10-Q 1 t1300621_10q.htm FORM 10-Q

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission file number 0-31927

 

LASERLOCK TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada    23-3023677   
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)

 

     3112 M Street NW, Washington, DC      20007
(Address of Principal Executive
Offices)
(Zip Code)

 

   202-400-3700   
(Registrant’s Telephone
Number, Including Area Code)

 

(Former Name, Former Address and Former Fiscal year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days). Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated file ¨
Non-accelerated filer ¨ Smaller reporting company  þ
(Do not check if a smaller reporting company)   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 258,091,442 shares of common stock outstanding at November 19, 2013.

 

 
 

 

PART I FINANCIAL INFORMATION  
     
ITEM 1. Financial Statements  
Condensed Consolidated Balance Sheets ( Unaudited ) 1
Condensed Consolidated Statements of Operations (Unaudited) 2
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited) 3
Condensed Consolidated Statements of Cash Flows (Unaudited) 9
Notes to Condensed Consolidated Financial Statements (Unaudited) 11
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 36
ITEM 4. Controls and Procedures 37
     
PART II OTHER INFORMATION  
     
ITEM 6. Exhibits 38
SIGNATURES 38

 

 
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

 

CONTENTS

 

  PAGE
   
CONDENSED CONSOLIDATED BALANCE SHEETS 1
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2
   
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT 3 - 8
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 9 - 10
   
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11 - 26

 

 
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Balance Sheets

September 30, 2013 and December 31, 2012

 

   September 30, 2013   December 31, 2012 
   (Unaudited)   (Audited) 
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $2,216,100   $2,994,350 
Accounts receivable, net of allowance of $0 at September 30, 2013 and December 31, 2012   3,473    3,473 
Inventory   39,434    19,980 
Prepaid expenses   329,605    750,000 
           
TOTAL CURRENT ASSETS   2,588,612    3,767,803 
           
PROPERTY AND EQUIPMENT          
Capital equipment, net of accumulated depreciation of $74,639 and $32,624 as of September 30, 2013 and December 31, 2012   161,387    2,340 
           
OTHER ASSETS          
Deposits   37,197    - 
Patents and trademarks, net of accumulated amortization of $102,116 and $92,302 as of September 30, 2013 and December 31, 2012   123,972    311,832 
           
TOTAL ASSETS  $2,911,168   $4,081,975 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $330,672   $660,493 
Accrued interest   14,667    97,563 
Embedded derivative liability   1,500,000    - 
Notes payable   50,000    200,000 
           
TOTAL CURRENT LIABILITIES   1,895,339    958,056 
           
LONG-TERM LIABILITIES          
Warrant liability   8,500,000    2,400,000 
Accrued interest   906,634    975,559 
Senior secured convertible notes payable   550,249    775,249 
Convertible notes payable   98,000    140,000 
Notes payable, net of discount of $9,914 and $13,632 as of September 30, 2013 and December 31, 2012   701,086    697,368 
           
TOTAL LONG-TERM LIABILITIES   10,755,969    4,988,176 
           
STOCKHOLDERS' DEFICIT          
           
Convertible Preferred Stock, $ .001 par value; 75,000,000 shares authorized; 21,111,111 shares issued and outstanding as of September 30, 2013 and no shares issued and outstanding at December 31, 2012   633,333    - 
           
Common stock, $ .001 par value; 675,000,000 shares authorized; 287,887,344 shares issued and 258,091,442 outstanding at September 30, 2013 and 248,244,012 shares issued and 218,448,109 outstanding at December 31, 2012   287,887    248,244 
           
Additional paid in capital   21,295,074    11,387,929 
           
Treasury stock, at cost (29,795,903 shares at September 30, 2013 and December 31, 2012)   (113,389)   (113,389)
           
Deficit accumulated during the development stage   (31,843,045)   (13,387,041)
           
STOCKHOLDERS' DEFICIT   (9,740,140)   (1,864,257)
           
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $2,911,168   $4,081,975 

 

See the accompanying notes to these condensed consolidated financial statements.

 

-1-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statement of Operations

For the three and nine months ended September 30, 2013 and 2012

And for the period November 10, 1999 (date of inception) to September 30, 2013

 

       Three Months   Three Months   Nine Months   Nine Months 
   Cumulative   Ended   Ended   Ended   Ended 
   Since   September 30,   September 30,   September 30,   September 30, 
   Inception   2013   2012   2013   2012 
                          
NET REVENUES                         
Sales  $464,295   $-   $3,289   $3,140   $7,029 
Royalties   645,180    -    -    -    10,000 
                          
TOTAL NET REVENUE   1,109,475    -    3,289    3,140    17,029 
                          
COST OF SALES   431,741    -    2,047    2,710    4,083 
                          
GROSS PROFIT   677,734    -    1,242    430    12,946 
                          
OPERATING EXPENSES                         
General and administrative   2,044,658    232,291    18,911    501,299    89,898 
Legal and accounting   1,817,061    110,187    4,549    278,275    174,358 
Patent costs   65,000    -    -    -    - 
Payroll expenses (a)   12,498,318    344,539    -    9,085,336    - 
Research and development   1,337,797    158,030    493    470,005    3,873 
Sales and marketing   5,202,458    78,225    55,463    182,726    155,725 
Total operating expenses   22,965,292    923,272    79,416    10,517,641    423,854 
                          
LOSS BEFORE OTHER INCOME (EXPENSE)   (22,287,558)   (923,272)   (78,174)   (10,517,211)   (410,908)
                          
OTHER INCOME (EXPENSE)                         
Interest income   63,665    -    -    -    - 
Interest expense   (2,307,351)   (42,700)   (77,169)   (116,918)   (229,125)
Loss on extinguishment of debt   (1,221,875)   -    -    (1,221,875)   - 
Change in fair value of warrants   (3,104,209)   9,676,165    -    (3,104,209)   - 
Change in fair value of embedded derivative liability   (500,000)   (500,000)   -    (500,000)   - 
Fair value of warrants in excess of consideration for convertible preferred stock   (2,995,791)   -    -    (2,995,791)   - 
Gain on debt forgiveness   340,352    -    -    -    - 
Gain on disposition of assets   4,722    -    -    -    - 
    (9,720,487)   9,133,465    (77,169)   (7,938,793)   (229,125)
                          
INCOME (LOSS) BEFORE INCOME TAX BENEFIT   (32,008,045)   8,210,193    (155,343)   (18,456,004)   (640,033)
                          
INCOME TAX BENEFIT   (165,000)   -    -    -    - 
                          
NET INCOME (LOSS)   (31,843,045)   8,210,193    (155,343)   (18,456,004)   (640,033)
                          
Less:  Deemed dividend distribution   (1,000,000)   -    -    (1,000,000)   - 
                          
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS  $(32,843,045)  $8,210,193   $(155,343)  $(19,456,004)  $(640,033)
                          
NET INCOME (LOSS) PER COMMON SHARE                         
    BASIC       $0.03   $(0.00)  $(0.08)  $(0.00)
    DILUTED       $0.02   $(0.00)  $(0.08)  $(0.00)
                          
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                         
    BASIC        247,476,627    145,144,603    240,255,146    145,144,603 
    DILUTED        465,253,680    145,144,603    240,255,146    145,144,603 

 

(a) -includes share based compensation of $9,137,726 cumulative, $154,975 for the three months ended September 30,2013, $8,427,202 for the nine months ended September 30, 2013 and $0 for the three and nine months ended September 30, 2012

 

See the accompanying notes to these condensed consolidated financial statements.

