Entry into Amended and Restated Acquisition and Share
Exchange Agreement; Completion of Acquisition of Assets
On September 21, 2016, Knowledge Machine International, Inc.
(“KMI”) 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 “Shareholders”),
and closed the acquisition (the “Acquisition”) of the ownership of EveryStory (the “Closing”). KMI had
previously announced its entry into the original version of the A&R Agreement, and noted that the closing of the transaction
was contingent on the completion of certain closing conditions.
Pursuant to the A&R Agreement, KMI acquired all of
the outstanding shares of EveryStory, and agreed to issue an aggregate of 77,377,712 shares of KMI common stock to the
EveryStory holders, with the understanding that an additional 45,247,288 shares were to be reserved for issuance to holders
of EveryStory derivative securities 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
KMI common stock were to be returned to KMI for cancellation, resulting in the current KMI shareholders owning an aggregate
of 40,875,000 shares of KMI common stock immediately prior to the Closing.
Pursuant to the A&R Agreement, the 122,625,000 Exchange
Shares issued or to be issued to the EveryStory constituted 75% of the total issued and outstanding shares of KMI’s common
stock, and the legacy KMI shareholders (who were the owners of KMI common stock immediately prior to the Closing) owned an aggregate
of 40,875,000 shares, which constituted 25% of the total outstanding KMI common stock.
KMI’s and EveryStory’s management agreed, and the
A&R Agreement provides, that following the Closing, KMI will conduct a reverse stock split (discussed in more detail below),
following which the outstanding shares of KMI’s Series A Preferred Stock will convert into a total of 8,000,000 post-reverse-split
common stock. Following such conversion, the EveryStory owners will own or have the right to receive shares of KMI common stock
equal to 60% of the then-outstanding KMI common stock, and the KMI legacy shareholders will own shares of KMI common stock equal
to 40% of the then-outstanding KMI common stock, consisting of 8,000,000 shares of KMI common stock issued on conversion of the
KMI Series A Preferred Stock (20%) and 8,000,000 shares of KMI common stock owned by the other legacy KMI shareholders (20%).
As a result of the Closing of the A&R
Agreement, EveryStory became a wholly owned subsidiary of KMI. Additionally (as discussed more fully below), the directors
and officers of KMI immediately prior to the Closing appointed the EveryStory management to become officers and directors of
KMI, and then resigned from their positions with KMI. In addition, KMI terminated its pre-Closing business operations and
agreed to dissolve its other wholly owned subsidiary, Knowledge Machine, Inc.
There was no relationship between KMI and EveryStory or their
principals or affiliates prior to the negotiation of the original agreement and the A&R Agreement.
Share Ownership Following Closing
Prior to Closing, KMI had 40,875,000 shares of its common stock
outstanding. Upon Closing, KMI issued an aggregate of 77,377,712 shares of its common stock to the then current shareholders of
EveryStory. Additionally, at Closing, EveryStory had options to issue a total of 600,000 shares of its common stock, and convertible
debt securities that would be convertible into 672,533 shares of EveryStory’s common stock. In connection with the Closing,
KMI agreed to reserve an aggregate of 45,247,288 shares of its common stock for issuance in connection with the future exchange
of shares of EveryStory common stock issued upon exercise of EveryStory options or conversion of EveryStory convertible debt securities.
Submission of Matters to a vote of Shareholders
Anticipated Reverse Stock Split; Shareholder
Approval
The A&R Agreement provides that following the Closing, KMI
will complete a reverse split (the “Reverse Split”) of the outstanding common shares of KMI at a ratio of approximately
1:5. The exact ratio of the Reverse Split will be determined by KMI’s board of directors.
Prior to the Closing, as required by the A&R Agreement,
KMI’s Board of Directors reviewed and approved the proposed Reverse Split, and recommended that the then-current KMI shareholders
approve the Reverse Split at a ratio between 1:5 and 1:7.5, to be determined by KMI’s Board of Directors. Following such
recommendation, a majority of the then-current shareholders approved the Reverse Split at a ratio between 1:5 and 1:7.5, to be
determined by KMI’s board of Directors.
Amendment to KMI’s Articles
of Incorporation; Shareholder Approval
As a further condition to the Closing, KMI was required to amend
its Articles of Incorporation to opt out of the provisions relating to acquisition of controlling interest (NRS Sections 78.3781
- 78.3793) and the provisions relating to combinations with interested stockholders (NRS Sections 78.411 – 78.445). KMI’s
board of directors approved the proposed amendments, and recommended them to the then-current KMI shareholders. Following such
recommendation, a majority of the then-current shareholders approved the proposed amendments. KMI’s post-Closing management
will work to implement these amendments to KMI’s Articles of Incorporation.
