NovelStem International Corp. 10-K

Item 9A. Controls and Procedures. 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 December 31, 2022 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. 17 Remediation Actions Management intends to focus on strengthening the Company’s internal controls. Management expects to make progress towards reducing the risk that the material weakness could result in a material misstatement of the Company’s annual or interim financial statements. As resources permit, management will continue to systematically build the necessary capabilities and infrastructure to implement corrective action. 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. Item 9B. Other Information. None Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 18 PART III Item 10. Directors, Executive Officers and Corporate Governance. Biographical and certain other information concerning the Company’s officers and directors is set forth below. There are no familial relationships among any of our officers or directors. Except as indicated below, none of our directors is a director in any other reporting companies. None of our officers or directors has been affiliated with any company that has filed for bankruptcy within the last ten years except that Jan Loeb has previously been affiliated with Kid Brands, Inc., which filed for bankruptcy in June 2014. We are not aware of any proceedings to which any of our officers or directors, or any associate of any such officer or director is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries. Unless otherwise indicated, there are no arrangements or understandings between any officer and any other person pursuant to which such person was selected as an officer. Jan Loeb – President and Executive Chairman – 64 Mr. Loeb has more than 40 years of business, money management and investment banking experience. He has served as Chairman of our Board since July 2018 and on September 29, 2022 was appointed as Executive Chairman. On January 13, 2023, Mr. Loeb was appointed President of the Company. He has been the Managing Member of Leap Tide Capital Management LLC since 2007 and has served as President and CEO of Acorn Energy, Inc. since January 2016 and as a Director since August 2015. He has been a Director of Keweenaw Land Association, Ltd. From 2005 to 2007, Mr. Loeb was President of Leap Tide’s predecessor, formerly known as AmTrust Capital Management Inc. He served as a Portfolio Manager of Chesapeake Partners from February 2004 to January 2005 and as Managing Director at Jefferies & Company, Inc. from 2002 to 2004. From 1994 to 2001, he served as Managing Director at Dresdner Kleinwort Wasserstein, Inc. (formerly Wasserstein Perella & Co., Inc.). Mr. Loeb was a Lead Director of American Pacific Corporation from 2013 to 2014 and a Director from 1997 to 2014. He also served as an Independent Director of Pernix Therapeutics Holdings Inc. (formerly, Golf Trust of America, Inc.) from 2006 to 2011 and as a Director of TAT Technologies, Ltd. from 2009 to 2016. Christine Jenkins – Vice President and Chief Financial Officer – 59 Ms. Jenkins has over thirty-five years of experience in public accounting, including audit, consulting and corporate tax. Ms. Jenkins is currently serving as a consultant providing audit and accounting consultation to publicly-traded and large privately held companies. From 2010 to 2018 Ms. Jenkins was an audit partner with Cherry Bekaert, LLP. Prior to Cherry Bekaert, from 1995 to 2010, Ms. Jenkins was a partner in a local accounting firm in Atlanta, GA. Prior experience included audit and tax positions in public accounting firms. Mitchell Rubenstein – Director – 68 Mr. Rubenstein co-founded and served as Chairman of HMC from its inception to June 2018, during which period the company returned approximately $37 million to shareholders in the form of dividends and share repurchases, including a tender offer. He founded Syfy Channel and numerous other media and digital businesses. Eric Richman – Director -61 Mr. Richman is a life science executive with significant leadership, operational and strategic experience from over 25 years in the field. He is currently The CEO of Gain Therapeutics and was a Venture Partner at Brace Pharma Capital and serves on the boards of LabConnect, F2G (board observer) and previously ADMA Biologics (NASDAQ: ADMA). Previously he served as President & CEO of PharmAthene and prior to that was part of the founding team at MedImmune, responsible for the U.S. launch of its first commercial product and an integral part of the global launch teams for other products. He began his career at HealthCare Ventures, a life-sciences focused VC firm and formerly was a Director of Lev Pharmaceuticals (sold to Viropharma) and American Bank (sold to Congressional Bancshares) and served as CEO of Tyrogenex (sold to Betta Pharma). David Seltzer – Director – 62 Mr. Seltzer is the CEO and Founder of Reliable 1 Laboratories LLC, a distributor of OTC medications and nutritional supplements to independent pharmacies, long-term care pharmacies, hospitals and government organizations. He is also a minority owner and Director at Leading Pharma LLC, a generic manufacturer of prescription drugs, having previously served as President and CEO and later Chairman of Hi-Tech Pharmacal Co., Inc., which was acquired by Akorn, Inc. for $640 million in 2014. Jerry Wolasky – Director – 64 Mr. Wolasky has over 35 years’ experience in the wholesale pharmaceutical business, most recently for the past 15 years in his current role as President of HealthSource Distributors LLC. He previously served in executive positions of increasing responsibility for AmerisourceBergen, and its predecessor company, Bergen Brunswig. Tracy Clifford – Director -54 Ms. Clifford has over twenty years of experience in accounting and finance, including mergers and acquisitions of public companies. Ms. Clifford is the CFO of Acorn Energy, Inc. and COO of its operating subsidiary Omnimetrix Inc. and since 2015 she has served as a contract CFO and COO for several clients, participated on advisory boards and worked on numerous project engagements. Ms. Clifford previously served as CFO, Principal Accounting Officer, Corporate Controller and Secretary for a publicly traded pharmaceutical company and a publicly-traded REIT from 1999 to 2015. Ms. Clifford’s prior experience included accounting leadership positions at United Healthcare, the North Broward Hospital District and the audit team of Deloitte & Touche. 19 Audit Committee; Audit Committee Financial Expert The Company’s full board is functioning as our audit committee at the time of this Annual Report. Compensation Committee We do not have a compensation committee or persons participating in deliberations concerning executive officer compensation as there was no executive officer compensation paid other than hourly payments for Chief Financial Officer services during 2022. Nominating Committee We do not have a nominating committee. All directors participate in the nomination and election of directors. Section 16(a) Beneficial Ownership Reporting Compliance; Delinquent Section 16(a) Reports Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. These persons are also required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Further, we have implemented measures to assure timely filing of Section 16(a) reports by our executive officers and directors. Based solely on our review of such forms or written representations from certain reporting persons, we believe that during 2021 our executive officers and directors complied with the filing requirements of Section 16(a). Code of Ethics To be added Changes in control There are no arrangements which may at a subsequent date result in a change in control of the Company 20 Item 11. Executive Compensation. Executive and Director Compensation Summary Compensation Table Option All Other Salary Bonus Awards Compensation Total Name and Principal Position Year ($) ($) ($) ($) ($) Jan H. Loeb 2022 - - 27,170 (1) - 27,170 President and Executive Chairman 2021 - - - - - Christine Jenkins 2022 58,725 (2) - - - 58,725 Vice President and Chief Financial Officer 2021 - - - - - Mitchell Rubenstein 2022 - - 27,170 (1) - 27,170 Director 2021 - - - - - Eric Richman 2022 - - 27,170 (1) - 27,170 Director 2021 - - - - - David Seltzer 2022 - - 27,170 (1) - 27,170 Director 2021 - - - - - Jerry Wolasky 2022 - - 27,170 (1) - 27,170 Director 2021 - - - - - Tracy Clifford 2022 - - 27,170 (1) - 27,170 Director 2021 - - - - - (1) Represents the grant date fair value calculated in accordance with applicable accounting principles with respect to 100,000 options granted per Executive/Director on January 31, 2022 with an exercise price of $0.29. The fair value of the options was determined using the Black-Scholes option pricing model using the following assumptions: (i) a risk-free interest rate of 1.505% (ii) an expected term of 4 years (iii) an assumed volatility of 184.74% and (iv) no dividends. (2) Represents hourly fees paid to Ms. Jenkins for the provision of services as Chief Financial Officer of the Company. 