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EX-32.2 - Emerald Medical Applications Corp.ex32-2.htm
EX-32.1 - Emerald Medical Applications Corp.ex32-1.htm
EX-31.2 - Emerald Medical Applications Corp.ex31-2.htm
EX-31.1 - Emerald Medical Applications Corp.ex31-1.htm

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

FORM 10-K

 

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

Commission file number 0-15476

 

EMERALD MEDICAL APPLICATIONS CORP.

(Exact Name Of Registrant As Specified In Its Charter)

 

Delaware   68-0080601
(State of Incorporation)   (I.R.S. Employer Identification No.)
     
7 Imber Street, Petach Tikva, Israel   4951141
(Address of Principal Executive Offices)   (ZIP Code)

 

Registrant’s Telephone Number, Including Area Code: +(972) 3-744-4505

 

Securities Registered Pursuant to Section 12(g) of The Act: Common Stock, $0.0001

 

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 [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

On June 30, 2016, the aggregate market value of the 5,713,985 shares of common stock held by non-affiliates of the registrant was approximately $3,999,789 based on the closing price of $0.70 of the Registrants common stock on June 30, 2016. On December 31, 2016, the Registrant had 19,962,728 shares of common stock outstanding.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act) or a smaller reporting company.

 

Large accelerated filer [  ] Accelerated filer [  ] Non-Accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

 

 

 
 

 

TABLE OF CONTENTS

 

Item  Description  Page
 
PART I
ITEM 1.  DESCRIPTION OF BUSINESS  3
ITEM 1A.  RISK FACTORS  11
ITEM 1B.  UNRESOLVED STAFF COMMENTS  19
ITEM 2.  PROPERTIES  19
ITEM 3.  LEGAL PROCEEDINGS  19
ITEM 4.  MINE SAFETY DISCLOSURES  19
       
PART II
 
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY  20
ITEM 6.  SELECTED FINANCIAL DATA  23
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND PLAN OF OPERATION  23
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK  25
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  26
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  47
ITEM 9A.  CONTROLS AND PROCEDURES  47
ITEM 9B.  OTHER INFORMATION  47
       
PART III
 
ITEM 10.  DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  48
ITEM 11.  EXECUTIVE COMPENSATION  50
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS  52
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE  52
ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES  53
       
   PART IV   
       
ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  54

 

 
 

 

Cautionary Statement regarding Forward-Looking Statements

 

This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Registrant has based these forward-looking statements on its current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about the Registrant that may cause its actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in this Annual Report on Form 10-K and in the Registrant’s other Securities and Exchange Commission filings.

 

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PART I

 

ITEM 1. DESCRIPTION OF BUSINESS

 

Overview

 

Our wholly-owned subsidiary, Emerald Medical Applications Ltd., was organized as a privately-owned company under the laws of the State of Israel on February 17, 2010. Emerald is digital health startup company engaged in the development, sale and service of imaging solutions utilizing its proprietary DermaCompare software that it developed for use in derma imaging and analytics (“DermaCompare”). Emerald believes that its proprietary DermaCompare software represents an advancement in skin cancer screening that should enable physicians to more readily identify and monitor changes in their patients’ skin characteristics.

 

Emerald’s DermaCompare solution allows dermatologists and other medical care professionals, using a set of 25 total body photography (“TBP”), to capture sets of skin lesion images with, among other devices, digital cameras and camera-equipped smart phones. These images are then transmitted online and are remotely analyzed by professionals using our DermaCompare software.

 

Our sales and marketing plan, which has already commenced, is to sell services for our DermaCompare imaging software to: NHSs, HMOs, health insurance companies, hospitals and medical clinics through distributers, health care channel partners or directly through independent salespersons and/or web purchase to dermatologists and other physicians (GPs) that we expect to purchase licenses based on the number of potential numbers of patients.

 

In furtherance of our business plan, which has resulted in us becoming an operating company, Emerald has entered into a series of agreements with unaffiliated third parties for the distribution of its DermaCompare Technology, as follows:

 

1. On August 12, 2013, Emerald entered into an exclusive distribution with Derma Italy Sri, organized under the laws of the Italy (“Derma Italy”), pursuant to which Derma Italy was granted exclusive distribution rights in Italy;

2. On December 1, 2013, Emerald entered into a distribution agreement with S. Bokhorst - Creatiekracht, organized under the laws of the Netherlands, pursuant to which S. Bokhorst was granted exclusive distribution in the Netherlands;

3. On February 6, 2014, Emerald entered into a distribution agreement with Medical Edge Pty Ltd, organized under the laws of Australia (“Medical Edge”), pursuant to which Medical Edge was granted exclusive distribution rights in the markets of Australia, New Zealand and Oceania;
 

 4. On January 14, 2015, Emerald entered into a Project Agreement with Realize S.A. and Ubitech, entities engaged in IT related to medical technology in Greece, and MEDISP and MPUoP, academic and research institutes in Greece (collectively, the “Greek Partners”). Emerald and the Greek Partners anticipate imminent grants from the Office of Chief Scientist of the State of Israel and the General Secretariat for Research and Technology of Greece, respectively, the proceeds of which will be used for development of enhanced smartphone applications for diagnosis of early stage Melanoma. The development of the Mark1, bi literal plan was finished successfully and approved by the Office of the Chief Scientist of Israel in February 2017.

 

  Notwithstanding our belief that DermaCompare represents a significant advance on existing technologies, there are a number of potential difficulties that we might face, including the following:

 

  We may not be able to raise sufficient additional funds to fully implement our business plan;
     
  Competitors may develop alternatives that render our DermaCompare software solution redundant or unnecessary;
     
  We may not obtain and maintain sufficient protection of our intellectual property;
     
  Our DermaCompare software may be shown to have characteristics that indicate it may be ineffective;
     
  Our DermaCompare may not be accepted by physicians including dermatologists and the medical community in general; and
     
  Strict government regulations and inappropriate reimbursement policies, especially in emerging economies, may hinder the growth of the dermatology device market.

 

During the twelve months ended December 31, 2016, we raised $948,978 in equity and debt capital and we may be expected to require up to an additional $1.5 million in capital during the next 12 months to fully implement our business plan and fund our operations.

 

Overview of Melanoma

 

Melanoma is a type of skin cancer which forms from melanocytes (pigment-containing cells in the skin), is very aggressive cancer and, at present, there is no cure for Melanoma.

 

There are 4 main types of skin cancer: (i) basal cell carcinoma; (ii) squamous cell carcinoma; (iii) melanoma; and (iv) actinic keratosis, all of which can be diagnosed in early stage, by tracking the moles and other skin changes, which are evidenced by new moles (60%), and changed moles (40%), based on ABCD dermatology method. Melanoma, which causes an average of 5% average of skin cancer cases and unlike the other types of skin cancer, is the most aggressive and, in later stages of development (stage 3- or 4) can cause death. At present, there are treatments for patients in later stage melanoma, but still there is no cure.

 

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In women, the most common location is the legs. Melanomas in men are most commonly located on the back. It is particularly common among Caucasians, especially northern Europeans and northwestern Europeans, as well as those living in sunny climates. Melanoma rates are higher in Oceania, North America, Europe, Southern Africa, and Latin America. This geographic pattern reflects the primary cause of Melanoma, ultraviolet light (UV) exposure in conjunction with the amount of skin pigmentation in the population. Melanocytes produce the dark pigment, melanin, which is responsible for the color of skin. These cells predominantly occur in skin, but are also found in other parts of the body, including the bowel and the eye. Melanoma can originate in any part of the body that contains melanocytes.

 

The treatment includes surgical removal of the tumor. If Melanoma is detected early, while it is still relatively small and thin in depth, and provided that it is timely removed or otherwise treated, the cure rates are very high. The likelihood that the Melanoma will reoccur or spread depends on how deeply it has penetrated into the layers of the skin. For Melanomas that come back or spread, treatments include chemo- and immunotherapy and/or radiation therapy. According to National Cancer Institute statistics, the survival rates in the US after five years are is on average 91%.

 

According to the World Health Organization (“WHO”),The incidence of both non-melanoma and melanoma skin cancers has been increasing over the past decades. Currently, between 2 and 3 million non-melanoma skin cancers and 132,000 melanoma skin cancers occur globally each year. One in every three cancers diagnosed is a skin cancer and, according to Skin Cancer Foundation Statistics, one in every five Americans will develop skin cancer in their lifetime.

 

As ozone levels are depleted, the atmosphere loses more and more of its protective filter function and more solar UV radiation reaches the Earth’s surface. It is estimated that a 10 per cent decrease in ozone levels will result in an additional 300,000 non-melanoma and 4,500 melanoma skin cancer cases. The global incidence of melanoma continues to increase – however, the main factors that predispose to the development of melanoma seem to be connected with recreational exposure to the sun and a history of sunburn. These factors lie within each individual’s own responsibility.

 

Some individual risk factors for skin cancer

 

fair skin
   
blue, green or hazel eyes
   
light-coloured hair
   
tendency to burn rather than suntan
   
history of severe sunburns
   
many moles
   
freckles
   
a family history of skin cancer

 

According to NIH statistics, estimated new cases of melanoma in 2016 are 76,380, and 10,130 deaths.

 

Number of New Cases and Deaths per 100,000: The number of new cases of melanoma of the skin was 21.8 per 100,000 men and women per year. The number of deaths was 2.7 per 100,000 men and women per year. These rates are age-adjusted and based on 2009-2013 cases and deaths.

 

Lifetime Risk of Developing Cancer: Approximately 2.1 percent of men and women will be diagnosed with melanoma of the skin at some point during their lifetime, based on 2011-2013 data.

 

Prevalence of This Cancer: In 2013, there were an estimated 1,034,460 people living with melanoma of the skin in the United States.

 

 

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The Dermatology Device Market

 

Various devices are used by dermatologists and surgeons to diagnose skin disorders and accurately determine the types of conditions and the treatments required. At present, the dermatology devices market consists of two segments:(i) diagnostic devices market; and (ii) treatment devices market. Our Product is part of the diagnostic device market aimed at increasing the speed and accuracy of skin disorder diagnosis at an early stage.

 

The respected research firm, “MarketsandMarkets.com,” has forecast that the global market for dermatology devices to grow from $6.6 billion in 2014 to $11.3 billion by 2019 and the market in North America, a primary market that we hope to compete in, is expected to reach approximately $5.2 billion by 2019. The key factors expected to drive the forecasted growth are: (i) a rise in skin disorder incidence; (ii) an increase in awareness of available aesthetic procedures; (iii) advances in technology and rising prices; and (iv) the recognition by the population of the harmful effects of to exposure to the sun on skin. All of the forgoing are major contributing factors towards the increasing number of people that become more skin and health conscious.

 

The global dermatology devices market includes two distinct segments:

 

  Diagnostic devices, such as dermatoscopes, microscopes and imaging techniques; and
     
  Applications of these diagnostic devices, such as imaging processing software, skin cancer diagnosis technology, hair removal and wrinkle removal

 

Based on the 2014 MarketsandMarkets.com report, imaging techniques accounted for the largest share of the diagnostic devices segment. Skin cancer diagnosis technologies represents the largest share of the device applications market.

 

The global dermatology devices market is expected to grow faster due to the increasing number of people suffering from skin-related disorders and the number of people opting for less invasive cosmetic surgeries. These are important factors contributing to the increasing demand of dermatology devices, which, in turn, is expected to contribute to demand for our DermaCompare software solution.

 

Dermatology devices and respective applications are rapidly gaining popularity not only due to their major role in aesthetic but also the rising numbers of skin disorders such as vascular and pigmented lesions, skin cancer, acne problems and other conditions that vary in different regions of the world.

 

Geographically, at this stage we plan to cover Israel and Europe, base our activity and then seek to penetrate the US market and other developed countries.

 

Our Market Opportunity

 

The challenge for dermatologists is the detection of skin cancer in its early stages, which is crucial for patient survival. Approximately 60% of melanomas occur as a result of a new mole, while the remaining 40% are the result of a mole that has changed. Since the human body dynamically changes over time, dermatologists are still using manual techniques, which are time-consuming and, as a result, costly, often inaccurate and not readily available for population-wide screening. The most recent innovation in the skin cancer detection field is Total Body Photography (“TBP”), typically a set of 25 photos that cover the entire skin surface of the patient, and was adopted by dermatologists approximately fifteen years ago. At present, dermatologists recommend doing TBP on a yearly basis, comparing the photographs and detecting the key differences.

 

We believe that the most significant research in skin cancer detection over the last decade has been conducted principally in the state of Schleswig-Holstein, Germany. This has involved the use of manually taken TBP which, from an efficacy study performed for the early detection of skin cancer, found a 30% increase in the early discovery of skin cancer, resulting in approximately 90% of melanomas being diagnosed at an early stage and with mortality rates decreasing by approximately 50% of that expected five years after the study. As a result of the study, since 2008, the country has mandated a nationwide statutory plan for a bi-annual early screening of skin cancer for citizens aged 35.

 

Based on our estimates, there are approximately 420 million people, representing 7% of the total world population, that can be defined as within the Melanoma high risk group; the majority of which are living in the Western hemisphere. Melanoma patients are more likely to be found in countries with warm and sunny weather. The disease is, however, also prevalent in other regions such as China, India and elsewhere in the Far-East.

 

At present, the most conventional and widely-used visualization method is a standard photograph followed by manual image analysis and then comparing these images with previously taken photographic images to reach a diagnosis. This traditional method has several disadvantages, including the fact that only the outermost layer of skin is imaged and subjected to diagnosis, the visual comparison process is time-consuming, expensive, and often inaccurate because it is dependent on the dermatologists’ eyes only. The standard conventional photograph method, although inexpensive, is inefficient and laborious for examination purposes and limits the market to dermatologists and specialized physicians.

 

By revolutionizing the fundamental approach in which skin lesions and/or Melanoma is diagnosed, especially in the early stages, we reasonably expect that our DermaCompare product should be well-positioned to become one of the leading applications in the market, although there can be no such assurance. We hope that this will be achievable by replacing the need for manual photo image analysis with automated image analytics software using advanced algorithms of our DermaCompare process for anchoring, identifying and detecting changes in the shapes, color and sizes of skin lesions. We also plan to utilize available large data bases together with new “computer learning” and “artificial intelligence” techniques to learn from the “wisdom of the crowd” and, based on business analytic tools, we will use as a DSS (Decision Support System) for all range of physicians.

 

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Our DermaCompare imaging software solution should provide several benefits including, but not limited to:

 

shortening the physician’s diagnostic procedure, which is both time-consuming and limits care only to those with very high expertise;
   
replacing manual photo analysis with our DermaCompare application that enables a more in-depth diagnosis; and
   
opening the market to less experienced physicians in less served markets outside of urban and suburban areas, thereby increasing the potential clientele and patient base significantly.

 

With the rise of the incidences of skin cancer, we believe that the medical community and the general population recognize that it is not only vital to monitor the skin on a regular basis, but it also important to have new means of diagnosing skin lesions more rapidly and accurately. One of the best early indicators of Melanoma is a new or changing mole. If detected in its early stage, Melanoma is almost always treatable. If left untreated for too long, skin Melanoma can become terminal and very difficult or virtually impossible to treat. In addition, if the skin is not monitored on a regular basis, it may be difficult for the patient or doctor to detect new moles or identify changes in existing ones.

 

Total body photography or TBP, which is part of the procedure used with our DermaCompare technology, is intended for use in detecting and monitoring skin moles and lesions, particularly for individuals considered at high risk for Melanoma. Early detection improves treatment and survival and increases the chance of a full recovery. Our DermaCompare application software is designed to assist dermatologists and other medical practitioners in diagnosing Melanoma quickly and with less effort.

 

Moreover, the use of computerized technologies with our DermaCompare provides an opportunity to compile, process and store data, thereby creating an extensive database for treating physicians as well as medical researchers. Availability of the data in Internet based SaaS and cloud networks can also provide cross linking between dermatologists, general physicians and/or oncologists.

 

We believe that this should help to alleviate the relative limited availability or even complete unavailability of suitable data in certain regions and for certain populations and may shed light on skin lesion development into Melanoma.

 

Our DermaCompare Solution

 

Our DermaCompare imaging solution is provided as a software platform aimed at early detection of Melanoma based on ABCD Rule for classification of dermatological lesions as published by the National Institute of Health (“NIH”) for analysis of moles. The ABCD Rule is defined as follows:

 

  A ● Asymmetry, a benign mole that is not asymmetrical;
   
  B ● Border, a benign mole has smooth, even borders, unlike melanomas;
   
  C ● Color. Most benign moles are all one color, often a single shade of brown; and
   
  D ● Diameter.

 

Benign moles usually have a smaller diameter than malignant ones. Our software processes and analyzes derma images of skin lesions, moles or total body images. Our DermaCompare imaging software solution is able to read and extract data from those images and in essence turning digital camera, camera-equipped smart phones and tablets into virtual scanning devices.

