NovelStem International Corp. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2024 ☐ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _________________ Commission file number: 001-14332 NOVELSTEM INTERNATIONAL CORP. (Exact name of registrant as specified in its charter) Florida 65-0385686 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 2255 Glades Road , Suite 221A , Boca Raton , FL 33431 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code (410) 598-9024 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer  ☒ Smaller reporting company   ☒ Emerging growth company   ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Class Outstanding at August 14, 2024 Common Stock, $ 0.01 par value per share 46,881,475 NOVELSTEM INTERNATIONAL CORP. Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2024 TABLE OF CONTENTS PAGE Part I Financial Information Item 1. Unaudited Condensed Financial Statements: Unaudited Condensed Balance Sheets as of June 30, 2024 and December 31, 2023 3 Unaudited Condensed Statements of Operations for the six and three months ended June 30, 2024 and 2023 4 Unaudited Condensed Statements of Changes in Shareholders’ Deficit for the six months ended June 30, 2024 and 2023 5 Unaudited Condensed Statements of Cash Flows for the six months ended June 30, 2024 and 2023 6 Notes to Unaudited Condensed Financial Statements 7 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 Part II Other Information Item 1. Legal Proceedings 18 Item 1A. Risk Factors 19 Item 6. Exhibits 19 Signatures 20 2 PART I ITEM 1. UNAUDITED CONDENSED FINANCIAL STATEMENTS NOVELSTEM INTERNATIONAL CORP. CONDENSED BALANCE SHEETS (Unaudited) As of June 30, December 31, 2024 2023 (Unaudited) ASSETS Current assets: Cash $ 7,871 $ 53,063 Accounts receivable, administrative fees 4,500 - Prepaid expenses 16,389 33,540 Total current assets 28,760 86,603 Investment in NetCo Partners 130,789 133,709 Note receivable, NewStem Ltd. 500,000 250,000 Investment in NewStem Ltd 1,678,991 1,784,234 Total assets $ 2,338,540 $ 2,254,546 LIABILITIES AND SHAREHOLDERS’ DEFICIT Current liabilities: Accounts payable $ 110,030 $ 54,257 Notes payable 250,000 250,000 Current portion of long-term notes payable, including accrued interest 3,037,047 - Accrued expenses 118,453 42,223 Total current liabilities 3,515,530 346,480 Long-term liabilities: Long-term notes payable, including accrued interest, net 720,519 3,324,599 Convertible debt, including accrued interest 102,598 - Derivative liability, guarantee 535,000 535,000 Total long-term liabilities 1,358,117 3,859,599 Total liabilities 4,873,647 4,206,079 Commitments and contingencies (see Note 7) - - Shareholders’ (deficit) equity: Common stock, $ .01 par value, 100,000,000 shares authorized, 50,316,672 shares issued, and 46,881,475 shares outstanding as of June 30, 2024 and December 31, 2023 468,815 468,815 Additional paid-in capital 290,929,548 290,907,217 Accumulated deficit ( 293,733,716 ) ( 293,127,811 ) Treasury stock, at cost, 3,435,197 shares as of June 30, 2024 and December 31, 2023 ( 199,754 ) ( 199,754 ) Total shareholders’ deficit ( 2,535,107 ) ( 1,951,533 ) Total liabilities and shareholders’ deficit $ 2,338,540 $ 2,254,546 The accompanying notes are an integral part of these unaudited condensed financial statements. 3 NOVELSTEM INTERNATIONAL CORP. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 2024 2023 2024 2023 Six Months Ended Three Months Ended June 30, June 30, 2024 2023 2024 2023 Administrative fee income $ 6,000 $ - $ 3,000 $ - Operating expenses: General and administrative expenses 327,336 551,153 144,030 386,361 Litigation expenses (Note 7) - 2,332,663 - 2,332,663 Total operating expenses 327,336 2,883,816 144,030 2,719,024 Loss from operations ( 321,336 ) ( 2,883,816 ) ( 141,030 ) ( 2,719,024 ) Other expenses: (Gain) loss on derivative instrument ( 25,000 ) 54,795 - 54,795 Interest expense 201,406 27,823 106,642 20,510 Total other expenses 176,406 82,618 106,642 75,305 Loss before income taxes ( 497,742 ) ( 2,966,434 ) ( 247,672 ) ( 2,794,329 ) Provision for income tax - - Loss before equity in net income of equity method investees ( 497,742 ) ( 2,966,434 ) ( 247,672 ) ( 2,794,329 ) Equity in net loss of equity method investees ( 108,163 ) ( 177,147 ) ( 54,953 ) ( 80,431 ) Net loss $ ( 605,905 ) $ ( 3,143,581 ) $ ( 302,625 ) $ ( 2,874,760 ) Basic and diluted net loss per share: Net loss per share - basic and diluted $ ( 0.01 ) $ ( 0.07 ) $ ( 0.01 ) $ ( 0.06 ) Weighted average number of shares outstanding - basic and diluted 46,881,475 46,881,475 46,881,475 46,881,475 The accompanying notes are an integral part of these unaudited condensed financial statements. 