, “will”, “should” or “anticipates”,
or the negatives thereof, or comparable terminology, or by discussions of strategy. You are cautioned that our business and operations
are subject to a variety of risks and uncertainties and, consequently, our actual results may materially differ from those projected
by any forward-looking statements. Certain of such risks and uncertainties are discussed below under the heading “Item 1A. Risk
Factors.”
PART
I
Item
1. Business.
NovelStem
International Corp. (“NovelStem” or the “Company”) is a development stage biotechnology holding company focused
on the stem cell-based technology developed by its affiliate, NewStem Ltd, an Israeli biotech company (“NewStem”), in which
the Company owns an approximate 31% equity interest. NovelStem was formed in January 1993 as Big Entertainment, Inc. Thereafter, the
Company changed its name to Hollywood.Com Inc. and, later to Hollywood Media Corp. (“Hollywood Media”).
In
2018, the Company shifted its business focus from media to cutting edge biotech when it acquired a substantial ownership interest in
NewStem and changed its name to NovelStem. As a significant shareholder in NewStem, and the substantial commitment of our management
and financial resources to NewStem, including the fact that our Executive Chairman, Jan Loeb, is also the Chairman of NewStem, we have
the ability to exert significant influence over the management and operations of NewStem resulting in NewStem functioning as a minority
operating subsidiary of the Company. Since his appointment in July 2018, Mr. Loeb has acted in an executive capacity on behalf of the
Company and has served in a de facto leadership role. In September 2022, the Board appointed Mr. Loeb as Executive Chairman of
NovelStem in order to ratify Mr. Loeb’s position and clarify his executive role. On January 13, 2023, the Board appointed Mr. Loeb
as President. With respect to NewStem, Mr. Loeb, as the Chairman, calls and presides over the meetings of NewStem’s Board of Directors.
Additionally, Mr. Loeb leverages his financial expertise by guiding NewStem’s financial and strategic planning, including the raising
and deployment of capital, developing and modifying NewStem’s business plan and budget and by participating in the negotiation
of NewStem’s material contracts as required. NewStem does not currently have an appointed Chief Financial Officer and, as such,
Mr. Loeb serves as the de facto Chief Financial Officer and Chief Strategic Officer of NewStem.
NovelStem
depends entirely on earnings and cash from its investments in NewStem and our 50% equity interest in a legacy joint venture named NetCo
Partners (“NetCo”). The Company’s principal operations coincide with those of NewStem. We have not received any dividend
payments or other distributions from NewStem in the fiscal years ended December 31, 2023 and 2022. We received distributions of earnings
from NetCo of $6,875 and $12,591, respectively, for the fiscal years ended December 31, 2023 and 2022.
NewStem
NewStem
is a development stage Israeli biotech limited liability company focused on human Pluripotent Stem Cells (hPSCs) in general, and
Haploid human Pluripotent Stem Cells (HhPSCs), in particular. These cells have the potential to change the face of medical research
as they play a pivotal role in cancer research, regenerative medicine and disease therapy. NewStem established a discovery
bio-platform based on haploid human embryonic stem cell technology for genome-wide screenings and is currently using this platform
for the discovery and development of oncology drugs based on synthetic lethal interaction and developing a personalized diagnostic
for early detection of chemotherapy resistance. NewStem has incurred losses since inception and has generated minimal revenues from
a licensing agreement to date. NewStem filed an FDA Pre-Submission and received a CE Mark from the European Medicines Agency (EMA)
for its in vitro diagnostic device (IVDD). NewStem does not have an FDA approved medical device. The NewStem Software Diagnostic
Device (NSDD) is CE marked under EU regulation as an “other” IVD under Directive 98/79/EC since March 2022.
