The accompanying notes are an integral part of these condensed financial statements
The accompanying notes are an integral part of these condensed financial statements
The accompanying notes are an integral part of these condensed financial statements
Notes to Condensed Consolidated Financial
Statements
September 30, 2016, and December 31, 2015
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, 2016, 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, 2015 audited financial statements. The results of operations for the periods ended September 30, 2016 and
2015 are not necessarily indicative of the operating results for the full years.
Restatement
of Prior Period Financial Statements
The purpose of
this Amendment on Form 10-Q/A for the nine months ended September 30, 2016, as previously filed with the Securities and Exchange
Commission on November 21, 2016, is to remove the conversion of 4,146,994 options that were accounted for as common stock during
the share exchange transaction between the Company and EveryStory, Inc. (as discussed below in Note 3), to correct the stockholders
equity to properly reflect stock issuances, and to record the amortization of options.
No
other changes have been made to the Quarterly Report except as noted above. This Amendment to the Quarterly Report speaks
as of the original filing date of the Quarterly Report, does not reflect events that may have occurred subsequent to the original
filing date, and does not modify or update in any way disclosures made in the original Quarterly Report except that changes
have been made to the cover page, Note 2 – Going Concern, Note 3 – Summary of Significant Accounting Policies, Note
10 - Common stock, Note 11 – Stock Purchase Options, Note 12 – Fair Value Measurement, Note 13 –Subsequent Events,
and Note 14 -
Correction of Interim Condensed Financial Statements
.
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 $1,405,884, negative working capital of $241,556, 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 12, 2013.
The Company offers a subscription-based
service that captures, shares, and stores photos and audio in cloud. It offers the EveryStory 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 “Shareholders”), and closed the
acquisition (the “Acquisition”) of the ownership of EveryStory (the “Closing”).
The Company acquired all of the outstanding shares of EveryStory,
and agreed to issue an aggregate of 77,377,713 pre-split /15,477,604 post-split shares of the Company’s common stock to the
EveryStory holders, with the understanding that an additional 21,942,062 pre-split/4,388,997 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 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 40,875,000 shares of the Company’s common stock immediately prior to the Closing.
Pursuant to the A&R Agreement, the 99,319,775 pre-split/
19,866,601 Exchange Shares issued or to be issued to the EveryStory 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 provides, that following the Closing, the Company will conduct a reverse stock split
(discussed in more detail below), following which the outstanding shares of the Company’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 the Company’s common stock equal to 55% of the then-outstanding Company common stock, and the
Company legacy shareholders will 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 a wholly owned subsidiary of the Company. Additionally, the directors and officers of the Company
immediately prior to the Closing appointed the EveryStory management to become officers and directors of the Company, and then
resigned from their positions with the Company. In addition, the Company terminated its pre-Closing business operations and agreed
to dissolve its other wholly owned subsidiary, Knowledge Machine, Inc.
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 77,377,713 pre-split /
15,477,604 post-split shares to the EveryStory shareholders, and 21,942,062 pre-split/4,388,997 post-split 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 the Company.
On
November 2, 2016, a reverse stock split (the “Reverse Split”) of the Company’s common stock took effect. The
ratio of the Reverse Split was 1:5.109375, meaning one new share for each 5.109375 old shares of the Company’s common stock.
All share numbers provided in this Quarterly Report are given on a post-reverse-split basis.
Accounting Basis
The Company’s
financial statements are prepared using the accrual basis of accounting in accordance with U.S. GAAP. As disclosed
in a Current Report on Form 8-K filed November 17, 2016, the Company recently changed to a December 31 fiscal year end.
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 nine months ended September 30, 2016 and 2015, 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 4,128,165 and 0 at nine months ended
September 30, 2016 and 2015, respectively.
Recent Accounting Pronouncements
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, 2016, and December 31, 2015:
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Computer & Equipment
|
|
|
2,816
|
|
|
|
2,816
|
|
|
Less: Accumulated Depreciation
|
|
|
(1,880
|
)
|
|
|
(1,168
|
)
|
|
Net Property and Equipment
|
|
$
|
936
|
|
|
$
|
1,648
|
|
NOTE 5 – ASSET ACQUISITION
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 at $0.67 per share for a value of $58,960. The price per share for Common Stock issued was based
on the relative fair market value of the Common Stock using the backsolve valuation method.
