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, 2019 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.
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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Patent and license new technology developed within the corporate research and development program;
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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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ACQUISITION OF OCL TECHNOLOGIES CORP.
On June 5, 2020, the Company completed the acquisition of 100% of the shares of OCL Technologies Corp. www.ocltechnologies.com (hereafter “OCL”), a Delaware Corporation, with its head office located in the technology hub of San Diego, California. OCL is specifically focused on providing enterprise organizations and individuals with highly-secure data privacy tools that provide sustained and continuous global regulatory compliance of data subject rights, while independently protecting all parties. With the burgeoning growth of privacy regulation worldwide coupled with strict regulatory oversight, companies are dedicating significant resources to achieve and maintain compliance. In the past two years alone, initiatives such as the EU GDPR (General Data Protection Regulation effective May 25, 2018) as well as the CCPA (California Consumer Privacy Act passed June 28, 2018 and effective January 1, 2020) have mandated privacy rights and data protection for entities and individuals contemplated within their legislative frameworks. In addition to these, there are additional data privacy legislative initiatives on-going in Asia and both North and South America which will require data protection solutions. The OCL cloud-native zero-trust data privacy API tool will provide secure, continuous regulatory compliance of a data subject’s ‘Right-to-be-Forgotten’ and ‘Right-of-Erase’ requests through a systematic consent/collect/store/verification process, protecting both the data subject and data controller. This initial entry into the market od data compliance will pave the way for more offerings as the OCL product platform matures. The Company believes that the acquisition of OCL is a tremendous fit within its core objective of developing robust cutting edge technologies that address focused customer data protection requirements on a global scale.
Contingent consideration consists of 12,500,000 non-transferable warrants that are exercisable into 12,500,000 common shares if certain criteria are met at an exercise price of $0.001 for a period of five years from the date of issuance expiry June 4, 2025. No share purchase warrants are exercisable until specific performance criteria have been met. Such criteria being 1) revenue sales projections per OCL’s 5 year proformas, or 2) listing on a major US exchange, or 3) change of control. The Company has estimated the fair value of the contingent consideration to be $414,128.
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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Revenue recognition;
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Impairment or disposal of long-lived assets;
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Deferred taxes;
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Accounting for stock-based compensation; and
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Commitments and contingencies.
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Revenue Recognition. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). This guidance outlines a single, comprehensive model for accounting for revenue from contracts with customers to depict the transfer of control over a product to a customer. The guidance's core principle is that the Company will recognize revenue when it transfers control over promised goods or services to customers in an amount that reflects consideration to which the Company expects to be entitled in exchange for those goods or services.
Under ASC 606, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to a customer. The Company's contracts with customers typically contain a single performance obligation. A contract's transaction price is allocated to its distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. If there are multiple performance obligations within a contract, the Company allocates the transaction price to each performance obligation based on their relative standalone selling prices. Sales are recorded net of sales returns, discounts and allowances.
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
For the Six Months Ended June 30, 2020
Sales
Sales for the six-month period ended June 30, 2020 and 2019 were $-0-
Cost of Sales
The cost of sales for the six months ended June 30, 2020 and 2019 were $-0-.
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 six months ending June 30, 2020. We continue to develop and market C-DPS – Cloud Document Protection System and the “Right-to-be-Forgotten” and “Right-to-Erase” platform. Administrative expenses have decreased moderately as a result of insignificant fluctuations in general costs.
Selling, general and administrative expenses for the six months ended June 30, 2020 decreased by $13,324 to $108,842 from $122,166 for the six months ended June 30, 2019.
Filing fees for the six months ended June 30, 2020, decreased to $6,473 from $12,710 for the comparable period in 2019. The decrease is related to a decrease in regulatory filing costs.
Marketing fees for the six months ended June 30, 2020, decreased to $Nil from $8,600 for the comparable period in 2019. The Company did not pay any marketing fees in 2020.
Currency exchange expense for the six months ended June 30, 2020, increased to $24,584 from $33 for the comparable period in 2019. We incurred increased costs in 2020 due to the change in the Canadian dollar and the United States dollar.
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 June 30, 2020, increased by $35,333 to $35,333 from $-0- for the comparable period in 2019. We incurred increased costs in 2020 due to management’s decision to develop C-DPS – Cloud Document Protection System as well as the development of our subsidiary’s zero trust data privacy platform. (“Right-to-be-Forgotten” and “Right-to-Erase”).
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 June 30, 2020 was $84,417 compared with a net loss of $69,486 for 2019.
Liquidity and Capital Resources
At June 30, 2020, our cash position was $869,410, compared $382,452 at December 31, 2019. We had a working capital of $691,301 and an accumulated deficit of $41,544,352 at June 30, 2020.
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 period ended June 30, 2020, the company issued 7,000,001 shares for proceeds of $773,038 and received $114,169 in cash on the acquisition of assets.
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 six months ended June 30, 2020 and 2019 reimbursed a related party $6,071 and $6,015, respectively. The Company incurred no expenses from a related party for research and development for the three months ended June 30, 2020 and 2019. The Company had no prepaid advances from related parties in the three months ended June 30, 2020.