NewStem
performs genome-wide genetic screening to identify synthetic lethal interactions with common cancer-related mutations. The first step
in the process is to create a model with relevant cancer-related mutations in HhPSCs, where, subsequently, a library targeting approximately
18,000 coding genes is induced. At the end of this step, each cell has two mutations, one in the cancer related gene and the other in
a coding gene. A genome-wide genetic screening is performed, both on normal HhPSCs and genomic modified HhPSCs to which a cancer-related
mutation was inserted. The goal of such screens is to identify mutations that in combination with a cancer-related mutation will kill
the cells. Following bioinformatic analysis of the genetic screening results, novel targets are identified and validated, first in HhPSCs
and then cancer models (tumor organoids and PDX). NewStem has validated several targets in HhPSCs and will move next to validation in
cancer models. To identify novel targets for drug development, NewStem performs genome-wide genetic screening. The validation process
requires additional experiments that corroborate the results in independent experiments
that are performed on haploid human embryonic stem cells and cancer models. For validated targets, artificial intelligence (AI) based
drug discovery will be performed following by hit to lead process and ADMET that will support the transition to clinical trials.
In
reference to AI-based drug discovery, AI can assist in structure-based drug discovery by predicting the 3D protein structure and the
chemical environment of the target protein site, thus helping to predict the effect of a compound on the target along with safety considerations
before their synthesis or production and, accordingly, accelerates the drug development process.
In
reference to the hit to lead process- this is the iterative process of lead improvement. It is the stage where a hit, typically a small
molecule identified in a high throughput screen, is chemically modified into a lead molecule following improvements in activity against
the target.
In
reference to ADMET, this is the five-letter acronym for absorption, distribution, metabolism, excretion, and toxicity that describes
pharmacokinetics. ADMET plays key roles in drug discovery and development. A high-quality drug candidate should not only have sufficient
efficacy against the therapeutic target, but also show appropriate ADMET properties at a therapeutic dose.
NewStem
possesses pioneering intellectual property, reagents and experience related to the isolation and differentiation of HhPSCs and hPSCs,
their genetic manipulation, immunogenicity, tumorigenicity and their unique capacity in disease modeling.
We
believe that NewStem is currently the only company worldwide to develop products based on this innovative proprietary technology. These
products refer to the medical device platform that provides information to oncologists regarding the presence of mutations in the patient’s
tumor profile which may confer resistance to different anti-cancer drugs and to anticancer drugs that target tumors with specific mutations
based on a synthetic-lethal interaction approach.
NewStem’s
technology solutions are derived from an exclusive, worldwide license from Yissum Research Development Company, Hebrew University’s
technology transfer company (“Yissum”) and The New York Stem Cells Foundation, based on the findings and inventions of Prof.
Nissim Benvenisty, Director of the Azrieli Center for Stem Cells and Genetic Research, The Hebrew University of Jerusalem (the “License”).
The License provides NewStem an exclusive worldwide license to make commercial use of the License and to develop, manufacture, market,
distribute or sell a product in the field of therapeutics, diagnostics, screening, development and testing. In consideration for the
grant of the License, NewStem is obligated to pay royalties of up to 3% of net sales and up to 12% of “Sublicense Consideration”
(as defined in the License Agreement).
NovelStem
was the original seed investor in NewStem providing $2 million in July 2018 and another $2 million over the next two and a half years.
We currently own a 30.51% equity interest in NewStem. The remaining equity interests in NewStem are owned by Yissum and Professor Benvenisty,
each of whom owns a 30.51% equity interest, Illumina Cambridge LTD, which owns a 5.31% equity interest, and management and a number of
other shareholders who own collectively approximately 3.18%. Currently, our President and Executive Chairman, Jan Loeb, is also the Chairman
of the Board of NewStem. Professor Benvenisty and a representative of Yissum occupy the other two Board seats.
Pursuant
to NewStem’s Articles of Association, investors (including NovelStem) are granted certain rights and are subject to certain restrictions
with respect to their equity interests in NewStem. NovelStem has preemptive rights to purchase additional shares issued by NewStem up
to its pro-rata share of all outstanding shares of NewStem held by all shareholders of NewStem, until the consummation of either an initial
public offering or a liquidation event. Such pro-rata share may be increased into an over-allotment if other shareholders decline to
exercise their preemptive rights. The Board of Directors of NewStem may make capital calls on NovelStem and the other shareholders, in
respect of any sum unpaid in respect of shares held by such shareholder. All shareholders holding at least 10% of the outstanding shares,
including NovelStem, may exercise a right of first refusal on all sales of shares of NewStem other than transfers to certain permitted
transferees. NovelStem and other shareholders have a co-sale right to sell their shares in place of those that would be issued and sold
by NewStem’s founder. The shares of NewStem are subject to a drag-along right, compelling all shares to be sold in the event that
a transaction meant to sell all shares of NewStem is approved by shareholders holding at least 65% of the vote of all shares of NewStem.