 

-2-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit)

For the period November 10, 1999 (date of inception) to September 30, 2013

 

   Convertible                       Deficit     
   Preferred   Common               Accumulated     
   Stock   Stock   Deferred   Additional       During the     
   Number of       Number of       Consulting   Paid-In   Treasury   Development     
   Shares   Amount   Shares   Amount   Fees   Capital   Stock   Stage   Total 
                                     
Issuance of initial 4,278,000 shares on November 10, 1999  -   $-    4,278,000   $4,278   $-   $16,595   $-   $-   $20,873 
Issuance of shares of common stock in exchange for services   -    -    1,232,000    1,232    -    35,728    -    -    36,960 
Issuance of shares of common stock   -    -    2,090,000    2,090    -    60,610    -    -    62,700 
Stock issuance costs   -    -    -    -    -    (13,690)   -    -    (13,690)
Net loss for the period ended December 31, 1999    -    -    -    -    -    -    -    (54,113)   (54,113)
                                              
Balance, December 31, 1999   -    -    7,600,000    7,600    -    99,243    -    (54,113)   52,730 
                                              
Issuance of shares of common stock   -    -    5,449,999    5,450    -    921,050    -    -    926,500 
Issuance of shares of common stock in exchange for services   -    -    240,000    240    (40,800)   40,560    -    -    - 
Stock issuance costs   -    -    -    -    -    (16,335)   -    -    (16,335)
Fair value of non-employee stock options grants   -    -    -    -    -    50,350    -    -    50,350 
Amortization of deferred consulting fees   -    -    -    -    20,117    -    -    -    20,117 
Net loss for the year ended December 31, 2000   -    -    -    -    -    -    -    (367,829)   (367,829)
                                              
Balance, December 31, 2000   -    -    13,289,999    13,290    (20,683)   1,094,868    -    (421,942)   665,533 
                                              
Issuance of shares of common stock   -    -    217,500    218    -    77,723    -    -    77,941 
Issuance of shares of common stock and stock options for acquisition of subsidiary   -    -    2,000,000    2,000    -    736,000    -    -    738,000 
Issuance of stock options   -    -    -    -    -    15,000    -    -    15,000 
Exercise of options   -    -    1,450,368    1,450    -    230,609    -    -    232,059 
Fair value of non-employee stock options   -    -    -    -    -    323,250    -    -    323,250 
Amortization of deferred consulting fees   -    -    -    -    20,683    -    -    -    20,683 
Net loss for the year ended December 31, 2001   -    -    -    -    -    -    -    (1,052,299)   (1,052,299)
                                              
Balance, December 31, 2001   -    -    16,957,867    16,958    -    2,477,450    -    (1,474,241)   1,020,167 

 

See the accompanying notes to these condensed consolidated financial statements.

 

-3-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit)

For the period November 10, 1999 (date of inception) to September 30, 2013

 

   Convertible                       Deficit     
   Preferred   Common               Accumulated     
   Stock   Stock   Deferred   Additional       During the     
   Number of       Number of       Consulting   Paid-In   Treasury   Development     
   Shares   Amount   Shares   Amount   Fees   Capital   Stock   Stage   Total 
Issuance of shares of common stock   -    -    3,376,875    3,377    -    687,223    -    -    690,600 
Fair value of non-employee stock options   -    -    -    -    -    94,000    -    -    94,000 
Salary due to shareholder contributed capital   -    -    -    -    -    15,000    -    -    15,000 
Return of shares of common stock related to purchase price adjustment   -    -    (1,000,000)   (1,000)   -    (353,000)   -    -    (354,000)
Net loss for the year ended December 31, 2002   -    -    -    -    -    -    -    (1,195,753)   (1,195,753)
                                              
Balance, December 31, 2002   -    -    19,334,742    19,335    -    2,920,673    -    (2,669,994)   270,014 
                                              
Issuance of shares of common stock   -    -    22,512,764    22,512    -    1,387,109    -    -    1,409,621 
Fair value of non-employee stock options   -    -    -    -    -    213,300    -    -    213,300 
Issuance of shares of common stock in exchange for services   -    -    143,000    143    -    23,857    -    -    24,000 
Stock issuance costs   -    -    -    -    -    (49,735)   -    -    (49,735)
Net loss for the year ended December 31, 2003   -    -    -    -    -    -    -    (1,107,120)   (1,107,120)
                                              
Balance, December 31, 2003   -    -    41,990,506    41,990    -    4,495,204    -    (3,777,114)   760,080 
                                              
Stock issuance costs   -    -    -    -    -    (25,000)   -    -    (25,000)
Fair value of non-employee stock options   -    -    -    -    -    493,600    -    -    493,600 
Issuance of shares of common stock   -    -    18,600,000    18,600    -    939,881    -    -    958,481 
Net loss for the year ended December 31, 2004   -    -    -    -    -    -    -    (1,406,506)   (1,406,506)
                                              
Balance, December 31, 2004   -    -    60,590,506    60,590    -    5,903,685    -    (5,183,620)   780,655 

 

See the accompanying notes to these condensed consolidated financial statements.

 

-4-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit)

For the period November 10, 1999 (date of inception) to September 30, 2013

 

   Convertible                       Deficit     
   Preferred   Common               Accumulated     
   Stock   Stock   Deferred   Additional       During the     
   Number of       Number of       Consulting   Paid-In   Treasury   Development     
   Shares   Amount   Shares   Amount   Fees   Capital   Stock   Stage   Total 
Fair value of non-employee stock options   -    -    -    -    -    286,762    -    -    286,762 
Issuance of shares of common stock   -    -    3,000,000    3,000    -    102,000    -    -    105,000 
Net loss for the year ended December 31, 2005   -    -    -    -    -    -    -    (1,266,811)   (1,266,811)
                                              
Balance at December 31, 2005   -    -    63,590,506    63,590    -    6,292,447    -    (6,450,431)   (94,394)
                                              
Fair value of non-employee stock options   -    -    -    -    -    215,463    -    -    215,463 
Fair value of employee stock options   -    -    -    -    -    135,098    -    -    135,098 
Fair value of warrants issued for deferred finance charges   -    -    -    -    -    392,376    -    -    392,376 
Exercise of warrants   -    -    5,550,000    5,550    -    49,950    -    -    55,500 
Exercise of options   -    -    4,300,000    4,300    -    (3,870)   -    -    430 
Shares retired upon cancellation of consulting agreements   -    -    (1,200,000)   (1,200)   -    1,080    -    -    (120)
Issuance of shares for services   -    -    1,200,000    1,200    -    53,800    -    -    55,000 
Net loss for the year ended December 31, 2006   -    -    -    -    -    -    -    (1,607,017)   (1,607,017)
                                              
Balance at December 31, 2006   -    -    73,440,506    73,440    -    7,136,344    -    (8,057,448)   (847,664)
                                              
Fair value of non-employee stock options   -    -    -    -    -    47,692    -    -    47,692 
Fair value of employee stock options   -    -    -    -    -    67,651    -    -    67,651 
Recognition of beneficial conversion feature   -    -    -    -    -    375,000    -    -    375,000 
Net loss for the year ended December 31, 2007   -    -    -    -    -    -    -    (1,117,334)   (1,117,334)
                                              
Balance at December 31, 2007   -    -    73,440,506    73,440    -    7,626,687    -    (9,174,782)   (1,474,655)

 

See the accompanying notes to these condensed consolidated financial statements.

