Quarterly Report (10-q)

Table of contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-191175

DTHERA SCIENCES

(Exact name of registrant as specified in its charter)

Nevada	90-0925768
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

7310 Miramar Rd., Suite 350, San Diego, CA	92126
(Address of principal executive offices)	(Zip Code)

(858) 215-6360

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant 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). Yes x No o

Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days.

Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer o	Smaller reporting company x
	Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares outstanding of the registrant’s common stock on May 12, 2017, was 43,069,401.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements (unaudited)	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	18
Item 4. Controls and Procedures	18
PART II – OTHER INFORMATION	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 6. Exhibits	19
SIGNATURES	20

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

DTHERA SCIENCES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of

	March 31,			December 31,
	2017			2016
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	467,339		$	12,191
Deposits		1,000			1,000
TOTAL CURRENT ASSETS		468,339			13,191

LONG TERM ASSETS
Property and equipment, net		736			914
TOTAL LONG TERM ASSETS		736			914

TOTAL ASSETS	$	469,075		$	14,105

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	244,044		$	268,564
Accounts payable and accrued expenses, related party		3,515			3,515
Derivative liabilities		–			234,502
Notes payable		70,000			20,000
Convertible notes payable, net		–			67,345
TOTAL CURRENT LIABILITIES		317,559			593,926

TOTAL LIABILITIES		317,559			593,926

Preferred stock, 1,000,000 shares authorized. $0.001 par value; redeemable preferred stock series A, 150,000 designated; $0.0001 par value; 112,690 shares issued and outstanding as at March 31, 2017 and December 31, 2016		11			11

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 200,000,000 shares authorized; $0.001 par value; 41,494,401 and 36,181,101 shares issued and outstanding as of March 31, 2017 and December 31, 2016		41,494			36,181
Stock subscriptions receivable		(10,000	)		–
Additional paid in capital		2,585,488			1,362,387
Accumulated deficit		(2,465,477	)		(1,978,400	)
Total Stockholders' Equity (Deficit)		151,505			(579,832	)
Total Liabilities and Stockholders' Equity (Deficit)	$	469,075		$	14,105

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

DTHERA SCIENCES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
(Unaudited)

	2017			2016

Sales		–			–
Cost of services		–			–
GROSS PROFIT		–			–

OPERATING EXPENSES
Amortization and depreciation		178			237
General and administrative		302,947			154,507
Professional fees		49,347			5,258
TOTAL OPERATING EXPENSES		352,472			160,002

OPERATING LOSS		(352,472	)		(160,002	)

OTHER EXPENSES
Interest expense		(185,847	)		(15,706	)
Gain on derivative liability		142,835			–
Gain on extinguishment of debt		(91,593	)		–
TOTAL OTHER EXPENSES		(134,605	)		(15,706	)

NET LOSS	$	(487,077	)	$	(175,708	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic and diluted		37,655,852			36,181,101

Loss per common share Basic and diluted	$	(0.01	)	$	(0.00	)

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

DTHERA SCIENCES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
(Unaudited)

	2017			2016

CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(487,077	)	$	(175,708	)
Adjustments for non-cash items:
Amortization and depreciation		178			15,944
Amortization of debt discount		172,655			3,328
Loss on extinguishment of debt		91,593			–
Loss on derivative liability		(142,835	)		–
Options issued for services		189,154			–
Operating expense paid in behalf of the company		–			18,149
Changes in operating assets and liabilities:
Prepaid expenses		–			21,390
Accounts payable and accrued liabilities		(24,520	)		7,839
NET CASH USED IN OPERATING ACTIVITIES		(200,852	)		(109,058	)

CASH FLOWS FROM INVESTING ACTIVITIES
NET CASH USED IN INVESTING ACTIVITIES		–			–

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net		846,000			–
Proceeds from issuance of notes payable		50,000			–
Proceeds from issuance of convertible notes payable		–			100,000
Payments on convertible notes payable		(240,000	)		–
NET CASH PROVIDED BY FINANCING ACTIVITIES		656,000			100,000

NET CHANGE IN CASH AND CASH EQUIVALENTS		455,148			(9,058	)

CASH AND CASH EQUIVALENTS
Beginning of period		12,191			27,238

End of period	$	467,339		$	18,180

Cash paid for interest	$	18,000		$	–

NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued in extinguishment of debt	$	183,260		$	–

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

DTHERA SCIENCES

Notes to Condensed Consolidated Financial Statements

March 31, 2017, and December 31, 2016

NOTE 1 – CONDENSED FINANCIAL STATEMENTS

The accompanying financial statements of Dthera Sciences (the “Company”) have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at March 31, 2017, and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2016 audited financial statements. The results of operations for the periods ended March 31, 2017 and 2016 are not necessarily indicative of the operating results for the full years.

