LaserLock Technologies, Inc. — Form 10-Q summary
Entity note: The filing identifies the registrant as LaserLock Technologies, Inc., not Openworld, Inc. It covers the quarter and nine months ended September 30, 2013; the financial statements are unaudited. The company describes itself as a development-stage anti-counterfeiting and authentication technology business.
Financial results and position
- Revenue: $0 for the third quarter of 2013, versus $3,289 in the 2012 quarter; $3,140 for the first nine months of 2013, versus $17,029 in 2012. The company reported no significant revenue since inception.
- Profit and margins: Third-quarter net income was $8.21 million, compared with a $155,343 loss in the prior-year quarter. The nine-month net loss was $18.46 million, versus $640,033. The quarterly profit was driven by a $9.68 million gain from warrant fair-value changes, not operating performance. Nine-month gross profit was $430 on revenue of $3,140.
- Costs: Nine-month operating expenses were $10.52 million, including $9.09 million of payroll expense, which included $8.43 million of stock-based compensation. A $1.22 million loss on debt extinguishment and derivative-related charges also affected results.
- Cash flow: Operating activities used $2.01 million and investing activities used $32,527 in the first nine months. Financing provided $1.26 million. Cash declined from $2.99 million at year-end 2012 to $2.22 million at September 30, 2013.
- Liquidity and liabilities: Current assets were $2.59 million and current liabilities $1.90 million. Total assets were $2.91 million; stockholders’ deficit was $9.74 million. The balance sheet included an $8.50 million warrant liability and a $1.50 million embedded derivative liability. Notes and convertible debt also remained outstanding; certain principal and accrued interest were due in 2015, while $50,000 of notes was past due.
- Share count: 258.1 million common shares were outstanding at September 30, 2013; the filing reports 258.1 million at November 19, 2013. Options, warrants, convertible securities and preferred-stock rights may increase dilution.
Changes, outlook and risks
- Operating expenses increased substantially as the company hired employees, opened a Washington, D.C. office, expanded marketing and research, and incurred legal and registration costs. Executives’ options issued in June had a reported fair value of $7.54 million.
- Management described an exclusive worldwide strategic partnership with American Banknote Corporation involving SecureLight+ and an agreement with Gaming Partners International to test invisible QR-code technology. Management expected the agreements to improve fourth-quarter revenue; the filing provides no quantified forecast or assurance of results.
- The company reported substantial doubt about its ability to continue as a going concern. The notes state existing cash would not be sufficient for the next 12 months and that additional revenue, expense reductions or financing would be needed. Elsewhere, MD&A says management believed cash resources would be sufficient for the next 12 months. Additional equity financing could dilute shareholders.
- Significant risks include limited operating revenue, dependence on financing and market acceptance, competition, technology and execution risks, and the possibility that planned sales will not support operating costs. The company’s patent-infringement settlement negotiations with WS Packaging Group were ongoing.
- Derivative and warrant liabilities are remeasured through earnings, creating potentially large noncash swings in reported results. The filing also describes a preferred-stock investor’s repurchase rights upon specified events, and future contingent license payments of $400,000 in 2014 and $4.5 million in 2015.
Investor verification priorities
- Confirm the registrant’s identity and filing attribution: this document is for LaserLock Technologies, Inc.
- Review the reported warrant fair-value gain and liability valuation assumptions; these materially drove quarterly net income and are sensitive to the share price.
- Assess the conflicting going-concern statements and determine the company’s actual cash runway and near-term financing needs.
- Verify the status, commercial terms and revenue contribution of the American Banknote and Gaming Partners agreements.
- Review debt maturities, past-due obligations, preferred-stock repurchase rights, contingent license payments and potential dilution from securities outstanding.