21 Executive Compensation for 2021 and 2022 Prior to being appointed as our Chief Financial Officer on September 29, 2022 and Vice President on January 13, 2023, beginning in March 2022, Ms. Jenkins served as our outside consultant providing certain financial services. Ms. Jenkins is paid on an hourly basis. Mr. Loeb was appointed as Executive Chairman on September 29, 2022 and President on January 13, 2023 and does not receive any compensation for his role as an officer of the Company. The Company pays compensation to its directors pursuant to the NovelStem International Corp. Equity Incentive Plan (the “Plan”). The Plan provides for the grant to officers, directors, third party contractors and other future key employees of options to purchase shares of common stock. Under the Plan, the Company is authorized to issue up to 7,000,000 shares of common stock as equity awards under the Plan. Awards may be made in the form of options, stock appreciation rights (“SARs”), restricted stock or restricted stock units, or stock bonus awards in respect of the Company’s common stock of the Company. Grants to any single participant or non-executive director during any calendar year may not exceed 1,000,000 shares. The purchase price may be paid in cash or at the end of the option term, 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. Options awarded under the Plan shall be awarded at an exercise price of not less than the fair market value of a share of our common stock as of the grant date and shall vest and become exercisable after a period not to exceed seven (7) years. SARs awarded under the Plan shall have a strike price per share of common stock of not less than the fair market value of a share of our common stock, provided that, in the case of a SAR granted in tandem with an option, the strike price shall not be less than the exercise price of the related option. A SAR granted in tandem with an option shall become exercisable and shall expire according to the same vesting schedule and expiration provisions as the corresponding option, such date not to exceed seven (7) years of the grant date. In the event of the termination of an employee, third party service provider, officer or Director’s service on the Board of the Company for any reason other than for cause, all of the Options which are then vested may be exercised within 18 months of such termination, provided that, in no event shall this extension period continue beyond the expiration of the term of the option(s). In addition, any such extension shall be applicable only to the extent that such option or options are vested and exercisable according to the terms of the Plan and any applicable option agreement. Any unvested options are immediately terminated on the effective date of the termination. In the event of termination of an employee, third party service provider, officer or Director’s service for cause, all options are forfeited and deemed cancelled and no longer exercisable as of the date of termination. 22 Outstanding Equity Awards at 2022 Fiscal Year End The following tables set forth all outstanding equity awards made to each of the Executives and Directors that were outstanding at December 31, 2022. Options to Purchase NovelStem International Corp. Stock Name Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Option Expiration Date Jan H. Loeb 50,000 0.10 November 12, 2025 50,000 0.10 November 26, 2026 1,000,000 0.10 November 24, 2027 100,000 0.29 January 31, 2029 Mitchell Rubenstein 50,000 0.10 November 12, 2025 50,000 0.10 November 26, 2026 1,000,000 0.10 November 24, 2027 100,000 0.29 January 31, 2029 Eric Richman 50,000 0.10 November 12, 2025 50,000 0.10 November 26, 2026 50,000 0.10 November 24, 2027 100,000 0.29 January 31, 2029 David Seltzer 50,000 0.10 November 12, 2025 50,000 0.10 November 26, 2026 50,000 0.10 November 24, 2027 100,000 0.29 January 31, 2029 Jerry Wolasky 50,000 0.10 November 12, 2025 50,000 0.10 November 26, 2026 50,000 0.10 November 24, 2027 100,000 0.29 January 31, 2029 Tracy Clifford 50,000 0.10 November 12, 2025 50,000 0.10 November 26, 2026 1,000,000 0.10 November 24, 2027 100,000 0.29 January 31, 2029 Christine Jenkins - - - - Warrants to Purchase NovelStem International Corp. Stock Name Number of Securities Underlying Unexercised Warrants (#) Exercisable Number of Securities Underlying Unexercised Warrants (#) Unexercisable Warrant Exercise Price ($) Warrant Expiration Date Jan H. Loeb 2,250,000 - 0.13 June 28, 2023 Mitchell Rubenstein 750,000 - 0.10 June 28, 2023 Eric Richman - - - - David Seltzer - - - - Jerry Wolasky - - - - Tracy Clifford - - - - Christine Jenkins - - - - 23 Option and Warrant Exercises None Non-qualified Deferred Compensation The Company has no deferred compensation plan in place during the years ended December 31, 2022 and 2021. Payments and Benefits Upon Termination or Change in Control There are no agreements in place with any Executive or Director that would provide for any amounts due under any termination scenario at December 31, 2022. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The following table sets forth certain information with respect to the beneficial ownership of our common stock, as of January 25, 2023, for each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock, each of our directors and all directors as a group. The Company has no executive officers. Except as indicated in footnotes to this table, we believe that the shareholders named in this table will have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such shareholders. Security Ownership of Certain Beneficial Owners and Management Name and Address of beneficial owner (6) Amount and nature of beneficial ownership Percent of total common equity (1) Christine Jenkins — — Michael Sosnowik 2,770,270 5.9 % Stephen Gans 5,537,978 11.8 % Jan Loeb 7,570,673 (2)(3)(4) 15.1 % Jerry Wolasky 10,122,973 (3)(4) 21.5 % Tracy Clifford 1,100,000 (4) 2.3 % Eric Richman 754,054 (3)(4) 1.5 % Mitchell Rubenstein 2,958,108 (4)(5) 6.1 % David Seltzer 4,028,378 (3)(4) 8.6 % All directors and officers as a group (seven persons) 26,484,186 49.4 % (1) Applicable percentage ownership is based on 46,881,475 shares of common stock outstanding as of January 25, 2023, together with securities exercisable or convertible into shares of common stock within 60 days of January 25, 2023. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that a person has the right to acquire beneficial ownership of upon the exercise or conversion of options, convertible stock, warrants or other securities that are currently exercisable or convertible or that will become exercisable or convertible within 60 days of January 25, 2023, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the number of shares beneficially owned and percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Includes 1,108,108 held in an IRA and 874,528 held as Trustee for the Steinberg Family Trust. Includes warrants to purchase 2.25 million shares of common stock at an exercise price of $0.13 per share and options to purchase 1.10 million shares of common stock at an exercise price of $0.10 per share. (3) Includes options to purchase 150,000 shares of common stock at an exercise price of $0.10 per share. (4) Director. (5) Includes options and warrants to purchase 1,850,000 shares of common stock at an exercise price of $0.10 per share. (6) The address of each person is c/o NovelStem International Corp. 2255 Glades Road, Suite 221A, Boca Raton, FL 33431. 24 Securities authorized for issuance under equity compensation plans. Equity Compensation Plan Information Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders Equity compensation plans not approved by security holders 8,400,000 $ 0.13 1,600,000 Total 8,400,000 $ 0.13 1,600,000 Item 13. Certain Relationships and Related Transactions, and Director Independence. Jan Loeb, our President and Executive Chairman of the Board, is also the Chairman of the Board of NewStem. On November 15, 2021, in connection with previous, the Company issued 1,729,729 shares of common stock to directors as a result of certain contingent assets not being realized, as required by the governing financing documents. A summary of the shares issued follows: Shares Jan Loeb 270,270 Mitchell Rubenstein 108,108 Jerry Wolasky 972,973 David Seltzer 324,324 Eric Richman 54,054 Total 1,729,729 On April 12, 2021, the Company entered into a promissory note (the “Note”) with Stephen Gans for $100,000. The Note accrued interest at 8% per annum and matured on April 12, 2022. The proceeds of this Note were used to pay operating expenses of the Company including directors and officer insurance premiums. Interest expense accrued related this this Note was $5,752 for the year ended December 31, 2021. The Note and all accrued interest were paid in full on February 16, 2022. In May 2022, the Company entered into a finance agreement with Jan Loeb and Jerry Wolasky, shareholders and Board members, 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 through November 11, 2022, at which time the interest rate increased to 10% per annum for subsequent advances . The agreement matures the earlier of January 31, 2024 or 20 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 Annual Report, the Company has received advances of $342,000 under the aforementioned agreement. Except as disclosed herein, no director, executive officer, shareholder holding at least 5% of shares of our common stock, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transaction since January 1, 2019, in which the amount involved in the transaction exceeds the lesser of $120,000 or one percent of the average of our total assets at the year-end for the last two completed fiscal years. 25 Review, Approval or Ratification of Transactions with Related Persons The Board conducts an appropriate review of and oversees all related party transactions on a continuing basis and reviews potential conflict of interest situations where appropriate. The Board has adopted formal standards to apply when it reviews, approves or ratifies any related party transaction. In addition, the Board applies the following standards to such reviews: (i) all related party transactions must be fair and reasonable and on terms comparable to those reasonably expected to be agreed to with independent third parties for the same goods and/or services at the time they are authorized by the Board and (ii) all related party transactions should be authorized, approved or ratified by the affirmative vote of a majority of the directors who have no interest, either directly or indirectly, in any such related party transaction. Director Independence. We have determined that, under the criteria established by NASDAQ and by our board of directors, Tracy Clifford, Eric Richman, Mitchell Rubenstein and David Seltzer are independent. Item 14. Principal Accountant Fees and Services. Accounting Fees Cherry Bekaert LLP The following table summarizes the fees accrued and paid by NovelStem for professional services rendered by Cherry Bekaert LLP for the years ended December 31, 2022 and 2021. 