Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Management’s Discussion and Analysis
of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income. This
section should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, and our interim
financial statements and accompanying notes to these financial statements. All amounts are in U.S. dollars.
Forward-Looking Statement Notice
This quarterly report on Form 10-Q of Dthera
Sciences (the “Company”) contains forward-looking statements about our expectations, beliefs or intentions regarding,
among other things, our product development efforts, business, financial condition, results of operations, strategies or prospects.
In addition, from time to time, we or our representatives have made or may make forward-looking statements, orally or in writing.
Forward-looking statements can be identified by the use of forward-looking words such as “believe,” “expect,”
“intend,” “plan,” “may,” “should” or “anticipate” or their negatives
or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical
or current matters. These forward-looking statements may be included in, but are not limited to, various filings made by us with
the SEC, press releases or oral statements made by or with the approval of one of our authorized executive officers. Forward-looking
statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking
statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that
could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements.
Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking
statements, including, but not limited to, those set forth in our most recent annual report referenced below.
This report identifies important factors
which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly
those set forth under Item 1A – Risk Factors as disclosed in the Annual Report on Form 10-K as filed with the Securities
and Exchange Commission on April 17, 2017.
All forward-looking statements attributable
to us or persons acting on our behalf speak only as of the date of this report and are expressly qualified in their entirety by
the cautionary statements included in this report. We undertake no obligations to update or revise forward-looking statements to
reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating
forward-looking statements, you should consider these risks and uncertainties.
Overview of the Company
Dthera Sciences, based in San Diego, CA,
is a digital therapeutics company focused on developing innovative quality of life therapies for the elderly and those suffering
from cognitive decline. The Company’s lead product, ReminX, is an artificial intelligence powered consumer health product
designed to digitally deliver reminiscence therapy to seniors suffering from limited social interaction with others (“Social
Isolation”) and/or neurodegenerative diseases such as Dementia, Alzheimer’s disease, and for which Company may seek
FDA clearance/approval and/or reimbursement.
On September 21, 2017, the Company announced
that its shares of common stock had been approved for trading on the OTCQB® Venture Market.
Our principal offices are located at 7310
Miramar Road, Suite 350, San Diego, CA, 92126.
The Company qualifies
as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”).
Dthera Business and Platform
Overview – The ReminX product
and the Dthera Delivery Platform
The ReminX Product is comprised of two
components and is built on the Dthera Delivery Platform.
The first component is the customized hardware
tablet (the “Tablet”) that is specifically designed for use by individuals with neurodegenerative diseases or the elderly
who are not able to operate standard consumer tablets. The Tablet does not display a user-interface for the elderly person. It
presents itself more closely similar to a detachable photo frame that charges in a docking station without having to be plugged
in. The absence of wires, buttons, or confusing interfaces is critical to making the product accessible to this patient or demographic
group. Additionally, the Tablet is wrapped in a protective foam casing which increases durability of the Tablet if it is dropped
or thrown. The speakers and sound system have been optimized to maximize volume and clarity in comparison to off the shelf tablets.
The included dock allows for charging of the Tablet in a cordless manner and powerful magnets make sure the Tablet lands securely
in the dock.
The ReminX Tablet Software (the “Software”),
which drives the use of the Tablet, combines a simplified viewing experience for the end user while simultaneously incorporating
monitoring and tracking functionality for caregivers and administrators. The user interface is designed so the end user does not
need to press any buttons. The user simply lifts the Tablet (off of the docking station) and it automatically begins to play calming,
positive, and personalized media. This software uses proprietary emotional recognition software that learns what content has the
greatest positive effect on the end user and relays the information to the Software’s artificial intelligence system, which
can focus its collection and organization of added media to the positive subject categories.
The second component of the ReminX Product
is the Software stack which is comprised of proprietary software functionality that includes an easy-to-use interface, which allows
families, friends, caregivers, and administrators to customize and organize the content displayed to the end user – the individual
who is experiencing Social Isolation or certain neurodegenerative diseases.
Primary interaction with the ReminX Product
by content observers and contributors such as family members is primarily driven through text message communication. Each paying
customer is given a private concierge phone number and any photos or videos that are sent to that number will appear on the end
users tablet. In addition, the concierge phone number can be given to the paying customers’ family and friends so they can
also contribute content to the end user. The concierge phone number can also be added to a group text between loved ones who typically
share photos and videos with each other and in this use case, through no additional effort, the content will also be shared with
the end user.
In addition to text messaging, the ReminX
product has several additional channels of content collection. These include The ReminX Family Mobile App (iOS/Android), The ReminX
Family Web App and email. The Company will continue to develop innovative content collection methods to ensure that the end user
is given the highest quantity and quality of content possible.
The ReminX Family App is guided by an artificial
intelligence system known as Rachel. Rachel asks group members (family, friends, caregivers, and others) to add photos, videos
and audio with the long-term goal of learning about what types of content is most helpful to the end user.
