Item 7. Management’s Discussion and Analysis
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion includes statements that are forward-looking in nature. Whether such statements ultimately prove to be accurate
depends on a variety of factors that may affect our business and operations. Certain of these factors are discussed in “Item 1A.
Risk Factors.”
The
following discussion of our financial condition and results of operations should be read in conjunction with our financial statements
and the related notes thereto and other financial information appearing elsewhere in this report.
Overview
We
are a development stage company and reported net losses of approximately $4,187,000 and $766,000 for the years ended December 31, 2023
and 2022, respectively. We had current assets of approximately $87,000 and current liabilities of approximately $346,000 as of December
31, 2023. As of December 31, 2022, our current assets and current liabilities were approximately $59,000 and $65,000, respectively. We
have prepared our financial statements for the years ended December 31, 2023 and 2022 assuming that we will continue as a going concern.
Our continuation as a going concern is dependent upon improving our profitability and the continuing financial support from our shareholders
as well as NewStem’s ability to successfully develop and commercialize its products. Our sources of capital in the past have included
the sale of equity securities, which include common stock sold in private transactions, and short-term debt. During the current year,
we continued to borrow on existing finance agreements with two related party individuals and entered into a long term finance agreement
with a shareholder to fund current operating expenses. Additionally, we entered into two short term notes to fund advances to NewStem.
NewStem
is a development stage Israeli biotech limited liability company focused on pioneering intellectual property related to haploid human
embryonic stem cells for the development of personalized diagnostics and therapeutics for genetic and epigenetic diseases. NewStem has
incurred losses related to in process research and development since inception and the Company records our percentage allocation of these
net losses as incurred. We have included the financial statements of NewStem as an exhibit to this Annual Report. In many cases, the
accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for
management’s judgement in their application. There are also areas in which the selection of an available alternative policy would
not produce a materially different result.
Critical
Accounting Policies
The
SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective
or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and
my change in subsequent periods.
The
following discussion of critical accounting policies represents our attempt to report on these accounting policies which we believe are
critical to our financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant
accounting policies, which are more fully described in Note 2 of the Notes to the Financial Statements included in this Annual Report.
We
have identified our accounting policies for stock-based compensation and accounting for derivative liabilities as critical
accounting policies.
We
recognize stock-based compensation expense based on the fair value recognition provision of applicable accounting principles, using the
Black-Scholes option valuation method. Accordingly, we are required to measure the cost of services received in exchange for an award
of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which services
are provided in exchange for the award. Under the Black-Scholes method, we make assumptions with respect to the expected lives of the
options that have been granted and are outstanding, the expected volatility, the dividend yield percentage of our common stock and the
risk-free interest rate at the respective dates of grant.
The
expected volatility factor used to value stock options in 2023 was based on the historical volatility of the market price of our common
stock over the period from our change to a biotechnology company, September 2018, through December
2023. For the expected term of the option, we used an estimate of the expected
option life based on historical experience. The risk-free interest rate used is based upon U.S. Treasury yields for a period consistent
with the expected term of the options. We assumed no quarterly dividend rate. Due to the numerous assumptions involved in calculating
stock-based compensation expense, the expense recognized in our financial statements may differ significantly from the value realized
by option holders on exercise of the share-based instruments. In accordance with the prescribed methodology, we do not adjust our recognized
compensation expense to reflect these differences.
For
the years ended December 31, 2023 and 2022, we incurred stock compensation expense with respect to options and warrants of
approximately $303,000 and $283,000, respectively.
See
Note 5 to the financial statements for the assumptions used to calculate the fair value of stock-based compensation.
In accordance with Accounting Standards Codification (“ASC”) 815, Derivatives
and Hedging, we identify and, if
applicable, bifurcate embedded derivatives in financial instrument instruments. Those embedded features that are identified, bifurcated
and accounted for separately are measured at fair value continuously at each financial statement reporting date. If the fair value of
a financial liability (the derivative) exceeds the proceeds received for the issuance of a hybrid instrument in an arms length transaction
with no rights or privileges that require separate accounting recognition as an asset identified, then we record the embedded derivative
at fair value with the excess of fair value over proceeds recognized as a loss in earnings.
14
Results
of Operations.
The
selected statement of operations data for the years ended December 31, 2023 and 2022 and balance sheet data as of December 31, 2023 and
2022 has been derived from our audited financial statements included in this Annual Report.
This
data should be read in conjunction with our financial statements and related notes included herein.
