Item 1A. Risk Factors
Item
1A. Risk Factors.
Our
business is subject to certain risks, including those described below. If any of the events described in the following risk factors actually
occurs then our business, results of operations and financial condition could be materially adversely affected. More detailed information
concerning these risks is contained in other sections of this registration statement, including “Business” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Risks
Relating to our Business
We
are a holding company the principal assets of which are illiquid, ownership interests in NewStem and NetCo.
Our
Company’s primary assets are equity interests in NewStem and NetCo. Our President and Executive Chairman, Jan Loeb, is also the
Chairman of NewStem and through this shared management structure along with our 30.51% ownership interest in NewStem, we are able to
exert significant influence over the operations of NewStem. Additionally, we are a 50% partner in NetCo and through our ownership interest.
We
conduct no other business and, as a result, we depend entirely upon earnings and cash flow from NewStem and NetCo. If we decide in the
future to pay dividends, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends
or other payments from our operating subsidiaries.
Our
investments in NewStem and NetCo are illiquid.
Our
shares in NewStem and our ownership interest in NetCo are illiquid and have extremely limited liquidity rights. The transferability of
these interests is restricted under federal and state securities laws and the governing documents of each of NewStem and NetCo.
We
depend on our executive officers and consultants and other key individuals along with the executive officers and key individuals of NewStem
to continue the implementation of our long-term business strategy and could be harmed by the loss of their services and our inability
to make up for such loss with qualified replacements.
We
believe that our continued growth and future success will depend in large part on the skills of our management team and the management
teams of NewStem and NetCo, and our partners’ respective abilities to motivate and retain these individuals and other key individuals.
Jan Loeb, our President and Executive Chairman, is also the Chairman of NewStem, and therefore has the shared responsibility of growing
the business and operations of NewStem. The loss of any of their service could reduce our ability to successfully implement our long-term
business strategy which may result in a loss of revenue, and the value of our common stock could be materially adversely affected. Leadership
changes will occur from time to time and we cannot predict whether significant resignations will occur or whether NewStem will be able
to recruit additional qualified personnel. We believe these management teams possess valuable knowledge about our, NewStem’s and
NetCo’s respective industries and that their knowledge and relationships would be very difficult to replicate. The loss of key
personnel, or the inability to recruit and retain qualified and talented personnel in the future, could have an adverse effect on the
respective businesses of NewStem and NetCo, and, consequently, our business, financial condition and/or operating results.
We
and NewStem have limited operating histories and have generated minimal revenue to date.
We
and NewStem have a limited operating history and do not have a meaningful historical record of sales and revenues, nor do we or NewStem
have an established business track record. While we believe that we have the opportunity to be successful, there can be no assurance
that we will be successful in accomplishing our business initiatives, or that we will be able to achieve any significant levels of revenues
or net income.
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, 2023 and we concluded there was a material weakness in the design of our
internal control over financial reporting.
A
material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis.
8
Rapid
technological change could cause products to become obsolete, and if NewStem does not enhance its product offerings through research
and development efforts, it may be unable to effectively compete.
NewStem’s
future business success will depend upon its ability to maintain and enhance its product portfolio with respect to advances in technological
improvements for certain products that meet customer needs and market conditions in a cost-effective and timely manner. NewStem may not
be successful in gaining access to new products that successfully compete or are able to anticipate customer needs and preferences, and
customers may not accept one or more of its products. If NewStem fails to keep pace with evolving technological innovations or fails
to modify its products and services in response to customers’ needs or preferences, then NewStem’s and our business, financial
condition and results of operations could be adversely affected.
The
technologies underlying NewStem’s products are subject to rapid and profound technological change. Competition intensifies as technical
advances in each field are made and become more widely known. We can give no assurance that others will not develop services, products,
or processes with significant advantages over the products, services, and processes that NewStem offers or is seeking to develop. Any
such occurrence could have a material and adverse effect on NewStem’s and our business, results of operations and financial condition.
NewStem
plans to enhance and broaden its product offerings in response to changing customer demands and competitive pressure and technologies.
The success of any new product offering or enhancement to an existing product will depend on numerous factors, including the ability
to:
-
Properly
identify and anticipate physician and patient needs;
-
Develop
and introduce new products or product enhancements in a timely manner;
-
Adequately
protect intellectual property and avoid infringing upon the intellectual property rights of third parties;
-
Demonstrate
the safety and efficacy of new products; and
-
Obtain
the necessary regulatory clearances or approvals for new products or product enhancements.
If
NewStem does not develop and, when necessary, obtain regulatory clearance or approval for new products or product enhancements in time
to meet market demand, or if there is insufficient demand for these products or enhancements, its results of operations will suffer.
NewStem’s research and development efforts may require a substantial investment of time and resources before it is adequately able
to determine the commercial viability of a new product, technology, material or other innovation. In addition, even if NewStem is able
to successfully develop enhancements or new generations of its products, these enhancements or new generations of products may not produce
sales in excess of the costs of development, and they may be quickly rendered obsolete by changing customer preferences or the introduction
by competitors of products embodying new technologies or features.
