Novelstem International Corp. - 10-K

Item 1A. Risk Factors.

Our business is subject to certain risks, including those described below. If any of the events described in the following risk factors actually occurs then our business, results of operations and financial condition could be materially adversely affected. More detailed information concerning these risks is contained in other sections of this registration statement, including “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risks Relating to our Business

We are a holding company, the principal assets of which are illiquid rights to a licensing agreement.

Our Company’s primary asset is the residual value of relicensing the License formerly held by NewStem.

We conduct no other business and, as a result, we depend entirely upon earnings and cash flow from the License held by Yissum. If we decide in the future to pay dividends, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of profits from this license agreement.

We depend on our executive officers and consultants and other key individuals along with the executive officers and key individuals of NewStem to continue the implementation of our long-term business strategy and could be harmed by the loss of their services and our inability to make up for such loss with qualified replacements.

We believe that our future success will depend in large part on the skills of our management team and the management team of Yissum related to subsequent monetization of the License. The loss of any of the key individuals’ services could reduce our ability to successfully implement our long-term business strategy which may result in a loss of revenue, and the value of our common stock could be materially adversely affected. Leadership changes will occur from time to time, and we cannot predict whether significant resignations will occur. We believe these management teams possess valuable knowledge about our and former NewStem’s respective industries and that their knowledge and relationships would be very difficult to replicate. The loss of key personnel, or the inability to recruit and retain qualified and talented personnel in the future, could have an adverse effect on our business, financial condition and/or operating results.

We have limited operating histories and have generated minimal revenue to date.

We have a limited operating history and do not have a meaningful historical record of sales and revenues, nor do we have an established business track record. While we believe that we have the opportunity to be successful, there can be no assurance that we will be successful in accomplishing our business initiatives, or that we will be able to achieve any significant levels of revenue or net income.

We have identified material weaknesses in our internal control and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.

Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. We have re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of December 31, 2025 and we concluded there was a material weakness in the design of our internal control over financial reporting.

A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Rapid technological change could cause the License to become obsolete.

Success from NewStem’s efforts will depend upon the ability of Yissum to relicense the technology supported by the License.

The technologies underlying NewStem’s products and the license technology are subject to rapid and profound technological change. Competition intensifies as technical advances in each field are made and become more widely known. We can give no assurance that others will not develop services, products, or processes with significant advantages over the products, services, and processes that have developed. Any such occurrence could have a material and adverse effect on our business, results of operations and financial condition.

Yissum plans to find new users for the technology based on the License. The success of a future licensee to enhance and broaden its product offerings in response to changing customer demands and competitive pressure and technologies will depend on numerous factors, including the ability to:

Properly identify and anticipate physician and patient needs;

Develop and introduce new products or product enhancements in a timely manner;

Adequately protect intellectual property and avoid infringing upon the intellectual property rights of third parties;

Demonstrate the safety and efficacy of new products; and

Obtain the necessary regulatory clearances or approvals for new products or product enhancements.

Risks relating to our common stock

Because our holding company structure creates restrictions on the payment of dividends, our ability to pay dividends is limited.

We are a holding company whose primary asset is our right to income from the License. We currently conduct no other business and, as a result, we depend entirely upon cash flow from the License. If we decide in the future to pay dividends, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of cash flow from the License. We do not presently have any intention to declare or pay dividends in the future. You should not purchase shares of our common stock in anticipation of receiving dividends in future periods.

Because we do not intend to pay any cash dividends on our common stock, our shareholders will not be able to receive a return on their shares unless they sell them.

We intend to retain any future earnings to reduce debt. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our shareholders will not be able to receive a return on their shares unless they sell them. Shareholders may never be able to sell shares when desired. Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.

Reporting requirement under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), including establishing and maintaining acceptable internal controls over financial reporting, are costly and may increase substantially.