2022 2021 Audit fees $ 60,800 $ 68,000 Tax Fees 3,500 11,100 All other fees 13,050 - Total $ 77,350 $ 79,100 Pre-Approval Policies and Procedures The Audit Committee’s current policy is to pre-approve all audit and non-audit services that are to be performed and fees to be charged by our independent auditor to assure that the provision of these services does not impair the independence of the auditor. The Audit Committee pre-approved all audit and non-audit services rendered by our principal accountant in 2022 and 2021. 26 PART IV Item 15. Exhibit and Financial Statement Schedules. (a) Financial Statements. The following financial statements are filed as part of this registration statement: NOVELSTEM INTERNATIONAL CORP. Years Ended December 31, 2022 and 2021 Index to Audited Financial Statements Page Audited Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID 677 ) F-1 Balance Sheets F-2 Statements of Operations F-3 Statements of Changes in Shareholders’ Equity F-4 Statements of Cash Flows F-5 Notes to Financial Statements F-6 27 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders NovelStem International Corp. Boca Raton, Florida Opinion on the Financial Statements We have audited the accompanying balance sheets of NovelStem International Corp. (the “Company”) as of December 31, 2022 and 2021, and the related statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Cherry Bekaert LLP We have served as the Company’s auditor since 2021. Fort Lauderdale, Florida March 31, 2023 F- 1 NOVELSTEM INTERNATIONAL CORP. BALANCE SHEETS 2022 2021 As of December 31, 2022 2021 ASSETS Current assets: Cash $ 6,346 $ 8,666 Accounts receivable, administrative fees 12,000 - Prepaid expenses 40,561 28,316 Other current assets Total current assets 58,907 36,982 Non-current assets Property and equipment, net Investment in Netco 137,011 137,011 Investment in NewStem 2,090,286 2,435,155 Total assets $ 2,286,204 $ 2,609,148 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 21,203 $ 49,777 Note payable - 100,000 Accrued expenses 43,673 43,425 Other liabilities Total current liabilities 64,876 193,202 Non-current liabilities Convertible financial instrument Long-term note payable, including accrued interest 288,450 - Total liabilities 353,326 193,202 Commitments and contingencies (see Note 7) - - Shareholders’ equity: Common stock, $ .01 par value, 100,000,000 shares authorized, 50,316,672 shares issued at December 31, 2022 and 2021 and 46,881,475 shares outstanding at December 31, 2022 and 2021 468,815 468,815 Additional paid-in capital 290,604,327 290,321,665 Accumulated deficit ( 288,940,510 ) ( 288,174,780 ) Treasury stock, at cost, 3,435,197 shares at December 31, 2022 and 2021 ( 199,754 ) ( 199,754 ) Total shareholders’ equity 1,932,878 2,415,946 Total liabilities and shareholders’ equity $ 2,286,204 $ 2,609,148 The accompanying notes are an integral part of these financial statements. F- 2 NOVELSTEM INTERNATIONAL CORP. STATEMENTS OF OPERATIONS 2022 2021 Years Ended December 31, 2022 2021 Administrative fee income $ 12,000 $ - Operating expenses: Research and development expenses Less – grants and participations received Research and development expenses, net General and administrative expenses 744,434 495,535 Contra expenses - legal fees ( 310,000 ) - Total operating expenses 434,434 495,535 Loss from operations ( 422,434 ) ( 495,535 ) Financial (income) expenses, net Interest expense 11,018 6,825 Loss before income taxes ( 433,452 ) ( 502,360 ) Provision for income tax - - Net loss before equity in net loss of equity method investees ( 433,452 ) ( 502,360 ) Equity in net loss of equity method investees ( 719,802 ) ( 843,268 ) Gain on dilution of equity method investment 387,524 - Net loss $ ( 765,730 ) $ ( 1,345,628 ) Basic and diluted net loss per share: Net loss per share - basic and diluted $ ( 0.02 ) $ ( 0.03 ) Weighted average number of shares outstanding – basic 46,881,475 44,259,559 Weighted average number of shares outstanding – diluted 46,881,475 44,259,559 The accompanying notes are an integral part of these financial statements. F- 3 NOVELSTEM INTERNATIONAL CORP. STATEMENTS OF SHAREHOLDERS’ EQUITY Number Additional of Total Number of Common Paid-In Accumulated Treasury Treasury Shareholders’ Shares Stock Capital Deficit Shares Stock Equity Balance December 31, 2020 43,881,477 $ 438,815 $ 290,078,899 $ ( 286,829,152 ) 3,435,197 $ ( 199,754 ) $ 3,488,808 Net loss - - - ( 1,345,628 ) - - ( 1,345,628 ) Stock issued 2,999,998 30,000 ( 30,000 ) - - - - Stock-based compensation - - 272,766 - 272,766 Balance, December 31, 2021 46,881,475 468,815 290,321,665 ( 288,174,780 ) 3,435,197 ( 199,754 ) 2,415,946 Balance 46,881,475 468,815 290,321,665 ( 288,174,780 ) 3,435,197 ( 199,754 ) 2,415,946 Net loss - - - ( 765,730 ) - - ( 765,730 ) Stock-based compensation - - 282,662 - - - 282,662 Balance, December 31, 2022 46,881,475 $ 468,815 $ 290,604,327 $ ( 288,940,510 ) 3,435,197 $ ( 199,754 ) $ 1,932,878 Balance 46,881,475 $ 468,815 $ 290,604,327 $ ( 288,940,510 ) 3,435,197 $ ( 199,754 ) $ 1,932,878 The accompanying notes are an integral part of these financial statements. F- 4 NOVELSTEM INTERNATIONAL CORP. STATEMENTS OF CASH FLOWS 2022 2021 Years Ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 765,730 ) $ ( 1,345,628 ) Adjustments required to reconcile loss to net cash used in operating Equity in loss of equity method investees 719,802 843,268 Gain on dilution of equity method investment ( 387,524 ) - Distribution from NetCo 12,591 21,290 Accrued interest added to long-term note payable 8,450 - Stock-based compensation 282,662 272,766 Accrued interest added to long-term note payable Depreciation Revaluation of marketable securities Revaluation of convertible financial instrument Change in operating assets and liabilities: Accounts receivable, administrative fees ( 12,000 ) - Prepaid expenses ( 12,245 ) 2,919 Increase (decrease) in other current assets Increase (decrease) in other liabilities Accounts payable ( 28,574 ) 20,706 Accrued expenses 248 3,751 Net cash used in operating activities ( 182,320 ) ( 180,928 ) Cash flows from investing activities Proceeds from the sale of marketable securities Purchase of property and equipment Net cash provided by investing activities Cash flows from financing activities: Proceeds from (repayment of) note payable, current ( 100,000 ) 100,000 Proceeds from a convertible financial instrument Issuance of shares, net Proceeds from long-term note payable 280,000 - Net cash from financing activities 180,000 100,000 Net change in cash ( 2,320 ) ( 80,928 ) Cash at the beginning of the year 8,666 89,594 Cash at the end of the year $ 6,346 $ 8,666 Supplemental cash flow information: Cash paid during the year for: Interest $ 8,320 $ 1,073 The accompanying notes are an integral part of these financial statements. F- 5 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements 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 cutting edge 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. NetCo is a legacy media business interest which owns “Net Force”, a book publishing franchise. Liquidity and Management’s Plans Since inception, the Company has accumulated a deficit of approximately $ 289,000,000 . The accumulated deficit of the Company subsequent to its business focus shift and name change in September 2018 is approximately $ 2,260,000 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 become profitable (see Note 3). In May 2022, the Company entered into a finance agreement with two individuals who are shareholders and directors, which was amended in July 2022, to borrow up to $ 600,000 for working capital needs (see Note 4). Following this financing, the Company believes that its cash resources are sufficient for the operations of the next 12 months. NOTE 2— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Financial Accounting Standards Board (“FASB”) has established the FASB Accounting Standards Codification (“ASC”) as the single source of authoritative GAAP. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. F- 6 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements Cash and Cash Equivalents Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less at the date of purchase. The Company had no cash equivalents as of either year end presented. Equity Investments Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation of several factors, including, among others, representation on the Investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method of accounting, an Investee company’s accounts are not reflected within the Company’s Balance Sheets or Statements of Operations; however, the Company’s share of the earnings or losses of the Investee company is reflected in the caption “Equity in net income (loss) of equity method investees” in the Statements of Operations. The Company’s carrying value in an equity method Investee company is reflected in the caption “Investment in Investee company’ in the Company’s Balance Sheets. When the Company’s carrying value in an equity method Investee company is reduced to zero, no further losses are recorded in the Company’s financial statements unless the Company guarantied obligations of the Investee company or has committed additional funding. When the Investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. The Company recognizes a gain or loss on dilution when the equity method Investee company issues stock to third parties. The Company reviews equity investments for impairment on an annual basis, or earlier if events or changes in circumstances indicate that the carrying amounts might not be recoverable. The Company holds a minority investment in an entity, NewStem, which is accounted for pursuant to the equity method of accounting. Additionally, the Company is a 50 % joint venture partner in NetCo which is accounted for pursuant to the equity method of accounting. See Note 3. Treasury Stock Shares of common stock repurchased are recorded at cost as treasury stock. F- 7 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements Stock-Based Compensation The Company accounts for stock-based awards in accordance with applicable accounting principles, which requires compensation expense related to share-based transactions to be measured and recognized in the financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all stock options, the Company recognizes expense over on an accelerated basis over the requisite service period (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense. Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with applicable accounting principles. In the event of the termination of an employee, third party service provider, officer or Director’s service on the Board of the Company for any reason other than for cause, all of the Options which are then vested may be exercised within 18 months of such termination, provided that, in no event shall this extension period continue beyond the expiration of the term of the option(s). In addition, any such extension shall be applicable only to the extent that such option or options are vested and exercisable according to the terms of the Plan and this Agreement. Any unvested options are immediately terminated on the effective date of the termination. In the event of termination of an employee, third party service provider, officer or Director’s service for cause, all Options are forfeited and deemed cancelled and no longer exercisable on the date of termination. See Note 5 for the assumptions used to calculate the fair value of stock-based compensation. Upon the exercise of options, it is the Company’s policy to issue new shares rather than utilizing treasury shares. Income Taxes Deferred income taxes are determined using the asset and liability method in accordance with Accounting Standards Codification (“ASC”) Topic 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are measured using enacted tax rates expected to apply to taxable income in years in which such temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred income taxes is recognized in the statement of operations of the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized. F- 8 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements Basic and Diluted Net Loss Per Share Basic net loss per share is computed by dividing the net loss by the weighted average number of shares outstanding during the year, excluding treasury stock. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares outstanding plus the dilutive potential of common shares which would result from the exercise of stock options and warrants. The dilutive effects of stock options and warrants are excluded from the computation of diluted net income per share if the effect of doing so would be antidilutive. The following data represents the amounts used in computing earnings per share and the effect on net income (loss) and the weighted average number of shares of dilutive potential common stock: SCHEDULE OF WEIGHTED AVERAGE NUMBER OF SHARES OF DILUTIVE 2022 2021 Year Ended December 31, 2022 2021 Net loss available to common shareholders $ ( 765,730 ) $ ( 1,345,628 ) Weighted average shares outstanding: -Basic 46,881,475 44,259,559 Add: Warrants - - Add: Stock options - - -Diluted 46,881,475 44,259,559 Basic and diluted net loss per share $ ( 0.02 ) $ ( 0.03 ) Warrants and stock options excluded from the above calculations are as follows: SCHEDULE OF WARRANTS AND STOCK OPTIONS 2022 2021 Year Ended December 31, 2022 2021 Warrants 3,000,000 3,000,000 Stock options 5,400,000 4,300,000 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 and 2022 resulting in the Company recognizing a gain on dilution of equity method investment. These transactions resulted in the Company having an ownership interest of 30.58 % and 31.51 %, respectively, as of December 31, 2022 and 2021. The Company accounts for its investment in NewStem under the equity method. At December 31, 2022 and 2021, the carrying value of the investment in NewStem exceeded the underlying net assets of NewStem by $ 2,090,286 and $ 2,435,155 , 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. F- 9 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements The Company assesses its investment in NewStem for impairment on an annual basis. NewStem is in the development stage and has incurred losses since its inception and has yet to generate any revenues. 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 of products or financing on terms acceptable to the Company. NewStem obtained additional funding of approximately $ 1,450,000 in 2022 through the sale of shares or ordinary stock. The following table represents the Company’s investment in NewStem: SCHEDULE OF INVESTMENTS 2022 2021 Year Ended December 31, 2022 2021 Investment in NewStem, beginning $ 2,435,155 $ 3,299,713 Allocation of net loss from NewStem ( 732,393 ) ( 864,558 ) Gain on dilution of equity method investment 387,524 - Purchase of NewStem shares - - Investment in NewStem, ending $ 2,090,286 $ 2,435,155 The results of operations and financial position of the Company’s investment in NewStem are summarized below: SCHEDULE OF OPERATIONS AND FINANCIAL POSITION INVESTMENT 2022 2021 Year Ended December 31, 2022 2021 Condensed income statement information: Net sales $ - $ - Gross margin $ - $ - Net loss $ ( 2,341,000 ) $ ( 2,630,000 ) Company’s allocation of net loss from NewStem $ ( 732,393 ) $ ( 864,558 ) 2022 2021 As of December 31, 2022 2021 Condensed balance sheet information: Current assets $ 911,000 $ 1,425,000 Non-current assets $ 23,000 $ 41,000 Current liabilities $ 97,000 $ 227,000 Non-current liabilities $ 121,000 $ 134,000 F- 10 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements 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 from this arrangement. The Company assesses its investment in NetCo for impairment on an annual basis. The following table represents the Company’s investment in NetCo: SCHEDULE OF INVESTMENTS 2022 2021 Year Ended December 31, 2022 2021 Investment in NetCo, beginning $ 137,011 $ 137,011 Allocation of net income from Netco 12,591 21,290 Distribution from NetCo ( 12,591 ) ( 21,290 ) Investment in NetCo, ending $ 137,011 $ 137,011 The results of operations and financial position of the Company’s investment in NetCo are summarized below: SCHEDULE OF OPERATIONS AND FINANCIAL POSITION INVESTMENT 2022 2021 Year Ended December 31, 2022 2021 Condensed income statement information: Net sales $ 25,182 $ 42,580 Gross margin $ - $ - Net income $ 25,182 $ 42,580 Net income (loss) $ 25,182 $ 42,580 Company’s allocation of net income from NetCo $ 12,591 $ 21,290 2022 2021 As of December 31, 2022 2021 Condensed balance sheet information: Current assets $ 13,473 $ 13,475 Non-current assets $ 272,799 $ 272,799 Current liabilities $ 12,250 $ 12,252 Non-current liabilities $ - $ - F- 11 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements NOTE 4— NOTES PAYABLE On April 12, 2021, the Company entered into a promissory note (the “Note”) with a related party (individual) for $ 100,000 . The Note accrued interest at 8 % per annum and matured on April 12, 2022 . The proceeds of this Note were used to pay operating expenses of the Company including directors and officer insurance premiums. Interest expense accrued related this this Note was $ 5,752 for the year ended December 31, 2021. The Note and all accrued interest, totaling $ 6,752 , were paid in full on February 16, 2022. In May 2022, the Company entered into a finance agreement (the “Agreement”) with two individuals who are shareholders and directors, which was amended in July 2022, to borrow up to $ 600,000 for working capital needs. This Agreement provides for funding through January 31, 2024 and provides 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 Agreement matures the earlier of January 31, 2024 or 20 months from the date of the first funded amount unless the shareholders agree to extend the due date at that time. The Company received advances of $ 280,000 pursuant to this agreement through December 31, 2022. NOTE 5— EQUITY (a) General At December 31, 2022 and 2021 the Company had issued 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. On November 15, 2021, in a noncash transaction, the Company issued approximately 3,000,000 shares of common stock to existing holders of subscription agreements dated June 2020. These subscription agreements provided for the issuance of additional shares if certain contingent assets were not realized. It was determined during the year ended December 31, 2021 that the contingent asset would not be realized and the shares were issued. (b) Summary Employee Option Information The Company’s stock option plans provide 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 at the end of the option term, 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 approved by the Company’s board of directors on November 12, 2018, an aggregate of 5,400,000 options have been issued to directors and investor relations professionals. F- 12 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements The Company utilized the Black-Scholes option-pricing model to estimate fair value, utilizing the following assumptions for the respective years (all in weighted averages): SCHEDULE OF FAIR VALUE OF OPTION USING VALUATION ASSUMPTIONS Year Ended December 31, 2022 2021 Risk-free interest rate 1.5 % 1.6 % Expected term, in years 3.82 6 Expected volatility 183.7 % 140.2 % Expected dividend yield 0 % 0 % Determined weighted average grant