The Company evaluated this acquisition
in accordance with ASC 805, Business Combinations (10-55-4) to discern whether the assets and operations of SIT met the definition
of a business. The Company concluded there were not a sufficient number of key processes obtained to develop the inputs into outputs,
nor could such processes be easily obtained by the Company. Accordingly, the Company accounted for this transaction as the acquisition
of assets.
The transaction was accounted for in accordance
with asset acquisition guidance found in ASC 805. The consideration transferred and assets acquired recognized is as follows:
|
Consideration paid:
|
|
|
|
|
Common Stock
|
|
$
|
58,960
|
|
|
|
|
|
|
|
|
Consideration received:
|
|
|
|
|
|
Intangible assets
|
|
$
|
58,960
|
|
|
|
|
|
|
|
|
Net value of assets purchased:
|
|
$
|
58,960
|
|
NOTE 6 – INTANGIBLE ASSETS
The Company’s
intangible assets were comprised of the following of September 30, 2016, and December 31, 2015:
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Technology asset purchase
|
|
$
|
58,960
|
|
|
$
|
7,100
|
|
|
Less: Accumulated Amortization
|
|
|
–
|
|
|
|
–
|
|
|
Less: Impairment
|
|
|
(58,960
|
)
|
|
|
(7,100
|
)
|
|
Net Intangible Assets
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company impaired
intangible assets related to the technology asset purchase and patent purchase due to no revenue production, totaling $58,960 and
$7,100, for the years ended September 30, 2016 and 2015, respectively.
NOTE 7 – LOANS PAYABLE
Notes Payable
– Related Parties
Notes payable due to related parties
consisted of the following as of September 30, 2016 and December 31, 2015:
|
Balance December 31, 2015
|
|
$
|
61,064
|
|
|
Cash additions
|
|
|
94,000
|
|
|
Expense additions
|
|
|
20,627
|
|
|
Cash payments
|
|
|
(80,100
|
)
|
|
Conversions
|
|
|
(95,591
|
)
|
|
Balance September 30, 2016
|
|
$
|
–
|
|
During the nine months ended
September 30, 2016 and the year ended December 31, 2015, the company Founder and CEO advanced $88,000 and $110,000, and
expense additions of $20,627 and $68,904, and was repaid $66,000 and $75,000, respectively. The notes bear an interest rate
of 0% per annum.
During the nine months ended September
30, 2016 and the year ended December 31, 2015, the company Founder and CTO advanced $6,000 and $25,000, and expense additions of
$0 and $595, and was repaid $14,100 and $73,153, respectively. The notes bear an interest rate of 0% per annum.
On September 21,
2016, the Company’s wholly owned subsidiary (EveryStory) issued 112,690 shares of the EveryStory Series A Preferred Stock
to the CEO and CTO in exchange for and as full payment of amounts 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
EveryStory 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, the shares of EveryStory Series A Preferred can be convertible into an aggregate of 160,986
shares of common stock, using a conversion price of $0.70 per share pursuant to the A&R Agreement.
Notes Payable
Notes payable consisted of the following
as of September 30, 2016, and December 31, 2015:
|
Balance December 31, 2015
|
|
$
|
–
|
|
|
Cash additions
|
|
|
20,000
|
|
|
Expense additions
|
|
|
–
|
|
|
Cash payments
|
|
|
–
|
|
|
Conversions
|
|
|
–
|
|
|
Balance September 30, 2016
|
|
$
|
20,000
|
|
On August 3, 2016,
the Company entered into a promissory note purchase agreement with an unrelated individual for $20,000, pursuant to the original
version of the Share Exchange Agreement with EveryStory dated July 1, 2016. This note is due on demand. In lieu of interest, the
Company issued 10,000 pre-split split shares of the Company’s common stock (69,811 post-split shares of the Company’s
common stock) for a value of $6,700.
Convertible Notes Payable
–
Related Parties
Convertible notes payable due to related
parties consisted of the following as of September 30, 2016, and December 31, 2015:
|
Balance December 31, 2015
|
|
$
|
60,000
|
|
|
Cash additions
|
|
|
–
|
|
|
Expense additions
|
|
|
–
|
|
|
Conversions
|
|
|
(60,000
|
)
|
|
Debt discount from debt issuance costs
|
|
|
–
|
|
|
Balance September 30, 2016
|
|
$
|
–
|
|
On June 29, 2015, the Company issued to
two related party individuals convertible notes for $30,000 that mature on December 31, 2016. The notes bear an interest rate of
12% per annum and are convertible into shares of the Company’s common stock at the lesser of 70% of the price per share paid
by the investors for the next preferred stock in a qualified financing or the quotient of $2,000,000 divided by the fully diluted
capitalization of the Company immediately prior to the closing date of the qualified financing.