Competition
The
technologies underlying NewStem’s products are subject to rapid and profound technological change. Competition intensifies as technical
advances in each field are made and become more widely known. We can give no assurance that others will not develop services, products,
or processes with significant advantages over the products, services, and processes that NewStem offers or is seeking to develop. Any
such occurrence could have a material and adverse effect on NewStem’s and our business, results of operations and financial condition.
NewStem
plans to enhance and broaden its product offerings in response to changing customer demands and competitive pressure and technologies.
The success of any new product offering or enhancement to an existing product will depend on numerous factors, including the ability
to:
- Properly identify and anticipate physician and patient needs;
- Develop and introduce new products or product enhancements in a timely manner;
- Demonstrate the safety and efficacy of new products; and
Government
Regulation
In
the United States, pharmaceutical products are subject to extensive regulation by the Federal Food and Drug Administration and Cosmetic
Act or the FDA. The FDA and other federal and state statutes and regulations, govern, among other things, the research, development,
testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and
reporting, sampling, and import and export of pharmaceutical products. The FDA has very broad enforcement authority and failure to abide
by applicable regulatory requirements can result in administrative or judicial sanctions being imposed on NewStem, including warning
letters, refusals of government contracts, clinical holds, civil penalties, injunctions, restitution, disgorgement of profits, recall
or seizure of products, total or partial suspension of production or distribution, withdrawal of approval, refusal to approve pending
applications, and criminal prosecution.
FDA
Approval Process
NewStem’s
therapeutic product candidates are expected to be regulated by the FDA as drugs. No manufacturer may market a new drug until it has submitted
a New Drug Application, or NDA, to the FDA, and the FDA has approved it.
The
testing and approval process requires substantial time, effort and financial resources, and NewStem’s product candidates may not
be approved on a timely basis, if at all. The time and expense required to perform the clinical testing necessary to obtain FDA approval
for regulated products can frequently exceed the time and expense of the research and development initially required to create the product.
The results of preclinical studies and initial clinical trials of NewStem’s product candidates are not necessarily predictive of
the results from large-scale clinical trials, and clinical trials may be subject to additional costs, delays or modifications due to
a number of factors, including difficulty in obtaining enough patients, investigators or product candidate supply. Failure by NewStem
to obtain, or any delay in obtaining, regulatory approvals or in complying with requirements could adversely affect the commercialization
of product candidates and NewStem’s (and, therefore, the Company’s) ability to receive product or royalty revenues.
The
diagnostic product (NSDD) will be considered a medical device. A Pre-Submission (Pre-Sub) regarding the NSDD was submitted to FDA in
March 2022, and the FDA’s written feedback was received in May 2022. The FDA requested that the presented intended use and pivotal
clinical testing design be modified. NewStem still needs to present to the FDA a Supplement to the Pre-Sub, presenting such modifications,
and asking it to confirm that the de novo route is indeed applicable to the device. Once an agreement is reached with the FDA, the device
will be subjected to a retrospective pivotal clinical testing that will be followed by the de novo submission to the FDA.
Other
Regulatory Requirements
After
approval, drug products are subject to extensive continuing regulation by the FDA, which include obligations to manufacture products
in accordance with Good Manufacturing Practice, or GMP, maintain and provide to the FDA updated safety and efficacy information, report
adverse experiences with the product, keep certain records and submit periodic reports, obtain FDA approval of certain manufacturing
or labeling changes, and comply with FDA promotion and advertising requirements and restrictions. Failure by NewStem to meet these obligations
can result in various adverse consequences, both voluntary and FDA-imposed, including product recalls, withdrawal of approval, restrictions
on marketing, and the imposition of civil fines and criminal penalties against the NDA holder. In addition, later discovery of previously
unknown safety or efficacy issues may result in restrictions on the product, manufacturer or NDA holder.
Outside
the United States, NewStem’s ability to market a product is contingent upon receiving marketing authorization from the appropriate
regulatory authorities. The requirements governing marketing authorization, pricing and reimbursement vary widely from jurisdiction to
jurisdiction. At present, foreign marketing authorizations are applied for at a national level, although within the European Union registration
procedures are available to companies wishing to market a product in more than one European Union member state.