 

-5-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit)

For the period November 10, 1999 (date of inception) to September 30, 2013

 

   Convertible                       Deficit     
   Preferred   Common               Accumulated     
   Stock   Stock   Deferred   Additional       During the     
   Number of       Number of       Consulting   Paid-In   Treasury   Development     
   Shares   Amount   Shares   Amount   Fees   Capital   Stock   Stage   Total 
Fair value of non-employee stock options   -    -    -    -    -    28,752    -    -    28,752 
Fair value of employee stock options   -    -    -    -    -    19,720    -    -    19,720 
Fair value of warrants issued in conjunction with debt financing   -    -    -    -    -    25,000    -    -    25,000 
Net loss for the year ended December  31, 2008   -    -    -    -    -    -    -    (931,338)   (931,338)
                                              
Balance at December 31, 2008   -    -    73,440,506    73,440    -    7,700,159    -    (10,106,120)   (2,332,521)
                                              
Fair value of non-employee stock options   -    -    -    -    -    1,524    -    -    1,524 
Fair value of warrants issued in conjunction with debt financing   -    -    -    -    -    15,450    -    -    15,450 
Issuance of shares for services   -    -    7,200,000    7,200    -    40,500    -    -    47,700 
Shares issued for conversion of notes payable   -    -    48,750,000    48,750    -    263,291    -    -    312,041 
Net loss for the year ended December  31, 2009   -    -    -    -    -    -    -    (694,910)   (694,910)
                                              
Balance at December 31, 2009   -    -    129,390,506    129,390    -    8,020,924    -    (10,801,030)   (2,650,716)
                                              
Fair value of non-employee stock options   -    -    -    -    -    364    -    -    364 
Fair value of warrants issued in conjunction with debt financing   -    -    -    -    -    20,143    -    -    20,143 
Issuance of shares for services   -    -    25,950,000    25,950    -    182,650    -    -    208,600 
Net loss for the year ended December 31, 2010   -    -    -    -    -    -    -    (721,841)   (721,841)
                                              
Balance at December 31, 2010   -    -    155,340,506    155,340    -    8,224,081    -    (11,522,871)   (3,143,450)

 

See the accompanying notes to these condensed consolidated financial statements.

 

-6-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit)

For the period November 10, 1999 (date of inception) to September 30, 2013

 

   Convertible                       Deficit     
   Preferred   Common               Accumulated     
   Stock   Stock   Deferred   Additional       During the     
   Number of       Number of       Consulting   Paid-In   Treasury   Development     
   Shares   Amount   Shares   Amount   Fees   Capital   Stock   Stage   Total 
Issuance of shares for services   -    -    1,000,000    1,000    -    29,000    -    -    30,000 
Contribution of common stock from related parties   -    -    (12,000,000)   -    -    95,594    (95,594)   -    - 
Purchase of common stock for treasury   -    -    (17,795,903)   -    -    -    (17,795)   -    (17,795)
Sale of common stock   -    -    15,500,000    15,500    -    384,500    -    -    400,000 
Issuance of shares for stock issuance costs   -    -    2,100,000    2,100    -    (2,100)   -    -    - 
Stock issuance costs   -    -    -    -    -    (40,000)   -    -    (40,000)
Exercise of options   -    -    1,000,000    1,000    -    9,000    -    -    10,000 
Fair value of warrants issued in conjunction with debt financing   -    -    -    -    -    21,275    -    -    21,275 
Fair value of employee stock options   -    -    -    -    -    47,658    -    -    47,658 
Fair value of non-employee stock options   -    -    -    -    -    48,374    -    -    48,374 
Net loss for the year ended December 31, 2011   -    -    -    -    -    -    -    (665,113)   (665,113)
                                              
Balance at December 31, 2011   -    -    145,144,603    174,940    -    8,817,382    (113,389)   (12,187,984)   (3,309,051)
                                              
Issuance of shares for services   -    -    1,000,000    1,000    -    45,500    -    -    46,500 
Issuance of shares of common stock   -    -    44,111,111    44,111    -    1,015,889    -    -    1,060,000 
Issuance of stock for licensing   -    -    2,222,222    2,222    -    97,778    -    -    100,000 
Issuance of stock for trademarks, etc.   -    -    2,222,222    2,222    -    97,778    -    -    100,000 
Shares issued for conversion of notes payable and accrued interest   -    -    12,923,622    12,925    -    568,639    -    -    581,564 
Exercise of options   -    -    10,490,996    10,491    -    2,622    -    -    13,113 
Exercise of warrants   -    -    333,333    333    -    49,667    -    -    50,000 
Fair value of employee stock options   -    -    -    -    -    332,036    -    -    332,036 
Fair value of non-employee stock options   -    -    -    -    -    11,638    -    -    11,638 
Forgiveness of debt - related party   -    -    -    -    -    349,000    -    -    349,000 
Net loss for the year ended December 31, 2012   -    -    -    -    -    -    -    (1,199,057)   (1,199,057)
                                              
Balance at December 31, 2012 (Audited)   -    -    218,448,109    248,244    -    11,387,929    (113,389)   (13,387,041)   (1,864,257)

 

See the accompanying notes to these condensed consolidated financial statements.

 

-7-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit)

For the period November 10, 1999 (date of inception) to September 30, 2013

 

   Convertible                       Deficit     
   Preferred   Common               Accumulated     
   Stock   Stock   Deferred   Additional       During the     
   Number of       Number of       Consulting   Paid-In   Treasury   Development     
   Shares   Amount   Shares   Amount   Fees   Capital   Stock   Stage   Total 
Issuance of shares of preferred stock   33,333,333    1,000,000    -    -    -    -    -    -    1,000,000 
Conversion of shares of preferred stock to common stock   (12,222,222)   (366,667)   12,222,222    12,222    -    354,445    -    -    - 
Issuance of shares of common stock   -    -    4,811,111    4,811    -    230,189    -    -    235,000 
Shares issued for conversion of notes payable and accrued interest   -    -    18,275,000    18,275    -    1,871,725    -    -    1,890,000 
Exercise of options   -    -    3,335,000    3,335    -    14,584    -    -    17,919 
Exercise of warrants   -    -    1,000,000    1,000    -    9,000    -    -    10,000 
Fair value of employee stock options   -    -    -    -    -    8,427,202    -    -    8,427,202 
Deemed dividend distribution   -    -    -    -    -    (1,000,000)   -    -    (1,000,000)
Net loss for the nine months ended September 30, 2013   -    -    -    -    -    -    -    (18,456,004)   (18,456,004)
                                              
Balance at September 30, 2013 (Unaudited)   21,111,111   $633,333    258,091,442   $287,887   $-   $21,295,074   $(113,389)  $(31,843,045)  $(9,740,140)

 

See the accompanying notes to these condensed consolidated financial statements.

 

-8-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statement of Cash Flows

For the nine months ended September 30, 2013 and 2012

And for the period November 10, 1999 (date of inception) to September 30, 2013

(Unaudited)

 

       Nine Months   Nine Months 
   Cumulative   Ended   Ended 
   Since   September 30,   September 30, 
   Inception   2013   2012 
CASH FLOWS FROM OPERATING ACTIVITIES               
Net loss  $(31,843,045)  $(18,456,004)  $(640,033)
Adjustments to reconcile net loss to net cash used in operating activities               
Fair value of options issued in exchange for services   10,844,434    8,427,202    11,638 
Accretion of interest on deferred finance charges   453,625    -    12,562 
Accretion of discount on notes payable   446,954    3,718    3,717 
Change in fair value warrant liability   3,104,209    3,104,209    - 
Change in fair value embedded derivative liability   500,000    500,000    - 
Fair value of warrants in excess of consideration for convertible preferred stock   2,995,791    2,995,791    - 
Fair value of stock in excess of converted notes payable and accrued interest   1,221,875    1,221,875      
Salary due to stockholder contributed to capital   15,000    -    - 
Amortization and depreciation   591,394    61,339    8,328 
Gain on disposition of assets   (4,722)   -    - 
Gain on debt forgiveness   (340,352)   -    - 
Stock issued in exchange for services   553,760    -    - 
Financing expenses paid directly from stock proceeds   5,270    -    - 
Amortization of deferred consulting fees   40,800    -    - 
(Increase) decrease in assets               
Accounts receivable   (3,473)   -    (3,473)
Inventory   526    (19,454)   3,583 
Prepaid expenses   70,395    420,395    117,760 
Deposit   (37,197)   (37,197)     
Increase in liabilities               
Accounts payable and accrued expenses   2,336,846    (230,516)   298,584 
Net cash used in operating activities   (9,047,910)   (2,008,642)   (187,334)
                