On November 18,
2015, the Company issued to two related party individuals convertible notes for $30,000 that mature on November 18, 2017. The notes
bear an interest rate of 12% per annum and are convertible into shares of the Company’s common stock at the lesser of 60%
of the lowest price per share paid by the investors for the next preferred stock in a qualified financing or the quotient of $5,000,000
divided by the fully diluted capitalization of the Company immediately prior to the closing date of the qualified financing.
On September
21, 2016, in connection with the EveryStory Transaction and the A&R Agreement, the Company's CEO converted the full
balance of notes totaling $10,000 of principal and $1,003 of interest, and a director of the Company converted $50,000 of
principal and $6,231 of interest into an aggregate of 478,419 shares of the Company’s common stock.
Convertible Notes Payable
Notes payable due to non-related parties
consisted of the following as of September 30, 2016, and December 31, 2015:
|
Balance December 31, 2015
|
|
$
|
465,000
|
|
|
New additions
|
|
|
340,000
|
|
|
Conversions
|
|
|
(656,000
|
)
|
|
Debt discount
|
|
|
(228,822
|
)
|
|
Balance September 30, 2016
|
|
$
|
11,178
|
|
On June 29, 2015,
the Company issued to ten unrelated individuals convertible notes in the aggregate amount of $195,000 that mature on December 31,
2016. The notes bear an interest rate of 12% per annum and are convertible into shares of the Company’s common stock at the
lesser of 70% of the price per share paid by the investors for the next preferred stock in a qualified financing or the quotient
of $2,000,000 divided by the fully diluted capitalization of the Company immediately prior to the closing date of the qualified
financing. On September 21, 2016, all of these convertible notes were converted into common stock based on the terms of the A&R
Agreement.
On October 20,
2015, the Company issued to an unrelated individual a convertible note for $5,000 that matures on October 20, 2017. The note bears
an interest rate of 12% per annum and is convertible into shares of the Company’s common stock at the lesser of 60% of the
lowest price per share paid by the investors for the next preferred stock in a qualified financing or the quotient of $5,000,000
divided by the fully diluted capitalization of the Company immediately prior to the closing date of the qualified financing. On
September 21, 2016, this convertible note was converted into common stock based on the terms of the A&R Agreement.
On November 18,
2015, the Company issued to eleven unrelated individuals convertible notes in the aggregate amount of $265,000 that mature on November
18, 2017. The notes bear an interest rate of 12% per annum and are convertible into shares of the Company’s common stock
at the lesser of 60% of the lowest price per share paid by the investors for the next preferred stock in a qualified financing
or the quotient of $5,000,000 divided by the fully diluted capitalization of the Company immediately prior to the closing date
of the qualified financing. On September 21, 2016, all of these convertible notes were converted into common stock based on the
terms of the A&R Agreement.
On February 9,
2016, the Company issued to an unrelated individual two convertible notes for $100,000 that mature on February 9, 2018. The notes
bear an interest rate of 0% per annum and are convertible into shares of the Company’s common stock at the $1.60 per share.
On September 21, 2016, these convertible notes were converted into common stock based on the terms of the A&R Agreement.
On September 13, 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 will 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 bear interest at a rate of 10%, and
mature on September 13, 2017, if not converted or prepaid prior to that. The Convertible Notes 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
may 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.
On September 21, 2016 as part of the EveryStory
Transaction, note holders converted promissory notes in the aggregate amount of $668,904 and interest totaling $62,487 into
21,942,062 pre-split/4,388,997 post-split shares of the Company’s common stock.
NOTE 8 –DERIVATIVE LIABILITIES
Determining which
category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures
each quarter. The Company has four liability measured at fair value on a recurring basis, which consists of a derivative liability
on certain convertible notes payable (see note 7). As of September 30, 2016 this derivative liability had an estimated fair value
of $191,949. The Company has no assets that are measured at fair value on a recurring basis.
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 September 30, 2016:
|
Balance at December 31, 2015
|
|
$
|
–
|
|
|
Issuances
|
|
|
260,197
|
|
|
Change in Fair Value of Derivative
|
|
|
(68,248
|
)
|
|
Balance at September 30, 2016
|
|
$
|
191,949
|
|
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,
|
|
|
|
|
2016
|
|
|
Expected term in years
|
|
1.00
- 0.95 years
|
|
|
Risk-free interest rates
|
|
|
0.56
- 0.63%
|
|
|
Volatility
|
|
|
103.83
- 176.59%
|
|
|
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 9 –PREFERRED STOCK
The Company has authorized 10,000,000
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 0 shares were
issued and outstanding as of December 31, 2016 and 2015, respectively.