 

Our imaging software can be installed on any desktop computer or smart phone with either iOS or Android operating systems. The software’s imaging capabilities include image recognition, repair and optimization, dynamic data extraction and several image-specific capabilities.

 

Our proprietary DermaCompare software combines our core image character recognition technology with advanced image processing capabilities that transform a color skin photograph or total body photograph into a digital image of various sizes and resolutions. Photographs taken by digital cameras or photographs of skin lesions captured by camera-equipped and smart phones are exposed to variable lighting conditions and various angles and focal distances. Raw photos of skin lesions taken by a camera-equipped and smart phone may be of an unknown size and resolution and may often be geometrically distorted, skewed or warped. As a result, an unedited mobile image of a skin lesion may be virtually unusable without the use of our DermaCompare imaging technology.

 

Our DermaCompare software solution uses advanced algorithms designed to identify and correct geometric and optical distortions and automatically correct each image, zoom in and manipulate both new and old images simultaneously in a corresponding manner to facilitate correct and timely diagnosis. In addition, our DermaCompare software is designed to enable dermatologists and other medical practitioners to review the skin lesion images and digital processing results in a graphical and analytic way.

 

These images can then be stored on our managed cloud-based servers and our licensee/users will be able to safely access their patients’ images via mobile access or Internet login. We believe that our central image storage solution insures that images and data are secured and kept confidential. We are compliant with HIPAA, the United States Health Insurance Portability and Accountability Act, sets the standard for protecting sensitive patient data. Any company that deals with protected health information must ensure that all the required physical, network, and process security measures are in place and followed.

 

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This includes covered entities, anyone who provides treatment, payment and operations in healthcare, and business associates, anyone with access to patient information and provides support in treatment, payment or operations. Subcontractors, or business associates of business associates, must also be in compliance. Emerald has recently been as a HIPAA compliant company and also using Microsoft Azure cloud that is already supporting HIPAA compliance.

 

Practice and Pricing

 

Our pricing will be based on a fixed-price model, which fees will be charged directly by the App or collected either by the dermatologists, other physicians or medical centers. The process will start with the dermatologist or medical center charging the patient for the total body photography and upload the images through the Internet to a secure, company-owned server. We will invoice the dermatologist or medical center directly on a monthly, per-patient basis. If a patient is to be found to have Melanoma, our pricing model is to waive the fee for this particular patient. We believe that this should serve to incentivize physicians to use our DermaCompare software and encourage patient acceptance of its use.

 

Our physician/services can add new patient accounts to their online account and, at present, our pricing model contemplates that each patient registration annual cost will be adjusted to the geographic area/region.

 

There are few parameters that influence the payment model: Health Policy (government or private), Medical and privacy regulations like local installation (One-time payment and monthly retainer) or cloud based services based on service charge, back to back to user’s rate.

 

We will offer our dermatologist/services unlimited access to their patients’ images during the one-year period. Each registered patient will also receive a user and password to enable secure access to his/her images through the website or mobile access and enable any other physician to review the images with that patient’s consent (“2nd opinion” model).

 

We believe that our pricing strategy should make us competitive and is based on the fact that we do not plan on being directly engaged with the end-user and taking and transmitting images to the server. Our strategy is to provide imaging software as a service to dermatologists and medical centers that analyze their own patient’s images.

 

DermaCompare Mobile App is free, and allows self-photography and immediate notification, based on the algorithm processing. Connection to physician is available, including chat.

 

Maintenance and Product Support

 

We plan to provide ongoing software support services to assist our medical professional licensees with answers to technical questions and will also maintain customer service department for support with respect to DermaCompare software installation and system maintenance. The majority of the inquiries that we expect to receive will be handled by us via telephone and email. We will maintain our licensees’ software largely through online releases via the Internet that may be downloaded by our licensees with technology enhancements and updated software features. We plan to offer our licensees post-contract support. All of these services are expected to generate significant recurring revenues and shall be typically offered under contract on an annual basis.

 

Maintenance and support service fees will be deferred and recognized over the contract period on a straight-line basis. Costs incurred by us to provide maintenance and support services will be charged to cost of revenue as incurred.

 

Intellectual Property

 

Our success will in large part depend upon our ability to protect our proprietary DermaCompare technology. We plan to protect our intellectual property rights primarily through patents, copyrights, trademarks, trade secrets, employee and third party nondisclosure agreements and other measures.

 

If we are unable to protect our intellectual property or our intellectual property infringes, for any reason that we do not presently contemplate, on the intellectual property rights of a third party, our operating results would, in all likelihood be materially, adversely affected.

 

In 2016, we completed PCT registration of 2 patents:

No. PCT/IL2016/050828 “Image Processing System and Method”

No. PCT/IL2016/050830 “Automatic Detection of Cutaneous Lesions”

Sales and Marketing Strategy

 

Our sales and marketing plan, which has already commenced, is to sell licenses for our DermaCompare imaging software to: NHSs, HMOs, health insurance companies, hospitals and medical clinics through distributers, health care channel partners or directly through independent salespersons and/or web purchase to dermatologists and other physicians (GPs) that we expect to purchase licenses based on the number of potential numbers of patients.

 

Initially, our marketing strategy for our product is based on a pilot program with worldwide leading dermatologists and medical centers in Israel and Europe in order to improve our DermaCompare software application further.

 

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Subsequently, we plan to market our product worldwide through channel partners, via the Internet as well as through our direct sales force.

 

We intent to have an internal marketing group that develops our product marketing strategies and executes marketing plans with the support of external resources as needed. We will employ a technically oriented sales force that works with management to identify prospective customers.

 

Our indirect sales strategy concentrates on distributors and software solution companies that build, integrate and sell software solutions.

 

Our direct sales strategy will concentrate on health insurance companies, NHS, HMOs, medical centers, dermatologists and other physicians that want to provide our software to their patients. Our sales process will additionally be supported by a broad range of marketing programs, including trade shows, public relations and digital advertising.

 

In addition, we plan to utilize the following low-cost methods in order to maximize our marketing budget, such as:

 

Internet promotion to support public relationships.
   
Collaborating with leading companies that manufacture sun-screen lotions, swimming-suits, etc.
   
Taking advantage of public awareness at special opportunities through product placements.
   
Social networking, utilizing web sites for PR needs.
   
Presentation at scientific and medical conferences and highly publicized patient organization meetings.

 

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Competition

 

The market for derma image processing software products is intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. We face direct and indirect competition from a broad range of competitors who offer a variety of competitive products and solutions to our target markets. Our principal competition will come from: (i) manufacturers of custom-developed solutions; (ii) companies offering automated derma imaging processing systems; and (iii) companies offering competing technologies capable of recognizing and analyzing derma images. Many, if not all of these competing companies will have far greater financial and other resources, established name recognition and lengthy operating histories, any of which could make it difficult for us to compete effectively.

 

It is also possible that we will face competition from new industry participants and/or alternative technologies. Moreover, as the market for derma imaging software further evolves and develops, a number of companies with significantly greater resources than we have could attempt to enter or increase their presence in our industry, either independently or by acquiring or forming strategic alliances with our competitors, or otherwise increase their focus on the industry. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our potential customers.

 

Our DermaCompare product competes, to various degrees, with products produced by a number of substantial competitors, many of which have far greater financial and other resources and established operating histories with name recognition. Competition among product providers in this market generally focuses on price, accuracy, reliability and technical support. We believe our primary competitive advantages in this market are: (i) flexibility resulting from the ability of our product to operate in Internet based web services environments; (ii) an architectural software design that allows our product to be more readily modified, improved with added functionality and configured for new products, thereby allowing our software to be easily upgraded ; and (iii) combined methodologies of “Big Data and wisdom of the crowd” (which means analyzing tens of thousands of electronic medical records, whereby investigators can uncover new risk factors, novel preventive measures and treatments that are the most effective for a range of diseases and conditions) with machine learning and artificial intelligence together with high end machine vision capabilities.

 

As a result, we believe that our DermaCompare software Product should differ substantially from what is currently available in the market and heretofore has been known as “gold standard.” Imaging and analytics is a major sector in the medical device industry and competition is expected to be broad-based and intense. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition.

 

The following list of competitors is not intended to be exhaustive, and there are other existing competitors and there likely will be new potential competitors in the future:

 

The following list of competitors is not intended to be exhaustive, and there are other existing competitors and there likely will be new potential competitors in the future:

 

DermAlert: The DermAlert software, as presently constituted, is designed to compare images taken by digital camera obtained during a 6 to 12-month period in order to detect new or changing moles through total body photography, by monitoring a specific mole or moles. We believe that their software, has no algorithmic/automatic way to detect new/changed moles, and is based on putting one image above/nearby another and looking manually for any change. It seems that this SW has no new developments in recent years.

 

Canfield Scientific: Canfield Scientific provides custom photographic systems, image monitoring and centralized analysis services for the pharmaceutical, biotechnology and cosmetics industries. Canfield software is a local based installation and is also expensive to purchase and for this reason is not truly competitive with our DermaCompare software.

 

DigitalDerm: DigitalDerm’s MoleMap technology is a baseline system for early Melanoma detection. Their technology is unique in that it combines total body photography and patented software into a CD-based imaging record or remote storage that can be accessed through the internet. Older versions used to run on any personal computer with a Windows-based operating system. DigitalDerm’s MoleMap applies 35 images as a baseline to compare new moles and moles that are changing or have changed. However, their service is basically Storage & images presentation only, to the best of our knowledge, their solution is a conventional manually-based solution, not using the any automatic algorithm.

 

FotoFinder Systems: FotoFinder Systems’ Dermoscope is a system for digital dermoscopy, fluorescence diagnosis and standardized photo documentation in dermatology. To the best of our knowledge, the company products operating in a local pc without cloud connection. Since FotoFinder solution include propriety hardware, their solutions in quite expensive. On Premises installations, this already established company might be a competitor.

Government Regulation

 

The Company’s DermaCompare software Product and systems was approved as FDA class I, under decision support system category.

 

9
 

 

Employees

 

Ms. Adi Zamir, CEO and director, and Mr. David Ben Nain, CFO, constitute our Management team. Mr. Alimi Ahmed is the Chairman of our board of directors. We have entered into employment agreements with Adi Zamir and David Ben Naim, Emerald’s CEO and CFO, respectively. Reference is made to the disclosure under Item 11. “Executive Compensation” which contains a summary of the material terms of the respective employment agreements.

 

At December 31, 2016, Emerald has 8 employees including its CEO, Adi Zamir.

 

Summary Events of 2016

 

Shenzen Competition – Innovation competition for candidates from 5 countries. Emerald won 2nd prize in the early competition in Tel Aviv, Israel, and 3rd prize in the international competition in Shenzen, April, 2016.

 

Publicis 90 – Publicis, one of the leading media companies in the world, organized an international competition for innovative digital start-up tech companies, held in Paris, France. Emerald won the 1st prize over 3,500 other competing entrants, world-wide. Emerald was awarded 500,000 Euros or approximately $526,000, among thousands of competitors. Reference is made th the Company’s Form 8-K filed on January 26, 2017 and the disclosure under the Subsequent Events note below.

 

MSD Merck – We were chosen to be one of four companies as part of HITS program, for Innovation. During 2017 both companies wll be in co process, for the best way to collaborate.

 

Israel’s Chief Scientist Office approved support for new biliteral plan with Russia. Emerald’s partner is Ulyanovsk University, that developed a blood test kit for early detection of Melanoma. Emerald is developing supporting technology for blood checks results, and image processing for patients TBP screening, based on Emerald’s current technology.

 

10
 

 

ITEM 1A. RISK FACTORS

 

The shares of our Common Stock are highly speculative in nature, involve a high degree of risk and should be purchased only by persons who can afford to lose their entire amount invested in the Common Stock. Accordingly, prospective investors should carefully consider, along with other matters referred to herein, the following risk factors in evaluating our business before purchasing any shares of Common Stocks. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, you may lose all or part of your investment. You should carefully consider the risks described below and the other information in this Prospectus before investing in our Common Stock.

 

Risks Associated with Our Business

 

Underlying fundamental of the business, means no revenues and need of financing. 

 

The audited financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result if we cease to continue as a going concern. We believe that in order to continue as a going concern, including the costs of being a public company, we will need approximately $60,000 per year simply to cover the administrative, legal and accounting fees. We have funded these losses primarily through the sale of restricted shares of our Common Stock and the issuance of convertible notes, which have subsequently been converted into restricted shares of Common Stock.

 

Based on our financial statements for the years ended December 31, 2016 and 2015, our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern. To date we have not generated any revenue.

 

Notwithstanding our success in raising $948,978 from the sale of equity and debt securities during the year 2016, there can be no assurance that we will have adequate capital resources or be able to continue to raise equity and/or debt capital to fund planned operations or that any additional funds will be available to us when needed or at all, or, if available, will be available on favorable terms or in amounts required by us. If we are unable to obtain adequate capital resources to fund operations, we may be required to delay, scale back or eliminate some or all of our plan of operations, which may have a material adverse effect on our business, results of operations and ability to operate as a going concern.

 

Our limited operating history does not afford investors a sufficient history on which to base an investment decision.

 

Our wholly-owned subsidiary was incorporated under the laws of the State of Israel on February 17, 2010 and its DermaCompare was fully launched at the beginning of 2015 and has only recently commenced marketing DermaCompare. We are therefore in the very early stage of our marketing plan for Derma Compare. There can be no assurance at this time that we will be able to operate profitably or that we will have adequate working capital to meet our obligations as they become due. Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. Such risks include the following:

 

competition;
   
need for acceptance of our product - there can be no assured market for our product and there is no guarantee of orders or of physicians or patient acceptance;
   
ability to develop a brand identity;
   
ability to anticipate and adapt to a competitive market;
   
ability to effectively manage rapidly expanding operations;
   
amount and timing of operating costs and capital expenditures relating to expansion of our business, operations, and infrastructure; and
   
dependence upon key personnel to market and sell our product and the loss of one of our key managers may adversely affect the marketing of our product.

 

We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.

 

DermaCompare may not be accepted in the marketplace.

 

Uncertainty exists as to whether our DermaCompare product will be accepted by the market without additional widespread doctor acceptance. A number of factors may limit the market acceptance of our DermaCompare product, including the availability of alternative products and the price of our DermaCompare product relative to alternative products. There is a risk that dermatologists or other physicians will be encouraged to continue to use other products and/or methods instead of ours. We are assuming that, notwithstanding the fact that our DermaCompare product is new in the market, dermatologists or other physicians will elect to use DermaCompare because it will permit to safe valuable physician’s time and more subjective analysis. While we intend to continue to build and gather data to demonstrate the benefit of our DermaCompare product, this data gathering may not be conclusive or may be viewed as insufficient by potential users such as dermatologists and other physicians.

 

Patients have to be persuaded that a certain level of intense self-imaging is justified for the anticipated benefit, but there is no assurance that sufficient numbers of patients will be convinced to enable a successful market to develop for our product.

 

11
 

 

Our revenues will be dependent upon acceptance of our DermaCompare product by the market. The failure of such acceptance will cause us to curtail or cease operations.

 

Our revenues are expected to come from the sale of our one DermaCompare product. As a result, we will continue to incur operating losses until such time as sales of our DermaCompare product reaches a mature level and we are able to generate sufficient revenues from the sale of our DermaCompare product to meet our operating expenses. There can be no assurance that dermatologists or other physicians will adopt our DermaCompare product. In the event that we are not able to market and significantly increase the number of dermatologists or other physicians that purchase our DermaCompare product, or if we are unable to charge the necessary prices, our financial condition and results of operations will be materially and adversely affected.

 

Defects or malfunctions in our product could hurt our reputation, sales and profitability.

 

Our business and the level of customer acceptance of our DermaCompare product depend upon the effective and reliable operation of our one DermaCompare product. Our DermaCompare product is complex and is continually being modified and improved, and as such may contain undetected defects or errors when first introduced or as new versions are released. To the extent that defects or errors cause our DermaCompare product to malfunction and our customers’ use of our DermaCompare product is interrupted, our reputation could suffer and our potential revenues could decline or be delayed while such defects are remedied. We may also be subject to liability for the defects and malfunctions.

 

There can be no assurance that, despite our testing, errors will not be found in our DermaCompare product or new releases, resulting in loss of future revenues or delay in market acceptance, diversion of development resources, damage to our reputation, adverse litigation, or increased service and warranty costs, any of which would have a material adverse effect upon our business, operating results and financial condition.

 

Software failures, breakdowns in the operations of our servers and communications systems or the failure to implement system enhancements could harm our business.

 

Our success depends on the efficient and uninterrupted operation of our servers and communications systems. A failure of our network or data gathering procedures could impede the processing of data, delivery of databases and services, client data and day-to-day management of our business and could result in the corruption or loss of data. While all of our operations will have disaster recovery plans in place, they might not adequately protect us. Despite any precautions we take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins and similar events at our computer facilities could result in interruptions in the flow of data to our servers and from our servers to our clients. In addition, any failure by our computer environment to provide our required data communications capacity could result in interruptions in our service. In the event of a server failure, we could be required to transfer our client data collection operations to an alternative provider of server hosting services. Such a transfer could result in delays in our ability to deliver our products and services to our clients.

