NovelStem International Corp.: Form 10-Q for the period ended Sep 30, 2024

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 $3,070,000 and $4,240,000 for the nine months ended September 30, 2024 and 2023, respectively, and $2,464,000 and $1,096,000 for the three months ended September 30, 2024 and 2023, respectively. We had current assets of approximately $69,000 and current liabilities of $3,599,000 as of September 30, 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 nine months ended September 30, 2024 assuming that we will continue as a going concern. Our continuation as a going concern is dependent upon the continuing financial support from our shareholders and the ability to monetize our investment in NetCo and our right to value from NewStem intangible assets. 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.

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”.

We are a holding company whose primary asset is our ownership of equity interest in NetCo and potential value from intangible assets of NewStem. 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 $894,000 and $635,000 for the nine months ended September 30, 2024 and 2023, respectively. Specifically, professional fees increased by approximately $31,000 in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily due to an increase in audit fees and general counsel legal fees. During the nine months ended September 30, 2024, we incurred bad debt expense of $500,000 from the write off of a receivable from NewStem and other miscellaneous G&A expenses increased by approximately $11,000.

Stock compensation expense, included in G&A expenses, decreased by approximately $261,000 in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 due to the cost incurred related to the extension of the term of outstanding warrants in May 2023.

We incurred G&A expenses of approximately $567,000 and $84,000 for the three months ended September 30, 2024 and 2023, respectively. The decrease in G&A expenses relates primarily to the bad debt expense from the write off of $500,000 due from NewStem as currently deemed uncollectible, a decrease in professional fees of approximately $3,000 offset by an increase in other general and administrative costs of approximately $6,000 and a decrease in stock compensation expense of approximately $8,000.

Interest expense increased by approximately $250,000 in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 due to the increased debt incurred through September 30, 2024.

Interest expense increased by approximately $77,000 in the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 due to the increased debt incurred through September 30, 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 nine months ended September 30, 2024 included a loss from NetCo of $4,164 and a loss from NewStem of $155,577. The net losses reported for the three months ended September 30, 2023 included net income of $5,362 from NetCo which was offset by net loss of $256,890 from NewStem.

We reported impairment expense of $1,628,657 related to our investment in NewStem during the nine and three months ended September 30, 2024. There were no such impairment losses during the nine and three months ended September 30, 2023.

Liquidity and Capital Resources

We have not paid dividends on our common stock since our name change in 2018. Our present policy is to apply cash to reduce debt; consequently, we do not expect to pay dividends on common stock in the foreseeable future.

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 we are able to monetize our investment in NetCo or monetize our right to a portion of the value of NewStem intangible assets now held by Yissum. 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.

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 matured September 1, 2025. 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.

As of the date of this Quarterly Report, the full amount of $750,000 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 $650,000 at September 30, 2024 and December 31, 2023.

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 nine months ended September 30, 2024, net cash used in operating activities was approximately $805,000, which consisted primarily of a net loss of approximately $3,070,000, offset by noncash equity in loss of equity method investees of approximately $160,000, impairment loss on NewStem of approximately $1,629,000, accretion of discount on notes payable of approximately $133,000, stock based compensation of approximately $31,000, interest added to notes payable of approximately $78,000 and loss on derivative instrument of $90,000. Additionally, cash was used in operations related to a decrease in current assets of approximately $9,000 and an increase in accrued liabilities and other payables of approximately $207,000.

For the nine months ended September 30, 2023, net cash used in operating activities was approximately $269,000, which consisted primarily of a net loss of approximately $4,240,000, offset by noncash equity in loss of equity method investees of approximately $251,000 and distributions from equity method investees of approximately $7,000, accretion of discount on notes payable of approximately $30,000, stock based compensation of approximately $293,000, interest added to notes payable of approximately $25,000, litigation funding agreement costs of approximately $2,799,000 and loss on derivative instrument of $500,000. Additionally, cash was used in operations related to a decrease in current assets of approximately $10,000 and an increase in accrued liabilities and other payables of approximately $56,000.

Net Cash Used in Investing Activities.

During the nine months ended September 30, 2024, $250,000 was loaned to NewStem in an investing activity in anticipation of a potential purchase of the remaining interest in NewStem. For the nine months ended September 30, 2023, no net cash was used in investing activities.

Net Cash Provided by Financing Activities.

For the nine months ended September 30, 2024, net cash provided by financing activities was $475,000, consisting of long-term borrowings from two directors and a significant stockholder totaling $375,000 and convertible debt of $100.000.

For the nine months ended September 30, 2023, net cash provided by financing activities was $270,000, consisting of long-term borrowings from two directors.

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 September 30, 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.

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.