The rules and regulations of the SEC require a public company to prepare and file periodic reports under the Exchange Act, which require that the Company engage legal, accounting, auditing and other professional services. The engagement of such services is costly. Additionally, the Sarbanes-Oxley Act requires, among other things, that we design, implement and maintain adequate internal controls and procedures over financial reporting. The costs of complying with the Sarbanes-Oxley Act and the limited technically qualified personnel we have may make it difficult for us to design, implement and maintain adequate internal controls over financial reporting. In the event that we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls, we may not be able to produce reliable financial reports or report fraud, which may harm our overall financial condition and result in loss of investor confidence and a decline in our share price.

We are working with our legal, accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, we anticipate that the expenses that will be required in order to adequately prepare for being a public company could be material. We estimate that the aggregate cost of increased legal services; accounting and audit functions; consultants to design and implement internal controls; and financial printing alone will be a few hundred thousand dollars per year and could be several hundred thousand dollars per year. In addition, we may incur additional expenses related to director compensation and/or premiums for directors’ and officers’ liability insurance, the costs of which we cannot estimate at this time. We may also incur additional expenses associated with investor relations and similar functions, the cost of which we also cannot estimate at this time. However, these additional expenses individually, or in the aggregate, may also be material.

The continued increased costs associated with operating as a public company may decrease our net income or increase our net loss and may cause us to reduce costs in other areas of our business. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

There is a very limited trading market for our common stock and investors are not assured of the opportunity to sell their stock, should they desire to do so.

Our common stock is currently quoted on the OTC Pink Market. However, our stock has traded in very limited quantities in the past. We believe a significant factor in the limited market is our limited capitalization and liquidity, results of operations and the characterization of our stock as a “penny stock.” We hope to remedy our financial condition and results of operation in the future. This, in turn, may assist us in obtaining listing of our stock on other exchanges. However, there is no assurance that any of these objectives will be met or that the market will ever increase to a point where investors could sell their stock at a desirable price, should they desire to do so.

The price of our common stock could be highly volatile.

Our shares of common stock are quoted on the OTC Pink Market. It is likely that our common stock will be subject to price volatility, low volumes of trades and large spreads in bid and ask prices quoted by market makers. Due to the low volume of shares traded on any trading day, persons buying or selling in relatively small quantities may easily influence prices of our common stock. This low volume of trades could also cause the price of our stock to fluctuate greatly, with large percentage changes in price occurring in any trading day session. Holders of our common stock may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due to low volume trading. If high spreads between the bid and ask prices of our common stock exist at the time of a purchase, the stock would have to appreciate substantially on a relative percentage basis for an investor to recoup their investment. Broad market fluctuations and general economic and political conditions may also adversely affect the market price of our common stock. No assurance can be given that an active market in our common stock will be sustained. If an active market does not continue, holders of our common stock may be unable to readily sell the shares they hold or may not be able to sell their shares at all.

We may be deemed an investment company, which could impose on us burdensome compliance requirements.

The Investment Company Act of 1940, as amended (the “Investment Company Act”), requires companies to register as an investment company if they are engaged primarily in the business of investing, reinvesting, owning, holding, or trading securities. Generally, companies may be deemed investment companies under the Investment Company Act if they are viewed as engaging in the business of investing in securities or they own investment securities having a value exceeding 40% of certain assets. We are not in the business of investing, reinvesting, owning, holding or trading securities. However, if the Securities and Exchange Commission deems us to be an investment company, we may have imposed upon us additional burdensome requirements, including having to register as an investment company, adopting a specific form of corporation structure and having to comply with certain reporting, record keeping, voting, proxy, and disclosure requirements. Such additional requirements would require us to incur additional costs and have an adverse effect on our results of operations and our ability to effectively carry out our business plan.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion includes statements that are forward-looking in nature. Whether such statements ultimately prove to be accurate depends on a variety of factors that may affect our business and operations. Certain of these factors are discussed in “Item 1A. Risk Factors.”

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto and other financial information appearing elsewhere in this report.

