NSTM NovelStem International Corp (PK)

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 31% equity interest in NewStem Ltd, an Israeli biotech company (“NewStem”), and a 50% equity interest in NetCo Partners (“NetCo”). NovelStem was formerly known as Hollywood Media Corp. The Company was incorporated in the State of Florida on January 22, 1993 and changed its name to NovelStem International Corp. in September 2018 as a result of its business focus shift from a media business to biotech.

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 $294,000,000. The accumulated deficit of the Company subsequent to its business focus shift and name change in September 2018 is approximately $7,050,000 which is comprised primarily of allocated losses from equity method investments and general and administrative costs incurred by the Company.

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 $750,000 and an additional finance agreement with a shareholder to borrow $300,000 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 $450,000 for working capital needs and to fund NewStem (see Note 4). As of the date of these financial statements, all funds available pursuant to these agreements have been received and these borrowings are projected to fund operations through November 2024. The Company will need to obtain additional funds to continue operations for the next 12 months.

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

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 $4,000,000 to NewStem. This funding was to be provided through the sale of up to 50,000 common shares of NewStem to the Company representing 33% of New Stem’s outstanding shares. In 2018, the Company purchased 25,000 shares of NewStem for $2,000,000 acquiring an ownership interest of 20%. The Company made additional investments in 2019 and 2020 purchasing 12,500 shares each year for a $1,000,000 investment each year. NewStem sold and issued shares to third party investors in 2021, 2022 and 2023 resulting in the Company recognizing a gain on dilution of equity method investment. These transactions resulted in the Company having an ownership interest of 30.51% as of June 30, 2024 and December 31, 2023.

The Company accounts for its investment in NewStem under the equity method. As of June 30, 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 $1,679,000 and $1,800,000, respectively. The excess relates to identified intangible assets including license agreements, specialized work force (goodwill) and two separate projects of in process research and development (“IPR&D”) related to stem cell-based diagnostics and therapeutics for cancer chemotherapies.

The Company assesses its investment in NewStem for impairment on an annual basis or more frequently if indicators of impairment exist.

During the six and three months ended June 30, 2024, the Company recorded a reimbursement due to NewStem of approximately $44,000 and $8,000, respectively, (included in accounts payable in the accompanying balance sheet) for audit and accounting related costs. During the six and three months ended June 30, 2023, the Company reimbursed NewStem for audit related costs of approximately $44,000 and $7,000, respectively.

The Company signed an agreement (the “Purchase Agreement”) on June 20, 2024 to acquire the remainder of NewStem in exchange for 25,248,525 shares of Company stock as well as funding for NewStem operations in the amount of $300,000 within 30 days of the Purchase Agreement date and an additional $750,000 in capital funding to be provided to NewStem by October 15, 2024.

In anticipation of this transaction, the Company advanced $250,000 to NewStem in December 2023 and an additional $250,000 in March 2024. The related note agreement bears no interest and is payable on December 30, 2024. The agreement provides for discharge of the note upon the closing of the anticipated acquisition transaction. This note receivable has been presented as a noncurrent asset along with the investment in NewStem in the accompanying balance sheets. The Purchase Agreement was not fully consummated, and no Company shares were issued to NewStem shareholders in exchange for NewStem shares. (See Note 8)

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’s management has adopted a cost reduction plan in order to adjust future operation expenses to its cash balance. In October 2023, the NewStem board of directors unanimously resolved to dismiss most employees which occurred in December 2023. During the second quarter of 2024, NewStem recruited new employees in order to renew its operations.

The above-mentioned events incur significant difficulties to continue to operate the Company’s business and there is a substantial doubt about its ability to continue as a going concern during the look-forward period.

Investment in NetCo

NovelStem owns a 50% interest in NetCo, a joint venture that owns the Net Force publishing franchise. The Company accounts for its investment in NetCo under the equity method and recognizes nominal royalties and administrative fees from this arrangement. The Company assesses its investment in NetCo for impairment on an annual basis or more frequently if indicators of impairment exist.

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 $125,000 each, 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. Interest expense related to these notes was $14,958 for the six months ended June 30, 2024.

In May 2022, the Company entered into note agreements with two individuals who are related parties (a director and the Executive Chairman) to borrow up to $600,000 for working capital needs. The agreements were amended in March 2024 to increase the total borrowing to $650,000 and extend the maturity date. The agreements provided for interest at a rate of 8% per annum through November 11, 2022, at which time the interest rate increased to 10% per annum for subsequent advances. The agreements matured September 1, 2025. The Company received advances of $650,000 and $400,000, respectively, pursuant to these agreements through June 30, 2024 and December 31, 2023. Related interest expense during the six and three months ended June 30, 2024 was $26,932 and $15,847, respectively. These note agreements were refinanced on August 7, 2024 at which time they were replaced with new note agreements providing for total borrowings of $750,000. The Company received additional advances on these agreements totaling $100,000 in August 2024. The new note agreements reflect total principal of $821,766, including accrued interest on the former note agreements of $71,766, mature on December 31, 2025 and bear interest at a rate of 10% per annum.