 

Additionally, significant delays in the planned delivery of system enhancements, improvements and inadequate performance of the systems once they are completed could damage our reputation and harm our business. Long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities and acts of terrorism, particularly involving cities in which we have offices, could adversely affect our businesses. Although, we plan to carry property and business interruption insurance for our business operations, our coverage might not be adequate to compensate us for all losses that may occur.

 

We face risks related to the storage of customers’ and their end users’ confidential and proprietary information.

 

Our DermaCompare product is designed to maintain the confidentiality and security of our customers’ and their end users’ confidential and proprietary data that are stored on our server systems, which may include sensitive personal data. However, any accidental or willful security breaches or other unauthorized access to these data could expose us to liability for the loss of such information, time-consuming and expensive litigation and other possible liabilities as well as negative publicity. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are difficult to recognize and react to. We may be unable to anticipate these techniques or implement adequate preventative or reactionary measures.

 

We might incur substantial expense to further develop our derma DermaCompare product that, once commercialized, may never become sufficiently successful.

 

Our growth strategy requires the successful launch of our DermaCompare product. Although management will take every precaution to ensure that our DermaCompare product will, with a high degree of likelihood, achieve commercial success, there can be no assurance that this will be the case. The causes for failure of our DermaCompare product once commercialized can be numerous, including:

 

market demand for our DermaCompare product proves to be smaller than we expect;
   
competitive products with superior performance either on the market or commercialized at the same time or soon after;
   
further DermaCompare product development turns out to be more costly than anticipated or takes longer;
   
our DermaCompare product requires significant adjustment post commercialization, rendering the DermaCompare product uneconomic or extending considerably the likely investment return period;
   
additional regulatory requirements which extend the time to launch our DermaCompare product increase the overall costs of the development;
   
patent conflicts or unenforceable intellectual property rights; and
   
Dermatologists and other physicians may be unwilling to adopt and/or use our DermaCompare product.

 

12
 

 

Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses.

 

In recent years, there have been several changes in laws, rules, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and various other new regulations promulgated by the SEC and rules promulgated by the national securities exchanges.

 

The Dodd-Frank Act, enacted in July 2010, expands federal regulation of corporate governance matters and imposes requirements on publicly-held companies, including us, to, among other things, provide stockholders with a periodic advisory vote on executive compensation and also adds compensation committee reforms and enhanced pay-for-performance disclosures. While some provisions of the Dodd-Frank Act were effective upon enactment, others will be implemented upon the SEC’s adoption of related rules and regulations. The scope and timing of the adoption of such rules and regulations is uncertain and accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain.

 

In addition, Sarbanes-Oxley specifically requires, among other things, that we maintain effective internal control over financial reporting and disclosure of controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of Sarbanes-Oxley Act (“Section 404”), and our independent registered public accounting firm is required to attest to our internal control over financial reporting.

 

Our testing, or the subsequent testing by our independent registered public accounting firm may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expenses and expend significant management efforts. We currently have limited internal audit capabilities and will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

These and other new or changed laws, rules, regulations and standards are, or will be, subject to varying interpretations in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Further, compliance with new and existing laws, rules, regulations and standards may make it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Members of our board of directors and our principal executive officer and principal financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified directors and executive officers, which could harm our business. We continually evaluate and monitor regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.

 

We cannot be certain that we will obtain patents for our DermaCompare product and technology or that such patents will protect us from competitors.

 

We believe that our success and competitive position will depend in part on our ability to obtain and maintain patents for our DermaCompare product, which is both costly and time consuming. We still are in the process to evaluate the patent potentials of our DermaCompare product. Patent Offices typically requires 12-24 months or more to process a patent application. There can be no assurance that any of our potential patent applications will be approved. However, we have decided to launch our DermaCompare product without patent protection. There can be no assurance that any potential patent issued or licensed to us will provide us with protection against competitive products, protect us against changes in industry trends which we have may not have anticipated or otherwise protect the commercial viability of our product, or that challenges will not be instituted against the validity or enforceability of any of our future patents or, if instituted, that such challenges will not be successful. The cost of litigation to uphold the validity of a patent and enforce it against infringement can be substantial. Even issued patents may later be modified or revoked by the Patent and Trademark Office or in legal proceedings. Patent applications in the United States are maintained in secrecy until the patent issues and, since publication of patents tends to lag behind actual discoveries, we cannot be certain that if we obtain patents for our product, we were the first creator of the inventions covered by a pending patent applications or the first to file patent applications on such inventions.

 

DermaCompare product liability is inherent in the medical devices industry and insurance is expensive and difficult to obtain, we may be exposed to large lawsuits.

 

Our business exposes us to potential product liability risks, which are inherent in the marketing and sale of medical devices. While we will take precautions we deem to be appropriate to avoid product liability suits against us, there can be no assurance that we will be able to avoid significant product liability exposure. DermaCompare product liability insurance for the medical products industry is generally expensive. We plan to obtain product liability professional indemnity insurance coverage for our DermaCompare product, when we’ll launch the product formally. There can be no assurance that we will be able to obtain such coverage on acceptable terms, or that any insurance policy will provide adequate protection against potential claims. A successful product liability claim brought against us may exceed any insurance coverage secured by us and could have a material adverse effect on our results or ability to continue marketing our product.

 

We also plan to obtain Directors and Officers Liability Insurance and certain commercial and personal property insurance.

 

13
 

 

We may have to establish a reserve funds for potential warranty claims. If we experience warranty claims or if our repair and replacement costs associated with warranty claims will increase significantly, it would have a material adverse effect on our financial condition and results of operations.

 

We may need to raise additional capital to fund continuing operations and an inability to raise the necessary capital or to do so on acceptable terms could threaten the success of our business.

 

We currently anticipate that our available capital resources will be sufficient to meet our expected working capital and capital expenditure requirements for the twelve-month ended December 31, 2016. We anticipate that we will require an additional $1.5 million during the next twelve months to fulfill our business plan. However, such resources may not be sufficient to fund the long-term growth of our business. If we determine that it is necessary to raise additional funds, we may choose to do so through strategic collaborations, licensing arrangements, public or private equity or debt financing, a bank line of credit, or other arrangements.

 

We cannot be sure that any additional funding will be available on terms favorable to us or at all. Any additional equity financing may be dilutive to our stockholders, new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock. Debt or equity financing may subject us to restrictive covenants and significant interest costs. If we obtain funding through a strategic collaboration or licensing arrangement, we may be required to relinquish our rights to our product or marketing territories. If we are unable to obtain the financing necessary to support our operations, we may be required to defer, reduce or eliminate certain planned expenditures or significantly curtail our operations.

 

We will need to increase the size of our organization, and may experience difficulties in managing growth.

 

At present, we are a small company. We expect to experience a period of expansion in headcount, infrastructure and overhead and anticipate that further expansion will be required to address potential growth and market opportunities. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate new managers. Our future financial performance and its ability to compete effectively will depend, in part, on its ability to manage any future growth effectively.

 

The loss of key personnel could adversely affect our business. We may not be able to hire and retain qualified personnel to support our growth. 

 

Emerald’s success depends to a significant extent upon the efforts of Mrs. Adi Zamir, its CEO, and other key senior employees and other key personnel. The loss of the services of such personnel could adversely affect our business and our ability to implement our growth plan. We cannot assure you that the services of the members of our management team will continue to be available to us, or that we will be able to find a suitable replacement for any of them. We do not have key man insurance on any members of our management team. If any member of our management team were to die and we are unable to replace either or both of them for a prolonged period of time, we may be unable to carry out our long-term business plan and our future prospect for growth, and our business, may be harmed.

 

On March 26, 2017, Adi Zamir, the Company’s CEO reported to the Board of Directors that effective June 23, 2017, she would cease serving as the Company’s CEO. Reference is made to the Company’s Form 8-K/A filed on April 10, 2017.

 

Our success is dependent upon our ability to attract, train, manage and retain sales, marketing and other qualified personnel. There is substantial competition for qualified personnel, and an inability to recruit or retain qualified personnel may impact our ability to implement our strategy to grow our business.

 

During 2016, we granted 3,795,483 options under our ESOP plan at an exercise price ranging between $0.001 and $0.40. and 1,315,735 options was canceled according to the terms and conditions of the option plan.

 

As of December 31,2016, we had 5,718,719 Class A Warrants, 1,350,000 Class B Warrants, 5,072,492 Class C Unit Warrants and 900,000 Class E Warrants outstanding. The Class B Warrants and Class C Unit Warrants were issued to Consultants for bona fide services to the Company as discussed in more detail under the subheading “Sales of Unregistered Securities” in “Market for Common Equity and Related Stockholder Matters” below.

 

If we are unable to adopt, implement and maintain equity compensation arrangements that provide sufficient incentives, we may be unable to retain our existing employees and attract additional qualified candidates. If we are unable to retain our existing employees, including qualified technical personnel, and attract additional qualified candidates, our business and results of operations could be adversely affected.

 

Some of our competitors are more established and better capitalized than we are and we may be unable to establish market share.

 

Some of our competitors are well known, more established and better capitalized than we are. As such, they may have at their disposal greater marketing strength and economies of scale and, as they may have additional products which they sell to the same customers, have greater presence with these customers. They may also have more resources to expend on research and development to create more innovative products in competition with ours. Competition will also likely increase as or when the cost benefits of the Company’s DermaCompare product are established and proven. Accordingly, we may not be successful in competing with them for market share.

 

14
 

 

We may license or collaborate with third parties in various potential markets.

 

We believe collaboration will allow us to leverage our resources and to access new markets while avoiding the cost of establishing or maintaining a direct sales force in each market. We may incur significant costs in the use of third parties to identify and assist in establishing relationships with potential collaborators. We currently have no direct sales force. We plan to sell our DermaCompare product first in the dermatology market in Israel, and we intend to slowly later expand geographically in the US and Europe.

 

To penetrate our target markets, we may need to enter into collaborative agreements to assist in the commercialization of our DermaCompare product. We may choose to license our DermaCompare product for distribution to a third party as opposed to pursuing commercialization ourselves. Establishing strategic collaborations is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of our financial or intellectual property position and our internal capabilities. Discussions with potential collaborators may not lead to the establishment of collaboration agreements on favorable terms and may have the potential to provide collaborators with access to our key intellectual property. We may have limited control over the amount and timing of resources that any future collaborators devote to our DermaCompare product. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. By entering into collaboration, we may preclude opportunities to collaborate with other third parties who do not wish to associate with our existing third party strategic partners. Moreover, in the event of termination of a collaboration agreement, termination negotiations may result in less favorable terms.

 

Our future sales in international markets will subject us to foreign currency exchange and other risks and costs which could harm our business.

 

We expect that a substantial portion of our future revenues will be derived from outside Israel. We will be subject to the effects of exchange rate fluctuations. Our functional currency is the Israel Shekel. For the preparation of our consolidated financial statements, the financial results are translated into U.S. dollars using average exchange rates during the applicable period. If the U.S. dollar appreciates against the Shekel, as applicable, the revenues we recognize from sales will be adversely impacted. Foreign exchange gains or losses as a result of exchange rate fluctuations in any given period could harm our operating results and negatively impact our revenues. Additionally, if the effective price of our products were to increase as a result of fluctuations in foreign currency exchange rates, demand for our DermaCompare products could decline and adversely affect our results of operations and financial condition.

 

We intend not to use hedging strategies to help offset the effect of fluctuations in foreign currency exchange rates. Movements in foreign currency exchange rates could impact our financial results positively or negatively in one period and not another, making it more difficult to compare our financial results from period to period.

 

The healthcare industry is subject to changing policies and procedures, we may find it difficult to continue to compete in an uncertain environment.

 

The health care industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare industry participants. During the past several years government regulation of the healthcare industry has changed significantly in several countries. Healthcare industry participants may react to new policies by curtailing or deferring use of new products, including our DermaCompare product. This could substantially impair our ability to successfully market our DermaCompare product, which would have a material adverse effect on our business prospects.

 

The market success of our DermaCompare product may be dependent in part upon third-party reimbursement policies that are often subject to change.

 

Our ability to successfully penetrate the market with our DermaCompare product may, to some extent, depend on the availability of reimbursement to individuals for using our DermaCompare product from third-party payers, such as governmental programs, private insurance and private health plans. There is no guarantee that users of our DermaCompare product get reimbursed or that a change in the future of levels of reimbursement to individuals and hospitals, if any, will be high enough to allow us to charge a reasonable profit margin. If levels of reimbursement are decreased in the future, the demand for our DermaCompare product could diminish or our ability to sell our DermaCompare products on a profitable basis could be adversely affected.

 

We may not be able to successfully expand our business through acquisitions.

 

We review corporate and product line acquisition candidates as a part of our growth strategy. If we decided to undertake an acquisition, we may not be able to successfully integrate it in order to realize the full benefit of such acquisition. Factors which may affect our ability to grow successfully through acquisitions include:

 

inability to identify suitable targets given the relatively narrow scope of our business;
   
inability to obtain acquisition or additional working capital financing due to our financial condition;
   
difficulties and expenses in connection with integrating the acquired companies and achieving the expected benefits;
   
diversion of management’s attention from current operations;
   
the possibility that we may be adversely affected by risk factors facing the acquired companies;
   
acquisitions could be dilutive to earnings, or in the event of acquisitions made through the issuance of our common shares to the shareholders of the acquired company, dilutive to our existing shareholders;
   
potential losses resulting from undiscovered liabilities of acquired companies not covered by the indemnification we may obtain from the seller; and
   
loss of key employees of the acquired companies.

 

15
 

 

Risks Related to Our Common Stock

 

Shares issuable upon the conversion of warrants may substantially increase the number of Shares available for sale in the public market and depress the price of our stock.

 

As of December 31, 2016, we had outstanding: (i) Class A Warrants exercisable to purchase 5,718,719 shares of Common Stock at an exercise price of $0.80 per Share for two years; (ii) Class B Warrants exercisable to purchase 1,350,000 Shares at an exercise price of $0.40 per Share on a cashless basis for a period of two years; (iii) Class C Unit Warrants are exercisable to purchase 5,072,492 units at an exercise price of $0.40, each unit consisting of one share of Common Stock and one Class A Warrant at an exercise price of $0.80, for a period of ninety (90) days commencing ninety (90) days after the effective date of our Registration Statement; and (ii) Class E Warrants exercisable to purchase 900,000 Shares, at an exercise price of $0.0001 per Share. 

 

To the extent any of these Warrants are exercised and any additional warrants are granted and subsequently exercised, there will be further dilution to stockholders. Until the warrants expire, these warrant holders will have an opportunity to profit from any increase in the market price of our Shares without assuming the risks of ownership. Holders of options and warrants may exercise these securities at a time when we could obtain additional capital on terms more favorable.

 

The exercise price of the warrants will dilute the voting interest of the owners of presently outstanding shares by adding a substantial number of additional Shares of our Common Stock. We have reserved Shares of Common Stock for issuance upon the exercise of the warrants and may increase the Shares reserved for these purposes in the future.

 

The Shares of our Common Stock which are issuable upon the exercise of any outstanding warrants may be sold in the public market pursuant to Rule 144, if applicable. The sale of our common stock issued or issuable upon the exercise of the warrants and options described above, or the perception that such sales could occur, may adversely affect the market price of our common stock.

 

We are subject to compliance with securities law, which exposes us to potential liabilities, including potential rescission rights.

 

We have offered and sold our Common Stock to investors pursuant to certain exemptions from the registration requirements of the Securities Act of 1933, as well as those of various state securities laws. The basis for relying on such exemptions is factual; that is, the applicability of such exemptions depends upon our conduct and that of those persons contacting prospective investors and making the offering. We have not received a legal opinion to the effect that any of our prior offerings were exempt from registration under any federal or state law. Instead, we have relied upon the operative facts as the basis for such exemptions, including information provided by investors themselves.

 

If any prior offering did not qualify for such exemption, an investor would have the right to rescind its purchase of the securities if it so desired. It is possible that if an investor should seek rescission, such investor would succeed. A similar situation prevails under state law in those states where the securities may be offered without registration in reliance on the partial preemption from the registration or qualification provisions of such state statutes. If investors were successful in seeking rescission, we would face severe financial demands that could adversely affect our business and operations. Additionally, if we did not in fact qualify for the exemptions upon which it has relied, we may become subject to significant fines and penalties imposed by the SEC and state securities agencies.

 

Our Executive Officers, Directors own over 34 % of our common stock and may be able to influence the outcome of stockholder votes and their interests may differ from other stockholders.

