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, 2023 and we concluded there was a material weakness in the design of our internal control over financial reporting as it relates to insufficient resources to employ proper segregation of duties over the processing of transactions and financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. 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 – 65 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 – 60 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 – 69 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 -62 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 – 63 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 – 63 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 -55 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 2023 and 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 2023 our executive officers and directors complied with the filing requirements of Section 16(a). Code of Ethics We have adopted a Code of Business Conduct and Ethics that applies to all our directors, officers and employees. This code of ethics is designed to comply with the NASDAQ marketplace rules related to codes of conduct. 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 2023 - - 16,573 (1) - 16,573 President and Executive Chairman 2022 - - 27,170 (2) - 27,170 Christine Jenkins 2023 54,000 (3) - 1,657 (1) - 55,657 Vice President and Chief Financial Officer 2022 58,725 (3) - - - 58,725 Mitchell Rubenstein 2023 - - 8,286 (1) - 8,286 Director 2022 - - 27,170 (2) - 27,170 Eric Richman 2023 - - 8,286 (1) - 8,286 Director 2022 - - 27,170 (2) - 27,170 David Seltzer 2023 - - 8,286 (1) - 8,286 Director 2022 - - 27,170 (2) - 27,170 Jerry Wolasky 2023 - - 8,286 (1) - 8,286 Director 2022 - - 27,170 (2) - 27,170 Tracy Clifford 2023 - - 8,286 (1) - 8,286 Director 2022 - - 27,170 (2) - 27,170 (1) Represents the grant date fair value calculated in accordance with applicable accounting principles with respect to 50,000 options granted per Director, 100,000 options granted to the President and Executive Chairman and 10,000 options granted to the Vice President and Chief Financial Officer on March 23, 2023 with an exercise price of $0.20. 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 3.39% (ii) an expected term of 4.98 years (iii) an assumed volatility of 118.3067% and (iv) no dividends. (2) 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. (3) Represents hourly fees paid to Ms. Jenkins for the provision of services as Chief Financial Officer of the Company. 21 Executive Compensation for 2022 and 2023 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 2023 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, 2023. 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 100,000 0.20 March 23, 2030 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 50,000 0.20 March 23, 2030 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 50,000 0.20 March 23, 2030 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 50,000 0.20 March 23, 2030 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 50,000 0.20 March 23, 2030 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 50,000 0.20 March 23, 2030 Christine Jenkins 10,000 0.20 March 23, 2030 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, 2025 Mitchell Rubenstein 750,000 - 0.10 June 28, 2025 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, 2023 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, 2023. 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 December 31, 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 5.0 % Stephen Gans 7,034,172 12.7 % Jan Loeb 7,670,673 (2)(3)(4) 13.9 % Jerry Wolasky 10,222,973 (3)(4) 18.5 % Tracy Clifford 1,200,000 (4) 2.2 % Eric Richman 804,054 (3)(4) 1.5 % Mitchell Rubenstein 3,058,108 (4)(5) 5.5 % David Seltzer 3,574,324 (3)(4) 6.5 % All directors and officers as a group (seven persons) 26,530,132 48.0 % (1) Applicable percentage ownership is based on 46,881,475 shares of common stock outstanding as of December 31, 2023, together with securities exercisable or convertible into shares of common stock within 60 days of December 31, 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 December 31, 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, options to purchase 1.10 million shares of common stock at an exercise price of $0.10 per share and options to purchase 100,000 shares of common stock at an exercise price of $0.29 per share. (3) Includes options to purchase 150,000 shares of common stock at an exercise price of $0.10 per share and options to purchase 100,000 shares of common stock at an exercise price of $0.29 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 and options to purchase 100,000 shares of common stock at an exercise price of $0.29 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 8,760,000 $ 0.14 1,240,000 Total 8,760,000 $ 0.14 1,240,000 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. During the year ended December 31, 2022, the Company entered into note agreements with Jan Loeb, our Executive Chairman and Jerry Wolasky, a shareholder and 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. On May 5, 2023, the Company entered into a long term note payable with a shareholder for $300,000 in financing to be funded $150,000 at inception and $150,000 in October 2023. 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. Except as disclosed herein, no director, executive officer, stockholder 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, 2023 and 2022. 2023 2022 Audit fees $ 111,605 $ 60,800 Tax Fees 6,400 3,500 All other fees - 13,050 Total $ 118,005 $ 77,350 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 2023 and 2022. 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, 2023 and 2022 Index to Audited Financial Statements Page Audited Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID 6651 ) F-1 Report of Predecessor Auditor (PCAOB ID 677 ) F-2 Balance Sheets F-3 Statements of Operations F-4 Statements of Changes in Shareholders’ Equity (Deficit) F-5 Statements of Cash Flows F-6 Notes to Financial Statements F-7 27 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders of NovelStem International Corp. Opinion on the Financial Statements We have audited the accompanying balance sheet of NovelStem International Corp. as of December 31, 2023, and the related statements of operations, shareholders’ equity (deficit) and cash flows for the year then ended, 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 NovelStem International Corp. as of December 31, 2023, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the financial statements, the entity has suffered losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. 