NewStem
is also subject to various environmental, health and safety regulations including those governing laboratory procedures and the handling,
use, storage, treatment, and disposal of hazardous materials. From time to time, and in the future, NewStem’s operations may involve
the use of hazardous materials.
NetCo
In
June 1995, we and C.P. Group Inc. (“C.P. Group”), formed the joint venture, NetCo. NetCo owns the entertainment property,
“Net Force”, about a division of the FBI investigating crimes and adventures involving the internet and the digital world.
NovelStem
and C.P. Group each own 50% of the ownership interest in NetCo. NetCo owns all rights in all media to the Net Force property including
film, television, and video games.
In
1997, NetCo licensed to Putnam Berkley the rights to publish the first six Net Force books in North America, which books were written
and published. This agreement was subsequently renewed in December 2001 for four more books that were created and published. There was
also a series of books targeted to the young adult market, Net Force Explorer, also published by Putnam Berkley. Net Force books have
so far been published in mass market paperback format. The first book in the series was adapted as a four-hour mini-series on the ABC
television network.
In
2019, NetCo entered into a new publishing agreement with HarperCollins. Three novels and two Net Force novellas have been published under
that agreement. Through its interest in NetCo, NovelStem receives distributions of its 50% share of proceeds generated from the rights
to Net Force.
Competition
Competition
in the publishing and video game industries is intense. Many new products and services are regularly introduced in each major industry
segment (console, mobile and PC), but only a relatively small number of “hit” titles account for a significant portion of
total revenue in each segment. NetCo’s competitors range from established interactive entertainment companies and diversified media
companies to emerging start-ups, and we expect new competitors to continue to emerge throughout the world.
See
Item 3 – Legal Proceedings for information concerning proceedings related to NetCo.
Employees
We
do not currently have any employees; however, the Company relies on consultants to perform the duties that would be performed by employees.
Additional
Financial Information
For
additional financial information regarding our operations, see “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our Financial Statements included in this Annual Report.
Available
Information
We
file annual, quarterly and current reports and other information with the U.S. Securities and Exchange Commission (the “SEC”).
These filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. You may also read and copy
any document we file at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference room.
Our
website can be found at http://novelstem.com.
Item
1A. Risk Factors.
Our
business is subject to certain risks, including those described below. If any of the events described in the following risk factors actually
occurs then our business, results of operations and financial condition could be materially adversely affected. More detailed information
concerning these risks is contained in other sections of this registration statement, including “Business” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Risks
Relating to our Business
We
are a holding company the principal assets of which are illiquid, ownership interests in NewStem and NetCo.
Our
Company’s primary assets are equity interests in NewStem and NetCo. Our President and Executive Chairman, Jan Loeb, is also the
Chairman of NewStem and through this shared management structure along with our 30.51% ownership interest in NewStem, we are able to
exert significant influence over the operations of NewStem. Additionally, we are a 50% partner in NetCo and through our ownership interest.
We
conduct no other business and, as a result, we depend entirely upon earnings and cash flow from NewStem and NetCo. If we decide in the
future to pay dividends, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends
or other payments from our operating subsidiaries.
Our
investments in NewStem and NetCo are illiquid.
Our
shares in NewStem and our ownership interest in NetCo are illiquid and have extremely limited liquidity rights. The transferability of
these interests is restricted under federal and state securities laws and the governing documents of each of NewStem and NetCo.
We
depend on our executive officers and consultants and other key individuals along with the executive officers and key individuals of NewStem
to continue the implementation of our long-term business strategy and could be harmed by the loss of their services and our inability
to make up for such loss with qualified replacements.
We
believe that our continued growth and future success will depend in large part on the skills of our management team and the management
teams of NewStem and NetCo, and our partners’ respective abilities to motivate and retain these individuals and other key individuals.
Jan Loeb, our President and Executive Chairman, is also the Chairman of NewStem, and therefore has the shared responsibility of growing
the business and operations of NewStem. The loss of any of their service could reduce our ability to successfully implement our long-term
business strategy which may result in a loss of revenue, and the value of our common stock could be materially adversely affected. Leadership
changes will occur from time to time and we cannot predict whether significant resignations will occur or whether NewStem will be able
to recruit additional qualified personnel. We believe these management teams possess valuable knowledge about our, NewStem’s and
NetCo’s respective industries and that their knowledge and relationships would be very difficult to replicate. The loss of key
personnel, or the inability to recruit and retain qualified and talented personnel in the future, could have an adverse effect on the
respective businesses of NewStem and NetCo, and, consequently, our business, financial condition and/or operating results.