4 NOVELSTEM INTERNATIONAL CORP. CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT (UNAUDITED) For the Six Months Ended June 30, 2024: Additional Number of Total Number of Common Paid-In Accumulated Treasury Treasury Shareholders’ Shares Stock Capital Deficit Shares Stock Deficit Balance, January 1, 2024 46,881,475 $ 468,815 $ 290,907,217 $ ( 293,127,811 ) 3,435,197 $ ( 199,754 ) $ ( 1,951,533 ) Net loss - - - ( 303,280 ) - - ( 303,280 ) Stock option compensation - - 13,493 - - - 13,493 Balance, March 31, 2024 46,881,475 $ 468,815 $ 290,920,710 $ ( 293,431,091 ) 3,435,197 $ ( 199,754 ) $ ( 2,241,320 ) Net loss - - - ( 302,625 ) - - ( 302,625 ) Stock option compensation - - 8,838 - - - 8,838 Balance, June 30, 2024 46,881,475 $ 468,815 $ 290,929,548 $ ( 293,733,716 ) 3,435,197 $ ( 199,754 ) $ ( 2,535,107 ) For the Six Months Ended June 30, 2023: Additional Number of Total Number of Common Paid-In Accumulated Treasury Treasury Shareholders’ Shares Stock Capital Deficit Shares Stock Deficit Balance, January 1, 2023 46,881,475 $ 468,815 $ 290,604,327 $ ( 288,940,510 ) 3,435,197 $ ( 199,754 ) $ 1,932,878 Net loss - - - ( 268,821 ) - - ( 268,821 ) Stock option compensation - - 15,077 - - - 15,077 Balance, March 31, 2023 46,881,475 $ 468,815 $ 290,619,404 $ ( 289,209,331 ) 3,435,197 $ ( 199,754 ) $ 1,679,134 Balance 46,881,475 $ 468,815 $ 290,619,404 $ ( 289,209,331 ) 3,435,197 $ ( 199,754 ) $ 1,679,134 Net loss - - - ( 2,874,760 ) - - ( 2,874,760 ) Stock option compensation - - 260,282 - - - 260,282 Balance, June 30, 2023 46,881,475 $ 468,815 $ 290,879,686 $ ( 292,084,091 ) 3,435,197 $ ( 199,754 ) $ ( 935,344 ) Balance 46,881,475 $ 468,815 $ 290,879,686 $ ( 292,084,091 ) 3,435,197 $ ( 199,754 ) $ ( 935,344 ) The accompanying notes are an integral part of these unaudited condensed financial statements. 5 NOVELSTEM INTERNATIONAL CORP. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 2024 2023 Six Months Ended June 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 605,905 ) $ ( 3,143,581 ) Equity in loss of equity method investees 108,163 177,147 Distribution from NetCo Partners - 7,875 Accretion of discount on note payable 88,531 11,507 (Gain) loss on derivative instrument ( 25,000 ) 54,795 Legal fees and litigation funding fees funded by litigation funding agreement - 2,332,663 Accrued interest added to long-term notes payable 97,034 15,848 Stock-based compensation 22,331 275,359 Change in operating assets and liabilities: Accounts receivable, administrative fees ( 4,500 ) 12,000 Prepaid expenses 17,151 14,494 Accounts payable 55,773 ( 4,105 ) Accrued expenses 76,230 48,977 Net cash used in operating activities ( 170,192 ) ( 197,021 ) Cash flows from investing activities: Loans made ( 250,000 ) - Net cash used in investing activities ( 250,000 ) - Cash flows from financing activities: Proceeds from convertible debt 100,000 - Proceeds from long term notes payable 275,000 225,000 Net cash from financing activities 375,000 225,000 Net change in cash ( 45,192 ) 27,979 Cash at the beginning of the period 53,063 6,346 Cash at the end of the period $ 7,871 $ 34,325 Supplemental cash flow information: Cash paid during the period for: Interest $ 883 $ 468 The accompanying notes are an integral part of these unaudited condensed financial statements. 6 NOVELSTEM INTERNATIONAL CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 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 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. NewStem is collaborating with life sciences companies for the development of drugs and reagents. 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 $ 294,000,000 . The accumulated deficit of the Company subsequent to its business focus shift and name change in September 2018 is approximately $ 7,050,000 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 $ 750,000 and an additional finance agreement with a shareholder to borrow $ 300,000 for working capital needs (see Note 4). Additionally, the Company entered into additional finance agreements with unrelated parties in December 2023 and April 2024 to borrow an additional $ 450,000 for working capital needs and to fund NewStem (see Note 4). As of the date of these financial statements, all funds available pursuant to these agreements have been received and these borrowings are projected to fund operations through November 2024. 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 accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented. Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future period. The accompanying unaudited condensed financial statements and related disclosures have been prepared with the presumption that users of the unaudited condensed financial statements have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these unaudited condensed financial statements should be read in conjunction with the Company’s Form 10-K, which was filed with the United States Securities and Exchange Commission (“SEC”) on April 1, 2024, from which the Company derived the balance sheet data at December 31, 2023. 7 Certain information and footnote disclosures normally included in condensed financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the Company’s Form 10K filed with the Securities and Exchange Commission on April 1, 2024 for the years ended December 31, 2023 and 2022. 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 investee company” 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. 