Business context and reporting period
The filing is LaserLock Technologies, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, not an Openworld, Inc. filing. LaserLock describes itself as a development-stage security technology company developing anti-counterfeiting inks and authentication products; it expects revenue primarily from licensing and ink sales. Its common stock trades over the counter as LLTI.PK.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $17,029 | $8,884 |
| Gross profit | $12,946 | $8,511 |
| Gross margin | 76.0% | 95.8% |
| Operating expenses | $1,090,743 | $536,339 |
| Net loss | $1,199,057 | $665,113 |
| Interest expense | $277,371 | $321,586 |
| Net cash used in operations | $367,060 | $313,885 |
| Cash provided by financing | $3,316,862 | $293,705 |
At year-end, cash was $2,994,350, current assets were $3,767,803, and current liabilities were $958,056. Total assets were $4,081,975 and total liabilities were approximately $3,546,232. Debt and accrued interest included $775,249 of senior secured convertible notes, $140,000 of convertible notes, $897,368 of notes payable before current/long-term presentation, and substantial accrued interest. The filing reports $200,000 of current notes payable. Management stated cash resources were approximately $3.6 million as of March 21, 2013.
Material changes versus the prior comparable period
- Revenue nearly doubled, but remained immaterial relative to operating costs; gross margin fell from approximately 95.8% to 76.0%.
- Net loss increased by $533,944, or about 80%, primarily as payroll and legal/accounting costs rose. Payroll increased to $612,721 from $227,658; legal and accounting increased to $276,774 from $71,847.
- Sales and marketing expense declined to $66,499 from $113,377, and R&D expense declined to $5,420 from $9,081 as the company conserved cash.
- Financing activity sharply increased cash: the company raised funds through private placements, warrant and option exercises, and investor agreements. Some debt was converted into equity, contributing to increased share count and dilution.
Outlook, risks, contingencies, and unusual items
- Management’s 12–24 month objective was to market products and generate revenue sufficient to cover operating expenses. It said year-end resources were expected to sustain operations for the next 12 months, but acknowledged that ongoing viability depends on raising capital and achieving sustainable revenue.
- On December 31, 2012, VerifyMe provided $2 million through related investment arrangements. A January 31, 2013 subscription added $1 million. The arrangements include substantial warrants, preferred shares, and registration rights; failure to meet specified registration deadlines could restrict other issuances, reduce exercise prices, and provide VerifyMe preferred shares with 51% of voting power.
- Other notable commitments include a $450,000 payment to Zaah, including $250,000 cash and warrants, plus $100,000 accrued and payable after 12 months, and a 10% commission on qualifying transactions originated by Zaah. Certain future license payments to VerifyMe—$400,000 in 2014 and $4.5 million in 2015—are contingent on further technology development and licensing.
- Debt includes secured and unsecured obligations, accrued interest, and a $50,000 note listed as past due. The company also disclosed high-interest debt; in March 2013 it agreed to convert remaining 25% notes and accrued interest into shares plus a cash payment.
- A patent infringement suit against WS Packaging was dismissed without prejudice in June 2012 while settlement discussions continued. The filing does not report a final settlement.
- Revenue was concentrated: two customers generated $15,289 of 2012 revenue. Risks include limited operating history and revenue, dependence on external financing, competition from larger companies, and execution and commercialization uncertainty.
Most important facts for investors to verify
- Confirm the filing identity: the supplied 10-K is for LaserLock Technologies, Inc., despite the request metadata naming Openworld, Inc.
- Verify cash and funding after year-end, including the January 2013 $1 million subscription and the reported March cash balance, and assess cash burn against the stated runway.
- Review the full VerifyMe and Zaah agreements, particularly ownership and voting rights, registration-default remedies, warrant dilution, commissions, and contingent license obligations.
- Reconcile all debt balances, accrued interest, maturities, past-due obligations, and post-year-end conversions.
- Assess customer concentration, actual commercial adoption and recurring revenue, and the status and potential economics of the WS Packaging settlement discussions.