date fair value per option $ 0.27 $ - 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 in order 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 of dividends in the near future. (c) Summary Option Information A summary of the Company’s option plans as of December 31, 2022 and 2021, as well as changes during each of the years then ended, is presented below: SCHEDULE OF STOCK OPTION ACTIVITIES Year Ended December 31, 2022 2021 Number Weighted Number Weighted of Average of Average Options Exercise Options Exercise (in shares) Price (in shares) Price Outstanding at beginning of year 4,300,000 0.10 4,300,000 0.10 Granted 1,100,000 0.29 - - Outstanding at end of year 5,400,000 0.14 4,300,000 0.10 Exercisable at end of year 4,800,000 0.12 4,300,000 0.10 Stock-based compensation expense was approximately $ 283,000 and $ 273,000 in the years ending December 31, 2022 and 2021, respectively. The total compensation cost related to non-vested awards not yet recognized was approximately $ 13,000 as of December 31, 2022. An award of 500,000 options granted on January 31, 2022 had special vesting provisions whereby the awards fully vested in 2022. All awards outstanding as of December 31, 2021 were vested. F- 13 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements (d) Warrants The Company has issued warrants at exercise prices equal to or greater than market value of the Company’s common stock at the date of issuance. A summary of warrant activity follows: SUMMARY OF WARRANTS ACTIVITY Year Ended December 31, 2022 2021 Number of Weighted Number Weighted shares Average of Average underlying Exercise Options Exercise warrants Price (in shares) Price Outstanding at beginning of year 3,000,000 0.12 3,000,000 0.12 Granted - - - - Exercised - - - - Forfeited or expired - - - - Outstanding at end of year 3,000,000 0.12 3,000,000 0.12 The warrants outstanding at December 31, 2022 have a weighted average remaining contractual life of approximately six months. NOTE 6— INCOME TAXES For the years ended December 31, 2022 and 2021, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2022 and 2021, the Company had approximately $ 61,000,000 and $ 118,000,000 , respectively, of net operating losses subject to IRC Section 382 limitations, of which $ 6,400,000 and $ 6,200,000 , respectively, were available for carryforward after the consideration of IRC Section 382 limitations. State of Florida net operating losses available for carryforward approximate the federal net operating loss carryforward amounts. The federal and state net operating losses expire beginning in 2021. Approximately $ 55,000,000 and $ 25,000,000 , respectively of federal and state losses expired in December 2022, and approximately $ 23,000,000 and $ 3,000,000 , respectively, of federal and state losses expired in December 2021. The Company has approximately $ 1,775,000 in federal and state losses that do not expire. The remaining losses expire from 2023 through 2036. The majority of these expiring losses are further limited by IRC section 382 as shown in the deferred tax table below. All such deferred tax assets have been offset with a full valuation allowance. F- 14 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements The Company’s income tax provision differs from the expense that would result from applying statutory rates to income before taxes. A reconciliation of the provision (benefit) for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows: SCHEDULE OF INCOME BEFORE INCOME TAX 2022 2021 Year Ended December 31, 2022 2021 Computed tax at the federal statutory rate of 21 % $ ( 160,803 ) $ ( 282,582 ) State income taxes, net of federal income tax benefit ( 33,271 ) ( 58,468 ) Foreign rate differential ( 171,089 ) ( 106,409 ) Change in federal valuation allowance 365,163 447,459 Total provision for income tax $ - $ - Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets as of December 31, 2022 and 2021 consist of the following: SCHEDULE OF DEFERRED TAX ASSETS 2022 2021 As of December 31, 2022 2021 Outside tax basis difference in equity investments $ 1,700,000 $ 1,700,000 Federal and state net operating loss carryforwards available after consideration of IRC Section 382 limitations 1,686,708 1,676,585 General business credit 41,551 41,551 Stock compensation 174,009 99,103 Net operating losses Research and development credit carried forward Other Total deferred tax assets 3,602,268 3,517,239 Federal and state net operating loss carryforwards subject to IRC Section 382 limitations 15,465,570 28,425,763 Less valuation allowance for net operating loss limitations ( 15,465,570 ) ( 28,425,763 ) Valuation allowance ( 2,971,573 ) ( 2,482,298 ) Subtotal deferred tax assets 630,695 1,034,941 Deferred tax liability, equity method basis difference ( 630,695 ) ( 1,034,941 ) Net deferred tax assets $ - $ - Management has evaluated all tax positions that could have a significant effect on the combined financial statements and determined the Companies had no significant uncertain income tax positions at December 31, 2022 and 2021. F- 15 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements NOTE 7— COMMITMENTS AND CONTINGENCIES The Company is 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 proceedings for the joint owners of NetCo concluded during 2022 with final briefs being filed in January 2023. The arbitrator has not rendered a decision as of the date of these financial statements. 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 this arbitration proceeding. 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. NOTE 8 – RESTATEMENTS OF PREVIOUSLY ISSUED INTERIM FINANCIAL STATEMENTS (UNAUDITED) Previously issued unaudited financial statements have been restated to reflect gains on dilution from the Company’s equity method investment in NewStem. The previously issued financial statements as of and for the three and six months ended June 30, 2022 and as of and for the nine months ended September 30, 2022 contained an error whereby the Company did not recognize gains on the dilution of its equity method investment in NewStem due to the issuance of stock to third parties. The following is a summary of the restatement: SCHEDULE OF ERROR CORRECTIONS AND PRIOR PERIOD ADJUSTMENTS Balance Sheet: Originally Reported Adjustment Restated September 30, 2022 Originally Reported Adjustment Restated Total current assets $ 65,832 $ - $ 65,832 Investment in NewStem, Ltd 1,828,419 194,948 2,023,367 Total assets 2,031,262 194,948 2,226,210 Total current liabilities 125,632 - 125,632 Stockholders’ equity 1,737,421 194,948 1,932,369 Statements of Operations: Originally Reported Adjustment Restated Nine Months Ended September 30, 2022 Originally Reported Adjustment Restated Loss before income taxes $ ( 270,283 ) $ - $ ( 270,283 ) Provision for income tax - - - Net loss before equity in net loss of equity method investees ( 270,283 ) - ( 270,283 ) Equity in net income (loss) of equity method investees ( 606,736 ) 194,948 ( 411,788 ) Net loss ( 877,019 ) 194,948 ( 682,071 ) Balance Sheet: Originally Reported Adjustment Restated June 30, 2022 Originally Reported Adjustment Restated Total current assets $ 108,634 $ - $ 108,634 Investment in NewStem, Ltd 1,913,951 194,948 2,108,899 Total assets 2,159,596 194,948 2,354,544 Total current liabilities 102,053 - 102,053 Stockholders’ equity 1,957,543 194,948 2,152,491 Statements of Operations: Originally Reported Adjustment Restated Six Months Ended June 30, 2022 Originally Reported Adjustment Restated Loss before income taxes $ ( 60,543 ) $ - $ ( 60,543 ) Provision for income tax - - - Net loss before equity in net loss of equity method investees ( 60,543 ) - ( 60,543 ) Equity in net income (loss) of equity method investees ( 521,204 ) 194,948 ( 326,256 ) Net loss ( 581,747 ) 194,948 ( 386,799 ) Statements of Operations: Originally Reported Adjustment Restated Three Months Ended June 30, 2022 Originally Reported Adjustment Restated Loss before income taxes $ ( 229,982 ) $ - $ ( 229,982 ) Provision for income tax - - - Net loss before equity in net loss of equity method investees ( 229,982 ) - ( 229,982 ) Equity in net income (loss) of equity method investees ( 134,301 ) 194,948 60,647 Net loss ( 364,283 ) 194,948 ( 169,335 ) NOTE 9— SUBSEQUENT EVENTS The Company evaluated subsequent events through the date these financial statements were available to be issued and filed with the SEC. On March 23, 2023, the board approved the grant of 360,000 stock options to directors and officers. F- 16 (b) Exhibits. Exhibit Number Description 3.1 Third Amended and Restated Articles of Incorporation December 1999 (1) 3.2 Articles of Amendment to Articles of Incorporation 2004 (1) 3.3 Articles of Amendment to Articles of Incorporation 2018 (1) 3.4 Bylaws (1) 3.5 Articles of Association of NewStem (1) 10.1 Equity Incentive Plan (1) 10.2 Joint Venture Agreement by and between the Company and NetCo (1) 10.3 Financing Agreement dated May 2022 (1) 10.4 Amendment to Financing Agreement dated July 2022 (1) 10.5 Promissory Note issued to Jan Loeb (1) 10.6 Promissory Note issued to Jerry Wolasky (1) 10.7 Form of NovelStem Subscription Agreement (1) 10.8 NewStem Share Purchase Agreement (1) 10.9 Redacted Litigation Funding Agreement with Omni Bridgeway (1) 10.10 Certification of Principal Executive Officer and Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 10.11 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 10.12 Certification of Principal Executive Officer and Executive Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 10.13 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) (1) Previously filed. 