Overview

We are a development stage company and reported net income (losses) of approximately $2,380,000 and $(3,233,000) for the years ended December 31, 2025 and 2024, respectively. We had current assets of approximately $16,000 and current liabilities of approximately $2,157,000 as of December 31, 2025. As of December 31, 2024, our current assets and current liabilities were approximately $32,000 and $5,304,000, respectively. We have prepared our financial statements for the years ended December 31, 2025 and 2024 assuming that we will continue as a going concern. Our continuation as a going concern is dependent upon improving our profitability and the continuing financial support from our shareholders as well as Yissum’s ability to successfully commercialize the License. Our sources of capital in the past have included the sale of equity securities, which include common stock sold in private transactions, and short-term debt. During the current year, we entered into a bridge loan agreement with our Executive Chairman to obtain funding for current operating expenses.

Critical Accounting Policies

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and my change in subsequent periods.

The following discussion of critical accounting policies represents our attempt to report on these accounting policies which we believe are critical to our financial statements and other financial disclosures. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 2 of the Notes to the Financial Statements included in this Annual Report.

We have identified our accounting policies for stock-based compensation and accounting for derivative liabilities as critical accounting policies.

We recognize stock-based compensation expense based on the fair value recognition provision of applicable accounting principles, using the Black-Scholes option valuation method. Accordingly, we are required to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the period during which services are provided in exchange for the award. Under the Black-Scholes method, we make assumptions with respect to the expected lives of the options that have been granted and are outstanding, the expected volatility, the dividend yield percentage of our common stock and the risk-free interest rate at the respective dates of grant.

The Company did not grant any options during the year ended December 31, 2025. The expected volatility factor used to value stock options granted in 2024 was based on the historical volatility of the market price of our common stock over the period from our change to a biotechnology company, September 2018, through December 2024. For the expected term of the option, we used an estimate of the expected option life based on historical experience. The risk-free interest rate used is based upon U.S. Treasury yields for a period consistent with the expected term of the options. We assumed no quarterly dividend rate. Due to the numerous assumptions involved in calculating stock-based compensation expense, the expense recognized in our financial statements may differ significantly from the value realized by option holders on exercise of the share-based instruments. In accordance with the prescribed methodology, we do not adjust our recognized compensation expense to reflect these differences.

For the years ended December 31, 2025 and 2024, we incurred stock compensation expense with respect to options of approximately $8,800 and $40,000, respectively.

See Note 5 to the financial statements for the assumptions used to calculate the fair value of stock-based compensation.

In accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, we identify and, if applicable, bifurcate embedded derivatives in financial instruments. Those embedded features that are identified, bifurcated and accounted for separately are measured at fair value continuously at each financial statement reporting date. If the fair value of a financial liability (the derivative) exceeds the proceeds received for the issuance of a hybrid instrument in an arm’s length transaction with no rights or privileges that require separate accounting recognition as an asset identified, then we record the embedded derivative at fair value with the excess of fair value over proceeds recognized as a loss in earnings. Our only identified derivative was terminated as part of the amendment of a note payable to a shareholder during the year ended December 31, 2025.

Results of Operations

The selected statement of operations data for the years ended December 31, 2025 and 2024 and balance sheet data as of December 31, 2025 and 2024 have been derived from our audited financial statements included in this Annual Report.

This data should be read in conjunction with our financial statements and related notes included herein.

Selected Statement of Operations Data:

Years Ended December 31,

Change

Administrative fee income

Operating expenses:

G&A expenses

Litigation expenses (contra expenses)

Total operating expenses

Loss from operations

Other (income) expenses:

Loss on derivative instrument

Gain on disposal of equity method investment

Relief of indebtedness income

Interest expense

Total other (income) expenses

Net income (loss) before equity in net income (loss) of equity method investees

Equity in net income (loss) of equity method investees

Impairment loss on equity method investee

Net income (loss)

2025 Compared to 2024

We are a holding company whose primary asset currently is our right to the monetization of the former NewStem license now held by Yissum. We currently conduct no other business and as a result, we have no operating revenue or cost of revenue. We did charge annual administrative fees to an affiliated entity through the year ended December 31, 2024.