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 NovelStem International Corp. 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 audit 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. NovelStem International Corp. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit 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 entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit 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 audit 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 audit provides a reasonable basis for our opinion. /s/ Kreit & Chiu CPA LLP We have served as NovelStem International Corp.’s auditor since 2024. New York , New York April 1, 2024 F- 1 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 sheet of NovelStem International Corp. (the “Company”) as of December 31, 2022, and the related statements of operations, shareholders’ equity, and cash flows for the year then ended, 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 the results of its operations and its cash flows for the year then ended, 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 audit. 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 audit 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for our opinion. /s/ Cherry Bekaert LLP We have served as the Company’s auditor from 2021 through 2022. Fort Lauderdale, Florida March 31, 2023 F- 2 NOVELSTEM INTERNATIONAL CORP. BALANCE SHEETS As of December 31, 2023 2022 ASSETS Current assets: Cash $ 53,063 $ 6,346 Cash and cash equivalents Accounts receivable, administrative fees - 12,000 Prepaid expenses 33,540 40,561 Other current assets Total current assets 86,603 58,907 Non-current assets Property and equipment, net Investment in Netco 133,709 137,011 Note receivable, NewStem 250,000 - Investment in NewStem 1,784,234 2,090,286 Total assets $ 2,254,546 $ 2,286,204 LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable $ 54,257 $ 21,203 Related party Note payable 250,000 - Accrued expenses 42,223 43,673 Total current liabilities 346,480 64,876 Long-term liabilities: Long-term notes payable, including accrued interest 3,324,599 288,450 Convertible financial instrument - - Derivative liability, guarantee 535,000 - Total long-term liabilities 3,859,599 288,450 Total liabilities 4,206,079 353,326 Commitments and contingencies (see Note 7) - - Shareholders’ equity (deficit): Common stock, $ .01 par value, 100,000,000 shares authorized, 50,316,672 shares issued at December 31, 2023 and 2022 and 46,881,475 shares outstanding at December 31, 2023 and 2022 468,815 468,815 Additional paid-in capital 290,907,217 290,604,327 Accumulated deficit ( 293,127,811 ) ( 288,940,510 ) Treasury stock, at cost, 3,435,197 shares at December 31, 2023 and 2022 ( 199,754 ) ( 199,754 ) Total shareholders’ equity (deficit) ( 1,951,533 ) 1,932,878 Total liabilities and shareholders’ equity (deficit) $ 2,254,546 $ 2,286,204 The accompanying notes are an integral part of these financial statements. F- 3 NOVELSTEM INTERNATIONAL CORP. STATEMENTS OF OPERATIONS Years Ended December 31, 2023 2022 Revenues Cost of revenues Gross profit Administrative fee income $ 12,000 $ 12,000 Operating expenses: Research and development expenses - - Less – grants and participations received - - Research and development expenses, net - - General and administrative expenses 665,277 744,434 Litigation expenses (contra expenses) (Note 7) 2,872,522 ( 310,000 ) Total operating expenses 3,537,799 434,434 Loss from operations ( 3,525,799 ) ( 422,434 ) Other expenses: Loss on derivative instrument 260,000 - Interest expense 99,023 11,018 Total other expenses 359,023 11,018 Financial income, net Loss before income taxes ( 3,884,822 ) ( 433,452 ) Provision for income tax - - Net loss before equity in net loss of equity method investees ( 3,884,822 ) ( 433,452 ) Equity in net loss of equity method investees ( 338,618 ) ( 719,802 ) Gain on dilution of equity method investment 36,139 387,524 Net loss $ ( 4,187,301 ) $ ( 765,730 ) Basic and diluted net loss per share: Net loss per share - basic and diluted $ ( 0.09 ) $ ( 0.02 ) Weighted average number of shares outstanding – basic 46,881,475 46,881,475 Weighted average number of shares outstanding – diluted 46,881,475 46,881,475 The accompanying notes are an integral part of these financial statements. F- 4 NOVELSTEM INTERNATIONAL CORP. STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) Number Total Additional of Shareholders’ Number of Common Paid-In Accumulated Treasury Treasury Equity Shares Stock Capital Deficit Shares Stock (Deficit) Balance, December 31, 2021 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 issued - - - - - - - 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 Net loss - - - ( 4,187,301 ) - - ( 4,187,301 ) Stock-based compensation - - 302,890 - - - 302,890 Balance, December 31, 2023 46,881,475 $ 468,815 $ 290,907,217 $ ( 293,127,811 ) 3,435,197 $ ( 199,754 ) $ ( 1,951,533 ) Balance 46,881,475 $ 468,815 $ 290,907,217 $ ( 293,127,811 ) 3,435,197 $ ( 199,754 ) $ ( 1,951,533 ) The accompanying notes are an integral part of these financial statements. F- 5 NOVELSTEM INTERNATIONAL CORP. STATEMENTS OF CASH FLOWS Years Ended December 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 4,187,301 ) $ ( 765,730 ) Adjustments required to reconcile loss to net cash used in operating activities: Depreciation - - Revaluation of convertible financial instrument - - Equity in net loss of equity method investees 338,618 719,802 Gain on dilution of equity method investment ( 36,139 ) ( 387,524 ) Distribution from NetCo 6,875 12,591 Accretion of discount on note payable 61,815 - Loss on derivative instrument 260,000 - Legal fees and litigation funding fees funded by litigation funding agreement 2,819,196 - Accrued interest added to long-term note payable 35,138 8,450 Stock-based compensation 302,890 282,662 Change in operating assets and liabilities: Decrease in other current assets - - Decrease in other liabilities - - Accounts receivable, administrative fees 12,000 ( 12,000 ) Prepaid expenses 7,021 ( 12,245 ) Accounts payable 33,054 ( 28,574 ) Accrued expenses ( 1,450 ) 248 Net cash used in operating activities ( 348,283 ) ( 182,320 ) Cash flows from investing activities: Loans made ( 250,000 ) - Net cash used in investing activities ( 