We
and NewStem have limited operating histories and have generated minimal revenue to date.
We
and NewStem have a limited operating history and do not have a meaningful historical record of sales and revenues, nor do we or NewStem
have an established business track record. While we believe that we have the opportunity to be successful, there can be no assurance
that we will be successful in accomplishing our business initiatives, or that we will be able to achieve any significant levels of revenues
or net income.
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 December 31, 2023 and we concluded there was a material weakness in the design of our
internal control over 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.
Rapid
technological change could cause products to become obsolete, and if NewStem does not enhance its product offerings through research
and development efforts, it may be unable to effectively compete.
NewStem’s
future business success will depend upon its ability to maintain and enhance its product portfolio with respect to advances in technological
improvements for certain products that meet customer needs and market conditions in a cost-effective and timely manner. NewStem may not
be successful in gaining access to new products that successfully compete or are able to anticipate customer needs and preferences, and
customers may not accept one or more of its products. If NewStem fails to keep pace with evolving technological innovations or fails
to modify its products and services in response to customers’ needs or preferences, then NewStem’s and our business, financial
condition and results of operations could be adversely affected.
The
technologies underlying NewStem’s products are subject to rapid and profound technological change. Competition intensifies as technical
advances in each field are made and become more widely known. We can give no assurance that others will not develop services, products,
or processes with significant advantages over the products, services, and processes that NewStem offers or is seeking to develop. Any
such occurrence could have a material and adverse effect on NewStem’s and our business, results of operations and financial condition.
NewStem
plans to enhance and broaden its product offerings in response to changing customer demands and competitive pressure and technologies.
The success of any new product offering or enhancement to an existing product will depend on numerous factors, including the ability
to:
- Properly identify and anticipate physician and patient needs;
- Develop and introduce new products or product enhancements in a timely manner;
- Demonstrate the safety and efficacy of new products; and
If
NewStem does not develop and, when necessary, obtain regulatory clearance or approval for new products or product enhancements in time
to meet market demand, or if there is insufficient demand for these products or enhancements, its results of operations will suffer.
NewStem’s research and development efforts may require a substantial investment of time and resources before it is adequately able
to determine the commercial viability of a new product, technology, material or other innovation. In addition, even if NewStem is able
to successfully develop enhancements or new generations of its products, these enhancements or new generations of products may not produce
sales in excess of the costs of development, and they may be quickly rendered obsolete by changing customer preferences or the introduction
by competitors of products embodying new technologies or features.
Our
ongoing viability as a company depends on NewStem’s ability to successfully develop and commercialize its products.
NewStem
is principally focused on utilizing proprietary hPSCs and HhPSCs in the development of diagnostic and therapeutic products in oncology.
NewStem must develop diagnostics and therapeutics successfully test them for safety and efficacy in the targeted patient population and
manufacture the finished drugs on a commercial scale to meet regulatory standards and receive regulatory approvals. The development and
commercialization process is both time-consuming and costly, and involves a high degree of business risk. The results of pre-clinical
and clinical testing of product candidates are uncertain, and there can be no assurance that NewStem will be able to obtain regulatory
approvals of its product candidates. If obtained, regulatory approval may take longer or be more expensive than anticipated. Furthermore,
even if regulatory approvals are obtained, NewStem’s products may not perform as we expect and NewStem may not be able to successfully
and profitably produce and market any products. Delays in any part of the process or our inability to obtain regulatory approval of such
products could adversely affect NewStem’s and, therefore, NovelStem’s future operating results by restricting (or even prohibiting)
the introduction and sale of such products.
The
value of our investment in NetCo and our ability to receive distributions may be affected by disputes between the Company and C.P. Group,
our partner in NetCo.
