# NovelStem International Corp.: Form 10-Q for the period ended Jun 30, 2023

- Company: [NovelStem International Corp.](/companies/nstm.md) (CIK 912544)
- Form: 10-Q
- Filed: 2023-08-14
- Accepted by EDGAR: Aug 14, 2023, 14:09 ET
- Period: 2023-06-30
- Accession: 0001493152-23-028259
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/912544/000149315223028259/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/912544/000149315223028259/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | −$2.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | −$2.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $20.5k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $27.8k | us-gaap:InterestExpense |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | −$2.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$3.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 46,881,475 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 46,881,475 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$197.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-06-30 | $34.3k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $60.4k | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $2.1m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $1.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $3.0m | us-gaap:Liabilities |
| Current portion of debt | at 2023-06-30 | $962.5k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-06-30 | −$935.3k | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 12,680 characters.

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 $3,144,000 and $387,000 for the six months ended June 30, 2023 and 2022 and approximately $2,875,000 and $169,000 for the three months ended June 30, 2023 and 2022, respectively. We had current assets of approximately $60,000 and current liabilities of $1,072,000 as of June 30, 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 six and three months ended June 30, 2023 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 our ability to utilize the NetCo intellectual property. 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, litigation funding and related party debt. We believe that our current financing resources are sufficient for the operations of the Company until April 2024.

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.

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”.

| Operating expenses: | Six Months Ended June 30, 2023 | 2022 | Change | Three Months Ended June 30, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| G&A expenses | $551,153 | $368,531 | $182,622 | $386,361 | $229,575 | $156,786 |
| Litigation expenses (contra expenses) | 2,332,663 | (310,000) | 2,642,663 | 2,332,663 | - | 2,332,663 |
| Total operating expenses | 2,883,816 | 58,531 | 2,825,285 | 2,719,024 | 229,575 | 2,489,449 |
| Loss from operations | (2,883,816) | (58,531) | 2,825,285 | (2,719,024) | (229,575) | 2,489,449 |
| Other expenses: |  |  |  |  |  |  |
| Loss on derivative instrument | 54,795 | - | 54,795 | 54,795 | - | 54,795 |
| Interest expense | 27,823 | 2,012 | 25,811 | 20,510 | 407 | 20,103 |
| Total other expenses | 82,618 | 2,012 | 80,606 | 75,305 | 407 | 74,898 |
| Net loss before equity in net |  |  |  |  |  |  |
| loss of equity method investees | (2,966,434) | (60,543) | (2,905,891) | (2,794,329) | (229,982) | (2,564,347) |
| Equity in net loss of equity method investees | (177,147) | (326,256) | 149,101 | (80,431) | (60,647) | (141,078) |
| Net loss | $(3,143,581) | $(386,799) | $(2,756,782) | $(2,874,760) | $(169,335) | $(2,705,425) |

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.

The Company incurs G&A expenses primarily related to professional fees and insurance. We incurred G&A expenses of approximately $551,000 and $369,000 for the six months ended June 30, 2023 and 2022, respectively. Specifically, the increase of approximately $183,000 is comprised of a reduction of nonrecurring professional fees related to the filing of our Form 10 in 2022 of approximately $60,000 combined with an increase in stock compensation expense related to a modification of our outstanding warrants as described below.

We incurred G&A expenses of approximately $386,000 and $229,000 for the three months ended June 30, 2023 and 2022, respectively. The increase in G&A expenses relates primarily an increase in stock compensation expense offset by a decrease in professional fees incurred in the previous period related to the filing of our Form 10 which are non-recurring. Specifically, professional fees decreased by approximately $86,000 in the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Stock compensation expense related to a modification of our outstanding warrants increased as described below, which when combined with the decrease in professional fees, comprises our increase in G&A expenses of approximately $157,000 for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Total stock compensation expense, included in G&A expenses, increased by approximately $152,000 in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 due to a smaller number of options awarded in the current period as compared to the prior period offset by the recognition of $243,000 in stock compensation expense related to the increased value of our outstanding warrants due to the amendment of the agreements to extend the due date by two years.