Selected
Statement of Operations Data:
Years
Ended December 31,
2023
2022
Change
Administrative
fee income
$ 12,000
$ 12,000
$ -
Operating expenses:
G&A expenses
$ 665,277
$ 744,434
$ (79,157 )
Litigation
expenses (contra expenses)
2,872,522
(310,000 )
3,182,522
Total
operating expenses
3,537,799
434,434
3,103,365
Loss
from operations
(3,525,799 )
(422,434 )
(3,103,365 )
Other expenses:
Loss on derivative instrument
260,000
-
260,000
Interest
expense
99,023
11,018
88,005
Total
other expenses
359,023
11,018
348,005
Net
loss before equity in net loss of equity method investees
(3,884,822 )
(433,452 )
(3,451,370 )
Equity in net loss of equity method investees
(338,618 )
(719,802 )
381,184
Gain on dilution of
equity method investment
36,139
387,524
(351,385 )
Net
loss
$ (4,187,301 )
$ (765,730 )
$ (3,421,571 )
2023
Compared to 2022
We
are a holding company whose primary assets are our ownership of equity interests in NewStem and NetCo. We conduct no other business and
as a result, we have no operating revenue or cost of revenue. We do charge annual administrative
fees to an affiliated entity.
The
Company incurs general and administrative (“G&A”) expenses primarily related to professional fees, insurance and
stock based compensation. We incurred G&A expenses of approximately $665,000 and $744,000 for the years ended December 31, 2023
and 2022, respectively. Our decrease in G&A expenses relates primarily to stock-based compensation and professional fees
incurred in the audit of our financial statements for the years ended December 31, 2023 and 2022, preparation of our quarterly
reports for 2023 and 2022, and, in the preparation, and filing of our Form 10 registration statement which was filed in August 2022.
Specifically, professional fees decreased by approximately $93,000 in the year ended December 31, 2023 as compared to the year ended
December 31, 2022. Insurance costs decreased by approximately $9,000 in the year ended December 31, 2023 as compared to the year
ended December 31, 2022. The remaining increase in G&A expenses of approximately $3,000 during the year ended December 31, 2023
consists primarily of increases in expenses related to investor relations and information
technology.
Total
stock compensation expense, included in G&A expenses, increased by approximately $20,000 in the year ended December 31, 2023 as compared
to the year ended December 31, 2022 due to a smaller number of options awarded in the current period as compared to the prior period
offset by the recognition of $243,000 in stock compensation expense related to the increased value of our outstanding warrants due to
the amendment of the agreements to extend the due date by two years.
We
incurred costs related to litigation and the related litigation funding agreement involving our arbitration with our NetCo joint venture
partner of approximately $2,873,000 for year ended December 31, 2023. We recognized contra expenses of $310,000 during the year ended
December 31, 2022 in relation to the same litigation and related litigation funding agreement. Specifically, the increase of approximately
$3,183,000 for the year ended December 31, 2023 as compared to 2022 is comprised of legal fees related to our NetCo arbitration including
litigation funding fees due to Omni Bridgeway pursuant to the litigation funding agreement combined with the reversal of the contra expenses
recognized in the previous period. These expenses and contra expenses were funded by the litigation funding agreement. This agreement
was signed during the first quarter of 2022 with Omni Bridgeway to fund our arbitration against our 50% joint venture partner, C.P. Group.
This is a nonrecourse agreement, and the Company had no obligation to repay any funds received under the agreement unless the NetCo arbitration
resulted in a favorable outcome. These amounts are included in the note payable to Omni Bridgeway which was recorded in June 2023 as
a result of the arbitration ruling.
15
The
Company has recorded a loss on derivative instrument of approximately $260,000 for the year ended December 31, 2023 related to a guarantee
included in the note payable shareholder entered into in May 2023. No such instrument was in effect in the year ended December 31, 2022.
Interest
expense increased by approximately $88,000 in the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increases
in interest expense are related to increased debt incurred for operations and the funding of NewStem.
The
Company has recorded no income tax expense as we have incurred operating losses and all deferred tax assets are fully offset by an income
tax valuation allowance.
We
reported net losses from equity method investees during the years ended December 31, 2023 and 2022. The net losses reported for the year
ended December 31, 2023 included net income of approximately $3,000 from NetCo which was offset by net loss of approximately $342,000
from NewStem. Net losses reported for the year ended December 31, 2022 included net income of approximately $13,000 from NetCo which
was offset by net loss of approximately $733,000 from NewStem.
We
reported a gain on dilution of our equity method investment related to stock issuances made to third parties by NewStem. The gain was
approximately $36,000 and $388,000 during the years ended December 31, 2023 and 2022, respectively.