The
Company and C.P. Group each own a 50% interest in NetCo. The joint venture agreement governing NetCo provides for mutual decision
making among the Company and C.P. Group generally (subject to exceptions) and arbitration in the event any controversy or
disagreement arises. The Company and C.P. Group were previously in arbitration as to ongoing scope and the operation of NetCo. This
arbitration was concluded in July 2023. The arbitrator ruled against the Company on certain key issues of the arbitration and in the
Company’s favor on two key issues of the arbitration. However, if we are unable proceed in successful utilization of the joint
venture assets in a manner favorable to the Company, our investment in NetCo and our ability to continue to receive distributions
from our interest in NetCo could have an adverse effect on our business, financial condition or operating results.
NetCo’s
business is intensely competitive and “hit” driven. NetCo may not deliver “hit” products and services, or consumers
may prefer a competitors’ products or services over NetCo.
Competition
in the publishing and video game industries is intense. Many new products and services are regularly introduced in each major industry
segment (console, mobile and PC), but only a relatively small number of “hit” titles account for a significant portion of
total revenue in each segment. NetCo’s competitors range from established interactive entertainment companies and diversified media
companies to emerging start-ups, and we expect new competitors to continue to emerge throughout the world. If NetCo’s competitors
develop and market more successful and engaging products or services, offer competitive products or services at lower price points, or
if NetCo does not develop high-quality, well-received and engaging products and services, NetCo and our revenue, margins, and profitability
will decline.
If
NetCo fails to develop relationships with new creative talent, its business could be adversely affected.
NetCo’s
business, in particular the trade publishing and media portions of the business, is highly dependent on maintaining strong relationships
with the authors, illustrators and other creative talent who produce the products and services that are sold to its customers. Any overall
weakening of these relationships, or the failure to develop successful new relationships, could have an adverse impact on NetCo and the
Company’s business and financial performance.
Risks
relating to our common stock
Because
our holding company structure creates restrictions on the payment of dividends, our ability to pay dividends is limited.
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 depend entirely upon NewStem’s and NetCo’s earnings and cash flow. If we decide in the future to pay dividends,
as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments
from NewStem or NetCo. NewStem and/or NetCo may be restricted in their ability to pay dividends, make distributions or otherwise transfer
funds to us prior to the satisfaction of other obligations, including the payment of operating expenses or debt service, appropriation
to reserves prescribed by laws and regulations, covering losses in previous years, restrictions on the conversion of local currency into
U.S. dollars or other hard currency, completion of relevant procedures with governmental authorities or banks and other regulatory restrictions.
We do not presently have any intention to declare or pay dividends in the future. You should not purchase shares of our common stock
in anticipation of receiving dividends in future periods.
Because
we do not intend to pay any cash dividends on our common stock, our shareholders will not be able to receive a return on their shares
unless they sell them.
We
intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends
on our common stock in the foreseeable future. Unless we pay dividends, our shareholders will not be able to receive a return on their
shares unless they sell them. Shareholders may never be able to sell shares when desired. Before you invest in our securities, you should
be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included
in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual
events, our business, financial condition or results of operations could be materially adversely affected.
We
are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies could make our common
stock less attractive to investors.
We
are an emerging growth company. Under the JOBS Act, emerging growth companies can take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies including, without limitation, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a non-binding advisory shareholder
vote on executive compensation and golden parachute payments, exemption from the requirement of auditor attestation in the assessment
of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting
Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about our audit and the financial statements (auditor discussion and analysis). As a result of the foregoing, the information that we
provide shareholders may be different than what is available with respect to other public companies.
In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. We plan to elect
to use the extended period for compliance and, as a result, our financial statements may not be comparable to companies that comply with
public company effective dates.
Reporting
requirement under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and compliance with the Sarbanes-Oxley
Act of 2002 (the “Sarbanes-Oxley Act”), including establishing and maintaining acceptable internal controls over financial
reporting, are costly and may increase substantially.
The
rules and regulations of the SEC require a public company to prepare and file periodic reports under the Exchange Act, which require
that the Company engage legal, accounting, auditing and other professional services. The engagement of such services is costly. Additionally,
the Sarbanes-Oxley Act requires, among other things, that we design, implement and maintain adequate internal controls and procedures
over financial reporting. The costs of complying with the Sarbanes-Oxley Act and the limited technically qualified personnel we have
may make it difficult for us to design, implement and maintain adequate internal controls over financial reporting. In the event that
we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls, we may not be
able to produce reliable financial reports or report fraud, which may harm our overall financial condition and result in loss of investor
confidence and a decline in our share price.