The Company incurs general and administrative (“G&A”) expenses primarily related to professional fees, insurance and stock-based compensation. We incurred G&A expenses of approximately $239,000 and $881,000 for the years ended December 31, 2025 and 2024, respectively. Our decrease in G&A expenses relates primarily to decreases in bad debt expense, stock-based compensation and professional fees incurred in the audit of our financial statements for the years ended December 31, 2025 and 2024, preparation of our quarterly reports for 2025 and 2024, and for documents and advice related to our attempt to purchase the remaining shares of NewStem in 2024.

Specifically, we wrote off as bad debt uncollected management fees of $9,500 during the year ended December 31, 2025 as compared to the net balance due from NewStem of $458,000 in the year ended December 31, 2024, and professional fees decreased by approximately $145,000 in the year ended December 31, 2025 as compared to the year ended December 31, 2024. Insurance costs decreased by approximately $17,000 in the year ended December 31, 2025 as compared to the year ended December 31, 2024.

Total stock compensation expense, included in G&A expenses, decreased by approximately $31,000 in the year ended December 31, 2025 as compared to the year ended December 31, 2024 due to the fact that no options were awarded during the current fiscal year.

The remaining decrease in G&A expenses of approximately $700 during the year ended December 31, 2025 consists primarily of decreases in expenses related to investor relations and information technology.

We incurred costs related to litigation and the related litigation funding agreement involving our former settled arbitration with our NetCo joint venture partner of approximately $59,000 during the year ended December 31, 2024.

The Company has recorded a loss on derivative instruments of $90,000, for the year ended December 31, 2024 related to a guarantee previously included in the note payable shareholder entered into in May 2023. The guarantee was removed in an amendment to the note payable during the year ended December 31, 2024, terminating the derivative.

The Company reported a gain on disposal of equity method investment of approximately $1,172,000 during the year ended December 31, 2025 related to the sale of our investment in NetCo. We also reported relief of indebtedness income of approximately $1,697,000 related to the cancellation of the remaining balance on the litigation funding agreement from the same transaction.

The Company recorded an impairment loss of approximately $1,629,000 during the year ended December 31, 2024 related to its investment in NewStem. This loss reduced our investment in NewStem to zero ($0.00) as of December 31, 2024. This adjustment was made in response to the fact that NewStem ceased operations and was in the process of liquidation. The technology and license held by NewStem reverted to the original licensee, Yissum, and the Company retains a right to a share of future licensing or monetization of the technology and license. The Company does expect to recover some value from the license, up to a total of $3,750,000, however, as of December 31, 2025 and 2024, the realization of this value is not certain, therefore has not been recorded by the Company. During the year ended December 31, 2025, the Company received approximately $5,000 from the liquidation of the remaining assets of NewStem which was reported as a partial recovery of the impairment loss.

Interest expense decreased by approximately $169,000 in the year ended December 31, 2025 as compared to the year ended December 31, 2024. The decrease in interest expense is primarily related to the reduction of interest from the settlement of the litigation funding agreement offset by increased debt incurred for operations.

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 income and losses from equity method investees during the years ended December 31, 2025 and 2024. The net income reported for the year ended December 31, 2025 included net income of $640 from NetCo. Net losses reported for the year ended December 31, 2024 included net loss of approximately $5,000 from NetCo combined with net loss of approximately $156,000 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.

The Company will need to obtain additional funds to continue its operations. Management’s plans with regard to these matters include fundraising until our interest in NewStem’s technology via monetization of the License 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’s technology will be monetized and become profitable.

During the year ended December 31, 2022, the Company entered into note agreements with Jan Loeb, our Executive Chairman and Jerry Wolasky, a member of the Board, to borrow up to an aggregate of $600,000 for working capital needs. The note agreements were amended in March 2024 to increase the total borrowing to $650,000 and extend the maturity date. The note agreements were refinanced in August 2024 providing for total borrowings of $750,000 and extending the maturity date to December 31, 2025. The agreements provide for interest at a rate of 10% per annum. Prior to the filing of this Annual Report, the maturity date of these notes was extended to June 30, 2026.