 

As of December 31, 2016, our executive officers and directors beneficially own 6,784,876 Shares of our Common Stock representing approximately 34% of our outstanding Shares, excluding Shares underlying the Class E Warrants, the exercise of which are subject to certain Milestones which are not expected to be reached within 60 days. Subject to any fiduciary duties owed to our other stockholders under Delaware law, these stockholders may be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have some control over our management and policies. Some of these persons may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree. The concentration of ownership could delay or prevent a change in control of the Company or otherwise discourage a potential acquirer from attempting to obtain control of the Company, which in turn could reduce the price of our stock. In addition, these stockholders could use their voting influence to maintain our existing management and directors in office, delay or prevent changes in control of the Company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

 

16
 

 

The availability of a large number of authorized but unissued shares of Common Stock may, upon their issuance, lead to dilution of existing stockholders.

 

We are authorized to issue 490,000,000 shares of Common Stock, $0.0001 par value per share, of which, as of December 31, 2016, 19,931,478 shares of Common Stock were issued and outstanding. Additional shares may be issued by our board of directors without further stockholder approval. The issuance of large numbers of shares, possibly at below market prices, is likely to result in substantial dilution to the interests of other stockholders. In addition, issuances of large numbers of shares may adversely affect the market price of our Common Stock.

 

Our Certificate of Incorporation authorizes 10,000,000 shares of preferred stock, $0.0001 par value per share of which none were issued and outstanding as of the date of this registration statement. The board of directors is authorized to provide for the issuance of these unissued shares of preferred stock in one or more series, and to fix the number of shares and to determine the rights, preferences and privileges thereof. Accordingly, the board of directors may issue preferred stock which may convert into large numbers of shares of Common Stock and consequently lead to further dilution of other shareholders.

 

We have never paid cash dividends and do not anticipate doing so in the foreseeable future.

 

We have never declared or paid cash dividends on our common shares. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations and capital requirements, as well as other factors deemed relevant by our board of directors.

 

Our Common Stock is subject to the “Penny Stock” rules of the SEC and the trading market in our stock is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment.

 

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

 

That a broker or dealer approve a person’s account for transactions in penny stocks; and
   
The broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

 

Obtain financial information and investment experience objectives of the person; and
   
Make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

 

Sets forth the basis on which the broker or dealer made the suitability determination; and
   
 That the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our Common Stock and cause a decline in the market value of our stock.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

Financial Industry Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability to buy and sell our Common Stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

Our stock is thinly traded, sale of your holding may take a considerable amount of time.

 

The shares of our Common Stock are thinly-traded on the OTCQB Market, meaning that the number of persons interested in purchasing our Common Stock at or near bid prices at any given time may be relatively small or non-existent. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our Common Stock will develop or be sustained, or that current trading levels will be sustained. Due to these conditions, we can give you no assurance that you will be able to sell your shares at or near bid prices or at all if you need money or otherwise desire to liquidate your shares.

 

17
 

 

Shares eligible for future sale may adversely affect the market.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months, subject only to the current public information requirement. Affiliates may sell after six months, subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Any substantial sales of our Common Stock pursuant to Rule 144 may have a material adverse effect on the market price of our Common Stock.

 

If we fail to maintain effective internal controls over financial reporting, the price of our Common Stock may be adversely affected.

 

Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our Common Stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our Common Stock.

 

We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.

 

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards.

 

We expect to incur expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, although attestation requirements by our independent registered public accounting firm are not presently applicable to us, we could become subject to these requirements in the future and we may encounter problems or delays in completing the implementation of any resulting changes to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief Financial Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how the market prices of our shares will be affected; however, we believe that there is a risk that investor confidence and share value may be negatively affected.

 

Our share price could be volatile and our trading volume may fluctuate substantially.

 

The price of our common shares has been and may in the future continue to be extremely volatile, with the sale price fluctuating from a low of $0.1 to a high of $2.24 since 2012. Many factors could have a significant impact on the future price of our common shares, including:

 

  our inability to raise additional capital to fund our operations;
     
  our failure to successfully implement our business objectives and strategic growth plans;
     
  compliance with ongoing regulatory requirements;
     
  market acceptance of our product;
     
  changes in government regulations;
     
  general economic conditions and other external factors; and
     
  actual or anticipated fluctuations in our quarterly financial and operating results; and the degree of trading liquidity in our common shares.

 

Our annual and quarterly results may fluctuate, which may cause substantial fluctuations in our common stock price.

 

Our annual and quarterly operating results may in the future fluctuate significantly depending on factors including the timing of purchase orders, new product releases by us and other companies, gain or loss of significant customers, price discounting of our product, the timing of expenditures, product delivery requirements and economic conditions. Revenues related to our product are required to be recognized upon satisfaction of all applicable revenue recognition criteria. The recognition of revenues from our product is dependent on a number of factors, including, but not limited to, the terms of any license agreement and the timing of implementation of our products by our customers.

 

Any unfavorable change in these or other factors could have a material adverse effect on our operating results for a particular quarter or year, which may cause downward pressure on our common stock price. We expect quarterly and annual fluctuations to continue for the foreseeable future.

 

18
 

 

Delaware law contains provisions that could discourage, delay or prevent a change in control of our company, prevent attempts to replace or remove current management and reduce the market price of our stock.

 

Provisions in our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider favorable. For example, our certificate of incorporation authorizes our board of directors to issue up to ten million shares of “blank check” preferred stock. As a result, without further stockholder approval, the board of directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for a third party to acquire us.

 

We are also subject to the anti-takeover provisions of the DGCL. Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change in control of us. An “interested stockholder” is, generally, a stockholder who owns 15% or more of our outstanding voting stock or an affiliate of ours who has owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in the DGCL.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Our principal office is located at SOSA House, 7 Imber Street, Petach Tikva, 4951141 Israel, Telephone: (972) 52-579-5082 and consists of approximately 120 square feet of executive office space. Our wholly-owned Israeli subsidiary also has offices at the same address, which it leases from an unaffiliated third party for $1,600 per month. The Registrant believes that the office facilities are sufficient for the foreseeable future.

 

ITEM 3. LEGAL PROCEEDING

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

19
 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY

 

Market Information

 

Our common stock is currently quoted on the OTCQB market under the symbol MRLA. For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. The below prices, adjusted for a one-for-four (1:4) reverse split effective March 20, 2015, represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

 

   Fiscal 2016   Fiscal 2015   Fiscal 2014 
   High   Low   High   Low   High   Low 
First Quarter ended March 31  $1.75   $0.55   $0.20   $0.11   $0.14   $0.11 
Second Quarter ended June 30  $0.77   $0.55   $2.24   $0.45   $0.14   $0.14 
Third Quarter ended September 30  $0.74   $0.3   $2.24   $1.00   $0.14   $0.14 
Fourth Quarter ended December 31  $0.4   $0.157   $1.25   $1.00   $0.40   $0.14 

 

Holders of Common Stock

 

Our transfer agent is Transfer Online, 512 SE Salmon Street, Portland, OR 97214-3444, Phone: (503) 227-2950.

 

Dividends

 

Holders of common stock are entitled to dividends if declared by the Board of Directors, out of funds legally available therefore. We have never declared cash dividends on our common stock and our Board of Directors does not anticipate paying cash dividends in the foreseeable future as it intends to retain future earnings to finance the growth of our businesses.

 

Rule 144 Shares

 

As of the date of this Registration Statement, we do not have any significant number of shares of our Common Stock that are currently available for sale to the public in accordance with the volume and trading limitations of Rule 144. This is due to the fact that shares of our Common Stock that were issued prior to the end of May 2015, at which time we ceased to be a shell company, as a result of our effective control of the business and financial operations and decisions of Emerald, were deemed to be a “shell” company as that term is defined under Rule 405 and Rule 144(i) promulgated by the SEC under the Act.

 

Outstanding Warrants

 

The following table summarizes information of outstanding warrants as of December 31, 2016:

 

   Warrants   Warrant Term   Exercise Price   Exercisable 
Investors - Class A Warrants (1)   5,918,719    2 years   $0.80    5,918,719 
Investors - Class B Warrants (2)   1,350,000    2 years   $0.40    1,350,000 
Investors - Class C Warrants (3)   5,072,492    (3)  $(3)   5,536,246 
Alimi Ahmed - Class E Warrants (4)   900,000    (4)  $0.0001    900,000 

 

The Class A Warrants were issued in connection with a private placement in reliance upon Regulation S, pursuant to which the Registrant sold a total of 5,918,719 units at a price of $0.40 per unit (the “Units”), each Unit comprised of one Share and one Class A Warrant exercisable at $0.80 per share with a term 24 months. While all of the Class A Warrants are exercisable within 60 days, in fact, none of these warrants will be exercised for the foreseeable future, based upon the exercise price of $0.80 per Share.

 

(2) The Class B Warrants were issued to consultants for bona fide services to the Company and are exercise, on a cashless basis at a price of $0.40 per Share for a period of two years.

 

(3) The Class C Unit Warrants were issued to consultants for bona fide services to the Company, and each Unit is exercisable at a price of $0.40 to purchase one Share of Common Stock and one Class A Warrant which, in turn, is exercisable to purchase one additional Share at a price of $0.80. The Class C Unit Warrants expire ninety (90) days after the effective date of this Registration Statement.

(4) A total of 2,700,000 Class E Warrants were issued by the Registrant to Lior Wayn, the former CEO, pursuant to the terms of the Share Exchange Agreement between the Registrant and Emerald Ltd. The Class E Warrants were exercisable in three equal tranches of 900,000 Shares (the “Tranches”) at an exercise price of $0.0001 per Share.

 

On December 16, 2016, the Company filed a Form 8-K reporting the termination of Lior Way’s employment agreements with the Company and Emerald Ltd., and his removal as a director, among other actions related to his positions with the Company. Subsequent to the year-ended December 31, 2016, Mr. Wayn transferred, sold and assigned his shares of the Company’s common stock and his Class E Warrants to Mr. Alimi Ahmed, a member of the Company’s Board of Directors. This transaction was reported in the Company’s Form 8-K filed with the SEC on January 27, 2017. (1) As of December 2016 1,800,000 Warrants were canceled.

 

20
 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table summarizes information of outstanding options as of December 31, 2016:

 

   Number of securities to be issued upon exercise of outstanding options, warrants and rights   Weighted-average exercise price of outstanding options, warrants and rights   Number of securities remaining available for future issuance 
Plan Category               
Equity compensation plans approved by security holders               
2014 Equity Incentive Plan   5,076,483   $0.2    - 

 

Sale of Unregistered Securities

 

During the last two years, the Registrant issued the following restricted shares which were not registered under the Act

 

On June 18, 2015 and July 21, 2015, after the Company ceased to be a shell company, the Company issued and sold unregistered securities, as set forth in the table below, in private offering of a total of 2,925,000 units at a price of $0.40. Each Unit consisted of one Share and one Class A Warrant exercisable to purchase one additional Share of Common Stock at a price of $0.80 (the “Units”). The sales were made without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

Name of Subscriber  Bases for Issuance  Date of Issuance  Price Per Unit   Shares Issued 
Short Trade Ltd (1)  Subscription Agreement  06/18/2015  $0.40    625,000 
Prop Trade Ltd (2)  Subscription Agreement  06/18/2015  $0.40    375,000 
Dr. Ben Zion Weiner  Subscription Agreement  06/18/2015  $0.40    125,000 
RP Holdings (1992) Ltd. (3)  Subscription Agreement  06/18/2015  $0.40    125,000 
Dr. Tank Siak Khim  Subscription Agreement  06/18/2015  $0.40    250,000 
Yoel Yogev  Subscription Agreement  06/18/2015  $0.40    200,000 
Universal Link Ltd (4)  Subscription Agreement  06/18/2015  $0.40    175,000 
Avigdor Hakmon  Subscription Agreement  06/18/2015  $0.40    62,500 
Dr. Shmuel Pasternak  Subscription Agreement  06/18/2015  $0.40    62,500 
Liat Sidi  Subscription Agreement  07/21/2015  $0.40    25,000 
Tzvi Aharonson  Subscription Agreement  07/21/2015  $0.40    137,500 
Estory Giloz Ran  Subscription Agreement  07/21/2015  $0.40    312,500 
Malca Maimon  Subscription Agreement  07/21/2015  $0.40    87,500 
Ohad Cohen  Subscription Agreement  07/21/2015  $0.40    150,000 
Nissim Simhon  Subscription Agreement  07/21/2015  $0.40    50,000 
NE Solution Ltd (5)  Subscription Agreement  07/21/2015  $0.40    162,500 
   Total     $1,169,961    2,925,000 

 

(1) Short Trade Ltd is controlled by Mr. Shlomo Noyman, a resident of Israel.

 

(2) Prop Trade Ltd is controlled by Mr. Andrew Philip Dings, a resident of Singapore.

 

(3) RP Holdings (1992) Ltd. is controlled by Mr. Rubin Zimerman, a resident of Israel.

 

(4) Universal Link Ltd is controlled by Mr. Ahmad Alimi, a resident of Israel.

 

(5) NE Solution Ltd is controlled by Mr. Lee Yang Tong, a resident of Singapore.

 

In July 2015, the persons listed in the table below, each a lender to Emerald on or before November 2014, converted their debt owed by Emerald into Units, each consisting of one restricted Share and one Class A Warrant, at a conversion price of $0.32. Each of the lenders was a resident of Israel and the issuance was without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

Name of Note Holder  Bases of Issuance  Debt Converted   Shares Issued 
David Masasa  Conversion of Debt  $8,788    27,463 
Liron Carmel  Conversion of Debt  $19,521    61,003 
Yoseph Cohen  Conversion of Debt  $15,632    48,850 
Tzvi Aharonson  Conversion of Debt  $43,969    137,403 
   Total  $87,910    274,719 

 

21
 

 

On July 21, 2015, the Registrant issued 140,000 restricted Shares to Shira Brand Shiffer, a resident of Israel, at a price of $0.107 per Share, with no warrants attached. The issuance to Shira Brand Shiffer, without registration under the Act, was made in reliance upon Section 4(2) of the Act and Reg S.

 

On July 16, 2015, the Registrant issued 517,900 restricted shares of Common Stock to Meyda Consulting Ltd, an entity organized under the laws of Israel controlled by Eliyahu Kirstein, a resident of Israel. The issuance of these shares was in consideration for services and was made without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

On July 16, 2015, the Registrant issued Class B Warrants and Class C Unit Warrants to the following entities for bona fide services to the Registrant. The issuances of these Warrants was in consideration for services and was made without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

   Basis of Issuance  Class B Warrant Issued   Class C Unit Warrants Issued   Total Warrants Issued 
Yaad Consulting Ltd. (1)  Services   625,000   $634,063    1,259,063 
LA Pure Capital Ltd. (2)  Services   375,000   $380,467    755,467 
Amir Uziel Economic Consultant Ltd. (3)  Services   625,000   $634,061    1,259,061 
Capitalink Ltd. (4)  Services   625,000   $634,061    1,259,061 

 

(1) The control person of Yaad Consulting Ltd is Itschak Shrem, a resident of Israel.

 

(2) The control person of LA Pure Capital Ltd is Kfir Silberman, a resident of Israel.

(3) The control person of Amir Uziel Economic Consultant Ltd. is Amir Uziel, a resident of Israel.

(4) The control person of Captalink Ltd is Lavi Krasney, a resident of Israel.

During November 2015, the Registrant issued and sold unregistered Shares as set forth on the table below:

 

Name of Issuee  Date of Issuance  Number of Shares   Consideration  Bases for Issuance
Shirat Hahayim  11/17/2015   250,000   $0.40 per share  Subscription Agreement (1)
Lyons Capital LLC. (2)  11/05/2015   250,000   Valued at $1.00 per share  Services
David Treves  11/16/2015   12,334   Valued at $1.00 per share  Services
Pnina Rosenblum  11/09/2015   5,750   Valued at $1.00 per share  Services
Total Shares Issued      518,084       

 

(1) The issuance was pursuant to a Unit Subscription Agreement each consisting of 1 Share and 1 Class A Warrant exercisable for a period of 24 months to purchase 1 additional Share at $0.80.

 

(2) Lyons Capital LLC is organized under the laws of Florida and its control person, Jason Lyons, is a resident of Florida.

 

The issuance and sale of Shares to Shirat Hahayim and Pnina Rosenbluem, residents of the State of Israel, and David Treves, resident of Australia, without registration under the Act, was made in reliance upon the exemptions provided in Section 4(2) of the Act and and Regulation S promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Act. The issuance of Shares to Lyons Capital LLC, without registration under the Act, was in reliance upon Section 4(2) and Regulation D promulgated by the SEC under the Act.