CASH FLOWS FROM INVESTING ACTIVITIES               
Purchase of property and equipment   (48,682)   (10,573)   - 
Purchase of patents and trademarks   (246,088)   (21,954)   (2,406)
Proceeds from sale of assets   6,738    -    - 
                
Net cash used in investing activities   (288,032)   (32,527)   (2,406)
                
CASH FLOWS FROM FINANCING ACTIVITIES               
Proceeds from issuance of preferred stock   1,000,000    1,000,000    - 
Proceeds from issuance of common stock   6,786,447    235,000    - 
Proceeds from exercise of stock options   273,401    17,919    - 
Proceeds issuance of stock options   15,000    -    - 
Proceeds from exercise of warrants   115,500    10,000    - 
Proceeds from issuance of warrants   1,000,000    -    - 
Proceeds from issuance of notes payable   2,789,000    -    200,000 
Repayments of notes payable   (202,751)   -    - 
Payment for treasury stock   (17,795)   -    - 
Debt issuance costs   (62,000)   -    - 
Stock issuance costs   (144,760)   -    - 
                
Net cash provided by financing activities   11,552,042    1,262,919    200,000 
                
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   2,216,100    (778,250)   10,260 
                
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD   -    2,994,350    53,573 
                
CASH AND CASH EQUIVALENTS - END OF PERIOD  $2,216,100   $2,216,100   $63,833 

 

See the accompanying notes to these condensed consolidated financial statements.

 

-9-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Condensed Consolidated Statement of Cash Flows

For the nine months ended September 30, 2013 and 2012

And for the period November 10, 1999 (date of inception) to September 30, 2013

(Unaudited)

 

       Nine Months   Nine Months 
   Cumulative   Ended   Ended 
   Since   September 30,   September 30, 
   Inception   2013   2012 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:               
Cash paid during the year for:               
Interest  $53,336   $13,895   $- 
                
Income taxes  $-   $-   $- 
                
Return of shares of common stock related to purchase price adjustment               
Common stock   (1,000)   -    - 
Additional paid-in capital   (353,000)   -    - 
                
Intangible assets  $(354,000)  $-   $- 
                
Issuance of common stock and stock options for acquisition of subsidiary  $738,000   $-   $- 
                
Proceeds from common stock sales applied directly to debt and financing expenses repayment  $55,270   $-   $- 
                
Fair value of warrants issued for deferred finance charges  $392,376   $-   $- 
                
Fair value of stock issued for conversion of notes payable and accrued interest  $1,561,730   $668,125   $- 
                
Fair value of stock issued for conversion of preferred stock to common stock  $366,667   $366,667   $- 
                
Fair value of stock issued for purchase of assets  $100,000   $-   $- 
                
Fair value of warrants issued for purchase of assets  $100,000   $-   $- 
                
Fair value of stock issued for licensing costs  $100,000   $-   $- 
                
Fair value of warrants issued for licensing costs  $300,000   $-   $- 
                
Accretion of discount on preferred stock as deemed dividend distribution  $1,000,000   $1,000,000   $- 
                
Fair value of beneficial conversion feature  $1,500,000   $1,500,000   $- 
                
Fair value of warrants issued as debt discount  $78,043   $-   $- 
                
Issuance of common stock for stock issuance costs  $2,100   $-   $- 
                
Issuance of options as stock cost for treasury stock  $5,594   $-   $- 
                
Forgiveness of debt-related party treated as additional paid in capital  $349,000   $-   $- 

 

See the accompanying notes to these condensed consolidated financial statements.

 

-10-
 

  

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of the Business

LaserLock Technologies, Inc. and Subsidiary (the “Company”) is a development stage enterprise incorporated in the state of Nevada on November 10, 1999. LaserLock Technologies, Inc. seeks to provide state-of-the-art authentication solutions to governments, health care providers, high-end retailers and the gaming industry. LaserLock Technologies, Inc. is based in Washington, D.C. and is publically traded on the OTC Market under the ticker symbol “LLTI”. The Company markets security technology to protect governments, health care providers, high-end retail goods, the gaming industry and branded products from counterfeiting.

 

Basis of Presentation

The financial statements are presented in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 915 for development stage entities. The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (the “SEC”). Operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.

 

Principle of Consolidation

The accompanying consolidated financial statements include the accounts of LaserLock Technologies, Inc. and its wholly-owned subsidiary, LL Security Products, Inc. All inter-company transactions have been eliminated in consolidation.

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

Comprehensive Income

The Company follows FASB ASC 220 in reporting comprehensive income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Since the Company has no items of other comprehensive income (loss), comprehensive income (loss) is equal to net income (loss).

 

Fair Value of Financial Instruments

The Company’s financial instruments consist of accounts receivable, accounts payable and accrued expenses, embedded derivative, warrant liability and notes payable. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short maturities. The Company believes the carrying amount of its notes payable and convertible debt approximates its fair value based on rates and other terms currently available to the Company for similar debt instruments.

 

The Company follows FASB ASC 820, Fair Value Measurements and Disclosures, and applies it to all assets and liabilities that are being measured and reported on a fair value basis. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

The level in the fair value within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

-11-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

Concentration of Credit Risk Involving Cash

The Company’s cash is held at two financial institutions. At times, the Company’s deposits may exceed Federal Deposit Insurance Corporation (FDIC) coverage limits. The Company has not experienced any losses from maintaining cash accounts in excess of federally insured limits.

 

Inventory

Inventory principally consists of penlights and pigments and is stated at the lower of cost (determined by the first-in, first-out method) or market.

 

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, principally three to seven years. Maintenance and repairs of property are charged to operations, and major improvements are capitalized. Upon retirement, sale, or other disposition of property and equipment, the costs and accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is included in operations. Depreciation of property and equipment was $17,313 and $51,525 for the three and nine months ended September 30, 2013 and $0 for the three and nine months ended September 30, 2012 and included in general and administrative expenses.

 

Patents and Trademark

The Company has five issued patents, filed for three provisional patents for anti-counterfeiting technology and purchased a trademark. Costs associated with the registration and legal defense of the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were determined to be 17 to 20 years.

 

Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with FASB ASC 360 “Property, Plant, and Equipment.” The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets are measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset, undiscounted and without interest or independent appraisals. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the assets.

 

Deferred Financing Costs

Costs incurred in securing long-term debt are deferred and amortized, as a charge to interest expense, over the term of the related debt. In the case of long-term debt modifications, the Company follows the guidance provided by FASB ASC 470-50 “Debt – Modification and Extinguishments.”

 

Convertible Notes Payable

Convertible notes payable, for which the embedded conversion feature does not qualify for derivative treatment, are evaluated to determine if the effective or actual rate of conversion per the terms of the convertible note agreement is below market value. In these instances, the Company accounts for the value of the beneficial conversion feature (“BCF”) as a debt discount, which is then accreted to interest expense over the life of the related debt using the straight-line method which approximates the effective interest method.