NOTE 2 – GOING CONCERN

The Company's financial statements are prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of the date of this Report, the Company had an accumulated deficit of $2,465,477, working capital of $150,780, and no revenues to cover its operating costs, which raises substantial doubt about its ability to continue as a going concern. As of the date of this Report, the Company had not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern.

The future of the Company as an operating business will depend on its ability to (1) obtain sufficient capital contributions and/or financing as may be required to sustain its operations and (2) to achieve adequate revenues from its operations. Management's plan to address these issues includes, (a) continued exercise of tight cost controls to conserve cash, (b) obtaining additional financing, (c) placing revenue producing services into place (d) identifying and executing on additional revenue generating opportunities.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Dthera Sciences (formerly Knowledge Machine International, Inc.) is a Nevada corporation, and was incorporated on December 27, 2012.

The Company offers a subscription-based service that captures, shares, and stores photos and audio in cloud. It offers a Platform, which enables users to preserve and share memories, and will initially target a Quality of Life benefit in certain patient populations, principally patients suffering from Alzheimer’s disease and dementia. On September 21, 2016, the Company acquired a new operating subsidiary, EveryStory, Inc., a Delaware corporation (“EveryStory”). Following the acquisition (referred to herein as the “EveryStory Transaction”), the Company’s business is to develop a Digital Therapeutic technology designed to deliver Reminiscence Therapy to certain patient populations, principally patients suffering from Alzheimer’s disease and dementia with the goal of a Quality of Life benefit and reduction in anxiety in those populations. As of the date of this Report, EveryStory was our only subsidiary. In connection with the EveryStory transaction, the Company dissolved its other former subsidiary entity and terminated its prior business operations.

Acquisition of EveryStory; EveryStory Transaction .

On September 21, 2016, the Company entered into an Amended and Restated Acquisition and Share Exchange Agreement (the “A&R Agreement”) with EveryStory, Inc., a Delaware corporation (“EveryStory”), and each of its shareholder (the “EveryStory Holders”), and closed the acquisition (the “Acquisition”) of the ownership of EveryStory (the “Closing”). The agreement between the Company and the EveryStory management was that following the Closing, the EveryStory Holders would own 55% of the outstanding shares of the Company’s common stock on a fully converted basis, and the legacy shareholders of the Company would own 45% of the shares, and that the Company would have between $500,000 and $1,000,000 in available cash and no debt.

The Company acquired all of the outstanding shares of EveryStory, and agreed to issue an aggregate of 15,477,604 shares of the Company’s common stock to the EveryStory holders, with the understanding that an additional 4,388,997 shares were issued to holders of EveryStory convertible debt instruments which are convertible or exercisable into shares of EveryStory common stock (collectively, the “Exchange Shares”). Additionally, prior to Closing, the parties agreed that certain shares of the Company’s common stock were to be returned to the Company for cancellation, resulting in the current Company’s shareholders owning an aggregate of 8,000,000 shares of the Company’s common stock immediately prior to the Closing.

Pursuant to the A&R Agreement, the 19,866,601 Exchange Shares issued or to be issued to the EveryStory Holders constituted 75% of the total issued and outstanding shares of the Company’s common stock, and the legacy Company shareholders (who were the owners of the Company’s common stock immediately prior to the Closing) owned an aggregate of 40,875,000 shares, which constituted 25% of the total outstanding Company common stock.

The Company’s and EveryStory’s management agreed, and the A&R Agreement provided, that following the Closing, the Company would conduct a reverse stock split (discussed in more detail below), following which the outstanding shares of the Company’s Series A Preferred Stock would convert into a total of 8,000,000 shares of common stock. Following such conversion, the EveryStory owners would own or have the right to receive shares of the Company’s common stock equal to 55% of the then-outstanding Company common stock, and the Company legacy shareholders would own shares of the Company’s common stock equal to 45% of the then-outstanding Company common stock, consisting of 8,000,000 shares of Company common stock issued on conversion of the Company’s Series A Preferred Stock (22.5%) and 8,000,000 shares of the Company’s common stock owned by the other legacy Company shareholders (22.5%).

As a result of the Closing of the A&R Agreement, EveryStory became our wholly owned subsidiary. Additionally (as discussed more fully below), our directors and officers immediately prior to the Closing appointed the EveryStory management to become our new officers and directors, and then resigned from their positions with us. In addition, we terminated our pre-closing business operations and agreed to dissolve our other wholly owned subsidiary, Knowledge Machine.