250,000 ) - Cash flows from financing activities: Proceeds from (repayment of) note payable, current 250,000 ( 100,000 ) Proceeds from long-term note payable 395,000 280,000 Funds received from a related party - - Issuance of ordinary shares, net - - Net cash from financing activities 645,000 180,000 Net change in cash 46,717 ( 2,320 ) Cash at the beginning of the year 6,346 8,666 Cash at the end of the year $ 53,063 $ 6,346 Supplemental cash flow information: Cash paid during the year for: Interest $ 1,248 $ 8,320 The accompanying notes are an integral part of these financial statements. F- 6 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. Going Concern, Liquidity and Management’s Plans Since inception, the Company has accumulated a deficit of approximately $ 293,000,000 . The accumulated deficit of the Company subsequent to its business focus shift and name change in September 2018 is approximately $ 6,447,000 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 be able to continue as a going concern and become profitable (see Note 3). The Company has in place a finance agreement with two individuals who are shareholders and directors to borrow $ 650,000 for working capital needs (see Note 4). Additionally, the Company entered into an additional finance agreement with a shareholder in 2023 to borrow $ 300,000 for working capital needs (see Note 4). As of the date of these financial statements, these borrowings have been fully utilized and the Company will need to obtain additional funds to continue operations for the next 12 months. In view of the matters described above, the Company’s ability to meet financing requirements is dependent upon the ability to complete additional fundraising or obtain additional financing, and/or monetize its investment in NetCo, along with NewStem continuing as a going concern. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. 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- 7 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. 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 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. Derivative Financial Instruments The Company has in place a financial instrument, in the form of a note payable, with an identified embedded derivative in the form of a guarantee. The identified embedded derivative has been bifurcated and accounted for separately. Such derivative financial instruments are measured at fair value 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 the embedded derivative is recorded at fair value with the excess of fair value over proceeds recognized as a loss in earnings. During the year ended December 31, 2023, the Company recognized a loss on derivative financial instruments of $ 260,000 . Proceeds from the note payable are shown as cash from financing instruments and the loss on derivative instrument is included as an adjustment to reconcile loss to net cash used in operating activities in the statements of cash flows for the year ended December 31, 2023. Treasury Stock Shares of common stock repurchased are recorded at cost as treasury stock. F- 8 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 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. Such options are valued using the Black-Scholes option pricing model. 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- 9 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements Basic and Diluted Net Loss Per Share Basic net income per share is computed by dividing the net income by the weighted average number of shares outstanding during the year, excluding treasury stock. Diluted net income per share is computed by dividing the net income 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 Year Ended December 31, 2023 2022 Net loss available to common shareholders $ ( 4,187,301 ) $ ( 765,730 ) Weighted average shares outstanding: -Basic 46,881,475 46,881,475 Add: Warrants - - Add: Stock options - - -Diluted 46,881,475 46,881,475 Basic and diluted net loss per share $ ( 0.09 ) $ ( 0.02 ) 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 resulting in an ownership interest of 30.51 % and 30.58 % , respectively, as of December 31, 2023 and 2022. The Company accounts for its investment in NewStem under the equity method. At December 31, 2023 and 2022, the carrying value of the investment in NewStem exceeded its portion of the underlying net assets of NewStem by approximately $ 1,800,000 and $ 1,900,000 , 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. During the years ended December 31, 2023 and 2022, the Company reimbursed NewStem for audit and audit related costs of approximately $ 58,000 and $ 105,000 , respectively. As disclosed in Note 8, the Company is in negotiations to acquire the remainder of NewStem in exchange for shares of Company stock. In anticipation of this transaction, the Company advanced $ 250,000 to NewStem in December 2023 and an additional $ 250,000 in March 2024. The related note agreement bears no interest and is payable on December 30, 2024. The agreement provides for discharge of the note upon the closing of the anticipated acquisition transaction. This note receivable has been presented as a noncurrent asset along with the investment in NewStem in the balance sheets. The Company assesses its investment in NewStem for impairment on an annual basis or more frequently if indicators of impairment exist. F- 10 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements NewStem is in the development stage and has incurred losses since its inception and has generated only minimal revenues related to a licensing agreement. 