During 2016, the Registrant issued and sold common Shares as set forth on the table below:

 

Name of Issuee  Date of Issuance  Number of Shares   Consideration  Bases for Issuance
Yair Fudim  02/18/2016   482,000   Valued at $0.9995 per share  Services
Estery Giloz Ran  02/18/2016   482,000   Valued at $0.9995 per share  Services
Baruch Kfir  02/18/2016   231,000   Valued at $0.9995 per share  Services
Legend Securities Inc  03/17/2016   50,000   Valued at $0.65per share  Services
JFS Investments PR LLC  01/26/2016   125,000   Valued at $1.75 per share  Services
Garden state securities Inc  05/04/2016   150,000   Valued at $0.70 per share  Services
JFS Investments PR LLC  05/10/2016   41,667   Valued at $0.71 per share  Services
Kodiak Capital Group LLc  05/18/2016   150,000   Valued at $0.68 per share  Services
Alpha Capital Anstalt  06/26/2016   125,000   Valued at $0.70 per share  Services
Legend Securities Inc  06/28/2016   50,000   Valued at $0.70 per share  Services
JFS Investments PR LLC  06/30/2016   333,333   Valued at $0.68 per share  Services
VAR Growth Corporation  07/01/2016   300,000   Valued at $0.71 per share  Services
David Treves  07/27/2016   6,767   Valued at $0.53 per share  Services
Firstfire Global Opportunities Fund LLC  08/04/2016   31,250   Valued at $0.49 per share  Services
Guy Shalom  10/11/2016   119,000   $0.40 per share  Investment
Total Shares Issued      2,677,017       

 

22
 

 

During 2016, the Registrant issued Class A Warrants and Class B Unit Warrants to the following entities for bona fide services to the Registrant. The issuances of these Warrants was in consideration for convertible note payable and was made without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

Name of Subscriber  Bases for Issuance  Date of
Issuance
  Price Per
Unit
   Class A
Warrant
Issued
   Class B
Warrant
Issued
 
Ilan Malca  Subscription Agreement  05/24/2016  $0.40    100,000    - 
Alpha Capital Anstalt  Subscription Agreement  05/30/2016  $0.40    1,000,000    1,000,000 
Maz Partners LP  Subscription Agreement  03/31/2016  $0.40    200,000    - 
Chi Squared Capital Inc  Subscription Agreement  05/30/2016  $0.40    100,000    100,000 
Firstfire Global Opportunities Fund LLC  Subscription Agreement  07/07/2016  $0.40    250,000    250,000 
Guy Shalom  Investment Agreement  10/11/2016  $0.40    119,000    - 
Total Warrants Issued              1,769,000    1,350,000 

 

ITEM 6. SELECTED FINANCIAL DATA

 

None.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND PLAN OF OPERATION

 

Overview

 

The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which refer to future events. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.

 

Plan of Operations

 

We are a digital health startup company engaged in the development, sale and service  of imaging solutions utilizing our proprietary DermaCompare software that we developed for use in derma imaging and analytics (our “DermaCompare” or “Product”). In our development of the DermaCompare technology, we utilized the knowledge learned from advanced military image processing and data analytics to improve the analysis of medical images for the benefit of patients and the medical community. We believe that our proprietary DermaCompare software represents an advancement in skin cancer screening that should enable physicians to more readily identify and monitor changes in their patients’ skin characteristics.

 

DermaCompare is Emerald’s first application of its technology, which we believe represents an advance in the early detection of skin cancer. DermaCompare is based on automated image analytics software using advanced algorithms for alignment, anchoring, identifying and detecting changes in the shapes, colors and sizes of skin lesions, which could potentially become Melanoma. We apply our DermaCompare technology in image capture, correction and intelligent data extraction in the market for derma imaging products.

 

Our DermaCompare solution allows dermatologists and other medical care professionals, using a set of 25 total body photography (“TBP”), to capture sets of skin lesion images with, among other devices, digital cameras, camera-equipped smart phones or tablets. These images are then transmitted online and are remotely analyzed by professionals using our DermaCompare software.

 

Our DermaCompare imaging software has 2 main modules:

 

  A SaaS cloud-based Dr. Module that can be launched on any desktop computer connected to the Internet; or
     
  Mobile APP for mass population uses can be installed on smart phones or tablets with iOS or Android operating systems.

 

Our future plans also contemplate the use of wearable computing and imaging devices such as Google glasses or other comparable devices.

 

Our sales and marketing plan, which has already commenced, is to sell licenses for our DermaCompare imaging software to: NHSs, HMOs, health insurance companies, hospitals and medical clinics through distributers, health care channel partners or directly through independent salespersons and/or web purchase to dermatologists and other physicians (GPs) that we expect to purchase licenses based on the number of potential numbers of patients.

 

23
 

 

In furtherance of our business plan, which has resulted in us becoming an operating company, we have entered into a series of agreements with unaffiliated third parties for the distribution of its DermaCompare Technology, as follows: 

 

  1. On August 12, 2013, Emerald entered into an exclusive distribution with Derma Italy Sri, organized under the laws of the Italy (“Derma Italy”), pursuant to which Derma Italy was granted exclusive distribution rights in Italy;
     
  2. On December 1, 2013, Emerald entered into a distribution agreement with S. Bokhorst - Creatiekracht, organized under the laws of the Netherlands, pursuant to which S. Bokhorst was granted exclusive distribution in the Netherlands;
     
  3. On February 6, 2014, Emerald entered into a distribution agreement with Medical Edge Pty Ltd, organized under the laws of Australia (“Medical Edge”), pursuant to which Medical Edge was granted exclusive distribution rights in the markets of Australia, New Zealand and Oceania;
     
  4. On January 14, 2015, Emerald entered into a Project Agreement with Realize S.A. and Ubitech, entities engaged in IT related to medical technology in Greece, and MEDISP and MPUoP, academic and research institutes in Greece (collectively, the “Greek Partners”). Emerald and the Greek Partners anticipate imminent grants from the Office of Chief Scientist of the State of Israel and the General Secretariat for Research and Technology of Greece, respectively, the proceeds of which will be used for development of enhanced smartphone applications for diagnosis of early stage Melanoma.

 

During the year ended December 31, 2016, we raised $989,974 through the issuance of equity debt and we may be expected to require up to an additional $1.5 million in capital during the next 12 months to fully implement our business plan and fund our operations.

 

Results of Operations during the year ended December 31, 2016 as compared to the year ended December 31, 2015

 

We have had no revenues for the years ended December 31, 2016 and 2015. We had operating expenses related to research and development and general and administrative expenses

 

During the year ended December 31, 2016, we incurred $5,808,925 in net loss due to $1,644,868 research and development expenses and $3,749,867 in general and administrative expenses, $12,422 depreciation expense, $406,459 interest expense and $7,740 loss from foreign currency translation.

 

During the year ended December 31, 2015, we incurred $8,756,267 in net loss due to $740,197 research and development expenses and $7,296,798 in general and administrative expenses, $6,494 depreciation expense, $30,604 interest expense, $678,027 loss on settlement of debt and $4,147 loss from foreign currency translation.

 

Liquidity and Capital Resources

 

On December 31, 2016, we have had current assets of $13,842 consisting of $4,486 in cash and other receivables of $9,356. We had fixed assets, net of $31,803. We had $958,197 in current liabilities consisting of $258,795 in accounts payable and accrued liabilities, $125,962 in accounts payable to related party, $101,341 employee payable, $32,768 in accrued interest, short-term note payable of $29,743 and $409,588 in convertible note payable.

 

On December 31, 2015, we have had current assets of $141,246 consisting of $115,449 in cash and other receivables of $25,797. We had fixed assets, net of $21,120. We had $288,775 in current liabilities consisting of $90,705 in accounts payable and accrued liabilities, $3,480 in accounts payable to related party, $25,612 employee payable, $19,285 in accrued interest, short-term note payable of $119,974 and $29,719 in convertible note payable.

 

We had negative working capital of $944,355 and $147,529 as of December 31, 2016 and December 31, 2015, respectively. The Company is assessing a number of options to increase its working capital to better sustain its operations. Our total liabilities as of December 31, 2016 were $958,197 compared to $288,775 at December 31, 2015.

 

During the year ended December 31, 2016, we had negative cash flow from operations of $818,533 which was mainly the result of a net loss of $5,808,925, $16,441 decrease in other receivables and offset by $4,714,117 in non-cash compensation, $122,991 increase in accounts payable and accrued liabilities, $75,729 increase in employee payable, $122,482 increase in amounts due from related party, $12,422 depreciation expense, and $409,588 amortization of debt discount. 

 

During the year ended December 31, 2015, we had negative cash flow from operations of $1,301,823 which was mainly the result of a net loss of $8,756,267, $19,079 increase in other receivables and offset by $6,626,619 in non-cash compensation, $678,027 loss on settlement of debt, $109,176 increase in accounts payable and accrued liabilities, $260 in decrease in related party payables, $24,913 increase in employee payable, $18,999 decrease in amounts due from related party, $6,494 depreciation expense, and $9,555 amortization of debt discount .

 

During the year ended December 31, 2016, we offset our negative cash flow from operations by $47,600 proceeds from sale of common stock (net of issuance expenses), and $695,000 issuance of short-term convertible payable. In addition, investing activities resulted in proceeds of $23,105 due to purchase of property and equipment.

 

During the year ended December 31, 2015, we offset our negative cash flow from operations by $380,000 proceeds from sale of common stock (net of issuance expenses), and $609,974 issuance of short-term payable. In addition, investing activities resulted in proceeds of $441,156 due to $467,380 related to the reverse merger offset by $26,224 due to purchase of property and equipment.

 

24
 

 

Availability of Additional Capital

 

Our potential financing transactions may include the issuance of equity and/or debt securities including convertible debt, obtaining credit facilities, or other financing mechanisms. In the event that we seek to raise funds through additional private placements of equity or convertible debt, the trading price of our common stock could be adversely effected. Further, any adverse conditions in the financial markets could make it more difficult to obtain future financing through the issuance of equity or debt securities when and if needed. Even if we are able to raise a sufficient amount of funds that may be required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us to seek additional and/or alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we may have to curtail our plan of operations.

 

The Company has only limited capital. Additional financing is necessary for the Company to continue as a going concern. Our independent auditors have issued an unqualified audit opinion for the year ended December 31, 2015 with an explanatory paragraph on going concern.

 

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company. Management believes that actions presently being taken to obtain additional equity financing will provide the opportunity to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2015 and 2014, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of 1934.

 

Contractual Obligations and Commitments

 

As of December 31, 2016 and 2015, we did not have any contractual obligations.

 

Critical Accounting Policies

 

Our significant accounting policies are described in the notes to our financial statements for the year ended December 31, 2015, and are included elsewhere in this prospectus .

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

We have  not entered into, and do not expect to enter into, financial instruments for trading or hedging purposes.

 

25
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm  28
Financial Statements for the Years Ended December 31, 2016 and 2015   
Balance Sheets  29
Statements of Operations  30
Statements of Comprehensive Income (Loss)  31
Statements of Cash Flows  32
Statement of Stockholders’ Deficit  33
Notes to Financial Statements  34

 

26
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF

Emerald Medical Applications Corp

 

We have audited the accompanying consolidated balance sheet of Emerald Medical Applications Corp. and its subsidiary (the “Company”) as of December 31, 2016 and the related consolidated statement of Operations, stockholders’ equity, and cash flows for the year ended December 31, 2016. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on the financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, based on our audit, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and the results of its operations and cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements for the year ended December 31, 2016 have been prepared assuming that the Company will continue as a going concern. To-date, the Company has not generated revenue and does not anticipate generating revenue for an extended period of time. These conditions result in substantial doubts about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of’ these uncertainties

 

Brightman Almagor Zohar & Co.

Certified Public Accountants

Member of Deloitte Touche Tohmatsu Limited

 

Tel Aviv, Israel

April 17, 2017

 

27
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Emerald Medical Applications Corp.

 

We have audited the accompanying balance sheets of Emerald Medical Applications Corp. (“the Company”) as of December 31, 2015 and the related statements of operations, shareholders’ deficit, and cash flows for the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Emerald Medical Applications Corp. at December 31, 2015 and the results of its operations and cash flows for the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 of the financial statements, the Company had incurred a loss, had negative cash flow from operating activities and no revenue during the years ended December 31, 2015. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ M&K CPAS, PLLC  
www.mkacpas.com  
Houston, Texas  
March 31, 2016  

 

28
 

 

Emerald Medical Applications Corp.

Balance Sheets

As of December 31, 2016, and 2015

 

   December 31, 2016   December 31, 2015 
Assets          
Current assets:          
Cash and cash equivalents  $4,486   $115,449 
Other receivable   9,356    25,797 
Total current assets   13,842    141,246 
           
Restricted cash   11,925      
Fixed assets, net of accumulated depreciation of $8,607 at December 31, 2016 and $6,536 at December 31, 2015   31,803    21,120 
Total assets  $57,570   $162,366 
           
Liabilities and Stockholders’ Equity (Deficit)          
Current liabilities:          
Accounts payable and accrued liabilities  $198,795   $90,705 
Accounts payable - related party   125,962    3,480 
Employee payable   161,341    25,612 
Accrued interest payable   32,768    19,285 
Short term payable   29,743    119,974 
           
Convertible note, net of discount of $305,417 at December 31, 2016 and $0 at December 31, 2015   409,588    29,719 
Total current liabilities   958,197    288,775 
Total liabilities   958,197    288,775 
           
Stockholders’ equity (deficit)          
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued.   -    - 
Common stock, $0.0001 par value; 490,000,000 shares authorized;          
19,962,728 and 15,325,889 shares issued and outstanding at December 31, 2016 and 2015, respectively.   1,994    1,533 
Accumulated other comprehensive income   (19,337)   (19,337)
Additional paid-in capital   13,786,957    8,752,711 
Accumulated deficit   (14,670,241)   (8,861,316)
Total stockholders’ deficit   (900,627)   (126,409)
Total liabilities and stockholders’ equity (deficit)  $57,570   $162,366 

 

The accompanying notes are an integral part of these financial statements.

 

29
 

 

Emerald Medical Applications Corp.

Statements of Operations

For the Twelve Months Ended December 31, 2016 and 2015

 

   Twelve months   Twelve months 
   ended   ended 
   December 31, 2016   December 31, 2015 
         
Revenues  $-   $- 
           
Expenses:          
Research and development   (1,644,868)   (740,197)
General and administrative expenses   (3,749,867)   *(7,303,292)
Total operating expenses   (5,394,735)   (8,043,489)
           
Loss from operations   (5,394,735)   (8,043,489)
           
Finance income (expense):          
Finance expense   (414,190)   (34,751)
Loss on settlement of debt   -    (678,027)
Total finance income (expense):   (414,190)   (712,778)
           
Net loss  $(5,808,925)  $(8,756,267)
           
Basic and diluted (net loss per share)  $(0.31)  $(0.81)
Weighted average shares outstanding - basic and diluted   18,966,032    10,872,526 

 

The accompanying notes are an integral part of these financial statements.

 

30
 

 

Emerald Medical Applications Corp.

Statements of Comprehensive Income (Loss)

For the Twelve Months Ended December 31, 2016 and 2015

 

   Twelve months   Twelve months 
   ended   ended 
   December 31, 2016   December 31, 2015 
Net loss  $(5, 808,925)   $(8,756,267)
Change in unrealized foreign currency translation gain (loss)   -    (28,269)
Total comprehensive income (loss)  $(5, 808,925)   $(8,784,536)

 

The accompanying notes are an integral part of these financial statements.

 

31
 

 

Emerald Medical Applications Corp.

Statements of Cash Flows

For the Twelve Months Ended December 31, 2016 and 2015

 

   Twelve months   Twelve months 
   ended   ended 
   December 31, 2016   December 31, 2015 
Operating Activities:          
Net (loss)  $(5, 808,925)   $(8,756,267)
Depreciation expense   12,422    6,494 
Amortization of debt discount   369,588    9,555 
Shares issued for services   2,263,304    885,984 
Warrants issued for services   -    5,343,088 
Loss on settlement of debt   -    678,027 
Employee option expense   2,028,803    397,547 
Adjustments to reconcile net (loss) to net cash (used in) operating activities:          
Increase in accounts payable and accrued liabilities   168,090    109,176 
Increase in employees payable   75,729    24,913 
Decrease in amounts due from related party   122,482    18,739 
Increase in other payable   (119,950)     
Decrease in accrued interest   13,483      
Increase in other receivables   16,441    (19,079)
Net cash used in operating activities   (858,533)   (1,301,823)
           
Investing Activities:          
Increase in restricted cash   (11,925)   - 
Purchase of fixed assets   (23,105)   (26,224)
Effect of reverse merger   -    467,380 
Net cash provided by investing activities   (35,030)   441,156 
           
Financing Activities:          
Proceeds from sale of common stock and warrants (net of issuance expenses)   47,600    380,000 
Issuance of short-term convertible notes   735,000    609,974 
Net cash provided by financing activities   782,600    989,974 
Effect of exchange rates on cash and cash equivalents        (28,269)
           
Net increase (decrease) in cash   (110,963)   101,038 
Cash and cash equivalents - beginning of period   115,449    14,411 
Cash and cash equivalents - end of period  $4,486   $115,449 
           
Non-cash transactions          
Shares issued for reverse merger  $-   $547 
Write of loan(*)   -   $490,000 
Debt settled with stock  $-   $91,687 
Cashless Exercise of Warrants  $192   $- 
Extinguishment of a derivative       $20,532

 

The accompanying notes are an integral part of these financial statements.