On September 13, 2016,
the Company issued 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 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, the shares of Series A Preferred Stock can be converted into shares of Common
Stock using a conversion price of $0.10 per share.
Series A Redeemable Preferred Stock
The Series A 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.
|
|
|
·
|
Converted 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 10
– COMMON STOCK
The Company has authorized 200,000,000 shares of $0.001
par value per share Common Stock, of which 181,069,775 pre-split/35,866,601 post-split shares and 14,353,093 shares were issued outstanding as of September 30, 2016, and December 31, 2015, respectively.
Nine months Ended September 30,
2016
EveryStory issued 37,500 shares of its
common stock, which were exchanged for 263,325 shares of Dthera common stock for the services value of $25,125 and recorded a
$34,875 gain on extinguishment of debt. 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. The price per share for Common
Stock issued for services was based on the relative fair market value of the Common Stock using the backsolve valuation method.
On September 21, 2016 as part of the A&R
Agreement, EveryStory issued 635,055 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, and issued 10,000 shares of EveryStory common stock, which were exchanged for
70,015 shares of Dthera common stock in lieu of interest for a value of $6,700.
Year Ended December 31, 2015
EveryStory issued 900,000 shares of its
common stock, which were exchanged for 6,301,358 shares of Dthera common stock for net cash proceeds of $10,000 to EveryStory founders.
EveryStory also issued 50,000 shares of its common stock which were exchanged for 350,075
shares of Dthera common stock as payment for services at $0.67 per share for a value of $33,500.
The price per share for
Common Stock issued for services was based on the relative fair market value of the Common Stock using the backsolve valuation
method.
NOTE
11 – STOCK PURCHASE OPTIONS
In
2015, the Board of Directors of EveryStory approved the adoption of the EveryStory’s Stock Option Plan (“the Plan”).
The purpose of the Plan is to advance the interests of EveryStory by encouraging and enabling acquisition of a financial interest
in EveryStory by employees, consultants, and other key individuals. The Plan is intended to aid EveryStory in attracting and retaining
key employees, to stimulate the efforts of such individuals and to strengthen their desire to remain with EveryStory. A maximum
of 680,000 shares of EveryStory's Common Stock is reserved for issuance under stock options to be issued under the Plan. The Plan
permits the grant of incentive stock options, non-statutory stock options and restricted stock awards. The Plan is administered
by the Board of Directors or, at its direction, a Compensation Committee comprised of officers of EveryStory.
Stock
Purchase Options
During
the nine months ended September 30, 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 with multiple
vesting periods. EveryStory issued the options in conjunction with employment agreements. The price per share for Common Stock
for the stock options was based on the relative fair market value of the Common Stock using the backsolve valuation method of applying
the Option Pricing Method (OPM). The EveryStory options were converted into Dthera options on September 21, 2016, p
ursuant
to the A&R Agreement
. The values attributable to these options are amortized over the
service period and the unvested portion of these options are remeasured on a quarterly basis until they have fully vested. 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 were revalued at each reporting date using the Black-Scholes valuation model. As of
September 30, 2016, the company remeasured the options at a value of $1,115,832.
During the year ended
December 31, 2015, EveryStory issued options to purchase a total of 486,200 shares of EveryStory common stock, which would exchange
for 3,404,132 shares of Dthera common stock, valued at $75,457 with multiple vesting periods. EveryStory issued 127,200 options
in conjunction to a consulting agreement entered into in May 10, 2015 and 359,000 options issued in conjunction with employment
agreements entered into during the year. The options were valued using the Black-Scholes options pricing model under the assumptions
noted below. The price per share for Common Stock for the stock options was based on the relative fair market value of the Common
Stock using the backsolve valuation method of applying the Option Pricing Method (OPM). The options were converted into Dthera
options on September 21, 2016, pursuant to the A&R Agreement. Further, according to the option agreements entered into in
2015, these options would vested immediately when EveryStory Options converted to Dthera options. Options issued in 2016 have
a 3 year vested period.
