Business context and reporting period
The supplied filing is LaserLock Technologies, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, not a filing identified as Openworld, Inc. The company describes itself as a development-stage security technology business focused on product and document authentication, including security inks, licensing, and related digital authentication services. It reported on a full-year basis; this filing does not provide a standalone fourth-quarter income statement.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $3,140 | $17,029 |
| Gross profit (margin) | $430 (13.7%) | $12,946 (76.0%) |
| Operating expenses | $11.642 million | $1.091 million |
| Net loss | $16.391 million | $1.199 million |
| Net cash used in operations | $2.789 million | $367,060 |
| Cash from financing activities | $1.113 million | $3.317 million |
- Cash and cash equivalents were $1.286 million at year-end, down from $2.994 million. Current assets were $1.513 million versus current liabilities of $1.183 million.
- Total assets were $1.815 million; total liabilities were approximately $7.814 million, and stockholders’ deficit was $5.999 million.
- Debt included $330,249 of senior secured convertible notes payable to related parties and $50,000 of current notes payable. The latter is described as past due in the debt note. Related accrued interest was also substantial.
- Warrant and embedded-derivative liabilities totaled $6.8 million at year-end, including $6.0 million of warrant liability and an $800,000 embedded-derivative liability.
- The reported loss applicable to common stockholders was $17.391 million, including a $1.0 million deemed dividend. The 2013 net loss included $8.619 million of share-based compensation.
Material changes versus 2012
- Revenue fell about 82% to $3,140. The company continued to report negligible sales relative to its cost base.
- Net loss rose to $16.391 million, driven substantially by increased payroll and option compensation, expanded research and development, higher general and administrative costs, and fair-value and financing-related charges.
- Payroll expense increased to $9.485 million from $612,721; management attributed most of the increase to approximately $8.5 million of option expense, as well as new executive hires. Research and development expense rose to $655,840 from $5,420.
- Operating cash use increased to $2.789 million. Financing cash inflows fell to $1.113 million from $3.317 million.
- The company converted significant shareholder debt into equity during 2013, including 25.975 million common shares issued in debt conversions, reducing some outstanding debt but increasing potential dilution.
Outlook, risks and unusual items
- Management’s stated 12–24-month objective was to market products and generate revenue sufficient to cover operating expenses. No quantified revenue, earnings, or cash-flow guidance was provided.
- The auditor and the financial-statement note state that recurring losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. The note says year-end cash would not be sufficient for the next 12 months and that the company needs revenue, expense reductions, or additional financing.
- There is a notable liquidity inconsistency: MD&A says existing cash resources were believed sufficient for the next 12 months, while the going-concern note says they were not. MD&A separately reports approximately $800,000 of cash as of March 14, 2014.
- Additional equity financing could dilute existing holders; the company also relies on debt or equity fundraising and has no bank credit facility. The filing highlights competition from substantially better-resourced companies and limited marketing resources.
- VerifyMe’s preferred-stock and warrant arrangements include repurchase rights triggered by specified events, and its securities carry conversion, voting, and liquidation-preference provisions. The company also reported $6.0 million of warrant liabilities measured using Level 3 valuation inputs.
- A patent-infringement suit against WS Packaging Group was dismissed without prejudice in 2012 while settlement negotiations continued; negotiations were still ongoing at year-end 2013.
- The company reported effective disclosure controls and internal control over financial reporting based on management’s assessment; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Confirm the issuer identity: the filing names LaserLock Technologies, Inc., despite the request metadata naming Openworld, Inc.
- Reconcile the conflicting statements about whether cash was adequate for the following 12 months, and review subsequent financing and cash use.
- Assess the company’s ability to generate material recurring revenue against its operating costs and continued cash burn.
- Review the terms, valuation assumptions, triggers, and potential cash consequences of VerifyMe-related preferred stock, warrants, and derivative liabilities.
- Quantify fully diluted ownership, including outstanding warrants and options, and evaluate the effect of further equity fundraising or conversions.
- Check the status and potential financial impact of the WS Packaging settlement negotiations and any other patent-related obligations.