Immediately prior to the Closing, there were 40,875,000 shares of the Company’s common stock. In connection with the Closing, the Company issued an aggregate of 15,477,604 shares to the EveryStory shareholders, and 4,388,997 shares were issued to the holders of EveryStory convertible debt instruments, and the parties to the A&R Agreement understand and anticipate that all such holders would exercise and convert their securities into the reserved shares of the Company.

Accounting Basis

The Company’s financial statements are prepared using the accrual basis of accounting in accordance with U.S. GAAP.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates are made in relation to the allowance for doubtful accounts and the fair value of certain financial instruments.

Principles of Consolidation

The consolidated financial statements include the accounts of Dthera Sciences and its subsidiaries. All significant inter-Company accounts and transactions have been eliminated.

Fair Value of Financial Instruments

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

The following are the hierarchical levels of inputs to measure fair value:

	Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.

	Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

	Level 3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity of these instruments.

The Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 2.

Embedded Conversion Features

The Company evaluates embedded conversion features within convertible debt under Accounting Standards Codification (“ASC”) 815, "Derivatives and Hedging" to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of any beneficial conversion feature.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income.

For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

Debt Issue Costs and Debt Discount

The Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

Stock-Based Compensation

The Company accounts for share based payments in accordance with ASC 718, Compensation - Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, Measurement Objective – Fair Value at Grant Date, the Company estimates the fair value of the award using a valuation technique. For this purpose, the Company uses the Black-Scholes option pricing model. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders.

Compensation cost is recognized over the requisite service period which is generally equal to the vesting period. Upon exercise, shares issued will be newly issued shares from authorized common stock.

ASC 505, "Compensation-Stock Compensation", establishes standards for the accounting for transactions in which an entity exchanges its equity instruments to non-employees for goods or services. Under this transition method, stock compensation expense includes compensation expense for all stock-based compensation awards granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of ASC 505.

Loss Per Share

Basic loss per Common Share is computed by dividing losses attributable to Common shareholders by the weighted-average number of shares of Common Stock outstanding during the period.

Diluted loss per Common Share is computed by dividing loss attributable to Common shareholders by the weighted-average number of Shares of Common Stock outstanding during the period increased to include the number of additional Shares of Common Stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding convertible Preferred Stock, stock options, warrants, and convertible debt. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s Common Stock can result in a greater dilutive effect from potentially dilutive securities.

For the three months ended March 31, 2017 and 2016, all of the Company’s potentially dilutive securities (warrants, options, convertible preferred stock, and convertible debt) were excluded from the computation of diluted earnings per share as they were anti-dilutive. The total number of potentially dilutive Common Shares that were excluded were 3,443,916 for the three months ended March 31, 2017.

Reclassification

Certain balances in previously issued financial statements have been reclassified to be consistent with the current period presentation.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative and intends to improve the accounting for share-based payment transactions. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. If an entity early adopts the ASU in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this standard did not have a material impact on our consolidated financial statements.

Management has considered all other recent accounting pronouncements issued since the last audit of our consolidated financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s consolidated financial statements.

NOTE 4 – PROPERTY AND EQUIPMENT

The Company’s property and equipment were comprised of the following as of March 31, 2017, and December 31, 2016:

	March 31, 2017			December 31, 2016
Computer & Equipment	$	2,816		$	2,816
Less: Accumulated Depreciation		(2,080	)		(1,902	)
Net Property and Equipment	$	736		$	914

Depreciation expense for the three months ended March 31, 2017 and 2016, was $176 and $237, respectively.

NOTE 5 – INTANGIBLE ASSETS

The Company’s intangible assets were comprised of the following of March 31, 2017, and December 31, 2016:

	March 31, 2017		December 31, 2016
Technology asset purchase	$	–	$	58,960
Less: Accumulated Amortization		–		–
Less: Impairment		–		(58,960	)
Net Intangible Assets	$	–	$	–

The Company impaired intangible assets related to the technology asset purchase and patent purchase due to no revenue production, totaling $0 and $58,960, for the three months ended March 31, 2017 and 2016, respectively.

NOTE 6 – LOANS PAYABLE

Notes Payable

Notes payable consisted of the following as of March 31, 2017, and December 31, 2016:

Balance December 31, 2016	$	20,000
Cash additions		50,000
Expense additions		–
Cash payments		–
Conversions		–
Balance March 31, 2017	$	70,000

On August 3, 2016, the Company entered into a promissory note purchase agreement with an unrelated individual for $20,000. This note was due on demand. As disclosed in Note 12, the Company repaid this promissory note on April 13, 2017.

