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 2, 2018.
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 individuals suffering from neurodegenerative diseases such Alzheimer’s and other dementias, as well
as seniors experiencing limited social interaction with others (“Social Isolation”). Additional products are under
development that, if successful, are expected to directly target the symptoms of Alzheimer’s disease and other dementias,
such as anxiety, depression, agitation, and cognitive decline, and for which Company may seek FDA clearance or approval as well
as 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: ReminX
Overview – The ReminX product
The ReminX Product is comprised of three
key components: A ReminX computer tablet, an AI chatbot, and a biofeedback loop.
ReminX Tablet
: The first component
is the customized ReminX computer tablet (the “Tablet”). The Tablet is specifically designed for use by individuals
with neurodegenerative diseases or the elderly who are not able to operate standard consumer tablets or other electronics. The
Tablet has no user interface, no buttons on the screen, and no wires. It presents itself more closely to a detachable digital
photo frame that charges in a docking station without having to be plugged in. The absence of wires, buttons on the screen, 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 to increase durability of the Tablet if it is dropped or thrown. The speakers and sound
system have been custom designed to maximize volume and clarity in comparison to off-the-shelf tablets, as required for seniors
who may have experienced hearing loss. A charging docking station is also included, that serves as a cradle to hold the Tablet
when not in use while also allowing for charging of the Tablet in a cordless manner, and powerful magnets make sure that the Tablet
lands securely into the dock.
The ReminX Tablet Software (the “Software”),
drives the display of media content on the Tablet. The Software combines a simplified viewing experience for the end user (the
patient) while simultaneously incorporating monitoring and tracking functionality for caregivers and administrators. Because the
Software has no user interface, the end user does not need to press any buttons or touch screen icons. This is critical since many
seniors not only have difficulty operating electronics, but they often have less moisture in their finger pads, leading to smaller
detectable difference in capacitance between their finger and the Tablet screen. The user simply lifts the Tablet off of the docking
station and it automatically begins to play calming, positive, and personalized media.
AI Chatbot
: The second component
of the ReminX Product is an AI chatbot that interacts with family, friends, and other caregivers, encouraging them to provide
photos, voice narration, video content, and music selections, and to optimize the content into personalized stories for their
loved one. The AI chatbot is a conversational goal-seeking tool, using natural language conversation, that understands the requirements
of the end user (patient) and tries to get the caregivers to complete tasks that satisfy the requirements. The AI chatbot was
designed specifically to make it easy to contribute content with minimal investment of time and effort on the part of the caregiver.
Interaction with the ReminX
Product by content contributors such as family caregivers is primarily driven through text message communication. Each paying
family is given a private concierge phone number that is shared among the family. The AI chatbot guides family members to text
photos to the concierge number as well as to narrate stories over the photos via voicemail. The content is then organized automatically
by ReminX and appears on the end user’s tablet as stories. The concierge phone number can be given to the paying customer’s
family and friends so they can also contribute content and collaborate in the care of 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. These modalities duplicate many of the functions that are available via text message, providing caregivers
with multiple options to contribute and organize content, depending on their preference. 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.
Biofeedback Loop
: ReminX uses biofeedback
from the patient during use of the device to refine and optimize reminiscence content to the patient. Patient feedback is gathered
from play statistics (e.g., how long or often a patient views certain stories) and emotional cues from the patient (e.g., smiles).
Emotions are monitored using the front-facing
camera on the computer tablet and customized software to track facial landmarks (29 points on the face). Additional biofeedback
modalities are under development. Play statistics track how many times and how long content is watched, as well as which emotions
are present when watching. Together, these features can be utilized to recognize the preferences of the patient.
The preferences are fed back into the
system in two ways. First, this information is used to focus on positive memories and those that engage the patient. Second, the
AI chatbot notifies the family on how the patient is responding to different types of content. This allows the family to: (a)
obtain updates on their loved one; and (b) to encourage the family to continue sending more effective content. For example, if
grandmother smiles, her grandchildren will be more likely to want to provide more of that kind of content since this has positive
therapeutic effect and because they can see that the reminiscence therapy is helping to improve their grandmother’s quality
of life.
Therefore, the biofeedback is intended
to ensure the delivery of highly personalized, positive therapeutic content for the patient, and at the same time to update family
caregivers on the status of their loved one via their mobile devices.
The emotional recognition software runs locally on the device,
and only facial landmark values are captured rather than facial images themselves, in order to eliminate privacy concerns.
