The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
September 30, 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 September 30, 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 September 30, 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 $4,044,160 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.
Dthera Sciences is a Digital Therapeutics
company based in San Diego, California, which is focused on improving the quality of life (“Quality of Life”) of patients
and their families. The Company's lead product, ReminX, is an artificial-intelligence-powered digital therapeutic designed to improve
the Quality of Life and reduce anxiety in patients with Alzheimer's disease and other forms of dementia. On September 21, 2016,
the Company acquired its current operating subsidiary, Dthera Sciences Operations, Inc. (fka EveryStory, Inc.), a Delaware corporation
(“EveryStory”). Following the acquisition (referred to herein as the “EveryStory Transaction”), the Company
is developing a 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, Dthera Sciences Operations, Inc., was our only subsidiary. In connection with the EveryStory transaction,
the Company dissolved its other former subsidiary entity and terminated its prior business operations.
Effective July 25, 2017, a reverse stock
split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.001 per share (the “Common
Stock”), at a ratio of 1-for-3 (one share of new common stock for each three shares of old common stock) (the “Reverse
Split”), took effect in the Market, following a filing of a Certificate of Change with the State of Nevada and authorization
from the Financial Industry Regulatory Authority (“FINRA”).
Effective October 17, 2017, the Company filed its Certificate
of Amendment (the “Amendment”) with the Secretary of State of Nevada to increase authorized common shares from 66,666,667
shares to 600,000,000 shares, and to increase the authorized preferred stock from 1,000,000 to 20,000,000 shares.
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.
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 nine months ended September 30, 2017 and 2016, all of the Company’s potentially dilutive securities (warrants and options)
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 6,261,813 for the nine months ended September 30, 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 is intended to improve the accounting for share-based
payment transactions. The areas for simplification in ASU 2016-09 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. ASU 2016-09 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 entirety of ASU 2016-09 is adopted. If an entity early adopts ASU 2016-09 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.
In April 2017,
the FASB issued ASU No. 2016-10 S
ervice Concession Arrangements (Topic 853): Determining the Customer of the Operation Services
(a consensus of the FASB Emerging Issues Task Force)
(“ASU 2016-10”). ASU 2016-10
amends
certain aspects of the FASB’s new revenue standard, ASU 2014-09. ASU 2016-10 identifies performance obligations and provides
licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU No. 2014-09.
The standard will be effective for public entities for annual reporting periods beginning after December 15, 2017 and interim
periods within those periods. The Company is currently assessing the impact that adopting this new accounting guidance will have
on its financial statements and footnote disclosures.
In
May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers
(Topic 606):
Narrow-Scope
Improvements and Practical Expedients
(“ASU 2016-12”). ASU 2016-12 provides for amendments to ASU No. 2014-09,
Revenue from Contracts with Customers, amending the guidance on transition, collectability, noncash consideration and the presentation
of sales and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition,
all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an
entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue
if an arrangement does not meet the standard’s contract criteria. The Company is currently assessing the impact that adopting
this new accounting guidance will have on its financial statements and footnote disclosures.
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 September 30, 2017, and December 31, 2016:
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
Computer & Equipment
|
|
$
|
4,676
|
|
|
$
|
2,816
|
|
|
Assets Used to Fulfill Contract Obligations
|
|
|
48,006
|
|
|
|
–
|
|
|
Less: Accumulated Depreciation
|
|
|
(2,668
|
)
|
|
|
(1,902
|
)
|
|
Net Property and Equipment
|
|
$
|
50,014
|
|
|
$
|
914
|
|
Depreciation expense for the nine months
ended September 30, 2017 and 2016, was $766 and $712, respectively.
NOTE 5 – LOANS PAYABLE
Notes Payable
– Related Parties
Notes payable due to related parties
consisted of the following as of September 30, 2017 and December 31, 2016:
|
Balance December 31, 2016
|
|
$
|
–
|
|
|
Cash additions
|
|
|
–
|
|
|
Expense additions
|
|
|
7,086
|
|
|
Cash payments
|
|
|
(209
|
)
|
|
Conversions
|
|
|
–
|
|
|
Balance September 30, 2017
|
|
$
|
6,877
|
|
During the nine months ended September
30, 2017, the Company’s CEO had expense additions of $7,086, and was repaid $209. The notes bear an interest rate of 0% per
annum.