On February 3, 2017, the Company issued a short-term note to an unrelated party individual for $50,000 due on demand. The note bore an interest rate of 10% per annum interest within the 90 day period and will increase to 20% interest if not fully paid back within 90 days. As disclosed in Note 12, on April 9, 2017, the Company repaid the full balance of $50,000.

Convertible Notes Payable

Notes payable due to non-related parties consisted of the following as of March 31, 2017, and December 31, 2016:

Balance December 31, 2016	$	67,345
Cash Payments		(240,000	)
Conversions		–
Debt discount		172,655
Balance March 31, 2017	$	–

Effective September 22, 2016, the Company conducted a private offering of convertible notes (the “Note Offering”) to raise additional capital that would remain in the Company following the Closing of the EveryStory Transaction. In the convertible note offering, the Company raised an aggregate of $240,000, which was to be a component of the post-Closing capitalization of the Company. In the Note Offering, investors entered into a securities purchase agreement (the “Note SPA”) and were issued a convertible redeemable promissory note (collectively, the “Convertible Notes”). Pursuant to the terms of the Note SPA, each investor represented and warranted that it was an accredited investor and that he or she was purchasing the Convertible Notes for his or her own account, and not with a view to distribution, as well as other standard representations made in private transactions. Also pursuant to the Note SPA, the Company has the right to put an additional Convertible Note (in the same principal amount as purchased by the applicable investor) beginning on January 3, 2017, subject to certain conditions. The Convertible Notes bore interest at a rate of 10%, and were to mature on September 13, 2017, if not converted or prepaid prior to that. The Convertible Notes could convert into shares of the Company's common stock at a price for each share of Common Stock equal to 65% of the lowest closing bid price of the Common Stock as reported on the OTC Market platform on which the Company’s shares are quoted or any exchange upon which the Common Stock may be traded in the future ("Exchange"), on the date of the closing of the EveryStory Transaction. Up to 50% of the Convertible Notes could be repaid by the Company any time prior to 180 days after the issuance of the Convertible Notes, with a 30% premium to be paid in connection with the prepayment. As a result of this transaction a debt discount of $240,000 was recorded against the note. As of March 31, 2017, interest expense of $172,655 was recorded as part of the amortization of the debt discount, leaving a debt discount balance of $0.

In March 2017, the Company modified the interest rate on the Convertible Notes to 15% per annum and repaid the Convertible Notes in the original principal amount of $240,000. In connection with the repayment of the Convertible Notes, the Company repaid a total of $240,000 in principal and $18,000 in interest, and agreed to issue 83,300 shares of the Company’s common stock to the holders of the Convertible Notes. The shares of stock were issued pursuant to Section 4(a)(2) of the Securities Act of 1933 and regulations promulgated thereunder. Each of the holders of the Convertible Notes represented to the Company that it was an accredited investor, that it was acquiring the shares for its own account and for investment purposes, and not with an intent to distribute. The Company evaluated amendment under ASC 470-50, “ Debt - Modification and Extinguishment” , and concluded that the additional shares issued and increase in annual interest rate did result in significant and consequential changes to the economic substance of the debt and thus resulted in loss on extinguishment of the debt of $91,593.

NOTE 7 –DERIVATIVE LIABILITIES

The Company evaluates its fair value hierarchy disclosures each quarter. The Company has convertible notes with embedded conversion features, which is accounted for as a derivative liability and measured at fair value on a recurring basis. As of March 31, 2017 this derivative liability had an estimated fair value of $0.

The following table presents information about our derivative liability, which was our only financial instrument measured at fair value on a recurring basis using significant inputs other than level one inputs that are either directly or indirectly observable (Level 2) as of March 31, 2017:

Balance at December 31, 2016	$	234,502
Conversion		(91,667	)
Change in Fair Value of Derivative		(142,835	)
Balance at March 31, 2017	$	–

The fair value of this derivative liability was calculated using the multinomial lattice models that value the derivative liability within the notes based on a probability weighted discounted cash flow model. These models are based on future projections of the various potential outcomes. The features in the notes that were analyzed and incorporated into the model included the conversion feature with the reset provisions; redemption provisions; and the default provisions. Assumptions used to calculate the fair value of the derivative liability were as follows:

		March 31,
		2017
Expected term in years		0.51 years
Risk-free interest rates		0.89%
Volatility		48.05%
Dividend yield		0%

In addition to the assumptions above, the Company also takes into consideration whether or not the Company would participate in another round of financing and if that financing is registered or not and what that stock price would be for the financing at that time. The Company notes that the notes have matured and is no longer calculating a derivative value for these notes.