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, licensing or financing on terms acceptable to the Company. NewStem obtained additional funding of approximately $ 1,450,000 in April 2022 through the sale of shares of ordinary stock. NewStem’s management has adopted a cost reduction plan in order to adjust future operation expenses to its cash balance. In October 2023, the NewStem board of directors unanimously resolved to dismiss most employees which occurred in December 2023. The aforementioned events indicate significant difficulties to continue as a concern. Additionally, Israel declared a state of war in October 2023 which resulted in a decrease in Israel’s economic and business activity. The security situation in Israel led to a disruption in the chain of supply and production, a decrease in the volume of national transportation, and a shortage in manpower as well as a decrease in the value of financial assets. As a result of the movement and work restrictions, NewStem began operating on a limited scale. Additionally, the situation has brought further difficulties in management’s efforts to seek additional financing. The following table represents the Company’s investment in NewStem: SCHEDULE OF INVESTMENTS 2023 2022 Year Ended December 31, 2023 2022 Investment in NewStem, beginning $ 2,090,286 $ 2,435,155 Allocation of net loss from NewStem ( 342,191 ) ( 732,393 ) Gain on dilution of equity method investment 36,139 387,524 Investment in NewStem, ending $ 1,784,234 $ 2,090,286 The results of operations and financial position of the Company’s investment in NewStem are summarized below: SCHEDULE OF OPERATIONS AND FINANCIAL POSITION INVESTMENT 2023 2022 Year Ended December 31, 2023 2022 Condensed income statement information: License fees $ 95,000 $ - Gross profit $ 84,000 $ - Net loss $ ( 1,119,000 ) $ ( 2,341,000 ) Company’s allocation of net loss from NewStem $ ( 342,191 ) $ ( 732,393 ) 2023 2022 As of December 31, 2023 2022 Condensed balance sheet information: Current assets $ 353,000 $ 911,000 Non-current assets $ 9,000 $ 23,000 Current liabilities $ 284,000 $ 97,000 Non-current liabilities $ - $ 121,000 F- 11 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 and administrative fees from this arrangement. The Company assesses its investment in NetCo for impairment on an annual basis or more frequently if indicators of impairment exist. The following table represents the Company’s investment in NetCo: SCHEDULE OF INVESTMENTS 2023 2022 Year Ended December 31, 2023 2022 Investment in NetCo, beginning $ 137,011 $ 137,011 Allocation of net income from Netco 3,573 12,591 Distribution from NetCo ( 6,875 ) ( 12,591 ) Investment in NetCo, ending $ 133,709 $ 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 2023 2022 Year Ended December 31, 2023 2022 Condensed income statement information: Net sales $ 25,789 $ 25,182 Gross profit $ 19,422 $ 25,182 Net income $ 7,146 $ 25,182 Company’s allocation of net income from NetCo $ 3,573 $ 12,591 2023 2022 As of December 31, 2023 2022 Condensed balance sheet information: Current assets $ 1,820 $ 13,473 Non-current assets $ 272,799 $ 272,799 Current liabilities $ 325 $ 12,250 Non-current liabilities $ - $ - F- 12 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements NOTE 4— NOTES PAYABLE In December 2023, the Company entered into two short term notes payable with unrelated parties, Hewlett Fund and AIGH Investment Partners, LLC. The notes are for $ 125,000 each, 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 . Interest expense related to these notes was $ 822 for the year ended December 31, 2023. Long-term notes payable are summarized as follows: SCHEDULE OF LONG TERM NOTES PAYABLE As of December 31, 2023 2022 Notes payable related parties: Notes payable director and Executive Chairman $ 400,000 $ 280,000 Accrued interest added to note balance 43,588 8,450 Total notes payable director and Executive Chairman 443,588 288,450 Note payable shareholder, principal amount 275,000 - Less unamortized discount ( 213,185 ) - Total note payable shareholder 61,815 - Note payable, litigation funding agreement: Note payable Omni Bridgeway (Fund 4) Invt. 3 L.P. 2,819,196 - Total notes payable 3,324,599 288,450 Less current portion - - Long-term notes payable $ 3,324,599 $ 288,450 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 to this Note was $ 1,198 for the year ended December 31, 2022. The Note and all accrued interest, totaling $ 6,752 , were paid in full on February 16, 2022. In May 2022, the Company entered into note agreements with two individuals who are related parties to borrow up to $ 600,000 for working capital needs. The 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 through November 11, 2022, at which time the interest rate increased to 10 % per annum for subsequent advances. The agreements mature September 1, 2025 . The Company received advances of $ 400,000 and $ 280,000 , respectively, pursuant to these agreements through December 31, 2023 and 2022. On May 5, 2023, the Company entered into a long term note payable with a shareholder for $ 300,000 in financing to be funded $ 150,000 at inception and $ 150,000 in October 2023. 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 which is reported separately on the balance sheet. The fair value of the note exceeds the proceeds, and the note has been discounted at inception so that the net liability is the fair value of the derivative. Accretion of the note discount of $ 61,815 has been reflected as part of interest expense in the statement of operations for year ended December 31, 2023. Note Payable, Litigation Funding Agreement 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 an arbitration proceeding disclosed in Note 7. 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. Additionally, the agreement provides for repayment of funded costs pursuant to the same multiple calculations in the event of a favorable outcome that does not include the collection of claims. During the year ended December 31, 2022, the Company received $ 310,000 pursuant to this agreement for the reimbursement of legal costs and working capital expenditures, including previously incurred general and administrative costs. F- 13 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements During July 2023, the arbitration was settled with a favorable outcome for the Company. As a result of the ruling disclosed in Note 7, the liability became probable and reasonably estimable, and the Company has recorded the full liability due to Omni as of December 31, 2023. This liability consists of expenses funded by Omni of $ 933,065 , including $ 310,000 advanced for working capital, and related fees or investment return to Omni calculated as contractual multiples of funding totaling $ 1,886,131 as of December 31, 2023 for a total liability of $ 2,819,196 . This agreement bears interest at 5 % per annum beginning January 2024 and on January 10, 2025. NOTE 5— EQUITY (a) General At December 31, 2023 and 2022 the Company had issued 50,316,672 and outstanding 46,881,475 shares of its common stock, par value $ 0.01 per share. The Company held 3,435,197 shares of its common stock, $ .01 par value, in treasury at December 31, 2023 and 2022. Holders of outstanding common stock are entitled to receive dividends when, 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. (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 5,760,000 options have been issued to directors and investor relations professionals. 