 

(*) Following the closing of the reverse merger, the $490,000 loan from Emerald Medical Applications Corp. to Emerald Medical Applications Ltd. was rendered an intercompany loan and as such was written off.

 

32
 

  

Emerald Medical Applications Corp.

Statement of Changes in Stockholders’ Equity (Deficit)

For the Years December 31, 2016 and 2015

 

                      
   Common  

Additional

Paid-in

   Stock  

Other

Comprehensive

   Accumulated  

Total

stockholders’

 
   Shares   Amount   Capital   Payable   Income   Deficit   equity 
Balance as of December 31, 2014   7,438,141    744    (744)   -    8,932    (105,049)   (96,117)
Common stock and warrants issued for cash   1,252,500    125    459,875    (80,000)   -    -    380,000 
Debt converted into shares   274,719    27    769,686    -    -    -    769,713 
Shares issued for services   885,984    88    885,896    -    -    -    885,984 
Class B and C warrants for services   -    -    5,343,088    -    -    -    5,343,088 
ESOP options   -    -    397,547    -    -    -    397,547 
Effect of reverse merger   5,474,545    547    876,833    80,000    -    -    957,380 
Other comprehensive income   -    -    -    -    (28,269)   -    (28,269)
Extinguishment on derivative   -    -    20,532    -    -    -    20,532 
Net loss for the year   -    -    -    -    -    (8,756,267)   (8,756,267)
Balance as of December 31, 2015   15,325,889$   1,533$   8,752,711   $-    (19,337)  $(8,861,316)  $(126,409)
Common stock and warrants issued for cash   119,000    12    47,588         -    -    47,600 
Cashless exercise of warrants   1,928,572    193    (193)   -    -    -    0 
Common stock issued for services   2,558,017    256    2,263,046                   2,263,302 
ESOP options             2,028,805                   2,028,805 
Issuance of convertible notes with beneficial conversion feature             695,000                   695,000 
Net loss for the year                            (5,808,925)   (5,808,925)
Balance as of December 31, 2016   19,931,478    1,994    13,786,957    -    (19,337)   (14,670,241)   (900,627)

 

The accompanying notes are an integral part of these financial statements.

 

33
 

 

Emerald Medical Applications Corp.
Notes to Financial Statements
December 31, 2016

 

Note 1. The Company and Significant Accounting Policies.

 

Organizational Background:

 

The Company’s predecessor, Zaxis International Inc. (“Zaxis”) was incorporated in the State of Ohio in 1989. On August 25, 1995, Zaxis merged with a subsidiary of The InFerGene Company, a Delaware corporation, which entity changed its name to Zaxis International Inc. and the Company was reincoirporated in Delaware as Zaxis. On December 30, 2014, Zaxis entered into a non-binding Memorandum of Understanding (“MOU”) with Emerald Medical Applications Ltd., which was then a private limited liability company incorporated under the laws of the State of Israel (“Emerald Ltd”).

 

On March 16, 2015, Zaxis and Emerald Ltd executed the Share Exchange Agreement. Pursuant to the terms of the Share Exchange Agreement, the Company agreed to issue to the holders of Emerald Ltd’s ordinary shares a total of 5,474,545 shares of the Company’s common stock representing approximately 45% of the Company’s outstanding common stock upon the closing. In addition, the Share Exchange Agreement also provided that the Registrant will issue to Lior Wayn, Emerald Ltd’s CEO and founder, warrants exercisable to acquire 2,700,000 shares of common stock, in three equal tranches of 900,000 shares, at an exercise price of $0.0001 per share, which warrants vested based upon the Company meeting the certain milestones set forth in the Share Exchange Agreement and would represent an additional 21% of the Company’s total outstanding common stock after exercise.

 

On July 14, 2015, the closing of the Share Exchange Agreement was held and the Registrant issued 5,474,545 shares of its common stock to the holders of Emerald Ltd’s ordinary shares in exchange for 100% of Emerald Ltd and, as a result, Emerald Ltd became a wholly owned subsidiary of the Company as of July 14, 2015, following which the Company changed its name to Emerald Medical Applications Corp.

 

The transaction between the Company and Emerald Ltd. was accounted for as a reverse recapitalization. As the shareholders of Emerald Ltd. received the largest ownership interest in the Company, based upon the 5,474,545 shares issued at the closing, the 2.7 warrants exercisable at par and most significantly, the fact that the Share Exchange Agreement expressly provided that a majority of the Company’s board of directors could be appointed by Emerald Ltd., Emerald Ltd. was determined to be the “accounting acquirer” in the reverse recapitalization. As a result, the historical financial statements of the Company were replaced with the historical financial statements of Emerald Ltd.

 

The Company and its subsidiary Emerald Ltd., are collectively referred to as the “Company”.

 

Emerald Medical Applications Ltd (“Emerald”), a wholly-owned subsidiary of the Registrant effective July 14, 2015, was organized as a privately-owned company under the laws of the State of Israel on February 17, 2010. Emerald is a digital health startup company engaged in the development, sale and service of imaging solutions utilizing its proprietary DermaCompare software that it developed for use in derma imaging and analytics (“DermaCompare”). Emerald believes that its proprietary DermaCompare software represents an advancement in skin cancer screening that should enable physicians to more readily identify and monitor changes in their patients’ skin characteristics.

 

Emerald’s DermaCompare solution allows dermatologists and other medical care professionals, using a set of 25 total body photography (“TBP”), to capture sets of skin lesion images with, among other devices, digital cameras, camera-equipped smart phones or tablets. These images are then transmitted online and are remotely analyzed by professionals using our DermaCompare software.

 

Our sales and marketing plan, which has already commenced, is to sell licenses for our DermaCompare imaging software to: NHSs, HMOs, health insurance companies, hospitals and medical clinics through distributers, health care channel partners or directly through independent salespersons and/or web purchase to dermatologists and other physicians (GPs) that we expect to purchase licenses based on the number of potential numbers of patients.

 

Basis of Presentation:

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has not established any source of revenue to cover its operating costs, and as such, has incurred an operating loss since inception. Further, as of December 31, 2016, the cash resources of the Company were insufficient to meet its current business plan, and the Company had negative working capital. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue operating as a “going concern” is dependent on several factors, among them is the ability to raise sufficient additional funding.

 

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

34
 

 

Significant Accounting Policies

 

Use of Estimates:

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.

 

Cash and Cash Equivalents:

 

For financial statement presentation purposes, the Company considers those short-term, highly liquid investments with original maturities of three months or less to be cash or cash equivalents. There were no cash equivalents as of December 31, 2016 and December 31, 2015.

 

Other Receivables

 

The Company treats VAT refunds claimed resulting from excess VAT paid over VAT received as other receivables, amount shown as other receivables as of December 31, 2016 was $ 8,234.

 

Currency Translation and other Comprehensive Income

 

The functional currency of the Emerald Application Corp. is the U.S dollar (“dollar”) since the dollar is the currency of the primary economic environment in which the Company has operated and expects to continue to operate in the foreseeable future. Transactions and balances denominated in dollars are presented at their original amounts. Transactions and balances denominated in foreign currencies have been re-measured to dollars in accordance with the provisions of ASC 830-10, “Foreign Currency Translation”. All transaction gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of operations as financial income or expenses, as appropriate.

 

Prior to January 1, 2016, Emerald Medial Application Ltd.’s functional currency was the New Israeli Shekel (“NIS”). Translation gains and losses from the application of the U.S. dollar as the reporting currency while the NIS was the functional currency are included as part of cumulative currency translation adjustment, which is reported as a component of shareholders’ equity under accumulated other comprehensive loss. Emerald Medial Application Ltd, re-assessed its functional currency and determined as at January 1, 2016, its functional currency changed from NIS to the U.S. dollar based on management’s analysis of changes in the primary economic environment in which the Company operates. The change in functional currency is accounted for prospectively from January 1, 2016.

 

fixed assets:

 

New property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 6 years. Expenditures for renewals and betterments are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place.

 

Accounting For Obligations And Instruments Potentially To Be Settled In The Company’s Own Stock:

 

We account for obligations and instruments potentially to be settled in the Company’s stock in accordance with FASB ASC 815, Accounting for Derivative Financial Instruments. This guidance addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company’s own stock.

 

Fair Value of Financial Instruments: FASB ASC 825, “Financial Instruments,” requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. FASB ASC 825 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. At December 31, 2015 and 2014, the carrying value of certain financial instruments (cash and cash equivalents, accounts payable and accrued expenses.) approximates fair value due to the short-term nature of the instruments or interest rates, which are comparable with current rates.

 

Accounting For Convertible Debt Instruments

 

We account for convertible debt instruments, which do not meet the definition of a derivative financial instrument per FASB ASC 815, Accounting for Derivative Financial Instruments, in accordance with FASB ASC 470-20, Debt with Conversion and Other Options. This guidance addresses the allocation of proceeds from the issuance of convertible debt into its equity and debt components. Discount on the debt component resulting from allocation of proceeds to the equity component is amortized in the profit and loss statement as finance expense.

 

Allocation of proceeds into equity and debt components of convertible notes issued together with other detachable financial instruments is performed in relation to the proceeds allocated to the convertible notes based on the relative fair value of such convertible notes and the other detachable financial instruments issued.

 

35
 

 

Share-based compensation

 

The Company applies ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors (including employee stock options under the Company’s stock plans) based on estimated fair values.

 

ASC 718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s statement of operations.

 

The Company recognizes compensation expenses for the value of non-employee awards based on the straight-line method over the requisite service period of each award, net of estimated forfeitures.

 

The Company estimates the fair value of stock options granted as equity awards using a Black-Scholes options pricing model. The option-pricing model requires a number of assumptions, of which the most significant are share price, expected volatility and the expected option term (the time from the grant date until the options are exercised or expire). Expected volatility is estimated based on volatility of similar companies in the technology sector. The Company has historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interest rate is based on the yield from governmental zero-coupon bonds with an equivalent term. The expected option term is calculated for options granted to employees and directors using the “simplified” method. Grants to non-employees are based on the contractual term. Changes in the determination of each of the inputs can affect the fair value of the options granted and the results of operations of the Company.

 

Fair Value Measurements:

 

The Company adopted the FASB standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

 

As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows.

 

Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Earnings per Common Share

 

We compute net income (loss) per share in accordance with ASC 260, Earning per Share. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing, Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. All per share disclosures retroactively reflect shares outstanding or issuable as though the reverse split had occurred January 1, 2012.

 

The weighted average number of Ordinary Shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the reverse recapitalization as if these shares had been outstanding as of the beginning of the earliest period presented

 

Research and development expenses, net:

 

Research and development expenses are charged to the statement of operations as incurred. Grants for funding of approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the costs incurred and applied as a deduction from the research and development expenses.

 

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Income Taxes:

 

We have adopted FASB ASC 740, Accounting for Income Taxes. Pursuant to ASC 740, we are required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.

 

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

 

Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax basis of assets and liabilities using the tax rates and laws in effect when the differences are expected to reverse. ASC 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Realization of our net deferred tax assets is dependent upon our generating sufficient taxable income in future years in appropriate tax jurisdictions to realize benefit from the reversal of temporary differences and from net operating loss, or NOL, carryforwards. We have determined it more likely than not that these timing differences will not materialize and have provided a valuation allowance against substantially all of our net deferred tax asset. Management will continue to evaluate the realizability of the deferred tax asset and its related valuation allowance. If our assessment of the deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income during the period in which we make the determination. Our tax rate may also vary based on our results and the mix of income or loss in domestic and foreign tax jurisdictions in which we operate.

 

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and to the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we will reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We will record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

 

ASC 740 which requires recognition of estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income tax is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized.

 

Uncertain Tax Positions:

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of FASB ASC 740-10, Accounting for Uncertain Income Tax Positions, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

Recent Accounting Pronouncements

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) (“ASU 2015-16”). Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s consolidated financial statements.

 

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period.

 

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In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on its balance sheets.

 

In January 2016, the FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities”, which provides targeted improvements to the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. Specific accounting areas addressed include, equity investments, financial liabilities reported under the fair value option and valuation allowance assessment resulting from unrealized losses on available-for-sale securities. The standard also changes certain presentation and disclosure requirements for financial instruments. This ASU is effective for the Company in its first quarter of fiscal year 2019. Early adoption, with certain exceptions, is not permitted. The Company does not expect that the adoption of this standard will have a significant impact on the financial position or results of operations.

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies certain provisions associated with the accounting for stock compensation. Among other things, ASU 2016-09 requires companies to record excess tax benefits and tax deficiencies as income tax benefit or expense in the statement of income and eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company is currently reviewing and evaluating this guidance and its impact on its consolidated financial statements.

 

Note 3. Stockholders’ Equity.

 

On January 8, 2015, the Board of Directors and the majority consenting stockholders of the Company executed a Joint Written Consent in accordance with the provisions of Section 242 of the Delaware General Corporation Law, to increase the authorized capital stock of the Company from 100,000,000 shares of common stock to 490,000,000 shares of common stock (the “Joint Written Consent”). All other provisions of the Company’s capital stock remained unchanged. Also, on that same date, the Company’s Board of Directors and majority consenting stockholders authorized a reverse split of common stock at the ratio of 1:4. The effective date of the reverse split was March 20, 2015, the date that FINRA approved implementation of the reverse recapitalization.

 

Except as otherwise noted, all share, option and warrant numbers have been restated to give retroactive effect to this reverse split. All per share disclosures retroactively reflect shares outstanding or issuable as though the reverse split had occurred at the beginning of the earliest period presented. January 1, 2012

 

The number of ordinary shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the reverse recapitalization as if these ordinary shares had been outstanding as of the beginning of the earliest period presented

 

Recent Issuances of Common Stock

 

Between January 15, 2015 and March 15, 2015, the Company sold a total of 2,052,000 units for cash consideration of $780,000 at a price of $0.40 (the “Units”), each unit comprised of one share of common stock and one Class A warrant exercisable at $0.80 per share with a term 24 month. These units were issued as stock payable and the cash from sale of units was not received for the sale of stock pre-reverse merger

 

Between April 1, 2015 and June 29, 2015, the Company sold a total of 1,012,500 units for cash consideration of $405,000 at a price of $0.40 (the “Units”), each unit comprised of one share of common stock and one Class A warrant exercisable at $0.80 per share with a term 24 month. These units were issued as stock payable and the cash from sale of units was not received for the sale of stock pre-reverse merger.

 

On July 21, 2015 the Company sold a total of 140,000 units for cash consideration of $15,000 at price of $0.107 (the “Units”), each unit comprised of one share of common stock and one Class A warrant exercisable at $0.80 per share with a term 24 month. These units were issued as stock payable and the cash from sale of units was not received for the sale of stock pre-reverse merger.

 

Between July 1, 2015 and September 30, 2015 the Company sold a total of 862,500 units for cash consideration of $345,000 at price of $0.40 (the “Units”), each unit comprised of one share of common stock and one Class A warrant exercisable at $0.80 per share with a term 24 month. Of these units $65,000 were issued as stock payable and the cash from sale of units was not received for the sale of stock pre-reverse merger and $280,000 cash was received subsequent to Closing of the reverse merger.

 

On July 31, 2015 and July 30, 2015 the Company issued 517,900 shares to one service provider, for financial and marketing consultant, and a total of 100,000 shares to two service providers, respectively, for services valued at a total value of $617,900, arrived at using the stock price on date of grant of $1.00 per Nasdaq.com.

 

On July 16, 2015 five Emerald debt holders in amount of $87,910 converted their debt into 274,719 units at a conversion price of $0.32 per unit, each unit comprised of one share of common stock and one Class A warrant exercisable at $0.80 per share with a term 24 month. The Loss on Settlement of Debt recorded is $678,027.

 

On July 14, 2015 the Company issued Emerald’s CEO and founder, Lior Wayn, 5,474,545 shares as per the share purchase agreement valued at $877,380, valued on the date of grant for the price of common stock.

 

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On July 16, 2015 consultants were issued 2,500,000 Class B Warrants exercisable for a two-year period to acquire one (1) share of Common Stock at a price of $0.40 per share; The fair value of these warrants is $2,199,507. The warrants were valued using the Black-Scholes model with volatility of 182% and discount rate of 0.67%. The Class B warrants are fully vested and were accordingly included in expenses as stock based compensation.

 

On July 16, 2015 consultants were issued 2,536,247 Class C Warrants exercisable for a 90 day period, commencing 90 days after the effective date of this Registration Statementat an exercise price of $0.40 to acquire one (1) share of Common Stock and one (1) Class A Warrant at an exercise price of $0.80. The fair value of these warrants is $3,143,581. The warrants were valued using the Black-Scholes model with volatility of 182% and discount rate of 0.67%. The Class C warrants are fully vested and were accordingly included in expenses as stock based compensation.