NOTE 8 –PREFERRED STOCK

The Company has authorized 1,000,000 shares of Preferred Stock, of which it has designated 150,000 shares of $0.0001 par value per share Series A Redeemable Preferred Stock. The Series A Preferred Stock has a stated value of $1.00 per share, of which 112,690 and 112,690 shares were issued and outstanding as of March 31, 2017, and December 31, 2016, respectively.

On September 13, 2016, the Company issued the 112,690 shares of A Preferred Stock to the CEO and CTO in exchange for amounts owed to them which included $6,096 of accrued expenses, $95,591 of related party loans, $10,000 of convertible notes payable and $1,003 of accrued interest on the convertible notes payable. The shares of Series A Preferred stock are redeemable at any time for cash on a dollar-per-dollar basis at a redemption price of $1.00 per share. If not redeemed for cash, according to the A&R Agreement the shares of Series A Preferred Stock can be converted into shares of Common Stock using a post-split conversion price of $0.10 per share pursuant to the A&R Agreement.

Series A Redeemable Preferred Stock

The Series A Preferred Stock have the following rights and preferences:

Redeemable at any time at the option of the holder for cash on a dollar-per-dollar basis at a redemption of $1.00 per share.

Convertible into shares of Common Stock using a conversion price of $0.10 per share.

No general voting rights until converted into Common Stock.

Entitled to receive dividends at a rate per annum of 8%

Liquidation preference upon a liquidation event.

NOTE 9 – COMMON STOCK

The Company has authorized 200,000,000 shares of $0.001 par value per share Common Stock, of which 41,494,401 and 36,181,101 shares were issued outstanding as of March 31, 2017, and December 31, 2016, respectively.

Three Months Ended March 31, 2017

During three months ended March 31, 2017, pursuant to a private placement offering (the “Private Offering”) the Company issued 5,230,000 shares of common stock for gross proceeds of approximately $846,000, with $10,000 in stock subscriptions receivable.

On March 10, 2017, the Company issued 83,300 shares of the Company’s common stock to the holders of the Convertible Notes as part of the modification and settlement of the notes, fair-valued at $183,260.

Year Ended December 31, 2016

On June 5, 2016, EveryStory issued 88,000 shares of its common stock, which were exchanged for 616,133 shares of Dthera common stock for the purchase agreement for an SIT Patent for a value of $58,960.

On August 3, 2016, EveryStory issued 10,000 shares of its common stock, which exchanged for 70,015 shares of Dthera common stock, for a value of $6,700 of accrued interest.

On September 15, 2016, EveryStory issued 25,000 shares of its common stock, which were exchanged for 175,038 shares of Dthera common stock valued at $16,750 for services .

On September 16, 2016, EveryStory issued 37,500 shares of its common stock, which were exchanged for 263,325 shares of Dthera common stock valued at $25,125 in settlement of $60,000 of accrued consulting fees . This resulted in a gain on settlement of $34,875.

On September 21, 2016, as part of the A&R Agreement, EveryStory issued 625,033 shares of its common stock, which were exchanged for 4,388,997 shares of Dthera common stock, for the conversion of debt for a value of $730,174. In connection with the A&R Agreement, the parties agreed that the prior shareholders of the Company would own an aggregate of 16,000,000 post-split shares of the Company’s common stock as part of the agreement totaling $56,354. The reverse stock split is discussed in more detail in Note 1 above.

From November to December 2016, the Company issued 314,500 shares of common stock at $0.20 per share for cash proceeds of $62,900, pursuant to the Private Offering.

NOTE 10 – STOCK PURCHASE OPTIONS

Stock Purchase Options

During the three months ended March 31, 2017, the Company did not issue any stock purchase options. As the options holders are non-employees, the values attributable to these options are remeasured on a quarterly basis and amortized over the service period and until they have fully vested over a 3 year vesting period. The Company believes that the fair value of the stock options is more reliably measurable than the fair value of the services received. The fair value of the stock options granted was revalued at each reporting date using the Black-Scholes valuation model. As of March 31, 2017, the Company remeasured the options at a value of $1,904,715 to be recognized over the vesting period, of which $189,154 has been recognized.