 

Revenue Recognition

In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition (Codified in FASB ASC 605), the Company recognizes revenue when (i) persuasive evidence of a customer or distributor arrangement exists, (ii) a retailer, distributor or wholesaler receives the goods and acceptance occurs, (iii) the price is fixed or determinable, and (iv) collectability of the revenue is reasonably assured. Subject to these criteria, the Company recognizes revenue from product sales, consisting mainly of pigments and penlights, upon shipment to the customer. Royalty revenue is recognized upon receipt of notification from a customer that the Company’s product has been used in the customer’s production process.

 

-12-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

Income Taxes

The Company follows FASB ASC 740, Income Taxes which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

Stock-based Payments

The Company accounts for stock-based compensation under the provisions of FASB ASC 718, Compensation—Stock Compensation which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. The Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC 505 -50, Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Any stock options issued to non-employees are recorded as an expense and additional paid-in capital in stockholders’ equity over the applicable service periods.

 

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs were $23,615 and $29,371 for the three and nine months ended September 30, 2013 and $0 for the three and nine months ended September 30, 2012, and are included in sales and marketing expenses.

 

Research and Development Costs

In accordance with FASB ASC 730, research and development costs are expensed when incurred. Non-cash items included in research and development costs for the three and nine months ended September 30, 2013 were approximately $137,500 and $412,500 and $0 for the three and nine months ended September 30, 2012.

 

Earnings (Loss) Per Share

The Company follows FASB ASC 260 when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share. Since the Company reported a net loss for the three months ended September 30, 2012 and the nine months ended September 30, 2013 and 2012, common stock equivalents, including stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and dilutive earnings (loss) per share were the same.

 

The numerator for both basic and diluted earnings per share is net income. The denominator for basic earnings per share is the weighted average number of common shares outstanding during the period. The dilutive effect of outstanding convertible debt, stock options and warrants is reflected in the denominator for diluted earnings per share using the treasury stock method.

 

The following is a reconciliation of basic shares to diluted shares:

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2013  2012  2013  2012
Weighted-average shares – basic   247,476,627    145,144,603    240,255,146    145,144,603 
Effect of dilutive securities   217,777,053    —      —      —   
                     
Weighted-average shares – diluted   465,253,680    145,144,603    240,255,146    145,144,603 

 

Segment Information

The Company is organized and operates as one operating segment wherein the Company’s patented technologies are utilized to address counterfeiting issues. In accordance with FASB ASC 280, Segment Reporting, the chief operating decision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company subject to Board approval. Since the Company operates in one segment and provides one group of similar products, all financial segment and product line information required by FASB ASC 280 can be found in the consolidated financial statements.

 

Reclassification

Certain prior year balances have been reclassified to conform to current year presentation.

 

Recently Adopted Accounting Pronouncements

As of September 30, 2013 and for the period then ended, there were no recently adopted accounting pronouncements that had a material effect on the Company’s financial statements.

 

-13-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

Recently Issued Accounting Pronouncements Not Yet Adopted

In July 2013, the FASB issued Accounting Standards Update (“ASU”) ASU 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists, in order to eliminate the diversity in practice in the presentation of unrecognized tax benefits in such instances. This guidance generally requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU 2013-11 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The Company is currently evaluating ASU 2013-11 and plans to comply with all applicable provisions of this ASU no later than the first quarter of 2014.

 

NOTE 2 – MANAGEMENT PLANS

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses and experienced negative cash flow from operations during the development stage. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company believes that its existing cash resources will not be sufficient to sustain operations during the next twelve months. The Company currently needs to generate revenue in order to sustain its operations. In the event that the Company cannot generate sufficient revenue to sustain its operations, the Company will need to reduce expenses or obtain financing through the sale of debt and/or equity securities. The issuance of additional equity would result in dilution to existing shareholders. If the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to the Company, the Company may be unable to execute upon the business plan or pay costs and expenses as they are incurred, which could have a material, adverse effect on the business, financial condition and results of operations.

 

If sufficient revenues are not generated to sustain operations or additional funding cannot be obtained in the short term, the Company will need to reduce monthly expenditures to a level that will enable the Company to continue until such funds can be obtained.

 

The Company is in the development stage at September 30, 2013. Successful completion of the Company’s development program, and the attainment of profitable operations are dependent upon future events, including obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company’s cost structure. However, there can be no assurances that the Company will be able to secure additional equity investment or achieve an adequate sales level.

 

NOTE 3 – PATENTS AND TRADEMARK

 

The Company has five issued patents and filed for three additional provisional patents for anti-counterfeiting technology. Accordingly, costs associated with the registration of these patents and legal defense have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents (17 to 20 years). During the three and nine months ended September 30, 2013, the Company capitalized patent costs of $0 and $21,594 and $0 and $2,406 for the three and nine months ended September 30, 2012. Amortization expense for patents was $3,277 and $9,814 for the three and nine months ended September 30, 2013 and $2,768 and $8,328 for the three and nine months ended September 30, 2012 and included in general and administrative expense. Future estimated annual amortization over the next five years is approximately $13,100 per year for the years ended December 31, 2013 through 2017. In December 2012, the Company had purchased trademarks, a domain name and software from a third party and in the second quarter of 2013, reallocated the purchase price of $200,000 from intangibles to capital equipment based on the determined fair value of the assets acquired.

 

NOTE 4 – INCOME TAXES

 

Income tax expense was $0 for the three and nine months ended September 30, 2013 and 2012.

 

As of December 31, 2012, the Company had net operating loss carry forwards approximating $8.3 million.

 

As of January 1, 2013, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2013 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the nine months ended September 30, 2013, and there was no accrual for uncertain tax positions as of September 30, 2013. Tax years from 2009 through 2012 remain subject to examination by major tax jurisdictions.

 

There is no income tax benefit for the income for the three months ended September 30, 2013 and for the losses for the nine months ended September 30, 2013 and 2012, since management has determined that the realization of the net tax deferred asset is not assured and has created a valuation allowance for the entire amount of such benefits.

 

-14-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

NOTE 5 - SENIOR SECURED CONVERTIBLE NOTES PAYABLE

 

In February 2006, the Company commenced a private placement of up to $800,000 principal amount of 10% senior secured convertible promissory notes due twelve months from the date of issue to certain Company shareholders and other accredited investors. As of December 31, 2006, the Company completed this private placement by selling all notes payable totaling $800,000. The notes are secured by a first priority lien on all of the tangible and intangible personal property of the Company. In May 2007, the due date of these notes was extended to August 2008 and the interest rate increased to 12% per annum during the extension period. In June 2011, the interest rate on all of the notes was reset to 10% and $596,500 of the notes and accrued interest was extended until September 15, 2015. During the fourth quarter of 2012 the remaining $178,749 of unextended notes and the associated accrued interest were extended to September 30, 2015. In June 2013, $225,000 of these notes payable plus accrued interest of $181,125 were converted into 7.4 million shares of the Company’s common stock, which was valued at $1,628,000. The excess of the fair value of the Company’s common stock over the value of the notes payable and accrued interest was recorded as loss on extinguishment of debt in accordance with FASB ASC 470-50. As of September 30, 2013 and December 31, 2012, the outstanding principal balance on these notes was $550,249 and $775,249. Accrued interest at September 30, 2013 and December 31, 2012 amounted to $478,370 and $600,091. Purchasers of the notes were issued 8,000,000 10-year warrants exercisable into the Company’s shares at an exercise price of $0.01 per share. The warrants were valued at $392,376 and recorded as a debt discount on the notes payable. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 169% and 284%, risk-free interest rate between 3.6% and 4.5% and expected warrant life of ten years. The deferred finance charges were amortized over one year, which was the original term of the notes. As of June 30, 2013, the Company has received $80,000 for the exercise of 8,000,000 of the warrants. In addition, if an equity financing with total proceeds of more than $5,000,000 occurs while any notes are outstanding, holders of notes will have the right, at their option, to convert the outstanding principal and interest of the notes into shares at a discount of 30% of the price per share in the qualified financing. Since the embedded conversion feature is contingent upon the occurrence of the qualified financing, the value of the contingent conversion feature, if beneficial, will be recognized when the triggering event occurs and the contingency is resolved.

