Openworld, Inc. quarterly report, Q1 FY2013

Full document

Business context and reporting period

LaserLock Technologies, Inc. and its wholly owned subsidiary filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The filing describes LaserLock as a development-stage company focused on product and document authentication and anti-counterfeiting technologies, including inks and licensing. The request metadata names Openworld, Inc., but the filing itself identifies the registrant as LaserLock Technologies, Inc.

Financial results and position

  • Revenue: The financial statements report quarterly revenue of $3,140, versus $13,740 in Q1 2012, including $10,000 of royalties in the prior-year quarter. Revenue remains very small relative to operating costs.
  • Profit and margins: Gross profit was $430, compared with $430 in Q1 2012. Operating expenses were $948,535, versus $175,602. Net loss was $15,906,647, compared with $235,605; loss applicable to common shareholders was $16,906,647 after a $1 million deemed dividend. Basic and diluted loss per share was reported as $0.07.
  • Unusual noncash charges: The quarter included an $11,921,510 expense from changes in warrant fair value and a $2,995,791 charge for warrants issued in excess of consideration in the preferred-stock transaction. These items drove most of the reported loss. The filing also reports $332,599 of quarterly share-based compensation in payroll expense.
  • Cash flow: Net cash used in operating activities was $746,163; investing activities used $25,772; and financing activities provided $1,262,919. Cash rose from $2,994,350 at year-end to $3,485,334 at March 31.
  • Liquidity and liabilities: Current assets were $4,134,667 and current liabilities $477,235, yielding working capital of approximately $3.66 million. Total liabilities were $21,381,953, including $17,317,301 of warrant liability and $1 million of embedded derivative liability. The balance sheet reports $775,249 of senior secured convertible notes, $98,000 of convertible notes and $748,607 of long-term notes payable, net of discount; an additional $50,000 of notes payable is current.
  • Equity and dilution: Stockholders’ deficit was $16,913,387. Common shares outstanding at March 31 were reported as 238,469,220; the cover page reports 238,469,219 at May 10.

Changes versus the prior comparable period

Reported quarterly revenue declined from $13,740 to $3,140, while operating expenses increased substantially, particularly payroll, research and development, and general and administrative costs. Management attributes hiring, expanded operations and marketing, and the Washington, D.C. office to expense growth. The sharp increase in net loss primarily reflects fair-value accounting for warrants and the preferred-stock transaction, rather than operating costs alone. Financing cash inflows supported the increase in cash.

Outlook, risks and unusual items

  • Management’s stated 12–24 month objective is to market products and generate revenue sufficient to cover operating expenses and support growth. It says existing cash resources should sustain operations for the next 12 months, while acknowledging that additional funding may be needed and that continued viability depends on revenue reaching a sustainable level. No quantified revenue or earnings guidance is provided.
  • Key risks identified include the need to raise capital, uncertain market acceptance and revenue generation, competition, dependence on third parties, technology and execution risks, and potential dilution from additional securities. The company reports no commercial bank line of credit or term loan.
  • VerifyMe’s preferred-stock subscription includes warrants and provisions allowing the investor, in specified circumstances during a two-year period, to require repurchase of its securities at the original purchase price. Other financing and registration-rights terms may also affect dilution, exercise prices and voting control.
  • The company’s patent-infringement suit against WS Packaging Group was dismissed without prejudice while settlement negotiations continued. The filing provides no clear resolution or expected proceeds.
  • The filing says disclosure controls were effective as of March 31, 2013 and notes that controls relating to contractual legal documents were added.

Most important facts to verify

  1. Revenue figures conflict: the statements show Q1 2013 revenue of $3,140 and Q1 2012 revenue of $13,740, while MD&A cites $3,140 and $3,740. Confirm the correct comparative amount.
  2. Cash is reported as $3,485,334 at March 31, but MD&A states cash on hand of $3,147,000 as of the report date. Reconcile the dates and amounts.
  3. Confirm the warrant and embedded-derivative valuations, assumptions, and potential cash, dilution and control consequences; these materially affect reported liabilities and losses.
  4. Review the maturity, interest and security terms of debt, including the $50,000 note shown as current and the debt scheduled to mature in 2015.
  5. Assess whether the company can convert its development-stage products and licensing plans into recurring revenue and maintain funding beyond management’s stated 12-month cash horizon.