28 (c) Financial statements of fifty percent or less owned subsidiaries. NewStem Ltd. Financial Statements As of December 31, 2022 Financial Statements as of December 31, 2022 NewStem Ltd. Contents Page Report of Independent Registered Public Accounting Firm F-2 Balance Sheets F-3 Statements of Operations F- 4 Statements of Changes in Shareholders’ Equity F- 5 Statements of Cash Flows F- 6 Notes to the Financial Statements F- 7- F-19 F- 1 Somekh Chaikin KPMG Millennium Tower 17 Ha’arba’a Street, PO Box 609 Tel Aviv 61006, Israel +972 3 684 8000 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of NewStem Ltd. Opinion on the Financial Statements We have audited the accompanying balance sheets of NewStem Ltd. as of December 31, 2022 and 2021, the related statements of operations, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. Somekh Chaikin Member Firm of KPMG International We have served as the Company’s auditor since 2021. Tel Aviv, Israel March 22, 2023 KPMG Somekh Chaikin, an Israeli partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee F- 2 NewStem Ltd. Balance Sheets as of December 31, 2022 2021 Note US$ thousands US$ thousands Assets Current assets Cash and cash equivalents 3 878 601 Prepaid share-based payment 7C - 771 Other current assets 4 33 53 Total current assets 911 1,425 Non-current assets Property and equipment, net 5 23 41 Total assets 934 1,466 Liabilities and shareholders’ equity Current liabilities Accounts payable 6 97 127 Other liabilities 8B - 100 Total Current liabilities 97 227 Non-current liabilities Convertible financial instrument 7F 121 134 Total liabilities 218 361 Commitments and contingent liabilities 8 - - Shareholders’ equity 7 Ordinary shares - * - * Additional paid-in capital 8,686 6,734 Accumulated deficit ( 7,970 ) ( 5,629 ) Total shareholders’ equity 716 1,105 Total liabilities and shareholders’ equity 934 1,466 Ayelet Dilion Mashiah CEO Date of approval of the financial statements: March 22, 2023. * Represents an amount less than $1 thousands. The accompanying notes are an integral part of the financial statements. F- 3 NewStem Ltd. Statements of Operations for the Year Ended December 31 2022 2021 Note US$ thousands US$ thousands Operating expenses Research and development expenses 2I 2,299 2,451 Less – grants and participations received 8B ( 200 ) ( 90 ) Research and development expenses, net 2,099 2,361 General and administrative expenses 245 264 Operating loss 2,344 2,625 Financial (income) expenses, net 9 ( 3 ) 5 Loss for the year 2,341 2,630 The accompanying notes are an integral part of the financial statements. F- 4 NewStem Ltd. Statements of Changes in Shareholders’ Equity Additional paid-in Accumulated Ordinary shares capital deficit Total Number of shares US$ thousands US$ thousands US$ thousands US$ thousands Balance as of January 1, 2021 150,000 - * 4,543 ( 2,999 ) 1,544 Issuance of ordinary shares in exchange of services 8,696 - * 1,952 - 1,952 Issuance of ordinary shares in exchange of services 8,696 - * 1,952 - 1,952 Stock based compensation - - 239 - 239 Loss for the year - - - ( 2,630 ) ( 2,630 ) Balance as of December 31, 2021 158,696 - * 6,734 ( 5,629 ) 1,105 Balance 158,696 - * 6,734 ( 5,629 ) 1,105 Issuance of ordinary shares, net 4,798 - * 1,450 - 1,450 Stock based compensation - - 502 - 502 Loss for the year - - - ( 2,341 ) ( 2,341 ) Balance as of December 31, 2022 163,494 - * 8,686 ( 7,970 ) 716 Balance 163,494 - * 8,686 ( 7,970 ) 716 * Represents an amount less than $1 thousands. The accompanying notes are an integral part of the financial statements. F- 5 NewStem Ltd. Statements of Cash Flows for the year ended December 31 2022 2021 US$ thousands US$ thousands Cash flows from operating activities Loss for the year ( 2,341 ) ( 2,630 ) Adjustments required to reconcile loss to net cash used in operating activities: Depreciation 18 12 Revaluation of marketable securities - 4 Revaluation of convertible financial instrument ( 13 ) - Stock based compensation 1,273 1,420 Decrease (increase) in other current assets 20 ( 22 ) Increase (decrease) in other liabilities ( 100 ) 100 Increase (decrease) in accounts payable ( 30 ) 58 Net cash used in operating activities ( 1,173 ) ( 1,058 ) Cash flows from investing activities Proceeds from the sale of marketable securities - 774 Purchase of property and equipment - ( 39 ) Net cash provided by investing activities - 735 Cash flows from financing activities Proceeds from a convertible financial instrument - 134 Issuance of shares, net 1,450 - Net cash provided by financing activities 1,450 134 Net increase (decrease) in cash and cash equivalents 277 ( 189 ) Cash and cash equivalents at the beginning of the year 601 790 Cash and cash equivalents at the end of the year 878 601 The accompanying notes are an integral part of the financial statements. F- 6 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 1 - General NATURE OF OPERATIONS A. NewStem Ltd. (“the Company”) was incorporated in September 2016 under the laws of the State of Israel and commenced its business operations in July 2018. B. The Company is a development stage company utilizing its pioneering intellectual property related to haploid human embryonic stem cells for the development of personalized diagnostics and therapeutics for genetic and epigenetic diseases. C. Since inception, the Company has accumulated a deficit of $ 7,970 thousand. The Company will need to obtain additional funds to continue its operations. 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. The Company’s management has approved a contingent cost reductions in order to adjust future operation expenses to its cash balance. Following the fund-raising mentioned in Note 7D, and Note 12, and the Company’s adjustment of its future operation expenses, the Company believes that its cash resources are sufficient for the operations of the next 12 months. D. Definitions In these financial statements – 1. The Company – NewStem Ltd. 2. Related Party – Within its meaning in ASC 850, “Related Party Transactions”. Note 2 - Significant Accounting Policies SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies applied on a consistent basis are as follows: A. Basis of Presentation The financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). B. Presentation of financial information The currency of the primary economic environment in which the Company conducts its operations is the U.S. dollar. The Company raises funds in US dollars and manages its budget in US dollars. Future revenues are also expected to be generated in US dollars. Accordingly, the Company uses the U.S. dollar as its functional and reporting currency. C. Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions regarding transactions or matters the final effect of which on the financial statements cannot be accurately determined at the time of their preparation. Even though the estimates and assumptions are based on management’s best judgment, the final effect of such transactions or matters may be different from the estimates and assumptions made in their respect. As applicable to these financial statements, the most significant estimates and assumptions relate to stock-based compensation. F- 7 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 2 - Significant Accounting Policies (cont’d) D. Cash and cash equivalents Cash and cash equivalents include short-term bank deposits with an original maturity not exceeding three months, that is not restricted for use. E. Property and equipment Property and equipment are stated at cost. Depreciation is computed by using the straight-line method, over the assets’ estimated useful life. The annual depreciation rate for Software and Computers is 33 %. Estimates of the depreciation method, useful life and residual value are reviewed at least at the end of each reporting year and adjusted as necessary. Long-lived assets held and used by the Company, are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of the assets may not be recoverable. No such impairment was recorded in 2022 or 2021. F. Concentrations of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and marketable securities. Cash and cash equivalents are invested in a major bank in Israel. Management believes that the financial institution that hold the Company’s investments are financially sound and, accordingly, a minimal credit risk exists with respect to these investments. The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. G. Severance pay Pursuant to Section 14 of the Severance Compensation Law, 1963 (“Section 14”), the Company’s employees, covered by this section, are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made in their name with insurance companies and/or pension funds. Payments in accordance with Section 14 release the Company from any liability for future severance payments in respect of those employees. Deposits under Section 14 are not recorded as an asset in the Company’s balance sheet. As of December 31, 2022 and 2021, all of the Company’s employees are included under Section 14. H. Marketable securities Marketable securities are recorded at fair value. Changes in fair value of the securities are reported as financial income or expenses in the statement of operations. I. Research and development costs Research and development expenses consist mainly of labor costs. Costs are expensed as incurred. A grant received is presented as an offset from research and development expenses. See also Note 2M. F- 8 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 2 - Significant Accounting Policies (cont’d) J. Income taxes Deferred income taxes are determined using the asset and liability method in accordance with Accounting Standards Codification (“ASC”) Topic 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income taxes are measured using enacted tax rates expected to apply to taxable income in years in which such temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred income taxes is recognized in the statement of operations of the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized. K. Fair value of financial instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: The carrying amounts of cash and cash equivalents, trade receivables, other accounts receivable, trade