The
following table summarizes the changes in options outstanding of the Company during the nine months ending September 30, 2016:
|
|
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price $
|
|
|
|
Outstanding, December 31, 2015
|
|
|
|
3,404,134
|
|
|
|
0.10
|
|
|
|
Granted
|
|
|
|
742,860
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
|
4,146,994
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2016
|
|
|
|
3,404,134
|
|
|
|
–
|
|
As of September 30, 2016, the Company had $1,086,280 in unrecognized
expense related to future vesting of stock options.
NOTE
12 – FAIR VALUE MEASUREMENTS
Liabilities
measured at fair value on a recurring basis at September 30, 2016, are summarized as follows:
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Fair value of options
|
|
|
$
|
–
|
|
|
$
|
1,191,289
|
|
|
$
|
–
|
|
|
$
|
1,191,289
|
|
|
|
Fair value of derivatives
|
|
|
$
|
–
|
|
|
$
|
191,949
|
|
|
$
|
–
|
|
|
$
|
191,949
|
|
Liabilities
measured at fair value on a recurring basis at December 31, 2015, are summarized as follows:
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
Fair value of options
|
|
|
$
|
–
|
|
|
$
|
75,457
|
|
|
$
|
–
|
|
|
$
|
75,457
|
|
|
|
Fair value of derivatives
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Fair value is calculated using the Black-Scholes options pricing
model.
NOTE 13- 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:
Reverse Stock Split; Conversion of Outstanding
Knowledge Machine Series A Preferred Stock
On November 2, 2016, a reverse stock split
(the “Reverse Split”) of the Company’s common stock took effect. The ratio of the Reverse Split was 1:5.109375,
meaning one new share for each 5.109375 old shares of the Company’s common stock. In lieu of issuing fractional shares, the
Company’s transfer agent was instructed to round up to the nearest whole share.
Immediately following the effectiveness
of the Reverse Split, the Company’s 47,500 outstanding shares of Series A Preferred Stock were converted, pursuant to their
terms, into 8,000,000 shares of post-Reverse Split common stock. Additionally, through the application of the Reverse Split, the
40,875,000 shares of common stock held by the legacy shareholders of Knowledge Machine following the closing of the EveryStory
Transaction and immediately prior to the Reverse Split became 8,000,000 shares of common stock. Accordingly, the legacy shareholders
of Knowledge Machine International, including the holders of the shares of Series A Preferred Stock, owned an aggregate of 16,000,000
shares of the Company’s common stock. The shares of the Company’s common stock held by the former EveryStory Shareholders
went from 77,377,713 to 15,477,604 shares by virtue of the Reverse Split, with an additional 4,388,997 shares of the Company’s
common stock reserved for issuance to the holders of EveryStory convertible instruments, including convertible notes, and other
derivative securities.
Following the Reverse Split, the Company
had 35,866,601 shares of common stock outstanding, consisting of 27,866,601 shares outstanding resulting from the Reverse Split,
and the 8,000,000 shares of the Company’s common stock issued on conversion of the prior KMI Series A Preferred Stock immediately
following the Reverse Split.
The Reverse Split was approved by the Board
of Directors and the shareholders of the Company prior to the closing of the EveryStory Transaction, which approval was included
in the closing conditions to the EveryStory Transaction.
Name Change; Ticker Symbol Change Requested
In connection with the closing of the EveryStory
Transaction and the divestiture of the prior business and operations of the Company, as well as the new focus of the Company on
the digital therapeutics and reminiscence therapy focus of the Company, the Board of Directors and the majority shareholders of
the Company immediately following the closing of the EveryStory Transaction approved an amendment to the Company’s Articles
of Incorporation to change the name of the Company (the “Name Change”) from Knowledge Machine International, Inc.,
to Dthera Sciences. The Name Change took effect at the same time as the Reverse Split on November 2, 2016.
In connection with the Name Change, and
to help current shareholders and new investors better understand the business of the Company, the Company requested that a new
ticker symbol be assigned to the Company. The Company has requested “DTHR” as the new ticker symbol, which will take
effect twenty business days following the effectiveness of the Reverse Split (per FINRA rules).
New Website
Additionally, the Company launched a new
website, www.dthera.com, to provide information about the Company, its business and operations, and additional information about
digital therapeutics and reminiscence therapy. The link provided is for informational purposes only, and no information contained
on the Company’s website should be deemed to be part of this or any filing of the Company.
Commencement of Clinical Trial
During November 2016, the University of
California at San Diego began the previously disclosed clinical trial of the use of the EveryStory Platform as a Digital Therapeutic
and Reminiscence Therapy treatment for patients with Alzheimer’s disease and other diagnoses of dementia. The Company anticipates
that the clinical trial will be completed during the first quarter of 2017, and the Company will announce the results of the trial
upon its completion.