As of the date of this Report, KMI’s new board of directors
had not implemented the Reverse Split, and had not filed the Articles of Amendment to opt out of the provisions of the Nevada Revised
Statutes listed above. KMI will provide disclosure relating to the amendments once they have been filed and become effective.
The foregoing summary of the terms and conditions of the A&R
Agreement does not purport to be complete, and is qualified in its entirety by reference to the full text of the A&R Agreement
attached as an exhibit hereto.
KMI Private Offerings Prior to Closing; Creation of a
Direct Financial Obligation of KMI
Prior to Closing, KMI conducted a non-public offering
of its Series A Convertible Preferred stock (the “Preferred Stock Offering”) to raise up to $120,000 for
operating funds for KMI and to satisfy accounts payable prior to Closing. One Hundred Thousand shares of KMI Series A
Preferred Stock were sold in the Preferred Stock Offering. As noted above, the KMI Series A Preferred Stock will convert into
KMI common stock immediately following the effectiveness of the Reverse Split. Pursuant to the Preferred Stock Offering, each
investor entered into a subscription agreement pursuant to which each investor represented and warranted that it was an
accredited investor and that he or she was purchasing the Preferred Stock for his or her own account, and not with a view to
distribution, as well as other standard representations made in private transactions.
Additionally, KMI conducted a private offering of convertible
notes (the “Note Offering”) to raise additional capital that would remain in KMI following the Closing. In the convertible
note offering, KMI raised an aggregate of $240,000, which will be a component of the post-Closing capitalization of KMI. 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 Note”). 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 Note 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, KMI 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 bear interest at a
rate of 10%, and mature on September 13, 2017, if not converted or prepaid prior to that. The Convertible Notes are convertible
into shares of KMI’s common stock at a conversion price of $0.195, subject to adjustment as described in the Convertible
Note. Up to 50% of the Convertible Notes may be repaid by KMI 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.
Based on the terms of the Convertible Notes, absent any adjustment
of the conversion price, KMI could be required to issue up to 1,230,769 shares of KMI’s common stock if the entire principal
amounts of the Convertible Notes were converted. KIMI could be required to issue additional shares of its common stock if interest
accruing on the Convertible Notes is converted into shares (on the same formula as that of the Convertible Notes), although KMI
cannot determine how many shares could be issued until such conversions occur.
The securities offered and sold by KMI in the non-public offerings
(both the preferred stock and the convertible note offerings) and in the exchange transition with the shareholders
of EveryStory have not been and will not be registered under the Securities Act and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
The non-public offerings (both the preferred stock and the convertible
note offerings) and in the exchange transition with the shareholders of EveryStory were made in reliance on the private offering
exemption of Section 4(2) of the Securities Act and/or the private offering safe harbor provisions of Rule 506 of Regulation D
based on the following factors: (i) the number of offerees or purchasers, as applicable, (ii) the absence of general solicitation,
(iii) investment representations obtained from the security holders in each of the transactions, (iv) the provision of appropriate
disclosure, and (v) the placement of restrictive legends on the certificates reflecting the securities.
Change in Control of KMI
Immediately prior to the Closing, there were 40,875,000 shares
of KMI’s common stock. In connection with the Closing, KMI issued an aggregate of 77,377,712 shares to the EveryStory shareholders,
and 45,247,288 shares were reserved for issuance to the holders of EveryStory options and 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 KMI.
As noted, once
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the Reverse Split has taken place;
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all of the KMI convertible preferred shares are converted into shares of KMI’s common stock;
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all of the EveryStory convertible notes are converted into shares of EveryStory common stock and then exchanged for shares
of KMI common stock; and
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all of the EveryStory options have been exercised into shares of EveryStory common stock and then exchanged for shares of KMI
common stock,
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then the legacy KMI shareholders would own 40%, and the EveryStory
shareholders and option and convertible debt holders would collectively own 60%. As of the date of this Report, KMI’s management
is unaware of any agreements between the EveryStory shareholders, the EveryStory option holders, the EveryStory convertible debt
holders, or anyone else to work together. Nevertheless, numerically, the EveryStory securities holders do or will own more than
50% of the outstanding common stock of KMI, and as such, a change of control could be deemed to have occurred.
Changes in Management
In connection with the Closing, Edward Cox, David Keene, and
Larry Morgan were appointed as new members of the Board of Directors of KMI by the existing members of KMI’s Board of Directors,
and Edward Cox was appointed as the Chief Executive Officer of KMI. Immediately following the appointment of Messrs. Cox, Keene,
and Morgan to the Board and Mr. Cox as the Chief Executive Officer, Vivek R. Dave and Taylor Caswell resigned all positions as
members of the Board of Directors and as officers of KMI.