payables and other liabilities approximate their fair value due to the short-term maturity of such instruments. The Company adopted ASC 820 Fair Value Measurements (“ASC 820”) which clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: Level 1- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2- Other inputs that are directly or indirectly observable in the marketplace. Level 3- Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. L. Collaborative arrangement The Company may enter into collaborative agreement with a third party. According to such agreement, the Company further develops its intellectual property to meet the needs of the third party and is entitled to royalties from any future sales that include its IP. The Company also receives reimbursement for the R&D costs it incurred as part of such agreement. Such agreement are considered to be within the scope of ASC 808 Collaborative Arrangements (“ASC 808”), as the parties are active participants and exposed to the risks and rewards of the collaborative activity. Performing R&D services for reimbursement is considered to be a collaborative activity under the scope of ASC 808. The Company records reimbursement payments received from the collaboration partner as reductions to R&D expense. F- 9 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 2 - Significant Accounting Policies (cont’d) M. Stock-based compensation The Company accounts for its stock options grants under the fair value recognition provisions of ASC Topic 718. The Company currently uses the straight-line amortization method for recognizing share option compensation costs. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date. The Company records prepaid share-based payment as an asset in cases where a fully vested equity award was granted but the services have not been fully received, as required by ASC 718-10 stock compensation . See also note 7C. N. Grants received The Company receives from time-to-time grants from various sources to fund certain research and development activities. To date, the grants’ terms have stated that if such research and development activities are not successful, the Company would not be obligated to refund any payment previously received. Given such terms, since the financial risk associated with the research and development remains with the grantor, the Company does not recognize a liability associated with such funding. Grants that do not include a specific deliverable in the terms are offset from research and development expenses. O. Leases In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 establishes a ROU model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the ASU effective January 1, 2022 using a modified retrospective transition approach. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption. The Company elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date. The Company is a lessee in two agreements. I. Laboratory The Company leases a certain portion of a laboratory space for its use from a related party. The leased space of the laboratory is not considered to be an identified asset as the agreement does not explicitly specify a distinct space for the company’s use, nor implicitly specify a distinct space as it does not represent a substantial portion of the laboratory’s capacity. Furthermore, other parties may also use the laboratory and have access to the laboratory. Therefor the lease is not under the scope of ASC-842. F- 10 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 2 - Significant Accounting Policies (cont’d) O. Leases (cont’d) 2. Vehicle lease The lease agreement is for a period of 12 months. The Company has elected not to recognize Right of Use assets and lease liabilities for short-term leases of transportation equipment that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term transportation equipment lease as an expense on a straight-line basis over the lease term. Note 3 - Cash and Cash Equivalents CASH AND CASH EQUIVALENTS The Company’s cash and cash equivalents balance as of December 31, 2022 and 2021, is denominated in the following currencies: SCHEDULE OF CASH AND CASH EQUIVALENTS 2022 2021 December 31 2022 2021 US$ thousands US$ thousands US Dollars 811 371 New Israeli Shekels 57 97 Euro 9 - Great British Pound 1 133 Cash and cash equivalents 878 601 Note 4 - Other Current Assets OTHER CURRENT ASSETS SCHEDULE OF OTHER CURRENT ASSETS 2022 2021 December 31 2022 2021 US$ thousands US$ thousands Government institutions 29 52 Prepaid expenses 4 1 Other current assets 33 53 Note 5 - Property and Equipment, net PROPERTY AND EQUIPMENT, NET SCHEDULE OF PROPERTY AND EQUIPMENT, NET 2022 2021 December 31 2022 2021 US$ thousands US$ thousands Cost: Software and Computers 62 62 Accumulated depreciation: Software and Computers 39 21 Depreciated cost 23 41 F- 11 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 6 - Accounts payable ACCOUNTS PAYABLE SCHEDULE OF ACCOUNTS PAYABLE 2022 2021 December 31 2022 2021 US$ thousands US$ thousands Employees and payroll accruals 53 104 Accrued expenses and other payables 44 23 Accounts payable 97 127 Note 7 - Share Capital EQUITY SCHEDULE OF SHARE CAPITAL COMPOSITION Composition: As of December 31, 2022 Issued and Authorized fully paid Number of shares Ordinary shares NIS 0.01 par value ( “ Ordinary Shares ” ) 1,000,000 163,494 Ordinary shares NIS 0.01 par value ( “ Ordinary Shares ” ) 1,000,000 163,494 As of December 31, 2021 Issued and Authorized fully paid Number of shares Ordinary shares 1,000,000 158,696 A. In 2016, the Company issued to its founders 100,000 Ordinary Shares. B. In June 2018, the Company entered into an investment agreement for the issuance of 50,000 Ordinary Shares, representing 33 % of the Company’s issued and outstanding shares for a total consideration of $ 4,000 thousands. In 2018, the Company issued to its investors 25,000 Ordinary Shares for a total amount of $ 2,000 thousands. The remainder of the investment in the amount of $ 2,000 thousands was subject to two equal tranches milestones. During 2019 the Company issued additional 12,500 Ordinary Shares for a total amount of $ 1,000 thousands. In 2020, the Company met all milestones set in the investment agreement. As such, the 3rd and last investment tranche of $ 1,000 thousands was paid during 2020 and an additional 12,500 Ordinary Shares were issued. C. In September 2021, the Company signed an agreement with a third-party in which such third party committed to provide the Company certain services in exchange to 5 % (fully diluted) of the Company’s Ordinary Shares amounting to 8,696 Ordinary Shares. The Company recognized the transaction based on the fair value of the shares at $ 1,952 thousands. The remaining services were rendered in 2022. Accordingly, the Prepaid share-based payment balance of US$ 771 thousands, was fully recognized in the Statement of Operations in 2022. F- 12 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 7 - Share Capital (cont’d) D. On April 30, 2022, the Company signed a share purchase agreement with two investors for the purchase of 2,647 Ordinary Shares of the Company (par value ILS 0.01 ) for a total consideration of US$ 800 thousands. On December 23, 2022, the Company signed a Share Purchase Agreement with another investor for the purchase of 2,151 Ordinary Shares of the Company (par value ILS 0.01 ) for a total consideration of US$ 650 thousands. According to those agreements, if the Company provides favorable terms to other investors in this round, then it shall adjust the existing agreements and provide substantially equivalent rights to all the Investors. Based on the Company’s agreement with one of its other shareholders, the Company is entitled in certain circumstances to a matching investment (“the matching investment”) which could bring the total funding to US$ 2,900 thousands. As of December 31, 2022, the matching investment has not yet been approved by the shareholder. E. Stock option plan: In 2018 the Company adopted a stock option plan for its employees, service providers and officers, pursuant to which, and to a resolution of the Company’s board of directors dated October 31, 2018, the Company reserved for issuance 6,250 Ordinary Shares. In June 2021, the Company increased its reserved stock option plan to 13,654 Ordinary Shares. The contractual life of the share option is 10 years from the respective date of grant. Share options to employees, service providers and officers granted under the stock option plan shall be vesting in installments, gradually over a period of 4 years from the grant date. Below is a summary of employee option activity under the Company’s equity incentive plan during the current year: SUMMARY OF EMPLOYEE OPTION ACTIVITY Year ended December 31, 2022 Weighted Weighted Aggregate average average intrinsic exercise remaining value Number of price contractual US$ options US$ term (years) thousands Outstanding at the beginning of the year 13,145 146.63 8.25 1,475 Granted - - Outstanding at the end of the year 13,145 146.63 7.25 2,045 Exercisable at the end of the year 8,862 101.90 6.8 1,775 F- 13 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 7 - Share Capital (cont’d) E. Stock option plan (cont’d) 1. The aggregate intrinsic value represents the total intrinsic value (the difference between the Company’s stock fair value on December 31, 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2022. 