LaserLock Technologies Inc. — Q2 2014 Form 10-Q
Filing identity: The request identifies Openworld, Inc., but the supplied filing is for LaserLock Technologies Inc. The summary below reflects the filing. Reporting period ended June 30, 2014; filed August 19, 2014. The company develops product and document authentication technologies, including security inks and digital identity services.
Financial results and liquidity
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Revenue | $65,148 | $65,148 |
| Gross profit / margin | $10,708 / approximately 16% | $10,708 / approximately 16% |
| Operating expenses | $890,315 | $3,119,116 |
| Net income | $3,651,844 | $222,136 |
| Net cash used in operating activities | Not separately stated | $1,428,203 |
Reported profits were driven chiefly by noncash gains from revaluing warrant and embedded derivative liabilities: $4.63 million combined in Q2 and $3.44 million for the first half. Revenue remained small relative to operating costs; the company reported no royalty revenue.
Cash was $107,770 at June 30, down from $1.29 million at December 31, 2013. Current assets were $434,984 versus current liabilities of $902,585. Total liabilities were $4.76 million, including $3.64 million of warrant liabilities; stockholders’ deficit was $4.07 million. Management separately reported cash of approximately $178,000 as of the report date.
The company received $250,000 from a June bridge note bearing 8% interest, due September 11, 2014, and issued warrants with it. A separate $50,000 note was past due; related-party notes had $114,000 principal and $105,665 accrued interest outstanding at June 30. During Q2, $216,249 of related-party note principal and $208,339 of accrued interest were converted into common shares.
Changes versus the prior comparable period
- Q2 revenue rose from zero in 2013 to $65,148; first-half revenue increased from $3,140 to $65,148.
- Q2 net income of $3.65 million compared with a $10.76 million net loss in 2013; first-half net income of $222,136 compared with a $26.67 million loss. The improvement largely reflects noncash fair-value movements and much lower 2013-comparable stock-based compensation, not a substantial increase in sales.
- First-half operating cash use increased to $1.43 million from $1.35 million. Cash declined by $1.18 million during the first half.
- First-half R&D expense rose to $875,849 from $137,424, primarily reflecting stock and warrants issued under a technology license agreement. First-half payroll expense fell to $1.50 million from $8.95 million, primarily because of unusually large 2013 stock compensation.
Outlook, risks and unusual items
- Management stated that existing cash was insufficient to fund the next 12 months and that substantial doubt existed about the company’s ability to continue as a going concern. It expected to need additional financing, expense reductions, and revenue growth; there is no assurance financing or adequate sales will be achieved.
- On June 5, 2014, the company entered an exclusive agreement with Merriman Capital to raise up to $5 million. Equity financing could materially dilute existing holders. No formal financial guidance was provided.
- Subsequent to quarter-end, the company announced a 10-year, $7 million licensing contract with a Mexican gaming company on July 31, 2014. Management said it was evaluating the contract’s impact; the filing does not establish recognized revenue or cash receipts from it. On August 11, the company reported allowance of a third independent patent for SecureLight+.
- The company said it had not concluded that technology received from VerifyMe was patentable and licensable. If it ultimately reaches that conclusion, a further $4.5 million payment may be due in January 2015, through shares and warrants; the filing estimated roughly 70 million of each at the then-current share price.
- A patent-infringement suit against WS Packaging Group was dismissed without prejudice while settlement negotiations continued. The filing provides no clear estimate of any potential financial exposure.
- Warrant and derivative valuations rely on significant assumptions and produced large, volatile noncash earnings effects. The filing reported 307.6 million common shares outstanding at June 30 and 118.2 million non-employee options/warrants outstanding, in addition to other potential dilution.
Important facts for investors to verify
- Confirm the correct issuer: the supplied filing is LaserLock Technologies Inc., not Openworld, Inc.
- Verify the Mexican licensing contract’s executed terms, milestones, collectability, and revenue-recognition timing.
- Assess near-term cash needs, the status and terms of the proposed financing, and repayment or refinancing of the September 2014 bridge note.
- Review potential dilution from outstanding securities, the VerifyMe agreement, and any contingent $4.5 million technology payment.
- Separate operating performance from noncash warrant and derivative revaluation gains when assessing profitability and cash generation.