Openworld, Inc. quarterly report, Q3 FY2014

Business context and reporting period

This is LaserLock Technologies, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014—not a filing under the requested Openworld, Inc. name. LaserLock develops product and document authentication technologies, including security inks and digital identity services. Its common stock trades on the OTCQB as LLTI.

Financial results and liquidity

• Gross margin was approximately 5.8% for Q3 and 11.7% for the first nine months of 2014; sales remained very small relative to operating costs.
• At September 30, cash was approximately $3,606; current assets were $346,137 and current liabilities $1,522,250, implying working capital deficit of about $1.18 million. Total assets were $586,332, against total liabilities of approximately $6.33 million.
• Current notes payable, net of discount, were $627,390. Long-term liabilities included $4.58 million of warrant liabilities, $109,085 of related-party accrued interest, and $114,000 of related-party convertible notes. Several 2014 bridge notes, bearing 8% interest, were due in December 2014; a $50,000 note was already past due.
• Weighted-average basic shares were 307.6 million for Q3 and 302.6 million for the nine-month period. The balance sheet reports 307.6 million common shares outstanding at September 30; the cover reports 307.8 million at October 28.

Material changes versus prior periods

• Nine-month revenue rose to $118,408 from $3,140, but the company continued to report operating losses and negative operating cash flow.
• Nine-month net loss narrowed substantially from 2013, mainly because 2013 included much larger stock-based compensation and unfavorable derivative revaluations. The 2014 result also includes a $2.01 million gain from changes in warrant fair value; Q3 2014 instead recorded an $824,283 warrant revaluation loss, while Q3 2013 included a $9.68 million gain. These noncash fair-value swings materially affect reported earnings.
• Operating expenses for the first nine months fell to $3.73 million from $10.52 million, principally reflecting lower share-based payroll expense. Research and development rose to $889,450 from $470,005, including equity-based consideration related to technology.
• Cash declined from $1.29 million at year-end 2013 to about $3,600 at September 30, 2014. The company raised $650,000 through short-term notes during the nine-month period.

Outlook, commentary, risks and unusual items

• Management states that existing cash is insufficient to sustain operations for the next 12 months and that substantial doubt exists about the company’s ability to continue as a going concern. It expects to need additional financing, revenue growth, or expense reductions; financing may dilute existing shareholders, and there is no assurance funding or sufficient sales will be obtained.
• The company engaged Merriman Capital in June 2014 to raise up to $5 million. The filing does not report that this fundraising target was achieved.
• LaserLock announced a 10-year, $7 million licensing contract with a Mexican gaming company on July 31, 2014. Management expected activity to begin in Q4 2014 and stated that one-tenth of the revenue was expected annually. This is an expectation, not revenue reported for the period.
• If the company concludes technology received from VerifyMe is patentable and licensable, an agreement could require a further $4.5 million payment in January 2015 in common shares and warrants. The company had not reached that conclusion; at the share price cited in the filing, it estimated issuance of approximately 125 million shares and warrants for an equal number.
• Risks include dependence on additional capital and market acceptance, limited operating revenue, competition, product-development and commercialization uncertainty, and reliance on third parties. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
• The notes describe ongoing settlement negotiations in a patent-infringement suit against WS Packaging Group, while Part II states “Legal Proceedings: None.” This apparent inconsistency should be checked against the complete filing.

Important facts for investors to verify

1. Confirm the issuer identity: the supplied filing is for LaserLock Technologies, Inc., not Openworld, Inc.
2. Verify cash needs, subsequent financing, and the status or repayment of bridge notes due in December 2014 and the past-due note.
3. Check whether the Mexican gaming license commenced, what revenue recognition and payment terms apply, and whether the expected $700,000 annual revenue was realized.
4. Review the VerifyMe technology agreement, patentability determination, and potential $4.5 million equity-and-warrant issuance.
5. Reconcile the legal-proceedings disclosure and confirm the reported share counts and cash balance, which differ slightly across filing locations.