Notes Payable
Notes payable consisted of the following
as of September 30, 2017, and December 31, 2016:
|
Balance December 31, 2016
|
|
$
|
20,000
|
|
|
Cash additions
|
|
|
50,000
|
|
|
Expense additions
|
|
|
–
|
|
|
Cash payments
|
|
|
(70,000
|
)
|
|
Conversions
|
|
|
–
|
|
|
Balance September 30, 2017
|
|
$
|
–
|
|
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. 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 would increase to 20% interest if not fully paid back within
90 days. 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 September 30, 2017, and December 31, 2016:
|
Balance December 31, 2016
|
|
$
|
67,345
|
|
|
Cash Payments
|
|
|
(240,000
|
)
|
|
Conversions
|
|
|
–
|
|
|
Amortization of debt discount
|
|
|
172,655
|
|
|
Balance September 30, 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
had 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 September 30, 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 pre-split/27,768 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 6 –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 September 30, 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 3)
as of September 30, 2017:
|
Balance at December 31, 2016
|
|
$
|
234,502
|
|
|
Conversion
|
|
|
(91,667
|
)
|
|
Change in Fair Value of Derivative
|
|
|
(142,835
|
)
|
|
Balance at September 30, 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:
|
|
|
September 30,
|
|
|
|
|
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 7 – PREFERRED STOCK
As of September 30, 2017, the Company was
authorized to issue 1,000,000 shares of Preferred Stock, of which it had designated 150,000 shares of $0.0001 par value per share
Series A Redeemable Preferred Stock (the “Series A Preferred”). The Series A Preferred has a stated value of $1.00
per share, of which 30,000 and 112,690 shares were issued and outstanding as of September 30, 2017, and December 31, 2016, respectively.
On
August 7, 2017, the Company redeemed 42,690 shares of
Series A Preferred with a stated value of $1.00 per share for
$42,690.
On
August 18, 2017, the Company redeemed 20,000 shares of
Series A Preferred with a stated value of $1.00 per share for
$20,000.
On
September 11, 2017, the Company redeemed 20,000 shares of
Series A Preferred with a stated value of $1.00 per share
for $20,000.
Series A Preferred
The Series A Preferred 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.
|
On October 17, 2017, the Company filed
a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of Nevada
to increase authorized preferred stock from 1,000,000 to 20,000,000 shares.
NOTE 8
– COMMON STOCK
As of September 30, 2017, the Company was
authorized to issue 66,666,667 shares of $0.001 par value per share Common Stock, of which 44,897,891 and 12,060,367 shares were
issued outstanding as of September 30, 2017, and December 31, 2016, respectively. On October 17, 2017, the Company filed the Amendment
with the Secretary of State of Nevada, which also increased the authorized common shares from 66,666,667 shares to 600,000,000
shares.
Nine Months Ended September 30, 2017
The Company conducted two private offerings
which closed during the quarter ended September 30, 2017.
Investor Offering
The first private offering was offered
to investors (the “Investor Offering”), in which the Company sold units (the “Units”) which consisted of
four shares of the Company’s common stock and warrants to purchase one additional share of common stock. The per Unit price
was 0.03 – 0.60, and the exercise price for the warrants is $0.45. The warrants cannot be exercised until two years from
the purchase date (subject to certain conditions), and expire four years after the purchase date.
As of the closing of the Investor Offering,
the Company had sold an aggregate of 38,035,915 pre-split/26,215,499 post-split shares of its common stock in the Investor Offering
and issued warrants to purchase an additional 9,508,906 pre-split/6,553,848 post-split shares of its common stock. (Please note:
In the Company’s Quarterly Report for the quarter ended June 30, 2017, the Company inadvertently overstated the number of
warrants that had been issued to that point in connection with the Investor Offering. The correct number as of August 10, 2017,
was 2,765,341.)