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 % 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 arm’s 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 six months ended June 30, 2024, the Company recognized a gain on derivative financial instruments of $ 25,000 . Proceeds from the note payable are included in cash from financing instruments and the gain on derivative instrument is included as an adjustment to reconcile loss to net cash used in operating activities in the statement of cash flows for the six months ended June 30, 2024. Basic and Diluted Net Loss Per Share Basic net loss per share is computed by dividing the net loss by the weighted average number of shares outstanding during the period, excluding treasury stock. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares outstanding plus the dilutive potential of common shares which would result from the exercise of stock options and warrants. The dilutive effects of stock options and warrants are excluded from the computation of diluted net income (loss) 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 loss and the weighted average number of shares of dilutive potential common stock (unaudited): SCHEDULE OF WEIGHTED AVERAGE NUMBER OF SHARES OF DILUTIVE 2024 2023 2024 2023 Six Months Ended June 30, Three Months Ended June 30, 2024 2023 2024 2023 Net loss attributable to common shareholders $ ( 605,905 ) $ ( 3,143,581 ) $ ( 302,625 ) $ ( 2,874,760 ) Weighted average shares outstanding: -Basic 46,881,475 46,881,475 46,881,475 46,881,475 Add: Warrants - - - - Add: Stock options - - - - -Diluted 46,881,475 46,881,475 46,881,475 46,881,475 Basic and diluted net loss per share $ ( 0.01 ) $ ( 0.07 ) $ ( 0.01 ) $ ( 0.06 ) 8 Options and warrants excluded from the computation of earnings per share: SCHEDULE OF WARRANTS AND STOCK OPTIONS 2024 2023 2024 2023 Six Months Ended June 30, Three Months Ended June 30, 2024 2023 2024 2023 Warrants 3,000,000 3,000,000 3,000,000 3,000,000 Stock options 5,760,000 5,760,000 5,760,000 5,760,000 Anti-dilutive securities 5,760,000 5,760,000 5,760,000 5,760,000 NOTE 3— EQUITY METHOD INVESTMENTS Investment in NewStem In 2018, the Company entered into a Share Purchase Agreement with NewStem and other related parties to provide aggregate funding of up to $ 4,000,000 to NewStem. This funding was to be provided through the sale of up to 50,000 common shares of NewStem to the Company representing 33 % of New Stem’s outstanding shares. In 2018, the Company purchased 25,000 shares of NewStem for $ 2,000,000 acquiring an ownership interest of 20 %. The Company made additional investments in 2019 and 2020 purchasing 12,500 shares each year for a $ 1,000,000 investment each year. NewStem sold and issued shares to third party investors in 2021, 2022 and 2023 resulting in the Company recognizing a gain on dilution of equity method investment. These transactions resulted in the Company having an ownership interest of 30.51 % as of June 30, 2024 and December 31, 2023. The Company accounts for its investment in NewStem under the equity method. As of June 30, 2024 and December 31, 2023, the carrying value of the investment in NewStem exceeded its portion of the underlying net assets of NewStem by approximately $ 1,679,000 and $ 1,800,000 , 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. The Company assesses its investment in NewStem for impairment on an annual basis or more frequently if indicators of impairment exist. During the six and three months ended June 30, 2024, the Company recorded a reimbursement due to NewStem of approximately $ 44,000 and $ 8,000 , respectively, (included in accounts payable in the accompanying balance sheet) for audit and accounting related costs. During the six and three months ended June 30, 2023, the Company reimbursed NewStem for audit related costs of approximately $ 44,000 and $ 7,000 , respectively. The Company signed an agreement (the “Purchase Agreement”) on June 20, 2024 to acquire the remainder of NewStem in exchange for 25,248,525 shares of Company stock as well as funding for NewStem operations in the amount of $ 300,000 within 30 days of the Purchase Agreement date and an additional $ 750,000 in capital funding to be provided to NewStem by October 15, 2024. 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 accompanying balance sheets. The Purchase Agreement was not fully consummated, and no Company shares were issued to NewStem shareholders in exchange for NewStem shares. (See Note 8) NewStem is in the development stage and has incurred losses since its inception and has generated only minimal revenues under 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’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. During the second quarter of 2024, NewStem recruited new employees in order to renew its operations. 