Rachel maximizes the amount of content
that is added by working with individual contributors, asking questions, leading the contributor through a process to develop additional
media content to be presented to the Tablet user. Contributors can work with Rachel through the Family App on their own schedule,
taking time when available to create new content, which generally takes 5-10 minutes per “story” added. Rachel also
allows users to contribute content via text message, email, or the ReminX website as adjuncts to the Family App.
In addition, the underlying Dthera Delivery
Platform upon which ReminX is built can be modified and adapted to support people with additional clinical indications. The Company
is presently researching additional vertical markets to determine different clinical development timelines.
The Company conducts its operations from
its facilities located in San Diego, California.
Plan of Operations
Revenue Model
The Company expects to market and sell its initial
product ReminX through four possible sales channels.
Direct-Response Consumer
Health (DRCH)
The primary near-term sales
channel the Company is pursuing is the Direct-Response Consumer Health (DRCH) starting with its initial launch, anticipated in
mid 2018. In the fourth quarter of 2017, the Company completed a beta sales test to show both viability and scalability
of the DRCH sales channel. Based on the success of that test, the Company plans to market the ReminX Product directly to the family
members and caregivers of individuals who maybe suffering from Social Isolation or several neurodegenerative diseases such as Dementia
(“Loved Ones”).
Management anticipates
that those who wish to purchase the ReminX Product will pay either $40 per month or an annual fee (which will be optimized and
finalized in the second quarter of 2018) through a subscription based model. The subscription includes unlimited access to the
ReminX Family App (no limit to users) and the Tablet/Dock System. The Company anticipates that the hardware will be leased to the
subscribers until they have paid the minimum subscription fee.
The Company feels the mechanism
by which it executes this specific sales channel is somewhat proprietary and appears very unique to the space Dthera operates in.
The successful execution of this sales channel would give Dthera a competitive advantage over other potential competitive products.
Senior
Living/Revenue Shares - Institutional Sales
The second channel the
company intends to explore later in 2018 is the marketing of a revenue-sharing offering directly to
Senior Living/Long Term Care management firms such as Independent Living (IL), Assisted Living (AL), and Memory Care (MC) businesses.
This sales channel will be pursued through our approximately 30 direct contract-sales representatives.
Skilled
Nursing/Cost Savings – Institutional Sales
Skilled Nursing Facilities
(SNFs) operate with a different business model from those of IL/AL/MC communities and, as such, cost-savings, specifically improving
labor efficiency, is possibly the single highest priority for operators in the space. Dthera intends to explore over the course
of 2018 whether it believes its product ReminX, with expanded use, can indeed reduce overtime costs, staff turnover, and improve
quality survey scores within SNFs. If Management believes that the Company can demonstrate improvement, then the Company intends
to directly market the product to Skilled Nursing Facilities as a cost saving service via the same contract sales force pursuing
the IL/AL/MC channel.
FDA
Approved and Reimbursed Medical Claims
Once Dthera has begun implementation
of the Platform for Social Isolation and initial neurodegenerative indications, the Company intends, through robust clinical trials,
to pursue FDA clearance or approval and medical reimbursement for specific medical claims most likely related to the symptoms of
Dementia and Alzheimer’s disease.
Other therapeutic uses
The Company is already
exploring other applications of the Platform targeting other indications with patients that could benefit from the core technology,
some of which may be able to be pursued using the same sales channels listed above.
Results of Operations – Three
Months Ended March 31, 2018, Compared to the Three Months March 31, 2017
Operating Expenses
General and Administrative Expenses
General and administrative expenses for
the three months ended March 31, 2018, totaled $597,074, a 73% increase compared to general and administrative expenses of $345,504
for the three months ended March 31, 2017. The increase is due to the Company’s amortizing stock options as compensation
and increases in consulting fees and legal fees in the current period, offset by a reduction in estimated compensation expense
versus payments in the prior period.
Research and Development Expenses
Research and development expenses for the
three months ended March 31, 2018, totaled $10,410, a 49% increase compared to research and development expenses of $6,968 for
the three months ended March 31, 2017. The increase is due to the Company’s entering into a Standard Services Agreement (the
“SSA”) with Hatch International Limited relating to the additional services related to tooling on the current prototype
for the Company’s product in the current period.
Other Expenses
Interest Expense
Interest expense for the three months ended
March 31, 2018, totaled $280, a 99% decrease compared to interest expenses of $185,847 for the three months ended March 31, 2017.
The decrease is due to notes accruing interest and the full amortization of debt discounts due to payment of all convertible notes
in the prior year.
Gain on Derivative Liability
Gain on derivative liability for the three
months ended March 31, 2018, totaled $0, a 100% decrease compared to gain on derivative liability of $142,835 for the three months
ended March 31, 2017. The decrease is from revaluing the derivative instruments before the instruments settled during the prior
year.