 

On November 17, 2015, the Company sold 250,000 units for cash consideration of $100,000 at price of $0.40 (the “Units”), each unit comprised of one share of common stock and one Class A warrant exercisable at $0.80 per share with a term 24 month. The relative fair value of the stock with embedded warrants was $41,304 for the common stock and $58,696 for the class A warrants. The warrants were valued using the Black-Scholes model with volatility of 149% and a discount rate of 0.50%.

 

Between November 5, 2015 and November 16, 2015 the Company issued 268,084 shares to three service providers and for services valued at a total value of $268,084, arrived at using the stock price on date of grant of $1.00 per Nasdaq.com.

 

On January 26, 2016 and March 17, 2016, the Company issued 125,000 common shares to one service provider and 50,000 common shares to two service providers, respectively, for services valued at a total value of $251,250, arrived at using the stock price on date of grant of $1.75 and $0.65, respectively, per Nasdaq.com.

 

On February 18, 2016, the Company issued 1,195,000 shares to three acting directors, for services valued at a total value of $1,194,403, arrived at using the stock price on date of grant of $1.00 per Nasdaq.com.

 

On January 26, 2016, consultants that were previously issued 2,500,000 Class B Warrants exercisable for a two-year period to acquire one (1) share of Common Stock at a price of $0.40 per share, exercised the warrants on a cashless basis resulting in 1,928,572 shares issued with no additional related expense booked.

 

On March 24, 2016, a convertible note payable and warrants where was issued to GoldMed Ltd for a consideration of $75,000 The warrants and the beneficial conversion feature  were valued at $75,000, which resulted in a $75,000 discount recorded as a reduction of debt and an increase to additional paid in capital. The discount is amortized in finance expense over the term of the note.

 

On April 11, 2016, a convertible note payable and warrants was issued to Maz Partner. The warrants and the e beneficial conversion feature were valued at $80,000, which resulted in a $80,000 discount recorded as a reduction of debt and an increase to additional paid in capital. The discount is amortized in finance expense over the term of the note.

 

On May 5, 2016, the Company issued 150,000 shares to one service provider for services valued at a total value of $105,000, arrived at using the stock price on date of grant of $0.7, per Nasdaq.com.

 

On May 10, 2016, the Company issued 41,667 shares to one service provider for services valued at a total value of $29,584, arrived at using the stock price on date of grant of $0.71, per Nasdaq.com.

 

On May 18, 2016, the Company issued 150,000 shares to one service provider for services valued at a total value of $102,000, arrived at using the stock price on date of grant of $0.68, per Nasdaq.com.

 

On June 28, 2016, the Company issued 175,000 shares to three service providers for services valued at a total value of $122,500, arrived at using the stock price on date of grant of $0.7, per Nasdaq.com.

 

On June 30, 2016, the Company issued 333,333 shares to one service provider for services valued at a total value of $226,666, arrived at using the stock price on date of grant of $0.68, per Nasdaq.com.

 

On June 6, 2016, a convertible note payable and warrants was issued to Alpha Capital. The warrants and the beneficial conversion feature were valued at $440,000, which resulted in a $440,000 discount recorded as a reduction of debt and an increase to additional paid in capital. The discount is amortized in finance expense over the term of the note.

 

On June 30, 2016, a convertible note payable and warrants was issued to Ilan Malka. The warrants and the embedded beneficial conversion feature were valued at $40,000, which resulted in a $40,000 discount recorded as a reduction of debt and an increase to additional paid in capital. The discount is amortized in finance expense over the term of the note.

 

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On July 7, 2016, a convertible note payable and warrants was issued to Firstfire Global Opportunities Fund LTC. The warrants and the beneficial conversion feature were valued at $100,000, which resulted in a $100,000 discount recorded as a reduction of debt and an increase to additional paid in capital. The discount is amortized in finance expense over the term of the note.

 

On July 1, 2016, the Company issued 300,000 shares to one service provider for service valued at a total value of $213,000 arrived at using the stock price on date of grant of $0.71, per Nasdaq.com.

 

On July 1, 2016, the Company issued 6,767 shares to one service provider for service valued at a total value of $3,587 arrived at using the stock price on date of grant of $0.53, per Nasdaq.com.

 

On August 4, 2016, the Company issued 31,250 shares to one service provider for service valued at a total value of $15,313, arrived at using the stock price on date of grant of $0.49, per Nasdaq.com.

 

On November 10, 2016, the Company issued 119,000 units to Guy Shalom in total amount of $47,600. Each unit consist 119,000 warrants exercisable for a two-year period in exercise price of $0.8 and 119,000 common shares.

 

The following table summarizes information of outstanding warrants as of December 31, 2016:

 

   Warrants   Warrant Term   Exercise Price   Exercisable 
Investors - Class A Warrants (1)   5,918,719    2 years   $0.80    5,918,719 
Investors - Class B Warrants (2)   1,350,000    2 years   $0.40    1,350,000 
Investors - Class C Warrants (3)   5,072,492    (3)  $(3)   5,536,246 
Alimi Ahmed - Class E Warrants (4)   900,000    (4)  $0.0001    900,000 

 

The Class A Warrants were issued in connection with a private placement in reliance upon Regulation S, pursuant to which the Registrant sold a total of 5,918,719 units at a price of $0.40 per unit (the “Units”), each Unit comprised of one Share and one Class A Warrant exercisable at $0.80 per share with a term 24 months. While all of the Class A Warrants are exercisable within 60 days, in fact, none of these warrants will be exercised for the foreseeable future, based upon the exercise price of $0.80 per Share.

 

(2) The Class B Warrants were issued to consultants for bona fide services to the Company and are exercise, on a cashless basis at a price of $0.40 per Share for a period of two years.

 

(3) The Class C Unit Warrants were issued to consultants for bona fide services to the Company, and each Unit is exercisable at a price of $0.40 to purchase one Share of Common Stock and one Class A Warrant which, in turn, is exercisable to purchase one additional Share at a price of $0.80. The Class C Unit Warrants expire ninety (90) days after the effective date of this Registration Statement.

 

(4) A total of 2,700,000 Class E Warrants were issued by the Registrant to Lior Wayn pursuant to the terms of the Share Exchange Agreement and were exercisable in three equal tranches of 900,000 Shares each (the “Tranches”) at an exercise price of $0.0001 per Share, subject to and within 45 days of the Registrant achieving the milestones defined in the Share Exchange Agreement

 

On December 16, 2016, the Company filed a Form 8-K reporting the termination of Lior Way’s employment agreements with the Company and Emerald Ltd., and his removal as an executive officer and director. After the year-ended December 31, 2016, Mr. Wayn transferred, sold and assigned his 5,212,878 shares of the Company’s common stock and 900,000 Class E Warrants that were fully-vested to an entity controlled by Mr. Alimi Ahmed, then a member of the Company’s Board of Directors. This transaction was reported in the Company’s Form 8-K filed with the SEC on January 27, 2017. Effective as of December 31, 2016, the remaining 1,800,000 Class E Warrants that had been issued to Mr. Wayn Warrants were canceled.

 

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Sale of Unregistered Securities

 

During the last two years, the Registrant issued the following restricted shares which were not registered under the Act

 

On June 18, 2015 and July 21, 2015, after the Company ceased to be a shell company, the Company issued and sold unregistered securities, as set forth in the table below, in private offering of a total of 2,925,000 units at a price of $0.40. Each Unit consisted of one Share and one Class A Warrant exercisable to purchase one additional Share of Common Stock at a price of $0.80 (the “Units”). The sales were made without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

Name of Subscriber  Bases for Issuance  Date of Issuance  Price Per Unit   Shares Issued 
Short Trade Ltd (1)  Subscription Agreement  06/18/2015  $0.40    625,000 
Prop Trade Ltd (2)  Subscription Agreement  06/18/2015  $0.40    375,000 
Dr. Ben Zion Weiner  Subscription Agreement  06/18/2015  $0.40    125,000 
RP Holdings (1992) Ltd. (3)  Subscription Agreement  06/18/2015  $0.40    125,000 
Dr. Tank Siak Khim  Subscription Agreement  06/18/2015  $0.40    250,000 
Yoel Yogev  Subscription Agreement  06/18/2015  $0.40    200,000 
Universal Link Ltd (4)  Subscription Agreement  06/18/2015  $0.40    175,000 
Avigdor Hakmon  Subscription Agreement  06/18/2015  $0.40    62,500 
Dr. Shmuel Pasternak  Subscription Agreement  06/18/2015  $0.40    62,500 
Liat Sidi  Subscription Agreement  07/21/2015  $0.40    25,000 
Tzvi Aharonson  Subscription Agreement  07/21/2015  $0.40    137,500 
Estory Giloz Ran  Subscription Agreement  07/21/2015  $0.40    312,500 
Malca Maimon  Subscription Agreement  07/21/2015  $0.40    87,500 
Ohad Cohen  Subscription Agreement  07/21/2015  $0.40    150,000 
Nissim Simhon  Subscription Agreement  07/21/2015  $0.40    50,000 
NE Solution Ltd (5)  Subscription Agreement  07/21/2015  $0.40    162,500 
   Total     $1,169,961    2,925,000 

 

(1) Short Trade Ltd is controlled by Mr. Shlomo Noyman, a resident of Israel.

(2) Prop Trade Ltd is controlled by Mr. Andrew Philip Dings, a resident of Singapore.

(3) RP Holdings (1992) Ltd. is controlled by Mr. Rubin Zimerman, a resident of Israel.

(4) Universal Link Ltd is controlled by Mr. Ahmad Alimi, a resident of Israel.

(5) NE Solution Ltd is controlled by Mr. Lee Yang Tong, a resident of Singapore.

 

In July 2015, the persons listed in the table below, each a lender to Emerald on or before November 2014, converted their debt owed by Emerald into Units, each consisting of one restricted Share and one Class A Warrant, at a conversion price of $0.32. Each of the lenders was a resident of Israel and the issuance was without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

Name of Note Holder  Bases of Issuance  Debt Converted   Shares Issued 
David Masasa  Conversion of Debt  $8,788    27,463 
Liron Carmel  Conversion of Debt  $19,521    61,003 
Yoseph Cohen  Conversion of Debt  $15,632    48,850 
Tzvi Aharonson  Conversion of Debt  $43,969    137,403 
   Total  $87,910    274,719 

 

On July 21, 2015, the Registrant issued 140,000 restricted Shares to Shira Brand Shiffer, a resident of Israel, at a price of $0.107 per Share, with no warrants attached. The issuance to Shira Brand Shiffer, without registration under the Act, was made in reliance upon Section 4(2) of the Act and Reg S.

 

On July 16, 2015, the Registrant issued 517,900 restricted shares of Common Stock to Meyda Consulting Ltd, an entity organized under the laws of Israel controlled by Eliyahu Kirstein, a resident of Israel. The issuance of these shares was in consideration for services and was made without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

On July 16, 2015, the Registrant issued Class B Warrants and Class C Unit Warrants to the following entities for bona fide services to the Registrant. The issuances of these Warrants were in consideration for services and was made without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

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   Basis of Issuance  Class B Warrant Issued   Class C Unit Warrants Issued   Total Warrants Issued 
Yaad Consulting Ltd. (1)  Services   625,000   $634,063    1,259,063 
LA Pure Capital Ltd. (2)  Services   375,000   $380,467    755,467 
Amir Uziel Economic Consultant Ltd. (3)  Services   625,000   $634,061    1,259,061 
Capitalink Ltd. (4)  Services   625,000   $634,061    1,259,061 

 

(1) The control person of Yaad Consulting Ltd is Itschak Shrem, a resident of Israel.
(2) The control person of LA Pure Capital Ltd is Kfir Silberman, a resident of Israel.
(3) The control person of Amir Uziel Economic Consultant Ltd. is Amir Uziel, a resident of Israel.
(4) The control person of Captalink Ltd is Lavi Krasney, a resident of Israel.

 

During November 2015, the Registrant issued and sold unregistered Shares as set forth on the table below:

 

Name of Issuee  Date of Issuance  Number of Shares   Consideration  Bases for Issuance
Shirat Hahayim  11/17/2015   250,000   $0.40 per share  Subscription Agreement (1)
Lyons Capital LLC. (2)  11/05/2015   250,000   Valued at $1.00 per share  Services
David Treves  11/16/2015   12,334   Valued at $1.00 per share  Services
Pnina Rosenblum  11/09/2015   5,750   Valued at $1.00 per share  Services
Total Shares Issued      518,084       

 

(1) The issuance was pursuant to a Unit Subscription Agreement each consisting of 1 Share and 1 Class A Warrant exercisable for a period of 24 months to purchase 1 additional Share at $0.80.
(2) Lyons Capital LLC is organized under the laws of Florida and its control person, Jason Lyons, is a resident of Florida.

 

The issuance and sale of Shares to Shirat Hahayim and Pnina Rosenbluem, residents of the State of Israel, and David Treves, resident of Australia, without registration under the Act, was made in reliance upon the exemptions provided in Section 4(2) of the Act and and Regulation S promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Act. The issuance of Shares to Lyons Capital LLC, without registration under the Act, was in reliance upon Section 4(2) and Regulation D promulgated by the SEC under the Act.

 

During 2016, the Registrant issued and sold common Shares as set forth on the table below:

 

Name of Issuee  Date of Issuance  Number of Shares   Consideration  Bases for Issuance
Yair Fudim  02/18/2016   482,000   Valued at $0.9995 per share  Services
Estery Giloz Ran  02/18/2016   482,000   Valued at $0.9995 per share  Services
Baruch Kfir  02/18/2016   231,000   Valued at $0.9995 per share  Services
Legend Securities Inc  03/17/2016   50,000   Valued at $0.65per share  Services
JFS Investments PR LLC  01/26/2016   125,000   Valued at $1.75 per share  Services
Garden state securities Inc  05/04/2016   150,000   Valued at $0.70 per share  Services
JFS Investments PR LLC  05/10/2016   41,667   Valued at $0.71 per share  Services
Kodiak Capital Group LLc  05/18/2016   150,000   Valued at $0.68 per share  Services
Alpha Capital Anstalt  06/26/2016   125,000   Valued at $0.70 per share  Services
Legend Securities Inc  06/28/2016   50,000   Valued at $0.70 per share  Services
JFS Investments PR LLC  06/30/2016   333,333   Valued at $0.68 per share  Services
VAR Growth Corporation  07/01/2016   300,000   Valued at $0.71 per share  Services
David Treves  07/27/2016   6,767   Valued at $0.53 per share  Services
Firstfire Global Opportunities Fund LLC  08/04/2016   31,250   Valued at $0.49 per share  Services
Guy Shalom  10/11/2016   119,000   $0.40 per share  Investment
Total Shares Issued      2,677,017       

 

During 2016, the Registrant issued Class A Warrants and Class B Unit Warrants to the following entities for bona fide services to the Registrant. The issuances of these Warrants were in consideration for convertible note payable and was made without registration under the Act in reliance upon the exemptions provided in Section 4(2) of the Act and Reg S.

 

Name of Subscriber  Bases for Issuance  Date of Issuance  Price Per Unit   Class A Warrant Issued   Class B Warrant Issued 
Ilan Malca  Subscription Agreement  05/24/2016  $0.40    100,000    - 
Alpha Capital Anstalt  Subscription Agreement  05/30/2016  $0.40    1,000,000    1,000,000 
Maz Partners LP  Subscription Agreement  03/31/2016  $0.40    200,000    - 
Chi Squared Capital Inc  Subscription Agreement  05/30/2016  $0.40    100,000    100,000 
Firstfire Global Opportunities Fund LLC  Subscription Agreement  07/07/2016  $0.40    250,000    250,000 
Guy Shalom  Investment Agreement  10/11/2016  $0.40    119,000    - 
Total Warrants Issued              1,769,000    1,350,000 

 

42
 

 

Recent Option Grants

 

On October 1, 2015, the Company’s board of directors approved a grant of 592,000 options to certain of its employees and consultants. Each option is exercisable to purchase a share of common stock at an exercise price equal to $0.01-$0.4 per share. As of December 31,2016, 561,280 options were fully vested and 30,720 options were canceled. As a result, the Company recognized share-based payment net expenses in 2016 and 2015 in the amount of $141,436 and $398,575 respectively.

 

On February 11, 2016, the Company’s board of directors approved a grant of 70,533 options to certain of its employees. Each option is exercisable to purchase a share of common stock at an exercise price equal to $0.01-$0.4 per share. As of December 31,2016, 47,133 options were fully vested and 31,500 options were canceled. As a result, the Company recognized share-based payment expenses in 2016 in the amount of $21,798.

 

On February 18, 2016, the Company’s board of directors approved a grant of 1,466,700 options to certain of its employees and consultants. Each option is exercisable to purchase a share of common stock at an exercise price equal to $0.01- $0.4 per share. As of December 31,2016, all the options were fully vested. As a result, the Company recognized share-based payment expenses in 2016 in the amount of $1,389,614.