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 following table represents the Company’s investment in NewStem: SCHEDULE OF INVESTMENTS Six Months Ended June 30, 2024 Year Ended December 31, 2023 (Unaudited) Investment in NewStem, beginning $ 1,784,234 $ 2,090,286 Allocation of net loss from NewStem, Ltd. ( 105,243 ) ( 342,191 ) Gain on dilution of equity method investment - 36,139 Distribution from NetCo Investment in NewStem, ending $ 1,678,991 $ 1,784,234 9 The results of operations of the Company’s investment in NewStem is summarized below (unaudited): SCHEDULE OF OPERATIONS AND FINANCIAL POSITION INVESTMENT 2024 2023 2024 2023 Six Months Ended June 30, Three Months Ended June 30, 2024 2023 2024 2023 Condensed income statement information: Net revenues $ - $ 95,000 $ - $ - Gross margin $ - $ 84,000 $ - $ - Net loss $ ( 345,000 ) $ ( 605,000 ) $ ( 175,000 ) $ ( 263,000 ) Company’s allocation of net loss from NewStem, Ltd. $ ( 105,243 ) $ ( 185,022 ) $ ( 53,384 ) $ ( 80,431 ) The financial position of the Company’s investment in NewStem is summarized below: 2024 2023 As of June 30, December 31, 2024 2023 (Unaudited) Condensed balance sheet information: Current assets $ 258,000 $ 353,000 Non-current assets $ 4,000 $ 9,000 Current liabilities $ 543,000 $ 284,000 Non-current liabilities $ - $ - 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 Six Months Ended June 30, 2024 Year Ended December 31, 2023 (Unaudited) Investment in NetCo, beginning $ 133,709 $ 137,011 Allocation of net income (loss) from NetCo ( 2,920 ) 3,573 Distribution from NetCo - ( 6,875 ) Investment in NetCo, ending $ 130,789 $ 133,709 The results of operations of the Company’s investment in NetCo is summarized below (unaudited): SCHEDULE OF OPERATIONS AND FINANCIAL POSITION INVESTMENT 2024 2023 2024 2023 Six Months Ended June 30, Three Months Ended June 30, 2024 2023 2024 2023 Condensed income statement information: Net sales $ 373 $ 15,750 $ - $ - Gross margin $ 310 $ 15,750 $ ( 63 ) $ - Net income $ ( 5,840 ) $ 15,750 $ ( 3,138 ) $ - Company’s allocation of net income from NetCo $ ( 2,920 ) $ 7,875 $ ( 1,569 ) $ - The financial position of the Company’s investment in NetCo is summarized below: 2024 2023 As of June 30, December 31, 2024 2023 (Unaudited) Condensed balance sheet information: Current assets $ 467 $ 1,820 Non-current assets $ 272,799 $ 272,799 Current liabilities $ 4,812 $ 325 Non-current liabilities $ - $ - 10 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 $ 14,958 for the six months ended June 30, 2024. Long-term notes payable are summarized as follows: SCHEDULE OF LONG TERM NOTES PAYABLE As of June 30, December 31, 2024 2023 (Unaudited) Notes payable related parties: Notes payable director and Executive Chairman $ 650,000 $ 400,000 Accrued interest added to note balance 70,519 43,588 Total notes payable director and Executive Chairman 720,519 443,588 Note payable shareholder, principal amount 300,000 275,000 Less unamortized discount ( 149,654 ) ( 213,185 ) Total note payable shareholder 150,346 61,815 Note payable, litigation funding agreement: Note payable Omni Bridgeway (Fund 4) Invt. 3 L.P. 2,819,196 2,819,196 Accrued interest added to agreement balance 67,505 - Total note payable, litigation funding agreement 2,886,701 2,819,196 Total notes payable 3,757,566 3,324,599 Less current portion ( 3,037,047 ) - Long-term notes payable $ 720,519 $ 3,324,599 In May 2022, the Company entered into note agreements with two individuals who are related parties (a director and the Executive Chairman) 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 provided 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 matured September 1, 2025 . The Company received advances of $ 650,000 and $ 400,000 , respectively, pursuant to these agreements through June 30, 2024 and December 31, 2023. Related interest expense during the six and three months ended June 30, 2024 was $ 26,932 and $ 15,847 , respectively. These note agreements were refinanced on August 7, 2024 at which time they were replaced with new note agreements providing for total borrowings of $ 750,000 . The Company received additional advances on these agreements totaling $ 100,000 in August 2024. The new note agreements reflect total principal of $ 821,766 , including accrued interest on the former note agreements of $ 71,766 , mature on December 31, 2025 and bear interest at a rate of 10 % per annum. 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 June 30, 2024 and 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 $ 88,531 has been reflected as part of interest expense in the statement of operations for the six months ended June 30, 2024. 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. 11 During July 2023, the arbitration was settled with a partially 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 . The balance at June 30, 2024 has been increased to $ 2,886,701 to include accrued interest of $ 67,505 .This agreement bears interest at 5 % per annum beginning January 2024 and is payable on January 10, 2025 . Interest expense related to this agreement was $ 67,505 and $ 35,785 , respectively, for the six and three months ended June 30, 2024. Convertible Debt In April 2024, the Company borrowed $ 100,000 from unrelated parties pursuant to convertible debt agreements accounted for as debt. These agreements bear interest at 10 % per annum and mature December 30, 2025 . The unpaid principal balance of these notes and any accrued interest may be converted into shares of the Company’s common stock at a conversion price of $ 0.13 per share. Interest accrued related to these agreements was $ 2,598 during the six months and three months ended June 30, 2024. NOTE 5— EQUITY (a) General At June 30, 2024 and December 31, 2023, the Company had issued 50,316,672 shares and outstanding 46,881,475 shares of its common stock, par value $ 0.01 per share. Holders of outstanding common stock are entitled to receive dividends when, as and if declared by the Board and to share ratably in the assets