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 bore interest at zero percent (0%) and matured on May 5, 2025. The note included a guarantee which has been identified as an embedded derivative with a fair value of a liability of $650,000 at December 31, 2024. This note was amended in May 2025 to provide for fixed interest, remove the guarantee and extend the maturity date to September 30, 2025. This note was amended for a second time in October 2025 to extend the maturity date to December 31, 2026.

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 matured December 21, 2025, at which time all principal and accrued interest were due and payable. Prior to the filing of this Annual Report, the maturity date of these notes was extended to June 30, 2026. 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 accounted for as debt. These agreements bear interest at 10% per annum and matured December 30, 2025. Prior to the filing of this Annual Report, the maturity dates have been extended to June 30, 2026.

During the year ended December 31, 2025, the Company borrowed $161,867 from the Executive Chairman in the form of an interim bridge loan until alternate funding sources can be found. The Company is accruing interest at 10% per annum for these advances. The agreement matured December 31, 2025. Prior to the filing of this Annual Report, the maturity date has been extended to June 30, 2026.

On May 9, 2025 the Company sold its interest in NetCo to its JV partner for $1,300,000 which was paid directly to Omni Bridgeway in full settlement of all liabilities related to the litigation funding agreement totaling $2,959,625.

Net Cash Used In Operating Activities.

For the year ended December 31, 2025, net cash used in operating activities was approximately $168,000, which consisted primarily of a net income of approximately $2,380,000 reduced by noncash gain of approximately $1,172,000 from the sale of our interest in NetCo and the related noncash relief of indebtedness income from the settlement of the litigation funding agreement with Omni Bridgeway of $1,697,000, stock-based compensation of approximately $9,000. Further offset by accretion of discount on notes payable of $60,000 and interest added to notes payable and convertible debt of approximately $194,000. Additionally, cash was used in operations related to an increase in current assets of approximately $10,000 and an increase in accrued liabilities and other payables of approximately $48,000.

For the year ended December 31, 2024, net cash used in operating activities was approximately $272,000, which consisted primarily of a net loss of approximately $3,233,000, offset by noncash equity in loss of equity method investees of approximately $161,000, impairment of equity method investees of approximately $1,629,000, bad debt expense of $500,000, and stock-based compensation of approximately $40,000. Further offset by loss on derivative instrument of $90,000, accretion of discount on notes payable of $178,000 and interest added to notes payable and convertible debt of approximately $215,000. Additionally, cash was used in operations related to an increase in current assets of approximately $8,000 and an increase in accrued liabilities and other payables of approximately $140,000.

Net Cash Used In Investing Activities.

During the year ended December 31, 2024, the Company loaned $250,000 to NewStem in anticipation of a purchase transaction. This transaction was not consummated and NewStem ceased operations and began liquidation proceedings in October 2024, resulting in the loan becoming uncollectible. As such, the Company determined the note was uncollectible and wrote the balance, including $250,000 loaned in 2023, off as a bad debt during the year ended December 31, 2024.

Net Cash Provided By Financing Activities.

For the year ended December 31, 2025, net cash provided by financing activities was $161,867, consisting of advances on the bridge loan payable to our Executive Chairman.

For the year ended December 31, 2024, net cash provided by financing activities was $475,000, consisting of long-term borrowings from two directors and a stockholder totaling $375,000 and borrowings from convertible debt with unrelated parties of $100,000.

Off-Balance Sheet Arrangements

We are not party to any off-balance sheet transactions.

Contractual Obligations and Commercial Commitments

As of December 31, 2025, we had a contractual obligation related to our directors’ and officers’ insurance providing for 10 monthly installments of $5,109 payable through June 2026.

As of December 31, 2024, we had a contractual obligation related to our directors’ and officers’ insurance providing for 10 monthly installments of $5,127 payable through June 2025.