During the year ended December 31, 2016, EveryStory issued non-employee options to purchase a total of 106,100 shares of EveryStory common stock, which would exchange for 742,860 shares of Dthera common stock, which were originally valued at $63,678. EveryStory issued the options in conjunction with services. The EveryStory options were converted into Dthera options on September 21, 2016, pursuant to the A&R Agreement. As the options holders are non-employees, the values attributable to these options are remeasured on a quarterly basis and amortized over the service period and until they have fully vested over a 3 year vesting period. The Company believes that the fair value of the stock options is more reliably measurable than the fair value of the services received. The fair value of the stock options granted was revalued at each reporting date using the Black-Scholes valuation model. As of December 31, 2016, the Company remeasured the options at a value of $1,609,669 to be recognized over the vesting period, of which $199,969 has been recognized.

The following table summarizes the changes in options outstanding of the Company during the three months ending March 31, 2017:

	Number of Options		Weighted Average Exercise Price $
Outstanding, December 31, 2016		4,146,994		0.10

Outstanding, March 31, 2017		4,146,994		0.10

Exercisable, March 31, 2017		3,404,134		0.10

As of March 31, 2017, the Company had $1,515,591 in unrecognized expense related to future vesting of stock options.

NOTE 11 – FAIR VALUE MEASUREMENTS

Liabilities measured at fair value on a recurring basis at March 31, 2017, are summarized as follows:

	Level 1		Level 2		Level 3		Total
Fair value of options	$	–	$	1,904,715	$	–	$	1,904,715
Fair value of derivatives	$	–	$	–	$	–	$	–

Liabilities measured at fair value on a recurring basis at December 31, 2016, are summarized as follows:

	Level 1		Level 2		Level 3		Total
Fair value of options	$	–	$	1,609,699	$	–	$	1,609,699
Fair value of derivatives	$	–	$	234,502	$	–	$	234,502

Fair value is calculated using the Black-Scholes options pricing model.

NOTE 12- SUBSEQUENT EVENTS

In accordance with ASC 855, Company’s management reviewed all material events through the date of this filing and determined that there were the following material subsequent events to report:

During April 2017, pursuant to the Private Offering, the Company issued 1,575,000 shares of common stock for gross proceeds of approximately $315,000.

On April 9, 2017, the Company paid in full the promissory note dated February 3, 2017, in the amount of $50,000.

On April 13, 2017 the Company paid in full the promissory note purchase agreement entered into on August 3, 2016, with an unrelated individual for $20,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income. This section should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016, and our interim financial statements and accompanying notes to these financial statements. All amounts are in U.S. dollars.

Forward-Looking Statement Notice

This quarterly report on Form 10-Q of Dthera Sciences (formerly Knowledge Machine International, Inc.) (the “Company”) contains forward-looking statements about our expectations, beliefs or intentions regarding, among other things, our product development efforts, business, financial condition, results of operations, strategies or prospects. In addition, from time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking statements can be identified by the use of forward-looking words such as “believe,” “expect,” “intend,” “plan,” “may,” “should” or “anticipate” or their negatives or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements may be included in, but are not limited to, various filings made by us with the SEC, press releases or oral statements made by or with the approval of one of our authorized executive officers. Forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements, including, but not limited to, those set forth in our most recent annual report referenced below.

This report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under Item 1A – Risk Factors as disclosed in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 17, 2017.

All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.

Overview

On September 21, 2016, the Company acquired a new operating subsidiary, EveryStory, Inc., a Delaware corporation (“ EveryStory ”). The Company is developing a Digital Therapeutic technology called ReminX, which is designed to deliver Reminiscence Therapy to certain patient populations, principally patients suffering from Alzheimer’s disease and dementia with the goal of a Quality of Life benefit and reduction in anxiety in those populations. Prior to the closing of the EveryStory transaction, the Company was incorporated in the State of Nevada on December 27, 2012, to engage in the development and operation of a business engaged in the distribution of high end edged tools produced outside the US. We conducted this business through October 22, 2014. On October 22, 2014, we acquired an operating subsidiary, Knowledge Machine, Inc., a Nevada corporation, (“ Knowledge Machine ”), which focused on new technologies, acquiring licensing rights to those technologies, and marketing the licensed technologies, and we sold off our edged tools business. In connection with the EveryStory transaction, we dissolved Knowledge Machine, and terminated the technology licensing and marketing operations.

Our principal offices are located at 7310 Miramar Rd., Suite 350, San Diego, CA 92126.

The Company qualifies as an “emerging growth company” as defined in the Jumpstart our Business Startups Act (the “JOBS Act”).

Dthera Business and Platform

Key components of the Platform include the ability to record audio narratives that are linked to specific photos and which can be played when the photos are viewed; the ability to import photos directly from computers or mobile devices; cloud-based data storage of the photos and the audio recordings; and multiple playback capabilities; collaborative creation and sharing of stories. The Platform was designed for mobile device platforms to enable users to record and store photos and audio easily and conveniently.