 

-15-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

NOTE 6 - CONVERTIBLE NOTES PAYABLE

 

During 2007, the Company commenced a private placement of up to $400,000 principal amount of 10% Convertible Promissory Notes originally due in August 2008 (the “Notes”). The Company raised $375,000 under this private placement in 2007 and the remaining $25,000 was raised in 2008. Holders of Notes will have the right, at their option, to convert the outstanding principal and interest of the Notes into shares of the Company’s Series A Preferred Stock at any time and from time to time at the option of the holder at the initial conversion price of $0.005333 per share. It is the intention, however, that the option holder will convert the Notes into shares of the Company’s common stock. The Notes are unsecured. The note holder of the remaining $140,000 under this convertible note issue agreed to extend the maturity date of these notes to September 30, 2015 at an interest rate of 10% per annum. Remaining shares to be potentially issued under this convertible note issue are 18,375,000.

 

On March 19, 2013, the investor holding $140,000 of convertible notes transferred $14,000 of the $140,000 convertible notes to the Vice Chairman of the Company. Also on March 19, 2013, the investor agreed to convert $28,000 of the investor’s remaining $126,000 of convertible notes into 5,250,000 shares of the Company’s common stock.

 

On March 19, 2013, the Vice Chairman of the Company agreed to convert $14,000 of convertible notes into 2,625,000 of the Company’s common stock.

 

As of September 30, 2013 and December 31, 2012, the remaining principal balance on the notes was $98,000 and $140,000. Accrued interest at September 30, 2013 and December 31, 2012 amounted to $87,150 and $78,750.

 

NOTE 7 - NOTES PAYABLE

 

Notes payable consists of the following:

 

   September 30, 2013   December 31, 2012 
           
Unsecured notes payable; interest at 10% per annum; principal and accrued interest due at maturity in September 2015  $561,000   $561,000 
           
Series A notes payable; interest at 8% per annum; principal and accrued interest due at extended maturity date in September 2015   150,000    150,000 
           
Series A notes payable; interest at 8% per annum; principal and accrued interest due at maturity in October 2011 (past due)   50,000    50,000 
           
Notes payable, interest at 25% per annum; principal and interest due September 2013   -    150,000 
           
Less: Debt discount   (9,914)   (13,632)
    751,086    897,368 
           
Less: Current portion   50,000    200,000 
Long-term portion  $701,086   $697,368 

 

At September 30, 2013 and December 31, 2012 accrued interest on notes payable was $355,781 and $394,281.

 

-16-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

Unsecured Notes Payable

During the second quarter of 2012, the Company received $200,000 for a 10% unsecured note payable, due April 27, 2013. In December 2012, this note payable and accrued interest of $9,167 was converted into 4,703,711 shares of the Company’s common stock.

 

Private Placement of 8% Series A Notes Payable

In August 2009, the Company commenced a private placement of up to $300,000 consisting of up to 6 units. Each unit consists of a $50,000, 8% Series A Note Payable, due September 30, 2011, and a non-detachable warrant to purchase 2 million shares of the Company’s common stock. During 2009, the Company sold 4 units, issued $200,000 of 8% Series A Notes Payable, issued 8 million warrants, and raised $180,000, net of commission of $20,000. In January 2010, the Company sold 0.5 unit, issued $25,000 of 8% Series A Notes Payable, issued 1 million warrants, and raised $17,500 net of commissions of $7,500. The commissions were treated as deferred finance charges and are expensed over the term of notes payable, which have been fully expensed.

 

The 8 million warrants in 2009 were valued at $15,450, fair value, using the Black-Scholes option pricing model to calculate the fair-value of the warrants, with the following assumptions: no dividend yield, expected volatility of between 30.9% and 34.5%, risk free interest rate between .95% and 1.06% and warrant life of approximately 2 years. The 1 million warrants in 2010 were valued at $20,143, fair value, using the Black-Scholes option pricing model to calculate the fair-value of the warrants, with the following assumptions: no dividend yield, expected volatility of 28.6 %, risk free interest rate of .84% and warrant life of approximately 2 years.

 

In June 2011, the maturity date on the $150,000 of the 8% Series A Notes Payable and the term on the associated 6 million warrants were extended to September 30, 2015. As a result, the warrants were revalued using the Black-Scholes option pricing model to calculate the incremental fair-value of the warrants of $21,275, with the following assumptions: no dividend yield, expected volatility of 60%, risk free interest rate of 1.52% and warrant life of approximately 1.25 years. As part of the debt extension, the lender holding the 6 million warrants agreed in writing to suspend its right to exercise these warrants until such time that the Company’s authorized shares have been increased. The authorized shares of the Company’s common stock were increased effective May 23, 2013 from 425,000,000 to 675,000,000.

 

The relative fair value of the warrants issued in conjunction with the 8% Series A Notes Payable have been treated as a debt discount with an offsetting credit to additional paid-in capital. The debt discount related to the warrant issuances is being accreted to interest expense over the term of the notes. When the warrants were revalued the incremental amount of $21,275 was also treated as additional debt discount and is being accreted over the new term of the 8% Series A Notes Payable. As of September 30, 2013 and December 31, 2012, the unaccreted debt discount related to warrants issued in conjunction with the 8% Series A Notes payable was $9,914 and $13,632. For the three and nine months ended September 30, 2013 accreted interest expense from the accretion of the debt discount was $1,239 and $3,718 and for the three and nine months ended September 30, 2012, accreted interest expense from the accretion of the debt discount was $1,239 and $3,718.

 

During the third quarter of 2011, $25,000 plus accrued interest of the 8% Series A Notes Payable were repaid and 3 million of the associated warrants expired unexercised.

 

Private Placement of 25% Notes Payable

In 2010, the Company issued $400,000 in notes payable in order to finance a patent infringement lawsuit (see Note 14 - Contingencies to these condensed consolidated financial statements). The notes payable accrue interest at 25% per annum and mature upon the earlier of September 1, 2013 or the date on which the Company receives net proceeds from the patent infringement claim. In addition to the base interest of 25% per annum, the lenders are entitled to Bonus Interest equal to the following:

 

a.First monies realized by the Company from its share of the net proceeds of the lawsuit shall be allocated and paid to the Lender until the principal and base interest accruing has been fully paid.
b.The next monies from the net proceeds of the litigation settlement will be paid to the Company to reimburse for out-of-pocket legal costs related to the lawsuit.

 

-17-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

c.The next $825,000 of proceeds will be split 50%/50% between the Company and the Lenders.
d.The next $1 million realized by the Company shall be allocated 90% to the Company and 10% to the Lenders.
e.The next $1 million realized by Company shall be allocated 85% to Company and 15% to Lenders.
f.All remaining proceeds realized by Company shall be allocated 80% to Company and 20% to Lenders.

 

The Lenders have a security interest in the Company’s patent infringement claim in which the Lender has the right to the net proceeds of this lawsuit to satisfy outstanding principal and interest under the notes.

 

As part of the private placement of the 25% notes payable, the Company incurred debt placement fees of $34,500 in 2010. These debt placement fees have been treated as deferred finance charges and are being amortized to interest expense over two years. During 2012, the deferred finance charges were fully amortized. For the three and nine months ended September 30, 2012 amortization of deferred finance charges was $3,937 and $12,562.