Liquidity
and Capital Resources
We
have not paid dividends on our common stock since our name change and business focus shift in 2018. Our present policy is to apply cash
to investments in product development at NewStem, acquisitions or expansion; consequently, we do not expect to pay dividends on common
stock in the foreseeable future.
We
expect to continue to incur greater expenses in the near future as we expand our business, including funding NewStem, or enter into strategic partnerships. We also
expect our G&A expenses to increase as we expand our administrative staff and add infrastructure.
The
Company will need to obtain additional funds to continue its operations. Management’s plans with regard to these matters include
additional financing and fundraising until our equity investment in NewStem is profitable. Although management continues to pursue these
plans, there is no assurance that the Company will be successful in obtaining sufficient cash from financing on terms acceptable to the
Company, or that NewStem will become profitable.
During
the year ended December 31, 2022, the Company entered into note agreements with Jan Loeb, our Executive Chairman and Jerry Wolasky, a
member of the Board, to borrow up to an aggregate of $600,000 for working capital needs. The note agreements were amended in March 2024
to increase the total borrowing to $650,000 and extend the maturity date. The agreements provide for interest at a rate of 8% per annum,
increased to 10% per annum for advances subsequent to November 11, 2022, and mature September 1, 2025. As of the date of this Annual
Report, the full amount of $650,000 has been funded pursuant to these agreements.
During the year ended December
31, 2023, the Company entered into a note agreement with a shareholder to borrow $300,000 for continued working capital. This note bears
interest at zero percent (0%) and matures on May 5, 2025. The note includes a guarantee which has been identified as an embedded derivative
with a fair value of a liability of $535,000 at December 31, 2023.
In December 2023, the Company entered into two short term notes payable with unrelated parties for a total of $250,000
in borrowings utilized for the funding of NewStem. The notes bear interest at 12% per annum and mature December 21, 2024, at which time
all principal and accrued interest are due and payable. The note agreements include a provision whereby, in the event of a capital raise
transaction by the Company, the note holders would be entitled to participate in the transaction in an amount equal to 133% of the amounts
owed on the note agreements at the closing of the transaction.
Net
Cash Used In Operating Activities.
For
the year ended December 31, 2023, net cash used in operating activities was approximately $348,000, which consisted primarily of a
net loss of approximately $4,187,000, offset by noncash equity in loss of equity method investees of approximately $339,000 and
distributions from equity method investees of $7,000, netted with gain on dilution of approximately $36,000 and stock-based
compensation of approximately $303,000. Further offset by approximately $2,819,000 in cumulative noncash litigation expenses funded
directly by the litigation funding agreement, loss on derivative instrument of $260,000, accretion of discount on notes payable of
$62,000 and interest added to related party notes payable of $35,138. Additionally, cash was used in operations related to a decrease in current assets of approximately $19,000 and an increase
in accrued liabilities and other payables of approximately $31,000.
For
the year ended December 31, 2022, net cash used in operating activities was approximately $182,000, which consisted primarily of a net
loss of approximately $776,000, offset by noncash equity in loss of equity method investees of approximately $720,000 and distributions
from equity method investees of approximately $13,000, netted with gain on dilution of approximately $388,000 and stock-based compensation
of approximately $283,000. Additionally, cash was used in operations related to an increase in current assets of approximately $24,000
and a decrease in accrued liabilities and other payables of approximately $28,000.
Net
Cash Used In Investing Activities.
For
the year ended December 31, 2023, $250,000 was loaned to NewStem in an investing activity. For the year ended December 31, 2022, no net
cash was used in investing activities.
Net
Cash Provided By Financing Activities.
For
the year ended December 31, 2023, net cash provided by financing activities was $645,000, consisting of long-term borrowings from two
directors and a stockholder totaling $395,000 and short term borrowings from unrelated parties of $250,000.
For
the year ended December 31, 2022, net cash provided by financing activities was $180,000, consisting of long-term borrowings from two
directors of $280,000 and repayment of $100,000 in short-term borrowings from a significant stockholder.
16
Off-Balance
Sheet Arrangements
We
are not party to any off-balance sheet transactions. With the exception of a guarantee related to long term borrowings from a stockholder
which is accounted for as a derivative, we have no guarantees or obligations other than those which arise out of normal business operations.
Contractual
Obligations and Commercial Commitments
As
of December 31, 2023, we had a contractual obligation related to our directors’ and officers’ insurance providing for 10
monthly installments of $4,943 payable through June 2024.
As
of December 31, 2022, we had a contractual obligation related to our directors’ and officers’ insurance providing for 10
monthly installments of $5,184 payable through June 2023.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
This
section is not applicable.