Our
ongoing viability as a company depends on NewStem’s ability to successfully develop and commercialize its products.
NewStem
is principally focused on utilizing proprietary hPSCs and HhPSCs in the development of diagnostic and therapeutic products in oncology.
NewStem must develop diagnostics and therapeutics successfully test them for safety and efficacy in the targeted patient population and
manufacture the finished drugs on a commercial scale to meet regulatory standards and receive regulatory approvals. The development and
commercialization process is both time-consuming and costly, and involves a high degree of business risk. The results of pre-clinical
and clinical testing of product candidates are uncertain, and there can be no assurance that NewStem will be able to obtain regulatory
approvals of its product candidates. If obtained, regulatory approval may take longer or be more expensive than anticipated. Furthermore,
even if regulatory approvals are obtained, NewStem’s products may not perform as we expect and NewStem may not be able to successfully
and profitably produce and market any products. Delays in any part of the process or our inability to obtain regulatory approval of such
products could adversely affect NewStem’s and, therefore, NovelStem’s future operating results by restricting (or even prohibiting)
the introduction and sale of such products.
The
value of our investment in NetCo and our ability to receive distributions may be affected by disputes between the Company and C.P. Group,
our partner in NetCo.
The
Company and C.P. Group each own a 50% interest in NetCo. The joint venture agreement governing NetCo provides for mutual decision
making among the Company and C.P. Group generally (subject to exceptions) and arbitration in the event any controversy or
disagreement arises. The Company and C.P. Group were previously in arbitration as to ongoing scope and the operation of NetCo. This
arbitration was concluded in July 2023. The arbitrator ruled against the Company on certain key issues of the arbitration and in the
Company’s favor on two key issues of the arbitration. However, if we are unable proceed in successful utilization of the joint
venture assets in a manner favorable to the Company, our investment in NetCo and our ability to continue to receive distributions
from our interest in NetCo could have an adverse effect on our business, financial condition or operating results.
9
NetCo’s
business is intensely competitive and “hit” driven. NetCo may not deliver “hit” products and services, or consumers
may prefer a competitors’ products or services over NetCo.
Competition
in the publishing and video game industries is intense. Many new products and services are regularly introduced in each major industry
segment (console, mobile and PC), but only a relatively small number of “hit” titles account for a significant portion of
total revenue in each segment. NetCo’s competitors range from established interactive entertainment companies and diversified media
companies to emerging start-ups, and we expect new competitors to continue to emerge throughout the world. If NetCo’s competitors
develop and market more successful and engaging products or services, offer competitive products or services at lower price points, or
if NetCo does not develop high-quality, well-received and engaging products and services, NetCo and our revenue, margins, and profitability
will decline.
If
NetCo fails to develop relationships with new creative talent, its business could be adversely affected.
NetCo’s
business, in particular the trade publishing and media portions of the business, is highly dependent on maintaining strong relationships
with the authors, illustrators and other creative talent who produce the products and services that are sold to its customers. Any overall
weakening of these relationships, or the failure to develop successful new relationships, could have an adverse impact on NetCo and the
Company’s business and financial performance.
Risks
relating to our common stock
Because
our holding company structure creates restrictions on the payment of dividends, our ability to pay dividends is limited.
We
are a holding company whose primary assets are our ownership of equity interests in NewStem and NetCo. We conduct no other business and,
as a result, we depend entirely upon NewStem’s and NetCo’s earnings and cash flow. If we decide in the future to pay dividends,
as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments
from NewStem or NetCo. NewStem and/or NetCo may be restricted in their ability to pay dividends, make distributions or otherwise transfer
funds to us prior to the satisfaction of other obligations, including the payment of operating expenses or debt service, appropriation
to reserves prescribed by laws and regulations, covering losses in previous years, restrictions on the conversion of local currency into
U.S. dollars or other hard currency, completion of relevant procedures with governmental authorities or banks and other regulatory restrictions.
We do not presently have any intention to declare or pay dividends in the future. You should not purchase shares of our common stock
in anticipation of receiving dividends in future periods.
Because
we do not intend to pay any cash dividends on our common stock, our shareholders will not be able to receive a return on their shares
unless they sell them.
We
intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends
on our common stock in the foreseeable future. Unless we pay dividends, our shareholders will not be able to receive a return on their
shares unless they sell them. Shareholders may never be able to sell shares when desired. Before you invest in our securities, you should
be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included
in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual
events, our business, financial condition or results of operations could be materially adversely affected.
We
are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies could make our common
stock less attractive to investors.
We
are an emerging growth company. Under the JOBS Act, emerging growth companies can take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies including, without limitation, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a non-binding advisory shareholder
vote on executive compensation and golden parachute payments, exemption from the requirement of auditor attestation in the assessment
of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting
Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about our audit and the financial statements (auditor discussion and analysis). As a result of the foregoing, the information that we
provide shareholders may be different than what is available with respect to other public companies.