of the Company legally available for distribution in the event of a liquidation, dissolution or winding up of the Company. (b) Summary Employee Option Information The Company’s stock option plan provides 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, 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 the Company’s board of directors approved on November 12, 2018, an aggregate of 6,360,000 options have been issued to directors and investor relations professionals as of June 30, 2024. The Company utilized the Black-Scholes option-pricing model to estimate fair value, utilizing the following assumptions for the options issued during the six months ended June 30, 2024 and 2023 (all in weighted averages): SCHEDULE OF FAIR VALUE OF OPTION USING VALUATION ASSUMPTIONS Six Months Ended June 30, 2024 2023 Risk-free interest rate 4.3 % 3.5 % Expected term of options, in years 5.09 4.00 Expected annual volatility 116.9 % 191.1 % Expected dividend yield 0 % 0 % Determined weighted average grant date fair value per option $ 0.06 $ 0.19 The expected term of the options represents an estimate of the length of time until the expected date of exercising the options. Options granted have a maximum life of 7 years. With respect to determining expected exercise behavior, the Company has grouped its option grants into certain groups to track exercise behavior and establish historical rates. The Company estimated volatility by considering historical stock volatility over the expected term of the option. The risk-free interest rates are based on the U.S. Treasury yields for a period consistent with the expected term. The dividend yield of 0 % is based on the Company’s history and expectation of dividend payout. The Company has not paid and does not anticipate paying dividends in the near future. 12 (c) Summary Option Information A summary of the Company’s option plans for the six months ended June 30, 2024, is presented below (unaudited): SCHEDULE OF STOCK OPTION ACTIVITIES Number Weighted of Average Options Exercise (in shares) Price Outstanding, December 31, 2023 5,760,000 $ 0.14 Granted 600,000 0.06 Outstanding, June 30, 2024 6,360,000 $ 0.13 Exercisable, June 30, 2024 5,760,000 $ 0.14 Stock-based compensation expense was approximately $ 22,000 and $ 13,000 in the six and three months ended June 30, 2024, respectively. Stock based compensation expense was approximately $ 32,000 and $ 15,000 in the six and three months ended June 30, 2023. The total compensation cost related to non-vested awards not yet recognized was approximately $ 27,000 as of June 30, 2024. As of June 30, 2024, 600,000 options were unvested. These options vest in April 2025. The total compensation cost related to non-vested awards not yet recognized was approximately $ 50,000 as of June 30, 2023. As of June 30, 2023, 360,000 options were unvested. These options vested during March 2024. (d) Warrants The Company has issued warrants at exercise prices equal to or greater than the market value of the Company’s common stock at the date of issuance. A summary of warrant activity follows (unaudited): SUMMARY OF WARRANTS ACTIVITY Number of Weighted shares Average underlying Exercise warrants Price Outstanding, December 31, 2023 3,000,000 $ 0.12 Granted - - Exercised - - Forfeited or expired - - Outstanding, June 30, 2024 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 June 30, 2024 have a weighted average remaining contractual life of approximately one year . The Company recognized $ 243,000 in stock-based compensation expense related to the increase in fir value of warrants pursuant to the modification of the warrant term during the six and three months ended June 30, 2024. 13 NOTE 6— INCOME TAXES The Company’s income tax provision differs from the expense that would result from applying statutory rates to income (loss) 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 (unaudited): SCHEDULE OF INCOME BEFORE INCOME TAX 2024 2023 Six Months Ended June 30, 2024 2023 Computed tax at the federal statutory rate of 21 % $ ( 127,240 ) $ ( 609,122 ) State income taxes, net of federal income tax benefit ( 26,327 ) ( 126,030 ) Change in federal valuation allowance 170,406 764,756 Foreign rate differential ( 16,839 ) ( 29,604 ) Total provision for income tax $ - $ - 2024 2023 Three Months Ended June 30, 2024 2023 Computed tax at the federal statutory rate of 21 % $ ( 63,551 ) $ ( 56,452 ) State income taxes, net of federal income tax benefit ( 13,149 ) ( 11,680 ) Change in federal valuation allowance 85,242 87,972 Foreign rate differential ( 8,542 ) ( 19,840 ) Total provision for income tax $ - $ - 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 and a total liability of $ 2,819,196 was recorded at December 31, 2023. 