 

In December 2012, $250,000 of these notes payable and accrued interest of $122,397 were converted into 8,219,911 shares of the Company’s common stock. In March 2013, the remaining $150,000 of the notes payable and accrued interest of $70,000 were converted into 3 million shares of the Company’s common stock. Accrued interest of $13,895 was paid in cash.

 

Aggregate Maturities of Long-term Debt

 

Aggregate maturities of the senior secured convertible notes, convertible notes and notes payable over the next five years are as follows:

 

2013  $50,000 
2014   - 
2015   1,349,335 
2016   - 
2017   - 

 

NOTE 8 – WARRANT LIABILITY

 

On December 31, 2012, the Company entered into an Investment Agreement, a Technology and Services Agreement, a Technology and Services Agreement with Zaah Technologies, Inc. (“Zaah”)., a Patent and Technology License Agreement, and an Asset Purchase Agreement (collectively the “Agreements”). Included in these Agreements were Warrants to purchase shares of the Company’s common stock.

 

The warrants associated with these Agreements are subject to anti-dilution adjustments outlined in the Agreements. In accordance with FASB ASC 815, the warrants were classified as a liability in the total amount of $2.4 million at December 31, 2012. In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. As of September 30, 2013, the value of the warrants increased to $5,200,000 resulting in a charge to income of $5,984,749 for the three months ended September 30, 2013 and a charge to expense of $2,800,000 for the nine months ended September 30, 2013.

 

NOTE 9 – CONVERTIBLE PREFERRED STOCK

 

Subscription Agreement

 

The Company entered into a Subscription Agreement with VerifyMe, Inc. (“VerifyMe”) on January 31, 2013 (the “Subscription Agreement”). Under the terms of the Subscription Agreement VerifyMe subscribed to purchase 33,333,333 shares of the Company’s preferred stock and a warrant to purchase 33,333,333 shares of the Company’s common stock for $1 million at an exercise price of $0.12.

 

-18-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

At any time within two years after January 31, 2013, the subscriber has the right, but not the obligation to require the Company to repurchase all, but not less than all, of the capital stock of the Company and warrants exercisable for capital stock of the Company held by subscriber in exchange for the price originally paid by the subscriber therefore upon the occurrence of any of the following events:(i) the consummation of any bona fide business acquisition, (ii) the incurring of any indebtedness by the Company in an amount in excess of $2 million, (iii) the issuance or sale of any security having a preference on liquidation senior to common stock, or (iv) the sale by the Company of capital stock or warrants exercisable for its capital stock at a price below $0.03 per share.

 

In accordance with FASB ASC 480 and 815, the Preferred Stock has been classified as permanent equity and was valued at $1 million at January 31, 2013.

 

The conversion feature of the Preferred Stock is an embedded derivative, which is classified as a liability in accordance with FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at a fair market value of $1 million at January 31, 2013 and $1,500,000 at September 30, 2013. This was classified as an embedded derivative liability and a discount to Preferred Stock. Because the Preferred Stock can be converted at any time, the full amount was accreted and classified as a reduction to the discount on Preferred Stock and a deemed dividend distribution in the full amount of $1 million.

 

Because the Preferred Stock can be converted at any time, the embedded derivative is classified as a current liability at September 30, 2013.

 

The warrants associated with the Preferred Stock were also classified as a liability and valued at a fair market of $2,995,791 at January 31, 2013. Because this amount was in entirely in excess of the transaction price, this amount was recorded as a charge to expenses of $2,995,791. In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. As of September 30, 2013, the value of the warrants increased to $3,300,000 resulting in an increase in income of $3,691,416 for the three months ended September 30, 2013 and a charge to expenses of $3,300,000 for the nine months ended September 30, 2013.

 

The Convertible Preferred Stock has a preference in liquidation that the holders of the Convertible Preferred Stock are to be paid out of assets available for distribution prior to holders of common stock. The Convertible Preferred Stockholders may cast the number of votes equal to the number of whole shares of common stock into which the shares of Convertible Preferred Stock can be converted. In addition, the Convertible Preferred Stockholders are to be paid dividends, based on the number of Convertible Preferred shares as if the shares had been converted to common shares, prior to the common stockholders receiving a dividend.

 

The conversion price of the Preferred A shares is currently $0.03 per share. There are no arrearages on cumulative dividends.

 

In August 2013, VerifyMe elected to convert in a cashless transaction an equal number of Preferred A stock valued at $366,667 to 12,222,222 shares of common stock.

 

NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Derivative Liabilities

For purposes of determining whether certain instruments are derivatives for accounting treatment, the Company follows the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

 

-19-
 

 

The Company has identified the following liabilities that are measured at fair value on a recurring basis, summarized as follows:

 

September 30, 2013  Level 1  Level 2  Level 3  Total
                     
Derivative liability related to fair value of beneficial conversion feature  $-   $1,500,000   $-   $1,500,000 
Derivative liability related to fair value of warrants   -    -    8,500,000    8,500,000 
Total  $-   $1,500,000   $8,500,000   $10,000,000 

 

December 31, 2012  Level 1  Level 2  Level 3  Total
                     
Derivative liability related to fair value of warrants   -    -    2,400,000    2,400,000 
Total  $-   $-   $2,400,000   $2,400,000 

 

The following table details the approximate fair value measurements within the fair value hierarchy of the Company’s derivative liabilities using Level 3 inputs:

   Total
      
Balance at January 1, 2013  $2,400,000 
Derivative liabilities resulting from Subscription Agreement   2,998,027 
Change in fair value of derivative liabilities   3,101,973 
      
Balance at September 30, 2013  $8,500,000 

 

The following table details the approximate fair value measurements within the fair value hierarchy of the Company’s derivative liabilities using Level 3 inputs:

   Total
      
Balance at July 1, 2013  $18,176,165 
Change in fair value of derivative liabilities   (9,676,165)
      
Balance at September 30, 2013  $8,500,000 

 

As of September 30, 2013, the beneficial conversion feature of the preferred stock is treated as an embedded derivative liability and changes in the fair value were recognized in earnings.  The preferred stock shares are convertible into shares of the Company’s common stock, which did trade in an active securities market, therefore the embedded derivative liability was valued using the following market based inputs:

   September 30, 2013
Closing Trading Price of Common Stock  $0.10 
Series A Preferred Stock Conversion Price  $0.03 
Intrinsic value of conversion option per share  $0.07 

 

The Company has no assets that are measured at fair value on a recurring basis. There were no assets or liabilities measured at fair value on a non-recurring basis as of September 30, 2013 and December 31, 2012.

As of September 30, 2013 and December 31, 2012, the Company’s outstanding warrants are treated as derivative liabilities and changes in the fair value were recognized in earnings. These common stock purchase warrants did not trade in an active securities market, and as such, the Company estimated the fair value of these warrants using Black-Scholes and the following assumptions:

   September 30, 2013
Annual Dividend Yield   0.0%
Expected Life (Years)   4.25 – 4.34 
Risk-Free Interest Rate   1.39%
Expected Volatility   266.9%

 

Expected volatility was based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods. The Company believed this method produced an estimate that was representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company had no reason to believe future volatility over the expected remaining life of these warrants was likely to differ materially from historical volatility.  The expected life was based on the remaining contractual term of the warrants. The risk-free rate was based on the U.S. Treasury rate that corresponded to the expected term of the warrants.

NOTE 11 – STOCKHOLDERS’ EQUITY

 

In January and February 2013, the Company received $185,000 from the sale of 3,700,000 units from private placements consisting of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock at an exercise price of $0.10 per share. The shares and warrants were sold in units with each unit comprised of one share and one warrant at a purchase price of $.05 per unit.