Total stock compensation expense, included in G&A expenses, increased by approximately $186,000 in the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 due to a smaller number of options awarded in the current period as compared to the prior period offset by the recognition of $243,000 in stock compensation expense related to the increased value of our outstanding warrants due to the amendment of the agreements to extend the due date by two years.

We incurred costs related to litigation and the litigation funding agreement involving our arbitration with our NetCo joint venture partner of approximately $2,333,000 for the six and three months ended June 30, 2023. We recognized contra expenses of $310,000 during the three months ended June 30, 2022 in relation to the same litigation and related litigation funding agreement. No related costs were incurred in the three months ended June 30, 2022. Specifically, the increase of approximately $2,643,000 is comprised of legal fees related to our NetCo arbitration including litigation funding fees due to Omni pursuant to the litigation funding agreement combined with the reversal of the contra expenses recognized in the previous period. These expenses and contra expenses were funded by a litigation funding agreement. This agreement was signed during the first quarter of 2022 with Omni Bridgeway to fund our arbitration against our 50% joint venture partner, C.P. Group. This is a nonrecourse agreement, and the Company had no obligation to repay any funds received under the agreement unless the NetCo arbitration resulted in a favorable outcome. These amounts are included in the note payable to Omni which was recorded in June 2023 as a result of the favorable arbitration ruling.

The Company has recorded a loss on derivative instrument of approximately $55,000 for the six and three months ended June 30, 2023 related to a guarantee included in the note payable shareholder entered into in May 2023. No such instrument was in effect in the six and three months ended June 30, 2022.

Interest expense increased by approximately $26,000 in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The increases in interest expense are related to increased debt incurred for operations.

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 six months ended June 30, 2023 included income of $7,875 from NetCo which was offset by net loss of $185,022 from NewStem. The net losses reported for the six months ended June 30, 2022 were fully comprised of net losses from NewStem.

The net losses from equity method investees reported for the three months ended June 30, 2023 and 2022 were fully comprised of net losses from NewStem.

### Liquidity and Capital Resources

We have not paid dividends on our common stock since our name change and shift in business to biotech in September 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 or enter into strategic partnerships. We expect our G&A expenses to remain consistent in the near term as we have expanded our finance and administrative staff and incurred additional costs related to being a reporting act company, including directors’ and officers’ insurance and increased professional fees, which should all now be normalized for our current operations.

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 become profitable.

In May 2022, the Company entered into an agreement with Jan Loeb, our Executive Chairman and Jerry Wolasky, a member of the Board, which was amended in July 2022, to borrow up to an aggregate of $600,000 for working capital needs. This agreement provides for funding through January 31, 2024, provides for interest at a rate of 8% per annum, increased to 10% per annum for advances subsequent to November 11, 2022, and matures the earlier of January 31, 2024 or twenty months from the date of the first funded amount unless the lenders agree to extend the due date at that time. As of the date of this Form 10-Q, the Company has drawn $355,000 pursuant to the aforementioned agreement.

On May 5, 2023 the Company entered into a financing agreement with a shareholder to borrow $300,000 consisting of advances of $150,000 in May 2023 and $150,000 in October 2023. This agreement bears no interest and matures May 5, 2025. The agreement includes a guarantee which has been identified as an embedded derivative with a fair value of a liability of $204,795 at June 30, 2023.

In July 2023 the Company received a favorable ruling on our arbitration related to NetCo, as such, the contingent litigation funding note payable became probable and reasonably estimable. A liability of approximately $2,333,000 was recorded for litigation costs funded by the agreement along with fees and investment return to Omni related to the litigation funding agreement (note payable). The ruling did not provide any claim recovery to the Company. This note is payable in four quarterly installments beginning April 2024. Management plans to work to maximize the potential of the NetCo assets based on the favorable arbitration ruling in order to service this debt and future operations.

## Controls and procedures

As filed, 1,925 characters.

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 June 30, 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.

The material weaknesses identified included insufficient resources to employ proper segregation of duties over the processing of transactions and financial reporting.

### 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.

## Risk factors

As filed, 144 characters.

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.

Filed Aug 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-028259. Last ingested by Listed: Oct 24, 2026, 15:00 ET. No prices; not investment advice.