ReminX Product – Digital Therapeutics and Reminiscence
Therapy
Dthera’s management is focused on the goal of using the
Company’s ReminX technology, which streamlines the creation of personalized digital stories, to become the first Digital
Therapeutic delivering Reminiscence Therapy to patients suffering from Social Isolation and/or neurodegenerative diseases such
as Alzheimer’s and other dementias.
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 multiple 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) channel, starting with the launch of the ReminX Product
in the third fiscal quarter of 2018. The Company plans to market the ReminX Product directly to the family members and caregivers
of individuals who may be suffering from Social Isolation or several neurodegenerative diseases such as Dementia (“Loved
Ones”). ReminX is a subscription service with a recurring monthly fee or an annual fee.
At this time, those who
wish to purchase the ReminX Product have three payment options: (1) $299 annually; (2) $99 up front and $33/month thereafter; or
(3) A 6-month contract at $33/month, and $33/month thereafter. The subscription will include unlimited access to the ReminX concierge
text messaging service and Family App (no limit to users) and a Tablet/Docking System. It is expected that the ReminX Tablet/Docking
System hardware will be owned by customers who pay annually (option 1). The hardware will be leased to the monthly subscribers
(options 2 and 3) and must be returned if service is discontinued.
The Company feels the mechanism
by which it executes this specific sales channel is somewhat proprietary and appears very unique to the space in which Dthera operates.
The Company’s management believes that successful execution of this sales channel would give Dthera a competitive advantage
over other potential competitive products.
Senior Living - Institutional
Sales
The second channel the
company intends to explore is the marketing of the product directly to Senior Living/Long Term Care management firms such as Independent
Living (IL), Assisted Living (AL), Memory Care (MC), and Adult Day Care (ADC) businesses. ReminX is expected to be offered to these
institutions in larger quantities at volume pricing, which the institutions can then offer to their customers directly. Management
plans to test this model with institutions in this sector to determine whether ReminX leads to improved patient care, caregiver
satisfaction, or economic benefits to the institutions themselves. If management decides to pursue this sales channel, we expect
to pursue it using direct contract-sales representatives.
Home
Care and Home Health – Institutional Sales
The third channel that
company intends to explore is the marketing of the product directly to Home Care and Home Health management firms. We expect ReminX
to be attractive to this market segment due to the increasing interest in “aging in place.” Home Care is a service
provided by caregivers, usually called home care aides, who are trained to assist seniors with activities of daily living and companionship.
Home health care is clinical medical care provided by a registered nurse, occupational therapist, physical therapist or other skilled
medical professionals, and is often prescribed as part of a care plan following a hospitalization. Home Health may be covered by
Medicare, Medicaid, or private pay, whereas Home Care is typically covered by private pay. ReminX is expected to be offered to
these service providers in larger quantities at volume pricing, which the service provider can then offer to their customers directly.
Management plans to test this model with service providers in this sector to determine whether ReminX leads to improved patient
care, caregiver satisfaction, or economic benefits to the service providers themselves. If management decides to pursue this option,
we expect to pursue it through 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, and MC communities (collectively, “IL/AL/MC”)
and, as such, cost-savings, specifically improving labor efficiency, is possibly the single highest priority for operators in this
space. Dthera intends to explore whether it believes that ReminX, with expanded use, can indeed reduce overtime costs, staff turnover,
and improve quality scores within SNFs. If Management believes that the Company can demonstrate improvement, then the Company intends
to directly market the product to SNFs as a cost saving service via contract sales force pursuing the IL/AL/MC channel.
FDA Approved and Reimbursed
Medical Claims
The Company
intends to develop additional products beyond ReminX. Some of these products may seek specific medical claims related to treating
Alzheimer’s disease, dementia, or other conditions. These products may require FDA clearance or approval and may lead to
reimbursement from third-party payors, including the Centers for Medicare & Medicaid Services (CMS) or private payors.
We plan to explore these options through additional research and development efforts.
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
and Six Months Ended June 30, 2018, Compared to the Three and Six Months June 30, 2017
Operating Expenses
General and Administrative Expenses
General and administrative expenses for
the three and six months ended June 30, 2018, totaled $835,521 and $1,418,305, respectively, a 33% and 10% decrease, respectively,
compared to general and administrative expenses of $1,245,545 and $1,582,382 for the three and six months ended June 30, 2017,
respectively. The decrease is due to a reduction in estimated compensation expense versus payments in the prior period in addition
to decreased stock compensation expense in the current year.
