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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
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FORWARD-LOOKING STATEMENTS AND SUPPLEMENTARY DATA
The following discussion should be read
in conjunction with our condensed interim financial statements and other financial information appearing elsewhere in this quarterly
report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking
statements under applicable securities laws. You can identify these statements by forward-looking words such as “plan”,
“may”, “will”, “expect”, “intend”, “anticipate”, believe”, “estimate”
and “continue” or similar words. Forward-looking statements are statements that are not historical facts, and include,
but are not limited to, statements regarding the Company’s digital watermarking technology and Cloud Document Protection
System (C-DPS), the Company’s expenses related to the Alpha and Beta testing of its digital water marketing technology and
Cloud Document Protection System, the anticipated development and commercialization date of its Cloud Document Protection System,
the future sources and availability of additional funding, and the effect of funding arrangements on projects and products. You
should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections
of future results of operations or financial condition or state other forward-looking information. We believe that it is important
to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately
predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even
if new information becomes available or other events occur in the future, except as required by law.
The forward-looking statements included
herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors”
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and other periodic reports filed with the United
States Securities and Exchange Commission (“SEC”). Accordingly, to the extent that this quarterly report contains
forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the
Company, please be advised that the Company’s actual financial condition, operating results and business performance may
differ materially from that projected or estimated by the Company in forward-looking statements.
OVERVIEW OF THE COMPANY
We have recognized that Internet-based,
digital document security/protection products are a business opportunity for the Company that allow us to apply our proprietary
real-time digital video watermarking technology, which was developed for studios and networks in the entertainment industry, to
the digital document security/protection sector. Our Cloud- DPS technology introduces the Company to the online, digital document
security/protection industry and possible vertical markets that exist in the sector, including the ability to confirm the authenticity
of online documents and photographs distributed through traditional wireline networks or over wireless smart devices.
Our Cloud-DPS secures and protects digital
documents (including text documents, photos, blueprints, etc.) from any modification, and/or attempted forgery. It works by imperceptibly
watermarking documents, using real-time image processing and watermarking algorithms, embedded into a secured/protected copy of
a document. This protected copy is designed to resist any attempts to alter or forge the document by forensically tracking and
deterring any attempts to tamper with the document. The watermarking algorithms are able to ascertain whether a document is protected
by our DPS technology and if any attempts to modify or tamper with the document occurred. Any such modifications will be flagged,
time stamped, and can be spatially highlighted in the document where any tampering occurred. This authentication and verification
process ensures the integrity of the original document.
As more fully discussed below, we have
not been profitable. On January 28, 2015, we received notice that our sole software license agreement dated November 13, 2006
for customized deployment of our proprietary watermarking technology to one of the industry's major Hollywood studios was to be
terminated effective January 31, 2015.
We currently have no customers for our
products and services. We are taking steps to monetarize our Cloud-DPS technology. These steps include actively seeking licensing
initiatives. Our DPS architecture is designed as a web service, which allows for an easy customization to individual customer
needs. The main customization effort is reduced by our creation of well synchronized interfaces to a potential customer's infrastructure.
This feature will allow us to offer "white label" licensing of our DPS technology.
BUSINESS OBJECTIVES:
We have established the following near-term
business objectives:
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1.
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Patent
and license new technology developed within the corporate research and development program;
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2.
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Demonstrate
proof of concept on selected commercial projects with C-DPS – Cloud Document Protection
System and gain industry recognition for the architectural and business differentiators
of company’s C-DPS product’s authentication and tamper-proof functionality.
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CRITICAL ACCOUNTING POLICIES (AND ESTIMATES)
Our discussion and analysis of our financial
condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to customer programs and
incentives, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, impairment or disposal
of long-lived assets, contingencies and litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We have identified the policies below
as critical to our business operations and to the understanding of our financial results. The impact and any associated risks
related to these policies on our business operations is discussed throughout management’s discussion and analysis of financial
condition and results of operations where such policies affect our reported and expected financial results:
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·
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Impairment
or disposal of long-lived assets;
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·
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Accounting
for stock-based compensation; and
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Commitments
and contingencies.
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Revenue Recognition
. Revenue
is recognized for digital water marking based on a contracted usage schedule on a monthly billing cycle. Software revenue and
other services are recognized in accordance with the terms of the specific agreement, which is generally upon delivery and when
accepted by the customer. Maintenance, support and service revenue are recognized ratably over the term of the related agreement.