In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. We plan to elect
to use the extended period for compliance and, as a result, our financial statements may not be comparable to companies that comply with
public company effective dates.
10
Reporting
requirement under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and compliance with the Sarbanes-Oxley
Act of 2002 (the “Sarbanes-Oxley Act”), including establishing and maintaining acceptable internal controls over financial
reporting, are costly and may increase substantially.
The
rules and regulations of the SEC require a public company to prepare and file periodic reports under the Exchange Act, which require
that the Company engage legal, accounting, auditing and other professional services. The engagement of such services is costly. Additionally,
the Sarbanes-Oxley Act requires, among other things, that we design, implement and maintain adequate internal controls and procedures
over financial reporting. The costs of complying with the Sarbanes-Oxley Act and the limited technically qualified personnel we have
may make it difficult for us to design, implement and maintain adequate internal controls over financial reporting. In the event that
we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls, we may not be
able to produce reliable financial reports or report fraud, which may harm our overall financial condition and result in loss of investor
confidence and a decline in our share price.
We
are working with our legal, accounting and financial advisors to identify those areas in which changes should be made to our financial
and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance,
corporate control, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue
to make, changes in these and other areas. However, we anticipate that the expenses that will be required in order to adequately prepare
for being a public company could be material. We estimate that the aggregate cost of increased legal services; accounting and audit functions;
consultants to design and implement internal controls; and financial printing alone will be a few hundred thousand dollars per year and
could be several hundred thousand dollars per year. In addition, we may incur additional expenses related to director compensation and/or
premiums for directors’ and officers’ liability insurance, the costs of which we cannot estimate at this time. We may also
incur additional expenses associated with investor relations and similar functions, the cost of which we also cannot estimate at this
time. However, these additional expenses individually, or in the aggregate, may also be material.
The
continued increased costs associated with operating as a public company may decrease our net income or increase our net loss and may
cause us to reduce costs in other areas of our business or increase the prices of our products or services to offset the effect of
such increased costs. Additionally, if these requirements divert our management’s attention from other business concerns, they
could have a material adverse effect on our business, financial condition and results of operations.
There
is a very limited trading market for our common stock and investors are not assured of the opportunity to sell their stock, should they
desire to do so.
Our
common stock is currently quoted on the OTC Pink Market. However, our stock has traded in very limited quantities in the past. We believe
a significant factor in the limited market is our limited capitalization and liquidity, results of operations and the characterization
of our stock as a “penny stock.” We hope to remedy our financial condition and results of operation in the future. This,
in turn, may assist us in obtaining listing of our stock on other exchanges. However, there is no assurance that any of these objectives
will be met or that the market will ever increase to a point where investors could sell their stock at a desirable price, should they
desire to do so.
The
price of our common stock could be highly volatile.
Our
shares of common stock are quoted on the OTC Pink Market. It is likely that our common stock will be subject to price volatility, low
volumes of trades and large spreads in bid and ask prices quoted by market makers. Due to the low volume of shares traded on any trading
day, persons buying or selling in relatively small quantities may easily influence prices of our common stock. This low volume of trades
could also cause the price of our stock to fluctuate greatly, with large percentage changes in price occurring in any trading day session.
Holders of our common stock may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due
to low volume trading. If high spreads between the bid and ask prices of our common stock exist at the time of a purchase, the stock
would have to appreciate substantially on a relative percentage basis for an investor to recoup their investment. Broad market fluctuations
and general economic and political conditions may also adversely affect the market price of our common stock. No assurance can be given
that an active market in our common stock will be sustained. If an active market does not continue, holders of our common stock may be
unable to readily sell the shares they hold or may not be able to sell their shares at all.
11
We
may be deemed an investment company, which could impose on us burdensome compliance requirements.
The
Investment Company Act of 1940, as amended (the “Investment Company Act”), requires companies to register as an investment
company if they are engaged primarily in the business of investing, reinvesting, owning, holding, or trading securities. Generally, companies
may be deemed investment companies under the Investment Company Act if they are viewed as engaging in the business of investing in securities
or they own investment securities having a value exceeding 40% of certain assets. We are not in the business of investing, reinvesting,
owning, holding or trading securities. However, if the Securities and Exchange Commission deems us to be an investment company, we may
have imposed upon us additional burdensome requirements, including having to register as an investment company, adopting a specific form
of corporation structure and having to comply with certain reporting, record keeping, voting, proxy, and disclosure requirements. Such
additional requirements would require us to incur additional costs and have an adverse effect on our results of operations and our ability
to effectively carry out our business plan.
Item
1B. Unresolved Staff Comments.
None
Item
2. Properties .
Our
corporate office is located at 2255 Glades Road, Boca Raton, FL 33431. We believe that our facilities are adequate for current operations.