The Company’s technology Platform streamlines the creation of personalized digital stories, and management is focused on the goal of becoming the first clinically-proven Digital Therapeutic technology targeting patients with Alzheimer's disease and Dementia. EveryStory already has received a US patent (issued in 2010) that broadly covers the use of EveryStory’s technology in Senior Living facilities. The Company has recently concluded a clinical trial with UCSD which produced positive results indicating that the Company’s ReminX Platform is an effective anxiety reduction and quality of life therapy for those with Alzheimer’s disease or Dementia (“ADOD”).

EveryStory conducts its operations from its facilities located in San Diego, California.

Plan of Operations

Revenue Model

Digital Therapeutics Business Model

Dthera intends to offer the Digital Therapeutics technology directly to the families of ADOD patients as a clinical supported therapy. Additionally, Dthera intends to partner directly with Senior Living management firms, to introduce to the resident and the resident’s families starting in the summer of 2017.

In both the direct-to-Patient and the Senior Living-management models, management anticipates that the product, which will include a digital tablet in the patient’s room, with monthly and/or yearly rates for participation in the program.

Additionally, Dthera intends to seek partners in international markets to help make introductions to the Senior Living-type markets and other implementation techniques.

Once Dthera has begun implementation of the Digital Therapeutics and Reminiscence Therapy applications of the Platform, Dthera’s management intends to further explore other applications of the Platform targeting other indications with patients that could benefit from the core technology.

Results of Operations –Three Months Ended March 31, 2017, Compared to the Three Months Ended March 31, 2016

Gross Revenue . Gross revenue for the three months ended March 31, 2017 and 2016, was $0. Accordingly, there were no costs of goods sold. The Company was previously operating in the cutlery sales market but that business was sold and a new operating subsidiary was acquired which is operating in the technology market. This new line of business is in the development stage and has not yet recognized any revenue.

Operating Expenses

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2017 totaled $302,947, a 96% increase compared to general and administrative expenses of $154,507 for the three months ended March 31, 2016. The increase is due to the Company’s amortizing stock and options as compensation compared to the prior three month period.

Professional fees

Professional fees for the for the three months ended March 31, 2017 totaled $49,347, a 839% increase compared to professional fees of $5,258 for the three months ended March 31, 2016. The increase is due to the Company’s incurring more expenses as a result of the 2016 audit.

Other Expenses

Interest Expenses

Interest expenses for the three months ended March 31, 2017, totaled $185,847, a 1,083% increase compared to interest expenses of $15,706 for the three months ended March 31, 2016. The increase is due notes accruing interest and the full amortization of debt discounts due to payment of all convertible notes in the current period.

Gain on Derivative Liabilities

Gain on Derivative Liabilities for the three months ended March 31, 2017, totaled $142,835, a 100% increase compared to gain on derivative liabilities of $0 for the three months ended March 31, 2016. The increase is due to the Company’s entering into four derivative instruments during the current period.

Loss on Extinguishment of Debt

Loss on settlement of debt for the three months ended March 31, 2017, totaled $91,593, a 100% increase compared to loss on settlement of debt of $0 for the three months ended March 31, 2016. The increase is due to the Company’s issuing stock in addition to paying the notes and accrued interest in cash in the settlement during the current period.

Net Loss . For the reasons stated above, the Company’s net loss for the three months ended March 31, 2017, was $487,077, compared to net loss of $175,708 during the three months ended March 31, 2016.

Liquidity and Capital Resources

As of March 31, 2017, the Company had cash of $467,339 and deposits of $1,000. The Company had current liabilities of $317,559 consisting of accounts payable and accounts payable, accrued expenses, and notes payable. As of March 31, 2017, the Company had a working capital of $150,780.

The accompanying financial statements have been prepared contemplating a continuation of the Company as a going concern. The Company had ongoing operations during from inception to March 31, 2017, with an accumulated deficit of $2,465,477.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.

Recent Developments

Closing of Private Offering

Results of Clinical Trial

On April 10, 2017, the Company announced the conclusion of a clinical study conducted at University of California San Diego School of Medicine, which demonstrated positive results of its product, ReminX on patients with Alzheimer's disease and Dementia. The study was conducted by J. Vincent Filoteo, PhD, Professor of Psychiatry and Neuropsychology Section Chief in the Department of Psychiatry at UC San Diego School of Medicine.

In the study, subjects were shown personalized video slideshow stories, which were created by the Platform itself, displaying moments from various points in their life along with narration provided by family members.