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, 2023 2022 Risk-free interest rate 3.4 % 1.5 % Expected term, in years 3.91 3.82 Expected volatility 118.3 % 183.7 % Expected dividend yield 0 % 0 % Determined weighted average grant date fair value per option $ 0.17 $ 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 6 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 period since the Company’s business focus shift to biotech. 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. F- 14 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements (c) Summary Option Information A summary of the Company’s option plans as of December 31, 2023 and 2022, as well as changes during each of the years then ended, is presented below: SCHEDULE OF STOCK OPTION ACTIVITIES Year Ended December 31, 2023 2022 Number Weighted Number Weighted of Average of Average Options Exercise Options Exercise (in shares) Price (in shares) Price Outstanding at beginning of year 5,400,000 0.14 4,300,000 0.10 Granted 360,000 0.20 1,100,000 0.29 Outstanding at end of year 5,760,000 0.14 5,400,000 0.14 Exercisable at end of year 5,400,000 0.14 4,800,000 0.12 Stock-based compensation expense was approximately $ 303,000 and $ 283,000 in the years ending December 31, 2023 and 2022, respectively. The total compensation cost related to non-vested awards not yet recognized was approximately $ 13,000 and $ 13,000 , respectively, as of December 31, 2023 and 2022. An award of 500,000 options granted on January 31, 2022 had special vesting provisions whereby the awards fully vested in 2022. (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, 2023 2022 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 warrant agreements were amended on May 12, 2023 to extend the expiration date to June 28, 2025 . The warrants outstanding at December 31, 2023 have a weighted average remaining contractual life of approximately one and a half years . The Company recognized $ 243,000 in stock-based compensation expense related to the increase in fair value of warrants pursuant to the modification of the warrant term during the year ended December 31, 2023. No such expense was recognized related to the warrants during the year ended December 31, 2022. F- 15 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements NOTE 6— INCOME TAXES For the years ended December 31, 2023 and 2022, 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, 2023 and 2022, the Company had approximately $ 54,000,000 and $ 61,000,000 , respectively of net operating losses subject to IRC Section 382 limitations, of which $ 9,900,000 and $ 6,400,000 , 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 Company’s federal and state net operating losses began expiring in 2021. Approximately $ 8,000,000 and $ 4,000,000 , respectively of federal and state losses expired in December 2023, and approximately $ 55,000,000 and $ 25,000,000 , respectively, of federal and state losses expired in December 2022. The Company has approximately $ 5,331,000 in federal and state losses that do not expire. The remaining losses expire from 2024 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. 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 2023 2022 Year Ended December 31, 2023 2022 Computed tax at the federal statutory rate of 21 % $ ( 879,333 ) $ ( 160,803 ) State income taxes, net of federal income tax benefit ( 181,938 ) ( 33,271 ) Foreign rate differential ( 48,968 ) ( 171,089 ) Change in federal valuation allowance 1,110,239 365,163 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, 2023 and 2022 consist of the following: SCHEDULE OF DEFERRED TAX ASSETS 2023 2022 As of December 31, 2023 2022 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 2,540,308 1,686,708 General business credit 41,551 41,551 Related party interest and accretion of note discount 25,691 - Loss on derivative instrument 68,900 Stock compensation 252,275 174,009 Total deferred tax assets 4,630,725 3,602,268 Federal and state net operating loss carryforwards subject to IRC Section 382 limitations 13,644,005 15,465,570 Less valuation allowance for net operating loss limitations ( 13,644,005 ) ( 15,465,570 ) Valuation allowance ( 4,130,103 ) ( 2,971,573 ) Subtotal deferred tax assets 500,622 630,695 Deferred tax liability, equity method basis difference ( 500,622 ) ( 630,695 ) 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, 2023 and 2022. F- 16 NOVELSTEM INTERNATIONAL CORP. Notes to Financial Statements NOTE 7— COMMITMENTS AND CONTINGENCIES The Company was 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 hearings were held at the end of July 2022. Arbitration proceedings for the joint owners of NetCo concluded during 2022 and the arbitrator rendered a decision 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. The Arbitrator ruled in NovelStem’s favor on the issue of contract interpretation of the Netco Partners JV Agreement. The Arbitrator also found that the Company’s joint venture partner failed to use “reasonable, good faith efforts” to license and exploit the Net Force concept, in breach of its contractual obligations under the Netco Partners’ Joint Venture Agreement. The Arbitrator confirmed NovelStem’s contractual right to use Tom Clancy’s name as a possessory credit in the Net Force title (Tom Clancy’s Net Force). As a result of this ruling, the costs related to the litigation funding agreement disclosed in Note 4 were recognized. Total costs related to the litigation and the related litigation funding agreement of $ 2,819,196 , including a reversal of the prior period contra expenses, were recorded during the December 31, 2023 and were separately stated in the statement of operations. NOTE 8— SUBSEQUENT EVENTS The Company evaluated subsequent events through the date these financial statements were available to be issued and filed with the SEC. During the fourth quarter of 2023, the Company entered into negotiations with NewStem stockholders for the acquisition of the shares not held by the Company. The negotiations are ongoing for the transaction in which the Company would acquire all outstanding shares in exchange for shares of NovelStem stock. Company management anticipates the transaction to conclude in the second quarter of 2024. In anticipation of the Company acquiring the remaining ownership of NewStem, the Company has loaned $ 500,000 to NewStem to ensure continuing operations. The Company advanced $ 250,000 of this loan to NewStem in December 