Loss on Settlement of Debt
Loss on settlement of debt for the three
months ended March 31, 2018, totaled $0, a 100% decrease compared to loss on settlement of debt of $91,593 for the three months
ended March 31, 2017. The decrease is from settling convertible notes and accrued interest for stock and cash during the prior
year.
Impairment of fixed assets
For the three months ended March 31, 2018, totaled $2,779, a 100% increase compared $0 for the three months ended March 31, 2017.
The increase is due to the Company’s impairing damaged equipment in the current period.
Net Loss
For the reasons stated above, the Company’s
net loss for the three months ended March 31, 2018, was $610,543, compared to net loss of $487,077 during the three months ended
March 31, 2017.
Liquidity and Capital Resources
As of the March 31, 2018, the
Company had cash of $428,966, prepaid expenses of $277,869, and deposits of $2,500, compared to cash of $323,483, prepaid
expenses of $95,176, and deposits of $2,500 for the year ended December 31, 2017. The increase in cash is due to the Company
conducting private placements of its securities in the current period. The increase in prepaid expenses are related to
prepayment on 5,000 Tablets ordered under the Standard Services Agreement (the “SSA”) with Hatch International
Limited offset by prepayments for insurance and marketing services in the fourth quarter of 2017, which were amortized during
the three months ended March 31, 2018. The Company had current liabilities of $331,139 consisting of accounts payable,
accrued expenses, deferred revenue, and related party advances as compared to current liabilities totaling $438,272 for the
year ended December 31, 2017. The decrease in current liabilities is directly related to the Company paying off accrued
payables related to consultants and employees and a reduction in estimated compensation expense versus payments in the prior
period during the current period, partially offset by increases in deferred revenue and in expenses pay by related parties.
As of the three months ended March 31, 2018, the Company had working capital of $378,196 which increased when compared to a
working deficit of $17,113 for the year ended December 31, 2017.
We incurred operating losses and had
negative operating cash flows and may continue to generate negative cash flows as the Company implements its business plan
for the future. There can be no assurance that our continuing efforts to execute our business plan will be successful and
that we will be able to continue as a going concern as the report of our independent registered public accounting firm with
respect to our financial statements for the years ended December 31, 2017 and 2016, indicates that our recurring losses and
negative cash flows from operations and the need for additional capital raise substantial doubt about our ability to continue
as a going concern. During the three months ended March 31, 2018 and 2017, we had a net loss of $610,543 and $487,077,
respectively and net cash used in operations of $824,743 and $200,852, respectively, and working capital (deficit) amounted
to $378,196 and ($17,113) as of March 31, 2018 and December 31, 2017, respectively. The consolidated financial statements
have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise
substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result should the Company be unable to continue as a going concern.
Management’s
plans include the fourth quarter offering of up to $3,000,000 worth of our common stock. There can be no assurance that we will
be successful to raise additional capital under this offering. As of March 31, 2018, the Company had current liabilities of approximately
$331,139. If we are not able to raise additional capital that may be needed, it is probable that the Company will be unable to
meet its obligations as they become due within one year from the issuance date of this filing and could have a material adverse
effect on our future business plans. Management believes that if we are not able to consummate this offering, we would have to
find other sources of financing to complete our business plans for the future. There can be no guarantee that we would obtain
financing with terms that are acceptable to us, in which case, we may have to limit our expansion of new products or limit our
working capital.
Recent Developments
Pre-Launch Offering
The Company commenced a private placement
offering of shares of its common stock (the “Pre-launch Offering”) in the fourth quarter of 2017. As of year-end the
Company had sold a total of 1,195,385 shares of the Company's Common Stock for net proceeds of $777,000 in the Pre-launch Offering.
As of May 15, 2018, 2018, the Company had
sold a total of 4,396,493 shares of the Company’s common stock in the Pre-launch Offering and had raised an aggregate of
$2,294,850.
The Pre-launch Offering is being made to
accredited investors only. No warrants or other securities are being offered in the Offering.
New Director; Grant of Options
Effective April 6, 2018, the Company’s Board of Directors
voted to increase the size of the Board from three directors to four directors and to appoint Steve R. Martin to the Board to fill
the resulting vacancy. Mr. Martin accepted the appointment and joined the Board of Directors effective April 9, 2018.
In connection with the appointment, the Company’s Board
of Directors also granted options to Mr. Martin to purchase up to 250,000 shares of the Company’s common stock. The terms
of the options are as follows: the options vest one-third on the first anniversary of the date of grant; one-third on the second
anniversary of the date of grant; and one-third on the third anniversary of the date of grant; the options have a contractual life
of eight years from the date of grant; and the exercise price is $0.65.
Promissory Note
On May 11, 2018, the Company issued a short-term note to an
unrelated party for $50,000 due 30 days from the date of issuance. The note bears an interest rate of 14.4% per annum
interest, and the Company has the right to pre-pay with no penalty or premium. The Company’s obligation to repay the note
was secured by the grant of a security interest in the assets of the Company.