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. As disclosed in Note 3, the Company entered into a Purchase Agreement for the acquisition of NewStem shares not held by the Company. The Purchase Agreement provides for the Company to acquire all outstanding shares in exchange for shares of NovelStem stock and for the Company to fund $ 300,000 operating capital to NewStem within 30 days of the date of the Purchase Agreement. The Purchase Agreement was not consummated as no NovelStem shares were issued in exchange for NewStem shares. In the period subsequent to the signing of the Purchase Agreement, the Company was not able to obtain funding to meet the financial obligation of providing $ 300,000 in operating capital by July 21, 2024. As such, NewStem considers the Company in default of the Purchase Agreement and on July 30, 2024, the Company received a notice of material breach (the “Notice”) of the Purchase Agreement from NewStem. The Notice indicates that the failure to materially fulfill the financial obligation of the Purchase Agreement entitles NewStem to notify the Company that the Purchase Agreement is void and that the terms of Article 6 “Unwinding” of the Purchase Agreement enter into operation. Company management is currently in negotiation with NewStem management to determine the outcome of the situation as the Company’s position is that the Purchase Agreement was not completed or consummated and the transaction was not closed. On August 7, 2024, the Company refinanced it’s related party borrowings with a director and the Executive Chairman to borrow an additional $ 100,000 and extend the term of the debt to December 31, 2025. See Note 4. 14 NOVELSTEM INTERNATIONAL CORP. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in the following discussion and throughout this Form 10-Q that are not historical in nature are “forward-looking statements.” You can identify forward-looking statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this Form 10-Q because of numerous factors, many of which are beyond our control. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect actual outcomes. Overview We are a development stage company and reported net losses of approximately $606,000 and $3,144,000 for the six months ended June 30, 2024 and 2023, respectively, and $303,000 and $2,875,000 for the three months ended June 30, 2024 and 2023, respectively. We had current assets of approximately $29,000 and current liabilities of $3,516,000 as of June 30, 2024. As of December 31, 2023, our current assets and current liabilities were approximately $87,000 and $346,000, respectively. The significant increase in current liabilities is primarily due to the litigation funding agreement liability classification changing from noncurrent to current in January 2024. We have prepared our financial statements for the six months ended June 30, 2024 assuming that we will continue as a going concern. Our continuation as a going concern is dependent upon NewStem’s ability to successfully develop and commercialize its products, improving our profitability and the continuing financial support from our shareholders as well as obtaining additional outside funding. Our sources of capital in the past have included the sale of equity securities, which include common stock sold in private transactions, large alternative minimum tax refunds, and related party debt as well as debt from unrelated parties. NewStem is a development stage Israeli biotech limited liability company focused on pioneering intellectual property related to haploid human embryonic stem cells for the development of personalized diagnostics and therapeutics for genetic and epigenetic diseases. NewStem has incurred losses related to in process research and development since inception and the Company records our percentage allocation of these net losses as incurred. RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto and other financial information appearing elsewhere in this Form 10-Q. In the discussion below, general and administrative expenses are referred to as “G&A expenses”. Six Months Ended June 30, Three Months Ended June 30, 2024 2023 Change 2024 2023 Change Administrative fee income $ 6,000 $ - $ 6,000 $ 3,000 $ - $ 3,000 Operating expenses: G&A expenses 327,336 551,153 (223,817 ) 144,030 386,361 (242,331 ) Litigation expenses (contra expenses) (Note 7) - 2,332,663 (2,332,663 ) - 2,332,663 (2,332,663 ) Total operating expenses 327,336 2,883,816 (2,556,480 ) 144,030 2,719,024 (2,574,994 ) Loss from operations (321,336 ) (2,883,816 ) 2,562,480 (141,030 ) (2,719,024 ) 2,577,994 Other expenses: Gain on derivative instrument (25,000 ) 54,795 (79,795 ) - 54,795 (54,795 ) Interest expense 201,406 27,823 173,583 106,642 20,510 86,132 Total other expenses 176,406 82,618 93,788 106,642 75,305 31,337 Net loss before equity in net loss of equity method investees (497,742 ) (2,966,434 ) 2,468,692 (247,672 ) (2,794,329 ) 2,546,657 Equity in net loss of equity method investees (108,163 ) (177,147 ) 68,984 (54,953 ) (80,431 ) 25,478 Net loss $ (605,905 ) $ (3,143,581 ) $ 2,537,676 $ (302,625 ) $ (2,874,760 ) $ 2,572,135 We are a holding company whose primary assets are our ownership of equity interests in NewStem and NetCo. We conduct no other business and as a result, we have no revenue or cost of revenue. We do charge annual administrative fees to an affiliated entity. The Company incurs G&A expenses primarily related to professional fees, insurance and stock based compensation. We incurred G&A expenses of approximately $327,000 and $551,000 for the six months ended June 30, 2024 and 2023, respectively. Specifically, professional fees increased by approximately $34,000 in the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, primarily