2. Fair value measurement: The fair value of each option granted during 2021 was estimated on the date of grant, using the Binomial model taking into account the following assumptions: SCHEDULE OF FAIR VALUE OF OPTION USING VALUATION ASSUMPTIONS 2021 Dividend yield 0 % Expected volatility 76 % Weighted average risk-free interest 1.5 % Expected life 10 years Expected volatility was calculated based on market benchmarks. Since the Company’s shares are not publicly traded and its shares are rarely traded privately, expected volatility is estimated based on the average historical volatility of similar entities with publicly traded shares. The expected option term represents the period that the Company’s share options are expected to be outstanding. Since the options were granted to executives , the assumption is that the option will be exercised close to the expiration date. The risk-free interest rate is based on the yield from U.S. Federal Reserve rates. The Company has historically not paid dividends and has no plans to pay dividends in the foreseeable future. There were no option grants during 2022. 3. The following table sets forth the total stock-based compensation expense resulting from stock options included in the statements of operations. SCHEDULE OF STOCK-BASED COMPENSATION EXPENSE 2022 2021 December 31 2022 2021 US$ thousands US$ thousands Research and development 321 185 General and administrative 181 54 Total stock-based compensation expense 502 239 F. Convertible Financial Instruments In November 2021, the Company signed a Simple Agreement for Future Equity (“SAFE”) with an investor in the amount of 100 thousand Great British Pound (“GBP”) (approximately US$ 134 thousands). According to the agreement, the SAFE does not bear interest and is convertible to the Company’s ordinary shares, as follows: F- 14 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 7 - Share Capital (cont’d) F. Convertible Financial Instruments (cont’d) (a) In the event of a financing round of at least 1 million GBP, the SAFE will be automatically converted into ordinary shares at the price determined in such round ; (b) In the event that the financing round is below 1 million GBP, the SAFE may be converted into ordinary shares at the price determined in such round, at the discretion of the investor ; (c) If no financing round occurs, the SAFE amount shall automatically be converted into ordinary shares at the earlier of: (a) an M&A transaction – using the price per share determined in such transaction, or (b) 36 months after the date of the agreement, at the fair market value of an ordinary share at that time. The SAFE was treated for accounting purposes as a liability, since this arrangement is settled in a variable amount of shares and the investor is not exposed to the changes in the fair value of the shares during the period from the transfer of funds until conversion. The convertible financial instrument is presented at fair value. The convertible financial instrument is considered a Level 3 fair value measurement. The changes in the liability measured at fair value for which the Company has used Level 3 inputs to determine fair value are as follows: SCHEDULE OF CHANGE IN LIABILITY MEASURED AT FAIR VALUE 2022 2021 2022 2021 US$ thousands US$ thousands Balance as of January 1, 134 - Convertible financial instrument received - 134 Change in fair value ( 13 ) - Balance as of December 31, 121 134 Note 8 - Commitments and Contingent Liabilities COMMITMENTS AND CONTINGENCIES A. Royalties As part of the Company’s research and development efforts, the Company received licenses to use intellectual property developed by Yissum Research and Development Company of the Hebrew University of Jerusalem (“Yissum”) and New York Stem Cell Foundation (“NYSCF”). During 2017, Yissum and NYSCF granted the Company an exclusive license to make commercial use of that intellectual property, in order to develop, manufacture, market, distribute or sell products, subject to certain terms and events. In consideration for the grant of the license, the Company shall pay Yissum and NYSCF royalties at a rate of up to 3 % of the net sales and sublicense fees at a rate of up to 12 % of sublicense consideration, subject to certain terms, as set forth in the agreement. As of December 31, 2022, the Company has yet to incur revenues, therefore no provision was recorded for these commitments in the financial statements. F- 15 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 8 - Commitments and Contingent Liabilities (cont’d) B. Research Agreement During 2021 and 2022, the Company received payments of US$ 200 thousand as part of a research agreement with a third-party, which was finalized in 2022. The Company recognized the payments in the statement of operations of 2022, as participation in the R&D activities which is offset from development expenses. The research agreement determines that the Company will use its intellectual property to further develop know-how that will allow the third party to use such developed know-how for its commercial purposes. The third party shall pay the Company royalties of up to 3.5 % from any sales that include the Company’s developed know-how, and additional royalties for any sublicense, as set forth in the research agreement. C. Master Innovation Hub Agreement On October 31, 2022 the Company entered into an agreement with a third party, according to the agreement the Company will develop an IP using the third party’s research data in exchange for 1.5 % royalties from future sales and 10 % royalties from future licenses. In addition, the Company will issue the third-party shares on the earliest of the following milestones: a. The FDA approval of the Product. b. A Change in Control of the Company provided that the collaboration is completed as described in the Development Plan. c. The execution of a Memorandum of Understanding (or equivalent) between the Company and the third party for the investment of funds from the third party into the Company. As of December 31, 2022, the Company does not expect any future sales or licenses nor does the Company considers an FDA approval or change in control of the company as events that are probable to occur. Therefore, no balances were recorded for these commitments in the financial statements . D. Lease commitments On November 10, 2022, the Company entered into a lease agreement (hereinafter – “The Agreement”. (According to the agreement, the Company will rent a vehicle for 12 months from December 10, 2022, at a monthly rent cost of approximately NIS 3 thousand (approximately US$ 1 thousand) Future minimum commitments under the agreement as of December 31, 2022, are as follows: SCHEDULE OF FUTURE MINIMUM COMMITMENTS US$ thousands 2023 9 During 2022, the Company recognized lease expenses in the amount of US$ 6 thousand in General and administrative expenses. F- 16 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 9 - Financial (Income) Expenses, net FINANCIAL (INCOME) EXPENSES, NET SCHEDULE OF FINANCIAL EXPENSE (INCOME), NET 2022 2021 December 31 2022 2021 US$ thousands US$ thousands Bank commissions 2 1 Revaluation of marketable securities to market value - 4 Revaluation of convertible financial instrument ( 13 ) - Interest from government authorities ( 3 ) - Currency exchange differences 11 - Financial (income) expenses, net ( 3 ) 5 Note 10 - Related Parties RELATED PARTIES The Company engaged with its shareholders to receive consulting services and lab renting. SCHEDULE OF RELATED PARTY TRANSACTIONS Transactions Year ended Year ended December 31 December 31 2022 2021 US$ thousands US$ thousands Research and development expenses 353 309 Note 11 - Taxes on Income INCOME TAXES A. The Company is incorporated in Israel and is subject to Israeli taxation. B. The Israeli corporate income tax rate was 23 % in 2022 and 2021. The main reconciling items from the statutory tax rate of the Company to the effective tax rate ( 0 %) is the change in valuation allowance (see note 11D) and non-deductible expenses. C. Net operating loss carried forward As of December 31, 2022, the Company has net operating tax losses carried forward indefinitely of approximately $ 3.8 million, (December 31, 2021 - $ 3.1 million). D. Deferred income taxes The tax effects of temporary differences that give rise to significant components of the Company’s deferred tax assets and liabilities are as follows: F- 17 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2022 Note 11 - Taxes on Income (cont’d) D. Deferred income taxes (cont’d) SCHEDULE OF DEFERRED TAX ASSETS 2022 2021 December 31, 2022 2021 US$ thousands US$ thousands Deferred tax assets: Net operating losses 885 719 Research and development credit carried forward 229 230 Other 26 4 Total deferred tax assets 1,140 953 Less valuation allowance ( 1,140 ) ( 953 ) Net deferred tax assets - - The Company has provided a full valuation allowance in respect of deferred tax assets resulting from the tax loss carried forward. Management currently believes that, since the Company has a history of losses, it is more likely than not that the deferred tax assets related to the loss carried forward and other temporary differences will not be realized in the foreseeable future. Note 12 – Subsequent Events SUBSEQUENT EVENTS On March 20, 2023, The Company signed a Convertible Loan Agreement (“the Loan”) of US$ 200 thousands, maturing after two years . The Loan shall bear simple interest at the rate of 12.5 % per annum, paid in kind, with a conversion price per share reflecting 75 % of the lowest price per share paid by the investors participating in the Company’s next financing. In an Event of liquidation only, the Interest rate shall increase to 20 % per annum. F- 18 Item 16. Form 10–K Summary. Not applicable 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March XX, 2023. NovelStem International Corp. By : /s/ Jan H Loeb Jan H. Loeb President and Executive Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Jan H. Loeb President and Executive Chairman March 31, 2023 Jan H. Loeb /s/ Christine Jenkins Vice President and Chief Financial Officer March 31, 2023 Christine Jenkins /s/ Mitchell Rubenstein Director March 31, 2023 Mitchell Rubenstein /s/ Eric Richman Director March 31, 2023 Eric Richman /s/ David Seltzer Director March 31, 2023 David Seltzer /s/ Jerry Wolasky Director March 31, 2023 Jerry Wolasky /s/ Tracy Clifford Director March 31, 2023 Tracy Clifford 30