| 3. Summary of Significant Accounting Policies | Nature of
Business Dthera Sciences
(formerly Knowledge Machine International, Inc.) is a Nevada corporation, and was incorporated on December 27, 2012. The Company offers
a subscription-based service that captures, shares, and stores photos and audio in cloud. It offers a Platform, which enables
users to preserve and share memories, and will initially target a Quality of Life benefit in certain patient populations, principally
patients suffering from Alzheimer’s disease and dementia. On September 21, 2016, the Company acquired a new operating subsidiary,
EveryStory, Inc., a Delaware corporation (“EveryStory”). Following the acquisition (referred to herein as the “EveryStory
Transaction”), the Company’s business is to develop a Digital Therapeutic technology designed to deliver Reminiscence
Therapy to certain patient populations, principally patients suffering from Alzheimer’s disease and dementia with the goal
of a Quality of Life benefit and reduction in anxiety in those populations. As of the date of this Report, EveryStory was our
only subsidiary. In connection with the EveryStory transaction, the Company dissolved its other former subsidiary entity and terminated
its prior business operations. Acquisition
of EveryStory; EveryStory Transaction . On September
21, 2016, the Company entered into an Amended and Restated Acquisition and Share Exchange Agreement (the “A&R Agreement”)
with EveryStory, Inc., a Delaware corporation (“EveryStory”), and each of its shareholder (the “EveryStory Holders”),
and closed the acquisition (the “Acquisition”) of the ownership of EveryStory (the “Closing”). The agreement
between the Company and the EveryStory management was that following the Closing, the EveryStory Holders would own 55% of the
outstanding shares of the Company’s common stock on a fully converted basis, and the legacy shareholders of
the Company would own 45% of the shares, and that the Company would have between $500,000 and $1,000,000 in available cash and
no debt. The Company acquired
all of the outstanding shares of EveryStory, and agreed to issue an aggregate of 15,477,604 shares of the Company’s common
stock to the EveryStory holders, with the understanding that an additional 4,388,997 shares were issued to holders of EveryStory
convertible debt instruments which are convertible or exercisable into shares of EveryStory common stock (collectively, the “Exchange
Shares”). Additionally, prior to Closing, the parties agreed that certain shares of the Company’s common stock were
to be returned to the Company for cancellation, resulting in the current Company’s shareholders owning an aggregate of 8,000,000
shares of the Company’s common stock immediately prior to the Closing. Pursuant to the
A&R Agreement, the 19,866,601 Exchange Shares issued or to be issued to the EveryStory Holders constituted 75% of the total
issued and outstanding shares of the Company’s common stock, and the legacy Company shareholders (who were the owners of
the Company’s common stock immediately prior to the Closing) owned an aggregate of 40,875,000 shares, which constituted
25% of the total outstanding Company common stock. The Company’s
and EveryStory’s management agreed, and the A&R Agreement provided, that following the Closing, the Company would conduct
a reverse stock split (discussed in more detail below), following which the outstanding shares of the Company’s Series A
Preferred Stock would convert into a total of 8,000,000 shares of common stock. Following such conversion, the EveryStory owners
would own or have the right to receive shares of the Company’s common stock equal to 55% of the then-outstanding Company
common stock, and the Company legacy shareholders would own shares of the Company’s common stock equal to 45% of the then-outstanding
Company common stock, consisting of 8,000,000 shares of Company common stock issued on conversion of the Company’s Series
A Preferred Stock (22.5%) and 8,000,000 shares of the Company’s common stock owned by the other legacy Company shareholders
(22.5%). As a result of
the Closing of the A&R Agreement, EveryStory became our wholly owned subsidiary. Additionally (as discussed more fully below),
our directors and officers immediately prior to the Closing appointed the EveryStory management to become our new officers and
directors, and then resigned from their positions with us. In addition, we terminated our pre-closing business operations and
agreed to dissolve our other wholly owned subsidiary, Knowledge Machine. Immediately prior
to the Closing, there were 40,875,000 shares of the Company’s common stock. In connection with the Closing, the Company
issued an aggregate of 15,477,604 shares to the EveryStory shareholders, and 4,388,997 shares were issued to the holders of EveryStory
convertible debt instruments, and the parties to the A&R Agreement understand and anticipate that all such holders would exercise
and convert their securities into the reserved shares of the Company. Accounting Basis The
Company’s financial statements are prepared using the accrual basis of accounting in accordance with U.S. GAAP. Use of
Estimates The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates are made in relation
to the allowance for doubtful accounts and the fair value of certain financial instruments. Principles
of Consolidation The consolidated
financial statements include the accounts of Dthera Sciences and its subsidiaries. All significant inter-Company accounts and
transactions have been eliminated. Fair Value
of Financial Instruments The Company measures
assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements,
which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be,
in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants
would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework
for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned
a hierarchical level. The following
are the hierarchical levels of inputs to measure fair value:
Level 1 - Observable inputs that reflect quoted market prices
in active markets for identical assets or liabilities.
Level 2 - Inputs reflect quoted prices for identical assets or
liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other
than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated
by observable market data by correlation or other means.
Level 3 - Unobservable inputs reflecting the Company's assumptions
incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market
participant assumptions that are reasonably available. The carrying
amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable
& accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the
short maturity of these instruments. The Company accounts
for its derivative liabilities, at fair value, on a recurring basis under level 2. Embedded Conversion
Features The Company evaluates
embedded conversion features within convertible debt under Accounting Standards Codification (“ASC”) 815, "Derivatives
and Hedging" to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted
for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require
derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options"
for consideration of any beneficial conversion feature. Derivative
Financial Instruments The Company does
not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of
it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value
reported as charges or credits to income. For option-based
simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments
at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Debt Issue
Costs and Debt Discount The Company may
record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be
paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt.
If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed. Stock-Based
Compensation The Company accounts
for share based payments in accordance with ASC 718, Compensation - Stock Compensation, which requires all share-based payments
to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date
fair value of the award. In accordance with ASC 718-10-30-9, Measurement Objective – Fair Value at Grant Date, the Company
estimates the fair value of the award using a valuation technique. For this purpose, the Company uses the Black-Scholes option
pricing model. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs
that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. Compensation
cost is recognized over the requisite service period which is generally equal to the vesting period. Upon exercise, shares issued
will be newly issued shares from authorized common stock. ASC 505, "Compensation-Stock
Compensation", establishes standards for the accounting for transactions in which an entity exchanges its equity instruments
to non-employees for goods or services. Under this transition method, stock compensation expense includes compensation expense
for all stock-based compensation awards granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of ASC 505. Loss Per
Share Basic
loss per Common Share is computed by dividing losses attributable to Common shareholders by the weighted-average number of shares
of Common Stock outstanding during the period. Diluted
loss per Common Share is computed by dividing loss attributable to Common shareholders by the weighted-average number of Shares
of Common Stock outstanding during the period increased to include the number of additional Shares of Common Stock that would
have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding
convertible Preferred Stock, stock options, warrants, and convertible debt. The dilutive effect of potentially dilutive securities
is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase
in the fair market value of the Company’s Common Stock can result in a greater dilutive effect from potentially dilutive
securities. For
the three months ended March 31, 2017 and 2016, all of the Company’s potentially dilutive securities (warrants, options,
convertible preferred stock, and convertible debt) were excluded from the computation of diluted earnings per share as they were
anti-dilutive. The total number of potentially dilutive Common Shares that were excluded were 3,443,916 for the three months ended
March 31, 2017. Reclassification Certain balances in previously issued
financial statements have been reclassified to be consistent with the current period presentation. Recent
Accounting Pronouncements In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting 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. |