NOTE 14 –CORRECTION OF INTERIM
CONDENSED FINANCIAL STATEMENTS
This
Amended Quarterly Report on Form 10-Q/A (the “Amendment”) corrects our previously issued interim consolidated
financial statements for the three and nine months ended September 30, 2016. The purpose of the Amendment is to remove the
conversion of 4,146,994 options that were accounted for as common stock during the share exchange transaction between Dthera
and EveryStory, described in more detail in Note 3 above, to correct the stockholders equity to properly reflect stock
issuances, and to record the amortization of options. The correcting adjustments increased the general and administrative
expenses for the three and nine months ended September 30, 2016 and decreases stock holder equity and as of September 30,
2016, because we concluded the corrections were material to the interim condensed financial statements.
The effects of
these corrections on the interim consolidated financial statements are as follows:
DTHERA SCIENCES
FKA Knowledge Machine International, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
September 30,
2016
|
|
|
As Reported
|
|
|
|
|
Common stock 200,000,000 Shares Authorized; $0.001 Par Value; 40,000,000 and 14,353,091 shares issued and outstanding as of September 30, 2016 and December 31, 2015
|
|
$
|
40,000
|
|
|
Additional paid in capital
|
|
$
|
1,159,377
|
|
|
Accumulated deficit
|
|
$
|
(1,440,008
|
)
|
|
|
|
|
|
|
|
Correction
|
|
|
|
|
|
Common stock 200,000,000 Shares Authorized; $0.001 Par Value; 35,866,601 and 14,353,091 shares issued and outstanding as of September 30, 2016 and December 31, 2015
|
|
$
|
(4,134
|
)
|
|
Additional paid in capital
|
|
$
|
(29,990
|
)
|
|
Accumulated deficit
|
|
$
|
34,124
|
|
|
|
|
|
|
|
|
As Corrected
|
|
|
|
|
|
Common stock 200,000,000 Shares Authorized; $0.001 Par Value; 35,866,601 and 14,353,091 shares issued and outstanding as of September 30, 2016 and December 31, 2015
|
|
$
|
35,866
|
|
|
Additional paid in capital
|
|
$
|
1,129,387
|
|
|
Accumulated deficit
|
|
$
|
(1,405,884
|
)
|
DTHERA SCIENCES
FKA Knowledge Machine International, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2016
|
|
|
2016
|
|
|
As Reported
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
136,209
|
|
|
$
|
388,402
|
|
|
TOTAL OPERATING EXPENSES
|
|
$
|
319,760
|
|
|
$
|
601,578
|
|
|
OPERATING LOSS
|
|
$
|
(319,760
|
)
|
|
$
|
(601,578
|
)
|
|
NET LOSS
|
|
$
|
(279,796
|
)
|
|
$
|
(656,412
|
)
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
17,713,943
|
|
|
|
15,512,115
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Correction
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
(34,124
|
)
|
|
$
|
(34,124
|
)
|
|
TOTAL OPERATING EXPENSES
|
|
$
|
(34,124
|
)
|
|
$
|
(34,124
|
)
|
|
OPERATING LOSS
|
|
$
|
34,124
|
|
|
$
|
34,124
|
|
|
NET LOSS
|
|
$
|
34,124
|
|
|
$
|
34,124
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(449,449
|
)
|
|
|
(150,909
|
)
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
As Corrected
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
102,085
|
|
|
$
|
354,278
|
|
|
TOTAL OPERATING EXPENSES
|
|
$
|
285,636
|
|
|
$
|
567,454
|
|
|
OPERATING LOSS
|
|
$
|
(285,636
|
)
|
|
$
|
(567,454
|
)
|
|
NET LOSS
|
|
$
|
(245,672
|
)
|
|
$
|
(622,288
|
)
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
17,264,494
|
|
|
|
15,361,206
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
DTHERA SCIENCES
FKA Knowledge Machine International, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
|
|
|
2016
|
|
|
As Reported
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(656,412
|
)
|
|
Options issued for services
|
|
$
|
105,141
|
|
|
|
|
|
|
|
|
Correction
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
34,124
|
|
|
Options issued for services
|
|
$
|
(34,124
|
)
|
|
|
|
|
|
|
|
As Corrected
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(622,288
|
)
|
|
Options issued for services
|
|
$
|
71,017
|
|