10-Q: NovelStem International Corp. Reports Q1 2024 Results, Cites Going Concern Uncertainty

NovelStem International Corp. reports a net loss for Q1 2024 and expresses substantial doubt about its ability to continue as a going concern.

Summary

• NovelStem International Corp. reported a net loss of $303,280 for the three months ended March 31, 2024, compared to a net loss of $268,821 for the same period in 2023.
• The company's administrative fee income was $3,000 for Q1 2024.
• General and administrative expenses totaled $183,306 for Q1 2024, up from $164,792 in Q1 2023.
• The company's share of the net loss from equity method investees was $53,210 for Q1 2024.
• As of March 31, 2024, NovelStem had current assets of $36,036 and current liabilities of $3,296,562.
• The company's ability to continue as a going concern is dependent on NewStem's success, shareholder support, and obtaining additional funding.
• Management plans include additional financing and fundraising until the NewStem investment becomes profitable.
• The company has finance agreements with shareholders and directors to borrow $650,000 and $300,000 for working capital.
• Additional finance agreements were entered into with unrelated parties in December 2023 and April 2024 to borrow $350,000 for working capital and to fund NewStem.
• The company has a nonrecourse litigation funding agreement with Omni Bridgeway related to an arbitration proceeding, resulting in a liability of $2,819,196 as of December 31, 2023.
• The company is in negotiations to acquire the remaining shares of NewStem in exchange for shares of NovelStem stock.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to the company's net losses, going concern uncertainty, material weaknesses in internal controls, and reliance on debt financing. While there are some positive aspects related to the arbitration outcome, the overall financial situation is concerning.

Positives

• The company recognized a gain on derivative financial instruments of $25,000 during the three months ended March 31, 2024.
• 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).

Negatives

• The company reported a net loss of $303,280 for the three months ended March 31, 2024.
• The company has a significant accumulated deficit of approximately $293,000,000.
• The company's current liabilities significantly exceed its current assets.
• The company's auditors have identified material weaknesses in internal controls.
• The company's ability to continue as a going concern is uncertain.
• NewStem Ltd. reported a net loss of $122,000 for the three months ended March 31, 2024 and has accumulated losses of $9,211,000 since inception.
• 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.

Risks

• The company's ability to obtain additional funding is uncertain.
• NewStem's ability to successfully develop and commercialize its products is uncertain.
• The company's reliance on related party debt financing poses a risk.
• The company's material weaknesses in internal controls could lead to financial misstatements.
• The ongoing negotiations to acquire the remaining shares of NewStem may not be successful.
• The war in Israel has created economic and business uncertainty for NewStem.
• The company's arbitration with its NetCo partner did not result in an award of damages or a change in operating control.

Future Outlook

The company expects to continue to incur greater expenses in the near future as it expands its business, including funding NewStem, or enters into strategic partnerships. The company also expects its G&A expenses to increase as it expands its administrative staff and adds infrastructure. Management anticipates the transaction to conclude in the second quarter of 2024.

Management Comments

• Managements 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.

Industry Context

The biotech industry is inherently risky, with many companies in the development stage facing challenges in securing funding and achieving profitability. NovelStem's focus on personalized diagnostics and therapeutics aligns with the broader industry trend towards precision medicine, but the company's financial challenges and reliance on related party debt are concerning.

Comparison to Industry Standards

• It is difficult to compare NovelStem's results to industry standards due to its unique business model as a holding company with investments in early-stage biotech and media ventures.
• Many comparable biotech companies are focused on specific therapeutic areas and have more advanced clinical pipelines.
• NovelStem's reliance on related party debt is higher than many of its peers, which typically rely on venture capital or public equity financing.
• The company's going concern warning is a significant concern and is not typical for publicly traded biotech companies.

Legal Proceedings

• The Company was the claimant in an arbitration proceeding against their 50 % partner in NetCo.
• 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).

Related Party Transactions

• The company has finance agreements with two individuals who are shareholders and directors to borrow $650,000 and an additional finance agreement with a shareholder to borrow $300,000 for working capital needs.
• 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.

Stakeholder Impact

• Shareholders face the risk of further dilution if the company raises additional equity financing.
• Employees may be affected by cost reduction measures and potential layoffs.
• Customers of NetCo may be impacted by the company's ability to exploit the Net Force intellectual property.
• Creditors face the risk of non-payment if the company is unable to continue as a going concern.

Next Steps

• The company needs to secure additional funding to continue operations.
• The company needs to improve NewStem's performance and profitability.
• The company needs to address the material weaknesses in internal controls.
• The company needs to successfully negotiate and complete the acquisition of the remaining shares of NewStem.
• The company needs to maximize the potential of the NetCo asset.

Key Dates

Keywords

NovelStem, NewStem, NetCo, Financial Results, Going Concern, Biotech, Litigation Funding, Equity Investment, Notes Payable, Arbitration