Filing and business context
The supplied filing is a Form 10-Q for the quarter ended September 30, 2012, but the registrant named in the filing is LaserLock Technologies, Inc., not Openworld, Inc. LaserLock describes itself as a development-stage company commercializing patented anti-counterfeiting and authentication technology, including products for gaming and other markets. It reports five issued patents.
The filing presents results for the three and nine months ended September 30, 2012, compared with the same periods in 2011. It also states that the company had not filed all required Exchange Act reports during the preceding 12 months.
Key financial metrics
| Metric | Q3 2012 / September 30, 2012 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $3,289 for the quarter; $17,029 for the nine months | Q3 2011: $2,404; nine months 2011: $8,884 |
| Gross profit | $1,242 for the quarter; $12,946 for the nine months | Q3 2011: $2,404; nine months 2011: $8,511 |
| Net loss | $155,343 for the quarter; $640,033 for the nine months | Q3 2011: $164,599; nine months 2011: $478,249 |
| Cash and cash equivalents | $63,833 at September 30 | $53,573 at December 31, 2011 |
| Operating cash flow | $(187,334) for the nine months | $(241,289) for the nine months ended September 30, 2011 |
| Current assets / current liabilities | $99,923 / $2,622,437 | December 31, 2011: $220,095 / $1,633,853 |
| Total assets / stockholders’ deficit | $212,619 / $(3,937,446) | December 31, 2011: $338,713 / $(3,309,051) |
| Debt | $740,000 current notes payable; $1,527,628 long-term liabilities, including convertible notes and notes payable | December 31, 2011: $50,000 current notes payable; $2,013,911 long-term liabilities |
Nine-month gross margin was approximately 76%, based on reported gross profit and revenue. The company reported interest expense of $229,126 for the nine months. Cash provided by financing activities was $200,000; cash used in investing activities was $2,406.
Material changes versus prior periods
- Nine-month revenue increased to $17,029 from $8,884, but the nine-month net loss widened to $640,033 from $478,249. The prior-year period included a $184,242 gain on debt forgiveness that did not recur.
- Legal and accounting expense rose to $174,358 from $48,099, attributed primarily to patent litigation and efforts to bring the company into filing compliance.
- Nine-month sales and marketing expense decreased to $155,725 from $206,052, and general and administrative expense decreased to $89,898 from $159,451. Management cited cost conservation and lower consulting, insurance, and share-based payroll costs.
- Interest expense declined to $229,126 from $251,408 for the nine-month period, which management attributed to lower rates negotiated on certain extended notes.
- Current liabilities increased substantially, while current assets fell. Accounts payable and accrued expenses were $1,882,437 at September 30.
Outlook, risks, and unusual items
- Going concern: The filing says substantial doubt exists about the company’s ability to continue as a going concern. Management states existing cash is insufficient for the next 12 months and plans to seek debt or equity financing; financing may not be available on acceptable terms, and equity issuance would dilute shareholders.
- Debt and liquidity: The company had substantial accrued interest, high-interest debt including notes bearing 25% interest, and a $50,000 note described as past due. A portion of debt is secured by the company’s patent infringement claim and related proceeds.
- Subsequent financing and debt settlement: In October 2012, the company reported receiving $250,000 in an equity offering, with warrants issued alongside the shares. It also agreed to satisfy $250,000 of 25% notes, $200,000 of unsecured notes, and $131,565 of accrued interest by issuing 12,923,622 common shares. Separately, management’s discussion states cash on hand “as of the date of this report” was $388,117; this is after quarter-end and is not reconciled in the supplied text.
- Management changes and compensation: October agreements appointed a Vice Chairman/CEO and a President/COO, each at $200,000 annual compensation, with options for each to acquire 5% of common shares after the company receives $2.5 million in funding.
- Litigation: The company’s patent infringement action against WS Packaging was dismissed without prejudice in June 2012 while settlement negotiations continued. The related 25% notes have repayment provisions tied to litigation proceeds.
- Revenue concentration: One customer generated a substantial portion of revenue; the filing reports $13,075 from that customer in the first nine months of 2012.
- Controls: Management concluded disclosure controls were not effective, citing a material weakness from limited segregation of duties due to the small staff.
- Management’s stated strategic priority for the next 12–24 months was raising financing to market products and generate revenue sufficient to cover operating costs. The filing provides no quantified revenue or earnings guidance.
Most important facts for investors to verify
- Confirm issuer identity: the supplied filing is for LaserLock Technologies, Inc., not Openworld, Inc.
- Reconcile the reported $388,117 post-quarter-end cash figure with the September 30 cash balance of $63,833 and subsequent financing and cash movements.
- Verify the October equity financing, share and warrant issuance, and debt-for-equity settlement, including resulting dilution and remaining debt and accrued interest.
- Assess the company’s ability to obtain additional financing and meet near-term obligations, given its going-concern warning and severe working-capital deficit.
- Review the status and potential proceeds of the WS Packaging litigation and the claims of lenders secured by those proceeds.
- Monitor revenue concentration, commercial adoption of the patented products, and remediation of the disclosed control weakness and filing-compliance issues.