due to an increase in audit fees and general counsel legal fees. Other miscellaneous G&A expenses decreased by approximately $5,000. Stock compensation expense, included in G&A expenses, decreased by approximately $253,000 in the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 due to the cost incurred related to the extension of the term of outstanding warrants in May 2023. We incurred G&A expenses of approximately $144,000 and $386,000 for the three months ended June 30, 2024 and 2023, respectively. The decrease in G&A expenses relates primarily to an increase in professional fees of approximately $12,000 offset by a decrease in other general and administrative costs of approximately $3,000 and a decrease in stock compensation expense of approximately $251,000 related to the extension of the term of outstanding warrants in May 2023. 15 Interest expense increased by approximately $174,000 in the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 due to the increased debt incurred through June 30, 2024. Interest expense increased by approximately $86,000 in the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 due to the increased debt incurred through June 30, 2024. The Company has recorded no income tax expense as we have incurred operating losses and all deferred tax assets are fully offset by an income tax valuation allowance. We reported net losses from equity method investees in all periods presented. The net losses reported for the six months ended June 30, 2024 included a loss from NetCo of $2,920 and a loss from NewStem of $105,243. The net losses reported for the three months ended June 30, 2023 included net income of $7,875 from NetCo which was offset by net loss of $185,022 from NewStem. Liquidity and Capital Resources We have not paid dividends on our common stock since our name change and business focus shift in 2018. Our present policy is to apply cash to investments in product development at NewStem, acquisitions or expansion; consequently, we do not expect to pay dividends on common stock in the foreseeable future. We expect to continue to incur greater expenses in the near future as we expand our business, including funding NewStem, or enter into strategic partnerships. We also expect our G&A expenses to increase as we expand our administrative staff and add infrastructure. The Company will need to obtain additional funds to continue its operations. Management’s plans with regard to these matters include additional financing and fundraising until our equity investment in NewStem is profitable. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient cash from financing on terms acceptable to the Company, or that NewStem will become profitable. In May 2022, the Company entered into note agreements with Jan Loeb, our Executive Chairman and Jerry Wolasky, a member of the Board, to borrow up to an aggregate of $600,000 for working capital needs. The note agreements were amended in March 2024 to increase the total borrowing to $650,000 and extend the maturity date. The agreements provide for interest at a rate of 8% per annum, increased to 10% per annum for advances subsequent to November 11, 2022, and matured September 1, 2025. These note agreements were refinanced on August 7, 2024 at which time they were replaced with new note agreements providing for total borrowings of $750,000. The Company received additional advances on these agreements totaling $100,000 in August 2024. As of the date of this Quarterly Report, the full amount of $750,000 has been funded pursuant to these agreements. During the year ended December 31, 2023, the Company entered into a note agreement with a shareholder to borrow $300,000 for continued working capital. This note bears interest at zero percent (0%) and matures on May 5, 2025. The note includes a guarantee which has been identified as an embedded derivative with a fair value of a liability of $535,000 at June 30, 2024 and December 31, 2023. 16 In December 2023, the Company entered into two short term notes payable with unrelated parties for a total of $250,000 in borrowings utilized for the funding of NewStem. The notes bear interest at 12% per annum and mature December 21, 2024, at which time all principal and accrued interest are due and payable. The note agreements include a provision whereby, in the event of a capital raise transaction by the Company, the note holders would be entitled to participate in the transaction in an amount equal to 133% of the amounts owed on the note agreements at the closing of the transaction. In April 2024, the Company borrowed $100,000 from unrelated parties pursuant to convertible debt agreements. These agreements bear interest at $10% per annum and mature December 30, 2025. The unpaid principal balance of these notes and any accrued interest may be converted into shares of the Company’s common stock at a conversion price of $0.13 per share. Net Cash Used In Operating Activities. For the six months ended June 30, 2024, net cash used in operating activities was approximately $170,000, which consisted primarily of a net loss of approximately $606,000, offset by noncash equity in loss of equity method investees of approximately $108,000, accretion of discount on notes payable of