2023 and the remainder in March 2024. See Note 3. As disclosed in Note 4, related party loan agreements were amended in March 2024 to increase the total borrowing to $ 650,000 and extend the maturity date to September 1, 2025 . The Company received an advances of $ 250,000 on these agreements which was utilized to fund NewStem in March 2024 fully utilizing available borrowings. F- 17 (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 Promissory Note issued to Stephen Gans 10.11 1 st Amendment to Promissory Note issued to Jan Loeb 10.12 1 st Amendment to Promissory Note issued to Jerry Wolasky 10.13 Certification of Principal Executive Officer and Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 10.14 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 10.15 Certification of Principal Executive Officer and Executive Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 10.16 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, 2023 NewStem Ltd. Financial Statements as of December 31, 2023 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-18 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1C to the financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1C. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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. /s/ Somekh Chaikin Somekh Chaikin Member Firm of KPMG International We have served as the Company’s auditor since 2021. Tel Aviv, Israel March 20, 2024 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, 2023 2022 Note US$ thousands US$ thousands Assets Current assets Cash and cash equivalents 3 324 878 Other current assets 4 29 33 Total current assets 353 911 Non-current assets Property and equipment, net 5 9 23 Total assets 362 934 Liabilities and shareholders’ equity Current liabilities Accounts payable 6 34 97 Related party 10 250 - Total current liabilities 284 97 Non-current liabilities Convertible financial instrument 7F - 121 Total liabilities 284 218 Commitments and contingent liabilities 9 - - Shareholders’ equity 7 Ordinary shares - * - * Additional paid-in capital 9,167 8,686 Accumulated deficit ( 9,089 ) ( 7,970 ) Total shareholders’ equity 78 716 Total liabilities and shareholders’ equity 362 934 /s/ Jan Loeb Jan Loeb Chairperson of the Board Date of approval of the financial statements: March 20, 2024 * Represents an amount less than $1 thousand. The accompanying notes are an integral part of the financial statements. F- 3 NewStem Ltd. Statements of Operations for the Year Ended December 31, 2023 2022 Note US$ thousands US$ thousands Revenues 8 95 - Cost of revenues 9A 11 - Gross profit 84 - Operating expenses: Research and development expenses 2H 965 2,299 Less – grants and participations received 9B - ( 200 ) Research and development expenses, net 965 2,099 General and administrative expenses, net 240 245 Operating loss 1,121 2,344 Financial income, net ( 2 ) ( 3 ) Loss for the year 1,119 2,341 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, 2022 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 Conversion of convertible financial instrument 412 - 125 - 125 Stock based compensation - - 356 - 356 Loss for the year - - - ( 1,119 ) ( 1,119 ) Balance as of December 31, 2023 163,906 - * 9,167 ( 9,089 ) 78 Balance 163,906 - * 9,167 ( 9,089 ) 78 * Represents an amount less than $1 thousand. The accompanying notes are an integral part of the financial statements. F- 5 NewStem Ltd. Statements of Cash Flows for the year ended December 31 2023 2022 US$ thousands US$ thousands Cash flows from operating activities Loss for the year ( 1,119 ) ( 2,341 ) Adjustments required to reconcile loss to net cash used in operating activities: Depreciation 14 18 Revaluation of convertible financial instrument 4 ( 13 ) Stock based compensation 356 1,273 Decrease in other current assets 4 20 Decrease in other liabilities - ( 100 ) Decrease in accounts payable ( 63 ) ( 30 ) Net cash used in operating activities ( 804 ) ( 1,173 ) Cash flows from financing activities Funds received from a related party 250 - Issuance of ordinary shares, net - 1,450 Net cash provided by financing activities 250 1,450 Net increase (decrease) in cash and cash equivalents ( 554 ) 277 Cash and cash equivalents at the beginning of the year 878 601 Cash and cash equivalents at the end of the year 324 878 Non-cash financing activities Conversion of convertible financial instrument 125 - 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, 2023 Note 1 - General NOTE 1— 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. Going Concern Since inception, the Company has accumulated losses of US$ 9,089 thousand. During the year ended December 31, 2023, the Company has incurred losses of US$ 1,119 thousand. As of December 31, 2023, the Company’s cash and cash equivalents balance is US$ 324 thousand, and the net cash used in operating activities during 2023, is US$ 804 thousand. The Company will need to obtain additional funds to continue its operations over the next 12 months. 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 (see also Note 1D). The Company’s management has adopted a cost reduction plan in order to adjust future operation expenses to its cash balance. On October 23, 2023, the board of directors of the Company unanimously resolved, due to the financial status of the Company, to hold a hearing for most of the Company’s employees to be followed by a dismissal notice, which occurred on December 31, 2023. The above-mentioned events incur significant difficulties to continue to operate the Company’s business and there is a substantial doubt about its ability to continue as a going concern during the look-forward period. The financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern. D. “Iron Swords” war Following the brutal attacks on Israel, the mobilization of army reserves, and the Government declaring a state of war (“Iron Swords” war) in October 2023, there was a decrease in Israel’s economic and business activity. The security situation has led, inter alia, to a disruption in the chain of supply and production, a decrease in the volume of national transportation, a shortage in manpower as well as a decrease in the value of financial assets and a rise in the exchange rate of foreign currencies in relation to the shekel. As a result of the movement and work restrictions, the Company began operating on a limited scale, and most of the employees were instructed to work from home. In addition, the situation has brought further difficulties in management’s efforts to seek additional financing arrangements. E. Definitions In these financial statements – 1. The Company – NewStem Ltd. 2. Related Party – Within its meaning in ASC 850, “Related Party Transactions”. F- 7 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 2 - Significant Accounting Policies NOTE 2— 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. Functional currency 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. Initial revenues recorded in 2023 were generated in US dollars, and 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. 