We
are working with our legal, accounting and financial advisors to identify those areas in which changes should be made to our financial
and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance,
corporate control, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue
to make, changes in these and other areas. However, we anticipate that the expenses that will be required in order to adequately prepare
for being a public company could be material. We estimate that the aggregate cost of increased legal services; accounting and audit functions;
consultants to design and implement internal controls; and financial printing alone will be a few hundred thousand dollars per year and
could be several hundred thousand dollars per year. In addition, we may incur additional expenses related to director compensation and/or
premiums for directors’ and officers’ liability insurance, the costs of which we cannot estimate at this time. We may also
incur additional expenses associated with investor relations and similar functions, the cost of which we also cannot estimate at this
time. However, these additional expenses individually, or in the aggregate, may also be material.
The
continued increased costs associated with operating as a public company may decrease our net income or increase our net loss and may
cause us to reduce costs in other areas of our business or increase the prices of our products or services to offset the effect of
such increased costs. Additionally, if these requirements divert our management’s attention from other business concerns, they
could have a material adverse effect on our business, financial condition and results of operations.
There
is a very limited trading market for our common stock and investors are not assured of the opportunity to sell their stock, should they
desire to do so.
Our
common stock is currently quoted on the OTC Pink Market. However, our stock has traded in very limited quantities in the past. We believe
a significant factor in the limited market is our limited capitalization and liquidity, results of operations and the characterization
of our stock as a “penny stock.” We hope to remedy our financial condition and results of operation in the future. This,
in turn, may assist us in obtaining listing of our stock on other exchanges. However, there is no assurance that any of these objectives
will be met or that the market will ever increase to a point where investors could sell their stock at a desirable price, should they
desire to do so.
The
price of our common stock could be highly volatile.
Our
shares of common stock are quoted on the OTC Pink Market. It is likely that our common stock will be subject to price volatility, low
volumes of trades and large spreads in bid and ask prices quoted by market makers. Due to the low volume of shares traded on any trading
day, persons buying or selling in relatively small quantities may easily influence prices of our common stock. This low volume of trades
could also cause the price of our stock to fluctuate greatly, with large percentage changes in price occurring in any trading day session.
Holders of our common stock may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due
to low volume trading. If high spreads between the bid and ask prices of our common stock exist at the time of a purchase, the stock
would have to appreciate substantially on a relative percentage basis for an investor to recoup their investment. Broad market fluctuations
and general economic and political conditions may also adversely affect the market price of our common stock. No assurance can be given
that an active market in our common stock will be sustained. If an active market does not continue, holders of our common stock may be
unable to readily sell the shares they hold or may not be able to sell their shares at all.
We
may be deemed an investment company, which could impose on us burdensome compliance requirements.
The
Investment Company Act of 1940, as amended (the “Investment Company Act”), requires companies to register as an investment
company if they are engaged primarily in the business of investing, reinvesting, owning, holding, or trading securities. Generally, companies
may be deemed investment companies under the Investment Company Act if they are viewed as engaging in the business of investing in securities
or they own investment securities having a value exceeding 40% of certain assets. We are not in the business of investing, reinvesting,
owning, holding or trading securities. However, if the Securities and Exchange Commission deems us to be an investment company, we may
have imposed upon us additional burdensome requirements, including having to register as an investment company, adopting a specific form
of corporation structure and having to comply with certain reporting, record keeping, voting, proxy, and disclosure requirements. Such
additional requirements would require us to incur additional costs and have an adverse effect on our results of operations and our ability
to effectively carry out our business plan.
Item
1B. Unresolved Staff Comments.
None
Item
2. Properties.
Our
corporate office is located at 2255 Glades Road, Boca Raton, FL 33431. We believe that our facilities are adequate for current operations.
Item
3. 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 asserts 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.
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. Total costs related to the litigation and the related litigation funding
agreement of $2,819,196 were recorded by the Company.