approximately $89,000, stock based compensation of approximately $22,000 and interest added to notes payable of approximately $97,000 and reduced by gain on derivative instrument of $25,000. Additionally, cash was used in operations related to an increase in current assets of approximately $13,000 and an increase in accrued liabilities and other payables of approximately $132,000. For the six months ended June 30, 2023, net cash used in operating activities was approximately $197,000, which consisted primarily of a net loss of approximately $3,144,000, offset by noncash equity in loss of equity method investees of approximately $177,000 and distributions from equity method investees of approximately $8,000, stock based compensation of approximately $275,000 and interest added to notes payable of approximately $16,000. Additionally, cash was used in operations related to an increase in current assets of approximately $26,000 and an increase in accrued liabilities and other payables of approximately $45,000. Net Cash Used In Investing Activities. During the six months ended June 30, 2024, $250,000 was loaned to NewStem in an investing activity in anticipation of the Purchase Agreement. For the six months ended June 30, 2023, no net cash was used in investing activities. Net Cash Provided By Financing Activities. For the six months ended June 30, 2024, net cash provided by financing activities was $375,000, consisting of long-term borrowings from two directors and a significant stockholder totaling $275,000 and convertible debt of $100.000. For the six months ended June 30, 2023, net cash provided by financing activities was $225,000, consisting of long-term borrowings from two directors. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK This section is not applicable. ITEM 4. 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 June 30, 2024 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. 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. PART II ITEM 1. LEGAL PROCEEDINGS As noted above, NetCo owns all rights to the “Tom Clancy’s Net Force” intellectual property in all media, including film, television, and video games. As part of the joint venture, NetCo has published more than a dozen books and had an ABC miniseries. After Tom Clancy passed away in 2013, his estate and business partners refused to cooperate in exploiting the intellectual property. After trying to amicably resolve the dispute, the Company initiated arbitration proceedings with the American Arbitration Association. The Company’s arbitration demand asserted claims for breach of the joint venture agreement and breach of fiduciary duty. Both claims arise from C.P. Group’s failure to make reasonable, good faith efforts to exploit the full array of media rights relating to Net Force. The Company’s goal is to maximize the total potential value of the NetCo intellectual property across video games, streaming, digital media, merchandising and other ancillary markets. The Company believes that the value of the intellectual property is significant. 18 The arbitration evidentiary hearing concluded on October 20, 2022, and the arbitrator ordered the parties to submit post-hearing briefs. Final briefs were filed in January 2023. The Arbitrator ruled in the Company’s favor on two key issues of the arbitration and ruled against the Company in other key issues. 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). However, the arbitrator did not award any damages to the Company and did not cede operating control of the joint venture to the Company as requested. As such, the Company continues to struggle to maximize the potential of the NetCo asset. To fund efforts to maximize the value of NetCo, NovelStem has secured non-recourse litigation funding. As a result of this ruling, the costs related to the litigation funding agreement were recognized. All costs related to the litigation and the related litigation funding agreement were recorded by the Company for a total liability of $2,819,196. ITEM 1A. RISK FACTORS We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) Not applicable. (b) Not applicable. (c) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 10.1 Promissory Note Issued to Jan Loeb 10.2 Promissory Note Issued to Jerry Wolasky #31.1 Certification of Principal Executive Officer and Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. #31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. #32.1 Certification of Principal Executive Officer and Executive Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. #32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. #101.1 The following financial statements from NovelStem International Corp.’s Form 10-Q for the quarter ended June 30, 2024, filed on August 14, 2024, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Changes in Shareholders’ Equity, (iv) Condensed Statements of Cash Flows and (v) Notes to Condensed Financial Statements, tagged as blocks of text. 104 Cover Page Interactive Data File (embedded within the Inline XBRL document). # This exhibit is filed or furnished herewith. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. NOVELSTEM INTERNATIONAL CORP. Date: August 14, 2024 By: /s/ Jan Loeb Name: Jan Loeb Title: Executive Chairman 20