LaserLock Technologies, Inc. — Q1 2014 Form 10-Q
Entity and period: The filing is for LaserLock Technologies, Inc. and its subsidiary, for the quarter ended March 31, 2014. This differs from the requested company name, Openworld, Inc.; verify that this is the intended filing. LaserLock describes itself as a development-stage authentication and anti-counterfeiting technology company.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / March 31, 2014 balance |
|---|---|---|
| Revenue | $0 | $3,140 in Q1 2013 |
| Operating expenses | $2.23 million | $948,535 in Q1 2013 |
| Net loss | $3.43 million | $15.91 million in Q1 2013 |
| Basic and diluted loss per share | $0.01 | $0.07 in Q1 2013 |
| Net cash used in operations | $706,632 | $746,163 in Q1 2013 |
| Cash and cash equivalents | $579,341 at March 31, 2014, down from $1.29 million at December 31, 2013 | |
| Current assets / current liabilities | $804,026 / $298,443; working capital was approximately $505,583 | |
| Liabilities and stockholders’ deficit | $9.37 million total liabilities; $8.29 million stockholders’ deficit |
There was no Q1 2014 revenue, so a current-quarter gross margin is not meaningful. The filing reports $1.11 million of cumulative revenue since inception, not Q1 revenue. The company had $50,000 of current notes payable and $330,249 of related-party senior secured convertible notes payable, plus accrued interest. Derivative liabilities totaled $8.434 million, including $7.334 million of warrant liabilities and a $1.1 million embedded derivative liability.
Changes versus the prior comparable period
- Revenue declined from $3,140 to zero.
- Net loss narrowed by approximately $12.48 million, chiefly because Q1 2013 included much larger noncash fair-value charges on warrants and derivatives.
- Operating expenses rose to $2.23 million from $948,535. The filing attributes increases to payroll, research and development, hiring and office costs, and business-development legal work. Stock-based compensation was a significant expense.
- Operating cash use was $706,632, slightly below the $746,163 used in Q1 2013. Financing cash flow was zero in Q1 2014, compared with $1.26 million provided in Q1 2013.
Outlook, risks, contingencies, and unusual items
- Going concern: Management says 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 needs revenue, additional financing, expense reductions, or a combination of these. Further equity financing would dilute shareholders.
- Management outlook: The stated 12–24 month priority is to market products and generate revenue sufficient to cover operating expenses. The filing provides no quantified revenue or earnings guidance and cautions that projections are uncertain.
- Potential dilution and technology payment: The company says a further $4.5 million payment under its VerifyMe technology agreement may be due in January 2015 if the technology is ultimately determined to be patentable and licensable. Payment would be in shares and warrants; at the filing’s stated $0.07 share price, it estimated approximately 70 million shares and warrants for another 70 million shares. The company had not reached that determination.
- Related-party debt conversion: A subsequent-event note says the company expected to exchange $330,249 of debt and $307,281 of accrued interest for 12,750,619 common shares in Q2 2014, leaving one $50,000 note outstanding. This was an expectation, not a completed transaction as of the filing.
- Other contingencies: A patent infringement suit against WS Packaging Group was dismissed without prejudice while settlement negotiations continued. The related lenders have security interests in proceeds from the claim.
- Unusual accounting items: Liability-classified warrants and an embedded conversion feature are remeasured at fair value, creating potentially material noncash earnings volatility. The company also recorded substantial stock-based compensation.
- Controls: Management concluded disclosure controls were effective as of March 31, 2014 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: the filing is for LaserLock Technologies, Inc. (OTC ticker LLTI), not Openworld, Inc.
- Confirm the company’s ability to fund operations, given its stated less-than-12-month cash runway, zero quarterly revenue, and going-concern warning.
- Track whether the expected Q2 related-party debt-for-equity exchange closed, and verify the remaining debt and accrued-interest balances.
- Assess whether the VerifyMe technology meets the stated patentability and licensing condition, which could trigger the $4.5 million share-and-warrant payment.
- Review potential dilution from outstanding options and warrants, derivative-linked agreements, and any additional financing.
- Monitor the WS Packaging litigation negotiations and any effect on the company or the secured lenders.