The underlying science behind the product is called “Reminiscence Therapy” (“RT”), which is a well-known and well-understood cognitive behavioral therapy, primarily used with the elderly, to both reduce anxiety and increase the quality of life in patients with dementia or those experiencing isolation. RT is usually provided either in a one-on-one setting or in groups. One of the key limitations to RT in the past was that it is very labor intensive, typically involving a family member or caregiver sitting with the patient manually going through the stories, therefore rendering it not easily scalable.

The Platform enables an immediate implementation of the core features of RT that can be provided to patients at any time. Dthera’s Platform allows for the key elements of the therapy to be delivered through a Digital Therapeutic software. Driven by a proprietary artificial intelligence engine, Dthera's software helps families populate stories so that patients in long term care facilities have constant access to personalized Reminiscence Therapy.

Dr. Filoteo stated: “The results of this proof-of-concept study are very promising and have the potential to help herald a new way to deliver a form of relief to patients suffering with dementia and related anxiety or depression. Our results indicate that the use of this software led to an immediate and significant decrease in anxiety and depression in our patients, which was also observed by their caregivers. These significant results, which were larger in magnitude than expected, form the basis to further investigate the neuropsychiatric mechanisms that underlie improved mood through the use of this software technology.”

Dthera’s management believes that digital therapeutics – the use of software to create a medical effect in patients – is an exciting new frontier for medicine, and that this clinical study supports that the ReminX Platform can be used to scale out otherwise labor-intensive medical practices.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, the Company is not required to provide the disclosure required by this item.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer who is also our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by the Report, we did not have a formal audit committee and there was a lack of segregation of duties.

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting, as defined in Rules 13a-15(f) of the Exchange Act, during our most recent fiscal quarter ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

See “Item 1A – Risk Factors” as disclosed in Form 10-K as filed with the Commission on April 17, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On April 10, 2017, the Company closed a private placement offering (the “Private Offering”) in which the Company raised gross proceeds of approximately $1,233,900 The Company sold an aggregate of 7,119,500 shares of its common stock in the Private Offering to approximately 27 investors. The Company’s officers and directors conducted the offering. For one investor, the Company also worked with a placement agent and paid a $5,000 cash fee and will be issuing 10,000 restricted shares in connection with the transaction. All of the investors signed agreements indicating that they were accredited investors, that they were purchasing the Company’s shares for investment purposes and not with a view to distribute them, that they were purchasing for their own accounts and not for the accounts of others, that they were experienced in investing in early stage companies, and that they had been afforded sufficient opportunities to obtain information about the Company. The Company made available copies of its public filings in connection with a private placement memorandum.

The Private Offering was conducted in reliance on the private offering exemption of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), as well as rules and regulations promulgated thereunder based on the following factors: (i) the number of purchasers; (ii) the absence of general solicitation; (iii) investment representations obtained from the investors in the transaction; (iv) the provision of appropriate disclosures; and (v) the placement of restrictive legends on the certificates reflecting the securities sold.

In February 2017, the Company issued a short-term note to an unrelated party individual for $50,000 due on demand. The note bore an interest rate of 10% per annum interest within the 90 day period and will increase to 20% interest if not fully paid back within 90 days. On April 9, 2017, the Company paid the full balance of $50,000.

The short-term note was issued in reliance on the private offering exemption of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), as well as rules and regulations promulgated thereunder based on the following factors: (i) the number of purchasers; (ii) the absence of general solicitation; (iii) investment representations obtained from the investors in the transaction; (iv) the provision of appropriate disclosures; and (v) the placement of restrictive legends on the promissory note.

In March 2017, the Company repaid convertible notes in the original principal amount of $240,000 (the “Convertible Notes”). The Convertible Notes were issued by the Company shortly before the EveryStory Transaction. In connection with the repayment of the Convertible Notes, the Company repaid a total of $240,000 in principal and $18,000 in interest, and agreed to issue 83,300 shares of the Company’s common stock to the holders of the Convertible Notes. The shares of stock were issued pursuant to Section 4(a)(2) of the Securities Act of 1933 and regulations promulgated thereunder. Each of the holders of the Convertible Notes represented to the Company that it was an accredited investor, that it was acquiring the shares for its own account and for investment purposes, and not with an intent to distribute.

Item 6. Exhibits

Exhibit Number	Title of Document
31.1	Certification by Principal Executive and Financial Officer
32.1	Certification of Principal Executive and Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Dthera Sciences

Date: May 15, 2017	By:	/s/ Edward Cox
		Edward Cox Chief Executive Officer, Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)