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 2023 or 2022. F- 8 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 2 - Significant Accounting Policies (cont’d) F. Concentrations of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. Cash and cash equivalents are invested in a major bank in Israel. Management believes that the financial institution that holds the Company’s investments is 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 pays 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. All of the Company’s employees are included under Section 14. H. Research and development costs Research and development expenses consist mainly of labor costs. Costs are expensed as incurred. A grant received is offset from research and development expenses. See also Note 2M. I. 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- 9 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 2 - Significant Accounting Policies (cont’d) J. 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. K. 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 agreements 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. L. 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 has elected to account for forfeitures as they occur; any compensation cost previously recognized for an award that is forfeited because of a failure to satisfy the service condition is reversed in the period of the forfeiture. The Company records prepaid stock-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. F- 10 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 2 - Significant Accounting Policies (cont’d) M. 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. N. Leases The Company is a lessee in two agreements. 1. 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. Therefore, the lease is not under the scope of ASC-842. (see also Note 9D). 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. O. Revenue recognition The Company views granting of licenses and sublicenses as outputs of its ordinary business activities, and recipients of such licenses as customers. Thus, the Company considered such licenses agreements to be in the scope of ASC 606 Revenue from Contracts with Customers (“ASC 606”) . The Company has a sublicense agreement with one customer (the “Agreement”). The Company determined that the customer has received rights of use of the IP, which are functional in nature, since the Company will not perform any activities to change functionality of the IP during the terms of the sub-license. As prescribed by ASC 606, revenue from right to use IP is recognized at a point in time, when the customer receives access to the IP. The Company did not identify a promise to provide future services in the Agreement, and hence the rights to use the IP are the only performance obligations in the Agreement. Sales-based royalties and milestone payments dependent of future sales will be recognized upon the occurrence of applicable future sales, under the royalty exception. Other milestone payments are currently fully constrained under the variable consideration guidance. F- 11 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 3 - Cash and Cash Equivalents The Company’s cash and cash equivalents balance as of December 31, 2023, and 2022, is denominated in the following currencies: Schedule of Cash and Cash Equivalents 2023 2022 December 31 2023 2022 US$ thousands US$ thousands US Dollars 257 811 New Israeli Shekels 67 57 Euro - 9 Great British Pound - 1 Cash and cash equivalents 324 878 Note 4 - Other Current Assets Schedule of Other Current Assets 2023 2022 December 31 2023 2022 US$ thousands US$ thousands Government institutions 3 29 Prepaid expenses 12 4 Related parties 14 - Other current assets 29 33 Note 5 - Property and Equipment, net Schedule of Property and Equipment, Net 2023 2022 December 31 2023 2022 US$ thousands US$ thousands Cost: Software and Computers 62 62 Accumulated depreciation: Software and Computers 53 39 Depreciated cost 9 23 F- 12 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 6 - Accounts payable Schedule of Accounts Payable 2023 2022 December 31 2023 2022 US$ thousands US$ thousands Employees and payroll accruals 21 53 Accrued expenses and other payables 13 44 Accounts payable 34 97 Note 7 - Share Capital NOTE 5— EQUITY Schedule of Share Capital Composition Composition: As of December 31, 2023 Authorized Issued and fully paid Number of shares Ordinary shares NIS 0.01 par value ( “ Ordinary Shares ” ) 1,000,000 163,906 Ordinary shares NIS 0.01 par value ( “ Ordinary Shares ” ) 1,000,000 163,906 As of December 31, 2022 Issued and Authorized fully paid Number of shares Ordinary shares 1,000,000 163,494 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. F- 13 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 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. 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, 2023 Weighted Weighted average average remaining Number of exercise price contractual options US$ term (years) Outstanding at the beginning of the year 13,145 146.63 Forfeited ( 6 ) 80 Outstanding at the end of the year 13,139 146.66 1.80 Exercisable at the end of the year 12,598 144.38 1.58 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 2023 2022 Year ended December 31 2023 2022 US$ thousands US$ thousands Research and development 212 321 General and administrative 144 181 Total stock-based compensation expense 356 502 F- 14 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 7 - Share Capital (cont’d) 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: (a) In the event of a financing round of at least 1 million GBP, the SAFE will be automatically converted at the end of the round 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 was presented at fair value. The convertible financial instrument is considered a Level 3 fair value measurement. In November 2023, upon closing of the round (see also Note 7D), the SAFE was converted to 412 Ordinary Shares, according to scenario (a). 