The resignations were agreed to by the former directors in connection
with the execution of the A&R Agreement and the closing of the Acquisition. There were no disagreements between KMI and any
of the former directors.
The following is a summary of the biographical
information of the new directors and officers of KMI:
Edward Cox
has served as
President and Chief Executive Officer and Chairman and a member of the Board of Directors of EveryStory since February 6,
2015. Prior to that, he served as a Vice President and Executive Officer of Apricus Biosciences, Inc., a publicly traded
company, since December 2009, in roles leading Commercial Development, Business Development, Investor Relations, and
Corporate Development. Mr. Cox served as the President, Director and Secretary of Bio-Quant, Inc. from January 2007 until
BioQuant’s merger with NexMed, Inc., which was renamed Apricus Biosciences. Prior to 2007, Mr. Cox previously served as
an executive or board member of both public and private companies in the areas of Healthcare, Life Science, Technology and
Resources. Mr. Cox holds a Master of Science in Management degree from the Warrington College of Business Administration at
the University of Florida.
David Keene,
Founder, Chief Technology
Officer and a member of the Board of Directors of EveryStory, is a veteran of the video game industry who has specialized in commerce
and content delivery. Prior to founding EveryStory, from 2010 to 2013, Mr. Keene served as Chief Architect – Commerce Platform
for Trion Worlds, Inc. (fka Trion World Networks, Inc.). At Trion, Mr. Keene led a group of senior engineers through the design
and architecture process to create an innovative, world class commerce platform. Mr. Keene also created a high capability MTX platform
that supported complex promotions, asymmetrical subscriptions, multiple game-specific currencies and robust reporting. While at
Trion, Mr. Keene also had direct management responsibility over the quality assurance engineering team that created a third party
order testing platform (custom DSL) for fully automated testing on all development. Prior to Trion, from 2006 to 2010, Mr. Keene
served as Senior Architect – PlayStation Network for Sony Network Entertainment (“SNE”). While at SNE, Mr. Keene
managed integrations with multiple SNE global partner groups, added search to the PlayStation Network (“PSN”) through
soir/lucene, implemented an innovative recommendation system that avoided IP risk exposure. Mr. Keene also defined and led development
guidance for the VERSA API, a RESTful api for next-gen PSN products and the Sony Qriosity video service. Prior to SNE, from 2004
to 2006, Mr. Keene served as a Senior Engineer at Sony Online Entertainment, where he worked supported the launch of several massively
multiplayer online games (“MMOs”) including EverQuest II. Prior to that, from 2001 to 2004, Mr. Keene served as an
independent software consultant and as a Senior Database Engineer for Shea Homes, a California-based home builder.
Larry Morgan
joined the EveryStory
board of directors in 2015. Mr. Morgan is a top-flight executive with over 25 years of global experience in the telecom, IT services,
enterprise restructuring, and consulting industries. Mr. Morgan is currently President and CEO of The Noble Group, a consulting
firm that advises early stage companies on growth strategies and advises the managements of seasoned companies regarding exit strategies.
Mr. Morgan is also an active investor with Vertical Venture Partners, Tech Coast Angels and OurCrowd. From 2010 to 2013 Mr. Morgan
served as Executive Director of San Diego Data Processing Corporation and led a restructuring that resulted in annual savings in
excess of $11 million to the City of San Diego. Prior to that, from 2007 to 2009, Mr. Morgan served as a Managing Director of Macquarie
Telecom, where he led the turnaround of the international hosting, voice and data outsourcing division and led the sale of the
resulting profitable business. In addition to domestic postings, during his tenure with Macquarie, Mr. Morgan had postings in Australia
and Singapore, Prior to Macquarie, from 2005 to 2006, Mr. Morgan served as President and CEO of Virtela Communications, spearheading
the turnaround that resulted in the the foundation for Virtela’s eventual sale for over $500 million. Prior to Virtela, from
1991 to 2005, Mr. Morgan had several executive positions of increasing responsibility with Infonet Services Corporation, and last
served as Corporate Vice President and General Manager. During his tenure with Infonet, Mr. Morgan led Infonet’s business
in Europe, the Middle East and Africa, was responsible for all IP, outsourcing and cloud computing products, expansion into India,
network coverage in 61 countries, and was a member of the executive due diligence and transition team in connection with the company’s
sale to British Telecom for $965 million. Also during his tenure with Infonet, Mr. Morgan had international postings in The Netherlands
and Singapore. Mr. Morgan holds both a B.S. degree (Mathematics and Education) and an M.A. degree (Administration) from Villanova
University.
As of the date of this Report, the Board of Directors KMI had
not yet organized any committees. Additionally, as of the date of this Report, none of the new directors or officers of KMI had
employment or other compensation agreements with KMI.