In order to recognize revenue, we must not have any continuing obligations and it must also be probable that we will collect the
accounts receivable.
Impairment or Disposal of Long-Lived
Assets
. Long-lived assets are reviewed in accordance with ASC Topic 360-10-05. Impairment or disposal of long-lived
assets losses are recognized in the period the impairment or disposal occurs.
Deferred Taxes
. We record
a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be
realized.
Accounting
for Stock-Based Compensation
.
Under ASC Topic 718, Stock Compensation (formerly referred to as SFAS No. 123(R)),
the Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for
awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which
is generally the option vesting term. The amount of expense attributed is based on estimated forfeiture rate, which is updated
based on actual forfeitures as appropriate. This option pricing model requires the input of highly subjective assumptions, including
the expected volatility of the Company’s common stock, pre-vesting forfeiture rate and an option’s expected life.
The financial statements include amounts that are based on the Company’s best estimates and judgments.
Commitments and Contingencies
.
We account for commitments and contingencies in accordance with ASC Topic 450 Contingencies (formerly referred to as
financial accounting standards board Statement No. 5, Accounting for Contingencies). We record a liability for commitments and
contingencies when the amount is both probable and reasonably estimable.
RESULTS OF OPERATIONS
Sales
Sales for the three month period ended
March 31, 2016 and 2015 were $-0- and $5,500, respectively. Revenues were generated from Software License Agreement from our Smartmark™
Software. Sales for 2015 were from one customer. As of February 1, 2015, our sole customer did not renew its contract for
usage of our digital watermarking software.
Cost of Sales
The cost of sales for the three months
ended March 31, 2016 were $-0- compared to $425 for the comparable period in 2015. Costs are the commissions and royalties on
our video watermarking license agreement. Contract for royalties expired in 2015.
Selling, General and Administrative
Expenses
Selling, general and administrative expenses,
consisting of product marketing expenses, consulting fees, office, professional fees and other expenses to execute our business
plan and for our day-to-day operations, increased in the three months ending March 31, 2016. We continue to develop and
market C-DPS – Cloud Document Protection System. Professional fees increased due to management’s decision to review
and update corporate requirements and procedures. Administrative expenses have increased as a result.
Selling, general and administrative expenses
for the three months ended March 31, 2016 increased by $13,587 to $36,688 from $23,101 for the three months ended March 31, 2015.
Website costs for the three months ended
March 31, 2016, increased to $2,360 from $-0- for the comparable period in 2015. We incurred increased costs in 2016 due to management’s
decision to update the company’s website.
Professional fees for the three months
ended March 31, 2016, increased to $21,253 from $5,168 for the comparable period in 2015. We incurred increased costs in 2016
due to management’s decision to review and update corporate requirements and procedures.
Salaries and fees for the three months
ended March 31, 2016 and 2015 were $-0-. No costs were incurred due to management and employee reductions.
We have arranged for additional staff
and consultants to engage in marketing activities in an effort to identify and assess appropriate market segments, develop business
arrangements with prospective partners, create awareness of new products and services, and communicate to the industry and potential
customers. Other components of selling, general and administrative expenses did not change significantly.
Research and Development
Research and development costs for the
three months ended March 31, 2016, increased to $55,075 from $-0- for the comparable period in 2015. We incurred increased costs
in 2016 due to management’s decision to develop C-DPS – Cloud Document Protection System.
Net Losses
To date, we have not achieved profitability
and expect to incur substantial losses for the foreseeable future. Our net loss for the three months ended March 31, 2016 was
$91,760 compared with a net loss of $25,201 for 2015.
Liquidity and Capital Resources
At March 31, 2016, our cash position was
$93,410, a decrease of $93,687 from December 31, 2015. We had a working capital of $39,921 and an accumulated deficit of $40,418,376
at March 31, 2016.
We have historically satisfied our capital
needs primarily by issuing equity securities to our officers, directors, employees and a small group of investors, and from short-term
bridge loans from members of management. During the three months ended March 31, 2016, no securities or loans were required.
Off-Balance
Sheet Arrangements
We do not maintain any off-balance sheet
transactions, arrangements, or obligations that are reasonably likely to have a material effect on our financial condition, results
of operations, liquidity, or capital resources.
RELATED PARTY TRANSACTIONS
The Company for the three months ended
March 31, 2016 and 2015 reimbursed a related party $4,340 and $4,229, respectively. The Company incurred expenses from a related
party of $55,075 and $-0- for research and development for the three months ended March 31, 2016 and 2015, respectively.