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 2023 2022 US$ thousands US$ thousands Balance as of January 1, 121 134 Change in fair value 4 ( 13 ) Conversion of a convertible financial instrument ( 125 ) - Balance as of December 31, - 121 Note 8 - Revenues On December 23, 2022, The Company signed a Sub-License Agreement (the “Agreement”), which entered into effect in January 2023, for a sub-license of the Company’s intellectual property related to Fragile X Syndrome (“IP”). In consideration for the grant of each period of the sub-license, the Company will be entitled to license fees of a lump sum of US$ 95 thousands for years 1-5 (“First License Period”), US$ 50 thousand per year for years 6-7, US$ 100 thousand per year for year 8 and onwards. The Company is also entitled for reimbursement of patent costs that were incurred in the past relating the intellectual property, of approximately $ 24 thousand and will be entitled for reimbursement of future patent costs. These reimbursements will be accounted for as reduction of General and administrative expenses. F- 15 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 8 - Revenues (cont’d) In addition, the Company will be entitled to royalties upon future sales of products that are based on the Company’s licensed intellectual property at a rate of 3.5 % of the net sales or 50 % of sales-based sub-license income, sublicense fees at a rate of up to 13.2 % - 22.0 % of sublicense consideration, subject to certain terms, as outlined in the Agreement. Moreover, the Company is entitled to certain future milestones payments, partly based on sales and partly based on reaching Phase III clinical trials. The Company also received a right to receive a fee equal to 0.5 % of the customer’s exit consideration (“Exit Fee”), which will be received upon an exit event of the customer, as defined in the Agreement. Based on the estimated date of the customer’s exit event and the discount rate used to calculate the current value of the Exit Fee, the fair value of the Exit Fee as of the inception date of the Agreement was considered to be immaterial. The Company determined that the customer has received rights of use of the IP, which are functional in nature, since the Company will not perform any activities to change functionality of the IP during the terms of the sub-license. The Company did not identify a promise to provide future services in the Agreement, and hence the rights to use the IP are the only performance obligations in the Agreement. Therefore, the Company recognized revenues of $ 95 thousand in 2023, for the First License Period. Sales-based royalties and milestone payments dependent of future sales will be recognized upon the occurrence of applicable future sales, under the royalty exception. Other milestone payments are currently fully constrained under the variable consideration guidance. Note 9 - Commitments and Contingent Liabilities NOTE 7— 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, 2023, a provision in the amount of US$ 11 thousands was recorded for these commitments in the financial statements. 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. F- 16 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 9 - Commitments and Contingent Liabilities (cont’d) 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, 2023, 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. Laboratory Renting Agreement The Company rents a laboratory from Yissum starting July 1, 2018. The rent is for an initial three-year term expiring on June 30, 2021. The Company extended the lease until December 31, 2023, and it has an option to further extend the term for an additional one-year period. Each party shall be entitled to terminate the agreement within 30 days’ notice. The company shall pay NIS 3,000 per company employee per month. Total rent cost associated with this lease for the year ended December 31, 2023, and 2022 was US$ 21 thousand and US$ 43 thousand, respectively. Note 1 0 - Related Parties The Company engaged with its shareholders to receive consulting services and laboratory renting (see also Note 9D). In addition, the Company is required to pay a shareholder sublicense fees at a rate of up to 12 % of sublicense (see also Note 9A). Schedule of Related Party Transactions A. Transactions Year ended Year ended December 31 2023 December 31 2022 US$ thousands US$ thousands Cost of revenues 11 - Research and development expenses 176 353 F- 17 NewStem Ltd. Notes to the Financial Statements for the year ended December 31, 2023 Note 1 0 - Related Parties (cont’d) B. Balances December 31, 2023 December 31, 2022 US$ thousands US$ thousands Other current assets 14 - Accounts payable 11 - Related party (*) 250 - (*) The Company negotiates with a related party to make an additional investment in the Company. In December 2023, as part of this negotiation, the Company received funds from the related party in the amount of US$ 250 thousand. Due to the fact that no binding agreement was signed as of December 31, 2023, the funds received were classified as a current liability. Note 11 - Taxes on Income NOTE 6— 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 2023 and 2022. 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, 2023, the Company has net operating tax losses carried forward indefinitely of approximately US$ 4.4 million, (December 31, 2022 - US$ 3.8 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: Schedule of Deferred Tax Assets 2023 2022 December 31, 2023 2022 US$ thousands US$ thousands Deferred tax assets: Net operating losses 1,024 885 Research and development credit carried forward 188 229 Other 12 26 Total deferred tax assets 1,224 1,140 Less valuation allowance ( 1,224 ) ( 1,140 ) Net deferred tax assets - - The net change in the total valuation allowance was an increase of US $ 84 thousand in 2023 and an increase of US $ 187 thousand in 2022. 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. 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 April 1, 2024. 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 April 1, 2024 Jan H. Loeb /s/ Christine Jenkins Vice President and Chief Financial Officer April 1, 2024 Christine Jenkins /s/ Mitchell Rubenstein Director April 1, 2024 Mitchell Rubenstein /s/ Eric Richman Director April 1, 2024 Eric Richman /s/ David Seltzer Director April 1, 2024 David Seltzer /s/ Jerry Wolasky Director April 1, 2024 Jerry Wolasky /s/ Tracy Clifford Director April 1, 2024 Tracy Clifford 30