On May 5, 2023, the Company entered into a long term note payable with a shareholder for $300,000 in financing to be funded $150,000 at inception and $150,000 in October 2023. 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 June 30, 2024 and December 31, 2023 which is reported separately on the balance sheet. The fair value of the note exceeds the proceeds, and the note has been discounted at inception so that the net liability is the fair value of the derivative. Accretion of the note discount of $88,531 has been reflected as part of interest expense in the statement of operations for the six months ended June 30, 2024.

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 $1,000,000 in exchange for an assignment of a certain portion of rights to and interest in claims related to this arbitration. The agreement provides for specific calculations of the portion of any claims collected to be received by Omni with the remainder collectible by the Company. Additionally, the agreement provides for repayment of funded costs pursuant to the same multiple calculations in the event of a favorable outcome that does not include the collection of claims.

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 $933,065, including $310,000 advanced for working capital, and related fees or investment return to Omni calculated as contractual multiples of funding totaling $1,886,131 as of December 31, 2023 for a total liability of $2,819,196. The balance at June 30, 2024 has been increased to $2,886,701 to include accrued interest of $67,505.This agreement bears interest at 5% per annum beginning January 2024 and is payable on January 10, 2025. Interest expense related to this agreement was $67,505 and $35,785, respectively, for the six and three months ended June 30, 2024.

Convertible Debt

In April 2024, the Company borrowed $100,000 from unrelated parties pursuant to convertible debt agreements accounted for as debt. 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. Interest accrued related to these agreements was $2,598 during the six months and three months ended June 30, 2024.

NOTE 5—EQUITY

(a) General

At June 30, 2024 and December 31, 2023, the Company had issued 50,316,672 shares and outstanding 46,881,475 shares of its common stock, par value $0.01 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 6,360,000 options have been issued to directors and investor relations professionals as of June 30, 2024.

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 7 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 0% 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.

(c) Summary Option Information

Stock-based compensation expense was approximately $22,000 and $13,000 in the six and three months ended June 30, 2024, respectively. Stock based compensation expense was approximately $32,000 and $15,000 in the six and three months ended June 30, 2023.

The total compensation cost related to non-vested awards not yet recognized was approximately $27,000 as of June 30, 2024. As of June 30, 2024, 600,000 options were unvested. These options vest in April 2025.

The total compensation cost related to non-vested awards not yet recognized was approximately $50,000 as of June 30, 2023. As of June 30, 2023, 360,000 options were unvested. These options vested during March 2024.

(d) Warrants

The warrant agreements were amended on May 12, 2023 to extend the expiration date to June 28, 2025. The warrants outstanding at June 30, 2024 have a weighted average remaining contractual life of approximately one year. The Company recognized $243,000 in stock-based compensation expense related to the increase in fir value of warrants pursuant to the modification of the warrant term during the six and three months ended June 30, 2024.

NOTE 6—INCOME TAXES

NOTE 7—COMMITMENTS AND CONTINGENCIES

The Company was the claimant in an arbitration proceeding against their 50% partner in NetCo. The Company initiated the arbitration proceeding in an effort to maximize the total potential value to be derived from fully utilizing the NetCo intellectual property across publishing, entertainment, digital media, merchandising and other ancillary markets. Arbitration hearings were held at the end of July 2022. Arbitration proceedings for the joint owners of NetCo concluded during 2022 and the arbitrator rendered a decision 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.

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 $2,819,196 was recorded at December 31, 2023.

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.

As disclosed in Note 3, the Company entered into a Purchase Agreement for the acquisition of NewStem shares not held by the Company. The Purchase Agreement provides for the Company to acquire all outstanding shares in exchange for shares of NovelStem stock and for the Company to fund $300,000 operating capital to NewStem within 30 days of the date of the Purchase Agreement. The Purchase Agreement was not consummated as no NovelStem shares were issued in exchange for NewStem shares. In the period subsequent to the signing of the Purchase Agreement, the Company was not able to obtain funding to meet the financial obligation of providing $300,000 in operating capital by July 21, 2024. As such, NewStem considers the Company in default of the Purchase Agreement and on July 30, 2024, the Company received a notice of material breach (the “Notice”) of the Purchase Agreement from NewStem. The Notice indicates that the failure to materially fulfill the financial obligation of the Purchase Agreement entitles NewStem to notify the Company that the Purchase Agreement is void and that the terms of Article 6 “Unwinding” of the Purchase Agreement enter into operation. Company management is currently in negotiation with NewStem management to determine the outcome of the situation as the Company’s position is that the Purchase Agreement was not completed or consummated and the transaction was not closed.

On August 7, 2024, the Company refinanced it’s related party borrowings with a director and the Executive Chairman to borrow an additional $100,000 and extend the term of the debt to December 31, 2025. See Note 4.