 

On May 5, 2016, the Company’s board of directors approved a grant of 93,750 options to certain of consultants. Each option is exercisable to purchase a share of common stock at an exercise price equal to $0.001 per share. As of December 31, 2016, all the options were fully vested. As a result, the Company recognized share-based payment expenses in 2016 in the amount of $61,455.

 

On October 1, 2016, the Company’s board of directors approved a grant of 2,514,500 options to certain of its executive, director and consultants. Each option is exercisable to purchase a share of common stock at an exercise price equal to $0.001- $0.4 per share. As of December 31, 2016, 1,111,500 options were fully vested and $450,000 thousands were canceled. As a result, the Company recognized share-based payment expenses in 2016 in the amount of $396,222.

 

On November 3, 2016, the Company’s board of directors approved a grant of 339,000 options to certain of its employees. Each option is exercisable to purchase a share of common stock at an exercise price equal to $0.2-$0.4 per share. As of December 31,2016, 139,000 options were fully vested. As a result, the Company recognized share-based payment expenses in 2016 in the amount of $40,747.

 

A summary of the Company’s activity related to options to employees, executives and directors and related information is as follows:

 

  

For the year ended

December 31, 2016

  

For the year ended

December 31, 2015

 
   Amount of options   Weighted average exercise price   Aggregate intrinsic value   Amount of options   Weighted average exercise price   Aggregate intrinsic value 
       $   $       $   $ 
Outstanding at beginning of year   561,280    0.0666         -    -    - 
Granted   5,440,483    0.1336         592,000    0.06      
Exercised   (697,086)   -         -    -      
Cancelled   (550,000)   (0.3956)        (30,720)          
                               
Outstanding at the end of year   4,193,397    0.11    1,006,415    561,280    0.06    527,603 
Vested and expected-to-vest at end of period   3,288,062    0.11    789,134    561,280    0.06    527,603 

 

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the fair market value of the Company’s common shares on December 31, 2016 and December 31, 2015 respectively and the exercise price, multiplied by the number of in-the-money stock options on those dates) that would have been received by the stock option holders had all stock option holders exercised their stock options on those dates.

 

The stock options outstanding as of December 31, 2016, and December 31, 2015, have been separated into exercise prices, as follows:

 

Exercise price  Stock options outstanding as of December 31,   Weighted average remaining contractual life – years as of December 31,   Stock options exercisable as of December 31, 
   2016   2015   2016   2015   2016   2015 
                         
0.4   1,208,600    78,720    9.25    8.75    1,208,600    78,720 
         -                     
0.2   1,870,000    -    9         1,870,000    - 
(*)   1,114,797    482,560    9.25    8.75    1,114,797    482,560 
    4,193,397    561,280    9.25    8.75    4,193,397    561,280 

 

(*)       Less than 1%

 

Compensation expense recorded by the Company in respect of its stock-based employee compensation awards in accordance with ASC 718-10 for the year ended December 31, 2016 and 2015 was $2,028,805 and $397,547, respectively.

 

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The fair value of the stock options is estimated at the date of grant using Black-Scholes options pricing model with the following weighted-average assumptions:

 

   Years ended December 31, 
    2016    2015 
           
Expected volatility   157%   70.0%
Risk-free interest   0.69%   1.0%
Dividend yield   0%   0%
Expected life of up to (years)   6.0    6.0 

 

Note 4. Related Party Transactions.

 

On July 16, 2015, five holders of Emerald debt with principal amount of $87,910 converted their debt into 274,719 units at a conversion price of $0.32 per unit, each unit comprised of one share of common stock and one Class A warrant exercisable at $0.80 per share with a term of 24 month. The Company recognized Loss on settlement of debt of $678,027 on the statements of operations.

 

On July 14, 2015, the Company issued Emerald’s CEO and founder, Lior Wayn, 5,474,545 shares as per the share purchase agreement valued at $877,380, valued on the date of grant using the closing price of common stock on that date.

 

Following the closing of the reverse merger, the $490,000 loan from Emerald Medical Applications Corp. to Emerald Medical Applications Ltd. was rendered an intercompany loan and as such was written off.

 

The Company’s former CEO, Lior Wayn, was owed $3,252 and $3,480 payable as of December 31, 2016 and December 31, 2015, respectively.

 

On February 18, 2016, the Company issued 1,195,000 shares to three acting directors, for services valued at a total value of $1,194,403, arrived at using the stock price on date of grant of $1.00 per Nasdaq.com.

 

On October 1, 2016, The Company granted its Chairman a total of 180,000 stock options (the “Options”). Of this amount 90,000 Options were fully vested immediately and 90,000 Options over vest periods of 8 quarters. The options are exercisable at prices of $0.20 per Share. The options were valued using the Black-Scholes option pricing model with 113% volatility and 1.14% discount rate for a total value of $64,518. Of this amount, $35,668 was expensed in 2016 with the remaining balance will be expensed in 2017 and 2018, 16,485 and 12,364 respectively.

 

Note 5. Employee Payable.

 

As of December 31, 2016, the Company had a total of $101,341. As of December 31, 2015, the Company had a total of $29,092 of which $3,480 were related party and $25,612 were unrelated party employee payable related to the monthly wages payable to the Company’s employees.

 

Note 6. Notes Payable

 

Convertible Notes Payable – see note 3

 

Note Payable - Non-Convertible

 

On July 8, 2014, the Company issued a convertible promissory note to Axel Springer Plug & Play Accelerator GmbH (the “Holder”) in the amount of $29,719. As of December 31, 2015, and 2016, the Company had accrued interest of $2,013 and $0 respectively. As of December 31, 2015, the convertible note is no longer convertible as Axel Springer did not exercise its option to convert upon occurrence of a qualifying event

 

Note 7. Commitments and Contingencies

 

The Company received grants to fund research and development projects from the State of Israel according to guidelines and procedures of the Office of the Chief Scientist of the Ministry of Industry and Trade. According to the agreement, the Company is obligated to pay royalties on the sale of products developed with the participation of the Chief Scientist. The royalty rate is 3.5% of sales and the total royalties will not exceed the amount of the grants received. As of December 31, 2016, total grants received amounted approximately $222 thousands.

 

The obligation to pay royalties is contingent upon the successful outcome of the Company’s research and development projects and the attainment of sales. The Company has no obligation to pay royalties, if sales are not generated, and if the research and development project fails.

 

44
 

 

Note 8. Derivative Liabilities from Convertible Notes - Axel Springer

 

The Company values its derivative instruments related to embedded conversion features and warrants from the issuance of convertible debentures in accordance with the Level 3 guidelines. For the twelve-month period ended December 31, 2015, the following table reconciles the beginning and ending balances for financial instruments that are recognized at fair value in these consolidated financial statements. The fair value of embedded conversion features that have floating conversion features and tainted common stock equivalents (warrants and convertible debt) are estimated using a Binomial Lattice model. The key inputs to this valuation model as of December 31, 2015, were: Volatility of 143.9% for the twelve-month period ending December 31, 2015, inherent term of instruments equal to the remaining contractual term, quoted closing stock prices on valuation dates, and various settlement scenarios and probability percentages summing to 100%.

 

Fair Value Measurements at December 31, 2015

 

Level 3 - Derivative liabilities from:  Balance at
December 31, 2014
   New Issuances   Extinguishment   Change in Fair Value  

Balance at

December 31, 2015

 
Convertible Note  $20,532   $-   $(20,532)   -   $- 

 

Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input used in the fair value measurement is the estimation for probability percentages assigned to future expected settlement possibilities. A significant increase (decrease) in this distribution of percentages would result in a higher (lower) fair value measurement.

 

The Company had no liabilities that were measured and recognized at fair value as of December 31, 2016 and December 31, 2015

 

There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the years ended December 31, 2016.

 

The Company had no other assets or liabilities valued at fair value on a recurring or non-recurring basis as of December 31, 2016 or December 31, 2016 and the years then ended.

 

Note 9. Other Receivables.

 

As of December 31, 2016, and December 31, 2015, the Company had other receivables of $9,356 and $25,797, respectively, which represent VAT refunds claimed resulting from excess VAT paid over VAT received from the Israeli government.

 

Note 10. Accounts Payable and Accrued Liabilities.

 

As of December 31, 2016, and December 31, 2015 the Company had accounts payable and accrued liabilities of $258,795 and $90,705, respectively, which mainly represent accrued expenses such as accrued vacation and deferred salary.

 

Note 11. Litigation Accruals.

 

On November 9, 2015, the Company received a notice of claim from Tomer Maharshak & Co., Israel, the Company’s former attorneys, for legal fees allegedly owed by the Company and its wholly owned Israeli subsidiary, Emerald Medical Applications Ltd. On December 12, 2015 and December 23, 2015, the claim was settled for cash payment and the Company recorded neither a gain nor a loss on the settlement. As of December 31, 2015, the litigation accrual balance is zero and there are currently no ongoing litigations against the Company.

 

Note 12. Income Taxes.

 

The Company is subject to income taxes under the Israeli and U.S. tax laws:

 

Corporate tax rates

 

The Company is subject to Israeli corporate tax rate of 26.5% in 2015, 25% in 2016, 24% in 2017 and 23% from 2018. The Company is subject to a blended U.S. tax rate (federal as well as state corporate tax) of 35%.

 

As of December 31, 2016, the Company generated net operating losses in Israel of approximately $2,484,835, which may be carried forward and offset against taxable income in the future for an indefinite period.

 

45
 

 

As of December 31, 2016, the Company generated net operating losses in the U.S. of approximately $14,670,241. Net operating losses in the United States are available through 2035. Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

 

The Company is still in its development stage and has not yet generated revenues, therefore, it is more likely than not that sufficient taxable income will not be available for the tax losses to be utilized in the future. Therefore, a valuation allowance was recorded to reduce the deferred tax assets to its recoverable amounts.

 

   As of December 31, 
   2016   2015 
   (in thousands) 
Net loss carry-forward  $17,155,076   $471,980 
           
Total deferred tax assets   5,730,945    125,075 
Valuation allowance   (5,730,945)   (125,075)
           
Net deferred tax assets  $-   $- 

 

Note 13. Subsequent Events.

 

On January 26, 2017, Lior Wayn, the Company's former CEO and director, transferred and assigned all of his 5,212,878 shares of common stock and 900,000 of his Class E Warrants to an entity controlled by Alimi Ahmed, who was a newly-appointed director of the Company. Effective on April 2, 2017, Mr. Alimi was appointed as Chairman of the Company’s Board of Directors, replacing Mr. Yair Fudim, who will continue to serve as a member of the Board of Directors. Effective December 31, 2016, the remaining 1.7 million Class E Warrants that had been issued to Mr. Wayn were cancelled.

 

Mrs. Adi Zamir, the Company’s CEO, reported to the Board of Directors on March 26, 2017 that pursuant to the terms of her employment agreement, she would cease serving as CEO effective on June 23, 2017. During the period from March 26, 2017 until June 23, 2017, Mrs. Zamir will continue to serve as CEO unless the Company appoints a new CEO prior to June 23, 2017. If the Company does appoint a new CEO prior to such date, Mrs. Zamir will continue to serve the Company in a non-executive officer capacity, until June 23, 2017.

 

On July 7, 2016, the Company announced that it was awarded first prize of 500,000 Euros or approximately U$526,000, over 3,500 other competing tech companies in the Publicis Groupe 90 initiative at the inaugural edition of Viva Technology Paris. On February 24, 2017, the Registrant accepted a Reg S Subscription Agreement from Publicis 90 in consideration for the issuance to Publicis 90 of 1,315,563 restricted shares of the Registrant’s common stock at a subscription price of $0.40 per share. The issuance was made in reliance upon the exemptions provided in Section 4(2) of the Securities Act of 1933, as amended (the “Act”) and Regulation S promulgated by the SEC under the Act.

 

46
 

 

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Evaluation of disclosure controls and procedures. As of December 31, 2016, the Company’s chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the fiscal year 2016 under the COSO framework .

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of those internal controls. As defined by the SEC, internal control over financial reporting is a process designed by our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with U.S. generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO ) in Internal Control-Integrated Framework. Based on our assessment and those criteria, we have concluded that our internal control over financial reporting had material weaknesses including lack of sufficient internal accounting personnel in order to ensure complete documentation of complex transactions and adequate financial reporting during the year ended December 31, 2016.  Management has identified corrective actions for the weakness and will begin implementation during the second quarter of 2017.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules  of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this annual report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the fourth quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

47
 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our directors were elected to serve until the next annual meeting of shareholders and until his respective successors will have been elected and will have qualified. The following table sets forth the name, age and position held with respect to our present executive officers and directors:

 

Name   Age   Title
Adi Zamir   42   CEO
David Ben Naim   47   CFO
Yair Fudim   66   Director
Alimi Ahmed   47   Chairman
Dr. Estery Giloz-Ran   42   Director
Dr. Ascher Shmulewitz   60   Director

 

Adi Zamir, 41, the CEO since August 28, 2015. Prior to her position as CEO, Ms. zamir served as VP Product and COO in Emerald. Ms. zamir served as head of the Training Division (VP), business line, testing and training at Ness Technologies, a leading ICT firm in Israel. Ms. zamir also brings extensive knowledge and experience in the implementation of crowdsourcing projects as a member of the Audit committee of the Israeli Wikimedia organization.

 

Yair Fudim, 66 , Director. Mr.Fudim served as Chairman of the Registrant’s Board of Directors from April 30, 2015 until December 25, 2016. Mr. Fudim has also been serving as Chairman and CEO of Peregrine Industries, Inc., a public company (OTCQB: PGID) since July 2013. During the past five years, Mr. Fudim has also served as Chairman of Dolomite Holdings Ltd., a public company organized in Israel and listed on the Tel Aviv Stock Exchange (“TASE”) since February 2013, prior to which he served as Dolomite’s CEO from February 2010 until March 2013. From April 1991 through April 2013, Mr. Fudim served as CEO of Leader Holdings & Investments Ltd (“Leader Holdings”), a public company organized in Israel and listed on the TASE; Mr. Fudim also serves as Chairman of the Board of Leader Capital Markets Ltd., a TASE listed public company organized in Israel and a subsidiary of Leader Holdings. Mr. Fudim holds a B.A. in Economics and an MBA from the Hebrew University of Jerusalem.

 

Dr. Estery Giloz-Ran, 42, a director since September 6, 2015, is a Certified Public Accountant, received a PhD in tax, accounting and finance from the Business Administration Department at the Ben-Gurion University in Beer Sheva, Israel in 2013. During the past five years, Dr. Giloz-Ran has served as Head of Accountancy at Peres Academic Center, a leading Israeli college located in Rehovot, Israel. Dr. Giloz-Ran presently serves as a director of: (i) Kamada Ltd, an Israeli biotech company listed on NASDAQ and Tel-Aviv Stock Exchange/TASE; (ii) Vaxil Bio Ltd, an Isreali biotech company listed on TASE, and (iii) Suny Electronic Inc. Ltd, an Israeli electronics company listed on TASE. Since 2006, Dr. Giloz-Ran has been lecturing at Ben-Gurion University at the Faculty of Business and Management - Department of Economics and Accounting. Dr. Giloz-Ran was a Visiting Assistant Professor of Finance at the Syms School of Business at Yeshiva University, New York and a Visiting Scholar at New York University - Leonard N. Stern School of Business, New York. Dr. Giloz-Ran served as a tax consultant and tax capital investment law adviser at Intel Corporation in Israel.

 

Dr. Ascher Shmulewitz, age 60: Dr. Shmulewitz has served as chairman of Therapix Biosciences Ltd (OTCQB: THXBY and TASE: THXBY), an Israel-headquartered emerging specialty pharmaceutical company developing unique Cannabinoid technologies in treatment of central nervous system (CNS) disorders, since January 2014 and on the board of directors since February 2013. Dr. Shmulewitz, an inventor and serial entrepreneur involved in biomedical technologies, has originated over two dozen life science companies including NeoVision Inc., Labcoat Medical Ltd., Arteria Inc., Circulation Inc. and X-Cardia Inc., many of which companies he led to successful exits through M&A transactions with large medical device companies. Dr. Shmulewitz has vast experience in the venture capital arena as an investor, manager and entrepreneur in dozens of companies and ventures as well as an M.D. Dr. Shmulewitz co-founded San Francisco Science and the Incumed Group for seed investments, and is the founder of Medgenesis Partners Ltd., an Israeli private investment firm and incubator that has invested in over a dozen ventures. Dr. Shmulewitz previously held senior executive positions at Advanced Technology Laboratories Inc. Dr. Shmulewitz received an MD degree from The Technion Medical School and a Ph.D. degree in Engineering from Tel Aviv University, Israel.

 

We do not compensate our directors. We do not have any standing committees at this time.

 

Our director, officers or affiliates have not, within the past five years, filed any bankruptcy petition, been convicted in or been the subject of any pending criminal proceedings, or is any such person the subject or any order, judgment or decree involving the violation of any state or federal securities laws.