NovelStem International Corp. 10-K

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 $766,000 and $1,346,000 for the years ended December 31, 2022 and 2021, respectively. We had current assets of approximately $59,000 and current liabilities of approximately $65,000 as of December 31, 2022. As of December 31, 2021, our current assets and current liabilities were approximately $37,000 and $193,000, respectively. We have prepared our financial statements for the years ended December 31, 2022 and 2021 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 entered into long term finance agreements with two related party individuals to fund current operating expenses. 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 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 policy for stock-based compensation as a critical accounting policy. 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 2022 was based on the historical volatility of the market price of our common stock over a period equal to the expected term of the options. 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, 2022 and 2021, we incurred stock compensation expense with respect to options of approximately $283,000 and $273,000, respectively. See Note 5 to the financial statements for the assumptions used to calculate the fair value of stock-based compensation. 14 Results of Operations. The selected statement of operations data for the years ended December 31, 2022 and 2021 and balance sheet data as of December 31, 2022 and 2021 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 Statement of Operations Data: Years Ended December 31, 2022 2021 Change Administrative fee income $ 12,000 $ - $ 12,000 Operating expenses: General and administrative expenses 744,434 495,535 248,899 Contra expenses - legal fees (310,000 ) - (310,000 ) Total operating expenses 434,434 495,535 (61,101 ) Loss from operations (422,434 ) (495,535 ) 73,101 Interest expense 11,018 6,825 4,193 Net loss before equity in net loss of equity method investees (433,452 ) (502,360 ) 68,908 Equity in net loss of equity method investees (719,802 ) (843,268 ) 123,466 Gain on dilution of equity method investment 387,524 - 387,524 Net loss $ (765,730 ) $ (1,345,628 ) $ 579,898 2022 Compared to 2021 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 operating revenue or cost of revenue. During the year ended December 31, 2022, we began charging annual administrative fees to an affiliated entity. The Company incurs general and administrative (“G&A”) expenses primarily related to professional fees and insurance. We incurred G&A expenses of approximately $744,000 and $496,000 for the years ended December 31, 2022 and 2021, respectively. Our increase in G&A expenses relates primarily to stock-based compensation and professional fees incurred in the audit of our financial statements for the years ended December 31, 2021 and 2020, preparation of our quarterly reports for 2022, and, in the preparation, and filing of our Form 10 registration statement which was filed in August 2022. Specifically, professional fees increased by $199,000 in the year ended December 31, 2022 as compared to the year ended December 31, 2021. Insurance costs increased by $31,000 in the year ended December 31, 2022 as compared to the year ended December 31, 2021. The remaining increase in G&A expenses of approximately $9,000 during the year ended December 31, 2022 consists primarily of increases in expenses related to investor relations and information technology. Stock-based compensation expense increased by approximately $10,000 in the year ended December 31, 2022 as compared to the year ended December 31, 2021. This is primarily due to certain options issued in 2022 having a shorter vesting period. During the year ended December 31, 2022, we recorded a contra expense of $310,000 which is comprised of funds from 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 has no obligation to repay any funds received under the agreement. In the event of a favorable outcome, Omni Bridgeway would recover disbursed funding as part of their investment return. As part of that funding arrangement, Omni Bridgeway agreed to reimburse NovelStem $310,000 which was comprised of $140,000 for reimbursement of previously incurred legal expenses and $170,000 for working capital needs including previously incurred general and administrative costs. There was no contra expense in the year ended December 31, 2021. 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 during the years ended December 31, 2022 and 2021. The net losses reported for the year ended December 31, 2022 included net income of approximately $13,000 from NetCo which was offset by net loss of approximately $733,000 from NewStem. Net losses reported for the year ended December 31, 2021 included net income of approximately $21,000 from NetCo which was offset by net loss of approximately $864,000 from NewStem. We reported a gain on dilution of our equity method investment related to stock issuances made to third parties by NewStem. The gain was approximately $388,000 during the year ended December 31, 2022. 15 Liquidity and Capital Resources We have not paid dividends on our common stock since our name change and business focus shift in 2018. Our present policy is to apply cash to investments in product development at NewStem, acquisitions or expansion; consequently, we do not expect to pay dividends on common stock in the foreseeable future. We expect to continue to incur greater expenses in the near future as we expand our business or enter into strategic partnerships. We also expect our G&A expenses to increase as we expand our finance and administrative staff, add infrastructure, and incur additional costs related to being a reporting act company, including directors’ and officers’ insurance and increased professional fees. The Company will need to obtain additional funds to continue its operations. Management’s plans with regard to these matters include additional financing and fundraising until our equity investment in NewStem is profitable. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient cash from financing on terms acceptable to the Company, or that NewStem will become profitable. In May 2022, the Company entered into 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-K, the Company has borrowed $292,000 pursuant to the agreement. Net Cash Provided By (Used In) Operating Activities. For the year ended December 31, 2022, net cash used in operating activities was approximately $182,000, which consisted primarily of a net loss of approximately $776,000, offset by noncash equity in loss of equity method investees of approximately $720,000, netted with gain on dilution of approximately $388,000 and stock-based compensation of approximately $283,000. Additionally, cash was used in operations related to an increase in current assets of approximately $24,000 and a decrease in accrued liabilities and other payables of approximately $28,000. For the year ended December 31, 2021, net cash used in operating activities was approximately $181,000, which consisted primarily of a net loss of approximately $1,345,000, offset by noncash equity in loss of equity method investees of approximately $865,000 and stock-based compensation of approximately $273,000 and an increase in accrued liabilities and other payables of approximately $24,000. Net Cash Used In Investing Activities. For the years ended December 31, 2022 and 2021, no net cash was used in investing activities. Net Cash Provided By Financing Activities. For the year ended December 31, 2022, net cash provided by financing activities was $180,000, consisting of long-term borrowings from two directors of $280,000 and repayment of $100,000 in short-term borrowings from a significant stockholder. For the year ended December 31, 2021, net cash provided by financing activities was $100,000 consisting of short-term borrowings from a significant stockholder. 16 Off-Balance Sheet Arrangements We are not party to any off-balance sheet transactions. We have no guarantees or obligations other than those which arise out of normal business operations. Contractual Obligations and Commercial Commitments As of December 31, 2022, we had a contractual obligation related to our directors’ and officers’ insurance providing for 10 monthly installments of $5,184 payable through June 2023. As of December 31, 2021, we did not have contractual obligations and commercial commitments. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. This section is not applicable. Item 8. Financial Statements and Supplementary Data. Furnished at the end of this Annual Report, commencing on page F-1. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None