Employee/Consultant Offering
The second private offering was offered
to employees and consultants of the Company (the “Employee Offering”), in which the Company sold shares of its common
stock at a purchase price of $0.03 per share, the same price as in the Investor Offering; however, there were no warrants in the
Employee Offering. The shares sold in the Employee Offering include restrictions on their resale, and the Company reserved the
right to repurchase the shares (the “Repurchase Right”) on terms as agreed between the Company and the employee or
consultant. Per the Employee and Consultant Share Purchase Agreement, the Company’s Repurchase Rights will terminate (subject
to certain conditions) following a term of not less than 5 months or more than 36 months from the purchase date.
As of the date of the closing of the Employee
Offering, the Company had sold an aggregate of 4,251,333 shares of its common stock in the Employee Offering.
The aggregate amount raised by the Company
in the Investor Offering and the Employee Offering as of the closing of the two offerings was $914,022.
Prior
Private Offering
During
nine months ended September 30, 2017, pursuant to another private placement offering conducted and closed earlier in the calendar
year (the “Prior Private Offering”) the Company issued 7,028,750 pre-split/2,342,924 post-split shares of common stock
for gross proceeds of approximately $1,215,750.
On March 10,
2017, the Company issued 83,300 pre-split shares/27,768 post-split 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.
NOTE
9 – STOCK PURCHASE OPTIONS AND WARRANTS
Stock Purchase
Options
During the nine
months ended September 30, 2017, the Company did not issue any stock purchase options. As the holders of the Company’s outstanding
options are employees and non-employees, the values attributable to non-employee 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. Stock options issued to employees
are valued on the date of issuance and amortized over the service period 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 non-employee stock options granted was revalued at each reporting date using the Black-Scholes valuation
model. As of September 30, 2017, the Company remeasured the options at a value of $1,024,728 to be recognized over the vesting
period, of which $399,049 has been recognized.
The following
table summarizes the changes in options outstanding of the Company during the nine months ending September 30, 2017:
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price $
|
|
|
Outstanding, December 31, 2016
|
|
|
1,382,351
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
1,382,351
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2017
|
|
|
1,217,270
|
|
|
|
0.29
|
|
As of September 30, 2017, the Company had $425,710 in unrecognized
expense related to future vesting of stock options.
Stock Purchase Warrants
During the nine
months ended September 30, 2017, the Company issued warrants to purchase a total
of
6,553,848
as part of the Investor Offering discussed above.
The
following table summarizes the changes in Warrants outstanding of the Company during the nine months ending September 30, 2017
:
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price $
|
|
|
Outstanding, December 31, 2016
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
6,553,848
|
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2017
|
|
|
–
|
|
|
|
–
|
|
NOTE
10 – FAIR VALUE MEASUREMENTS
Liabilities
measured at fair value on a recurring basis at September 30, 2017, are summarized as follows:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Fair value of options
|
|
$
|
–
|
|
|
$
|
1,100,184
|
|
|
$
|
–
|
|
|
$
|
1,100,184
|
|
|
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 for options and warrants and the Binomial Lattice model for derivative liabilities.
NOTE 11- 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:
Amendment to Articles of Incorporation
On October 12, 2017, the Company received approval from the
holders of a majority of the outstanding shares of common stock of the Company to amend the Company’s Articles of Incorporation,
as amended to date, to increase the authorized capital stock of the Company. The Company’s Board of Directors had considered
amending the Articles of Incorporation to increase the authorized common stock of the Company from 66,666,667 shares to 600,000,000
shares, and to increase the authorized preferred stock from 1,000,000 to 20,000,000 shares. On September 15, 2017, the Board of
Directors approved the amendment and recommended it to the shareholders of the Company.
On October 12, 2017, the Company received the written consent
to approve the amendment from the holders of 24,725,042 shares of the Company’s common stock, equal to 53.93% of the total
outstanding shares of the Company’s common stock.
On October 17, 2017, the Company filed a Certificate of Amendment
to its Articles of Incorporation (the “Amendment”) with the Secretary of State of Nevada to increase authorized common
shares from 66,666,667 shares to 600,000,000 shares, and to increase the authorized preferred stock from 1,000,000 to 20,000,000
shares.
Common Stock
From
October 1, 2017, through November 9, 2017, the Company issued
730,770 shares of Common Stock for $475,000 in cash
in connection with a private placement offering.