Item
4. Mine Safety Disclosures.
Not
applicable
PART
II
[See
General Instruction G2]
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
information
There
is no established public trading market in our common stock, and a regular trading market may not develop, or if developed, may not be
sustained. Our securities are currently quoted on the OTC Markets Pink under the symbol “NSTM”. The following reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
High Low
Holders
As
of April 1, 2024 there were 46,881,475 shares of common stock outstanding held by approximately 80 record holders.
Dividends
We
have not paid cash dividends on any of our capital stock since our name change and business focus shift in 2018 and currently intend
to retain our future earnings, if any, to fund the development and growth of our business. We do not expect to pay any dividends on any
of our capital stock in the foreseeable future.
Item
6. [Reserved]
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion includes statements that are forward-looking in nature. Whether such statements ultimately prove to be accurate
depends on a variety of factors that may affect our business and operations. Certain of these factors are discussed in “Item 1A.
Risk Factors.”
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 report.
Overview
We
are a development stage company and reported net losses of approximately $4,187,000 and $766,000 for the years ended December 31, 2023
and 2022, respectively. We had current assets of approximately $87,000 and current liabilities of approximately $346,000 as of December
31, 2023. As of December 31, 2022, our current assets and current liabilities were approximately $59,000 and $65,000, respectively. We
have prepared our financial statements for the years ended December 31, 2023 and 2022 assuming that we will continue as a going concern.
Our continuation as a going concern is dependent upon improving our profitability and the continuing financial support from our shareholders
as well as NewStem’s ability to successfully develop and commercialize its products. Our sources of capital in the past have included
the sale of equity securities, which include common stock sold in private transactions, and short-term debt. During the current year,
we continued to borrow on existing finance agreements with two related party individuals and entered into a long term finance agreement
with a shareholder to fund current operating expenses. Additionally, we entered into two short term notes to fund advances to NewStem.
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 financial statements of NewStem as an exhibit to this Annual Report. In many cases, the
accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for
management’s judgement in their application. There are also areas in which the selection of an available alternative policy would
not produce a materially different result.
Critical
Accounting Policies
The
SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective
or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and
my change in subsequent periods.
The
following discussion of critical accounting policies represents our attempt to report on these accounting policies which we believe are
critical to our financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant
accounting policies, which are more fully described in Note 2 of the Notes to the Financial Statements included in this Annual Report.
We
have identified our accounting policies for stock-based compensation and accounting for derivative liabilities as critical
accounting policies.
We
recognize stock-based compensation expense based on the fair value recognition provision of applicable accounting principles, using the
Black-Scholes option valuation method. Accordingly, we are required to measure the cost of services received in exchange for an award
of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which services
are provided in exchange for the award. Under the Black-Scholes method, we make assumptions with respect to the expected lives of the
options that have been granted and are outstanding, the expected volatility, the dividend yield percentage of our common stock and the
risk-free interest rate at the respective dates of grant.
The
expected volatility factor used to value stock options in 2023 was based on the historical volatility of the market price of our common
stock over the period from our change to a biotechnology company, September 2018, through December
2023. For the expected term of the option, we used an estimate of the expected
option life based on historical experience. The risk-free interest rate used is based upon U.S. Treasury yields for a period consistent
with the expected term of the options. We assumed no quarterly dividend rate. Due to the numerous assumptions involved in calculating
stock-based compensation expense, the expense recognized in our financial statements may differ significantly from the value realized
by option holders on exercise of the share-based instruments. In accordance with the prescribed methodology, we do not adjust our recognized
compensation expense to reflect these differences.
For
the years ended December 31, 2023 and 2022, we incurred stock compensation expense with respect to options and warrants of
approximately $303,000 and $283,000, respectively.
See
Note 5 to the financial statements for the assumptions used to calculate the fair value of stock-based compensation.
In accordance with Accounting Standards Codification (“ASC”) 815, Derivatives
and Hedging, we identify and, if
applicable, bifurcate embedded derivatives in financial instrument instruments. Those embedded features that are identified, bifurcated
and accounted for separately are measured at fair value continuously 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 we record the embedded derivative
at fair value with the excess of fair value over proceeds recognized as a loss in earnings.
Results
of Operations.
The
selected statement of operations data for the years ended December 31, 2023 and 2022 and balance sheet data as of December 31, 2023 and
2022 has been derived from our audited financial statements included in this Annual Report.
This
data should be read in conjunction with our financial statements and related notes included herein.
Selected