Research and Development Expenses
Research and development expenses for
the three and six months ended June 30, 2018, totaled $53,488 and $78,188, a 29% and 14% decrease, respectively, compared to research
and development expenses of $75,699 and $91,334 for the three and six months ended June 30, 2017. The decrease is due to capitalization
of software development costs as technological feasibility was achieved in January 2018.
Other Expenses
Interest Expense
Interest expense for the three and six
months ended June 30, 2018, totaled $1,837 and $2,117, a 100% increase and 99% decrease, respectively, compared to interest expenses
of $0 and $185,847 for the three and six months ended June 30, 2017. The increase is due to notes accruing interest and the decrease
due to 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 six
months ended June 30, 2017 was $142,835 with no related gains in other comparable periods. The gain 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 six
months ended June 30, 2017 was $91,593 with no related gains in the other comparable periods. The loss resulted from settling convertible
notes and accrued interest for stock and cash during the prior year.
Loss on disposal of assets
For the three and six months ended June
30, 2018, the Company recognized $3,391 and $6,170, respectively, as a loss on disposal of its fixed assets, with no related expense
in the three and six months ended June 30,2017. The increase is due to the Company disposing damaged equipment in the current period.
Net Loss
For the reasons stated above, the Company’s
net loss for the three and six months ended June 30, 2018, was $894,237 and $1,504,780, compared to net loss of $1,321,244 and
$1,808,321 during the three and six months ended June 30, 2017.
Liquidity and Capital Resources
As of the June 30, 2018, the Company had
cash and restricted cash of $90,192, prepaid expenses of $630,014 and deposits of $3,200, compared to cash and restricted cash
of $323,483, prepaid expenses of $95,176, and deposits of $2,500 for the year ended December 31, 2017. The decrease in cash is
due to the Company prepaying for hardware to be shipped in the third quarter of the current year. The increase in prepaid expenses
are related to prepayment on 5,000 tablets ordered offset by prepayments for insurance and marketing services in the fourth quarter
of 2017, which were amortized during the three and six months ended June 30, 2018. The Company had current liabilities of $633,173
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 increase in current liabilities is directly related to the Company
increasing accrued payables related to consultants and employees including increases in deferred revenue and in expenses paid
by related parties. As of the six months ended June 30, 2018, the Company had working capital of $90,233 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
and six months ended June 30, 2018 we had a net loss of $894,237 and $1,504,780, respectively, and a net loss of $1,321,244 and
$1,808,321 for the three and six months ended June 30, 2017, respectively. The Company had net cash used in operations of $1,683,409
and $738,975 in the six months ended June 30 2018 and 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.
The Company recently
closed its offering launched in the fourth quarter of 2017, raising $2,551,350 in exchange for 3,925,274 shares. The Company intends
to raise additional financing to support the launch of the ReminX product in the third quarter of the 2018. As of June 30, 2018,
the Company had current liabilities of approximately $633,173. 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 July 20, 2018, the Company closed
the Pre-launch Offering. As of the date of the closing of the Offering, the Company had sold a total of 3,925,274 shares of the
Company’s common stock in the Offering and had raised an aggregate of approximately $2,551,350.
The Pre-launch offering was made to accredited
investors only. No warrants or other securities were offered in the offering.
Promissory Notes
On July 2, 2018, the Company issued a short-term
note to an unrelated party for $100,000 due 60 days from the date of issuance. The note bears an interest rate of 12% per annum,
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.
On July 2, 2018, the Company received
$50,000 for a short-term promissory note to an unrelated party due 60 days from the date of issuance. The note bears interest
at a rate of 12% per annum, 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.
Product Launch
The Company announced on August 1, 2018, that it had launched ReminX,
an artificial-intelligence-powered consumer health product designed to digitally deliver Reminiscence Therapy to individuals suffering
from Alzheimer's and other dementias, as well as from social isolation. This digital therapeutic device is the first to focus
on the care of the elderly.
ReminX seeks to digitize and scale Reminiscence
Therapy, a common behavioral intervention used to treat these conditions. ReminX features a computer tablet designed specifically
for seniors, as well as an AI chatbot that interacts with family members and caregivers via text messages or its mobile app, prompting
them to send a photo, voice narration, and video content regularly and optimizing the content into personalized stories. ReminX
also features proprietary emotional recognition software to further improve content for each user and to communicate emotional
responses back to the family.
Along with the launch, Dthera commenced sales using the
Direct-Response
Consumer Health (DRCH) model, described in Plan of Operation above.