 

In January 2013, the Company commenced private placements consisting of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock at an exercise price of $0.12 per share. The shares and warrants were sold in units with each unit comprised of one share and one warrant at a purchase price of $.045 per unit. The company sold 1,111,111 units and raised $50,000.

 

-20-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

On February 1, 2013, an investor exercised a warrant to purchase 1 million shares of the Company’s common stock that raised $10,000 for the Company.

 

In February and March 2013, four investors exercised options to purchase 3,335,000 shares of the Company’s common stock that raised $17,919 for the Company.

 

NOTE 12 – STOCK OPTIONS AND WARRANTS

 

During 1999, the Board of Directors (“Board”) of the Company adopted, with the approval of the stockholders, a Stock Option Plan. In 2000, the Board superseded that plan and created a new Stock Option Plan, pursuant to which it is authorized to grant options to purchase up to 1.5 million shares of common stock. On December 17, 2003, the Board, with approval of the stockholders, superseded this plan and created the 2003 Stock Option Plan (the “Plan”). Under the Plan the Company is authorized to grant options to purchase up to 18,000,000 shares of common stock to the Company’s employees, officers, directors, consultants, and other agents and advisors. The Plan is intended to permit stock options granted to employees under the Plan to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan, which are not intended to qualify as Incentive Stock Options, are deemed to be non-qualified options (“Non-Statutory Stock Options”). As of September 30, 2013, there are 16,925,996 options that have been issued and exercised, 1,000,000 options that have been issued and are unexercised and 74,004 options that are available to be issued under the Plan.

 

The Plan is administered by a committee of the Board of Directors (“Stock Option Committee”) which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan.

 

In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock for which an employee may exercise Incentive Stock Options under all plans of the company shall not exceed $1,000,000 per calendar year. If any employee shall have the right to exercise any options in excess of $100,000 during any calendar year, the options in excess of $100,000 shall be deemed to be Non-Statutory Stock Options, including prices, duration, transferability and limitations on exercise.

 

The Company issued non-statutory stock options pursuant to contractual agreements to non-employees. Options granted under the agreements are expensed when the related service or product is provided.

 

 

-21-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

Effective October 8, 2012, the Company entered into a three year agreement with the Vice Chairman of the Board of the Company, with an annual compensation of $200,000 per year. In addition, upon execution of the agreement the Company has agreed to issue options to the Vice Chairman to purchase 5% of the shares of the Company’s fully diluted common stock at an exercise price of $.05 per share, subsequent to the Company receiving funding of $2.5 million. The Company has raised the $2.5 million in funding and on June 25, 2013, the Company issued the Vice Chairman 19 million options in satisfaction of the 5% of the shares of the Company’s fully diluted common stock clause. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 146.1%, risk-free interest rate of 2.6% and expected option life of ten years. The fair value of options issued was $3,767,700 which was expensed immediately.

 

Effective October 16, 2012, the Company entered into a three year agreement with the President and Chief Executive Officer of the Company with an annual compensation of $200,000 per year. In addition, upon execution of the agreement the Company has agreed to issue options to the President to purchase 5% of the shares of the Company’s fully diluted common stock at an exercise price of $.05 per share, subsequent to the Company receiving funding of $2.5 million and on June 25, 2013, the Company issued the President and Chief Executive Officer 19 million options in satisfaction of the 5% of the shares of the Company’s fully diluted common stock clause. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 146.1%, risk-free interest rate of 2.6% and expected option life of ten years. The fair value of options issued was $3,767,700 which was expensed immediately.

 

On January 22, 2013, the Company issued options to an employee to purchase 1 million shares of the Company’s common stock at an exercise price of $.05, with a term of ten years. The options vest as follows: 250,000 immediately, 250,000 in one year and 500,000 in two years The Company used the Black- Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 222%, risk-free interest rate of 1.9% and expected option life of ten years. The fair value of options issued was $99,972 of which $25,000 was expensed immediately and the remainder is being expensed over the vesting terms. The total expense for the three and nine months ended September 30, 2013 was $12,599 and $59,367.

 

On February 25, 2013, the Company issued options to an employee to purchase 500,000 shares of the Company’s common stock at an exercise price of $.05, with a term of ten years. The options vest as follows: 200,000 in one year, 200,000 in two years and 100,000 in three years. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 259%, risk-free interest rate of 1.9% and expected option life of ten years. The fair value of options issued was $89,998. The options were cancelled during the three months ended June 30, 2013. The total expense recognized of $5,000 was reversed upon cancellation of the options.

 

On March 13, 2013, the Company issued an option to purchase 2 million shares of the Company’s common stock at an exercise price of $.05, with a term of ten years, to a member of the Board of Directors. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 235%, risk-free interest rate of 2.0% and expected option life of ten years. The fair value of the option issued was $439,963 of which $219,982 was expensed immediately and the remainder will be expensed over one year. The total expense for the three and nine months ended September 30, 2013 was $55,447 and $341,122.

 

On May 4, 2013, the Company issued an option to purchase 2 million shares of the Company’s common stock at an exercise price of $.05, with a term of ten years, to the a member of the Board of Directors. The options vest 50% immediately and 50% on May 4, 2014. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 235%, risk-free interest rate of 1.78% and expected option life of ten years. The fair value of the option issued was $460,000 of which $230,000 was expensed immediately and the remainder will be expensed over one year. The total expense for the three and nine months ended September 30, 2013 was $57,973 and $323,890.

 

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LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

On September 30, 2013, the Company issued an option to purchase 1 million shares of the Company’s common stock at an exercise price of $.15, with a term of ten years, to the Company’s Chief Operating Officer. The options vest 50% after the first year and 50% at the end of 24 months. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of ranging from 268.4% to 272.8%, risk-free interest rate of 1.39% and expected option life of ten years. The fair value of the option issued was $99,840. No expense was recognized for the three and nine months ended September 30, 2013.

 

A summary of incentive stock option transactions for employees since December 31, 2011 is as follows:

 

           Weighted Average 
   Option/Warrant   Exercise   Exercise 
   Shares   Price   Price 
Outstanding, December 31, 2011   6,390,000   $0.00125   $0.00125 
                
Granted   15,000,000    0.05 - 0.15    0.06 
Transferred from non-employee options   200,000    0.05    - 
Exercised   (5,823,333)   0.00125 - 0.15    - 
Expired/Returned   -    -    - 
                
Outstanding, December 31, 2012   15,766,667    0.00125 to 0.10    0.06 
                
Granted   44,500,000    0.05 - 0.15    0.04 
Exercised   (900,000)   0.00125    - 
Expired/Returned   (500,000)   0.05    - 
                
Outstanding, September 30, 2013   58,866,667    $0.05 to $0.15   $0.05 
                
Exercisable, September 30, 2013   50,116,667    $0.05 to $0.15   $0.06 
                
Weighted Average Remaining Life, Exercisable, September 30, 2013 (years)   9.6           

 

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LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

The following tables summarize non-employee stock option/warrant activity of the Company since December 31, 2011:

 

           Weighted Average 
   Option/Warrant   Exercise   Exercise 
   Shares   Price   Price 
Outstanding, December 31, 2011   15,585,996    $0.00125 to $0.20   $0.01 
                
Granted   72,422,221    0.05 to 0.10    0.08 
Transferred to employee options   (200,000)   (0.05)   - 
Exercised   (5,000,996)   0.00125    - 
Expired   -    -    - 
                
Outstanding, December 31, 2012   82,807,221    0.00125 to 0.20    0 
                
Granted   38,144,444    0.10 to 0.15    0.03 
Exercised   (3,435,000)   0.00125 -  0.07    - 
Expired   -    -    - 
                
Outstanding, September 30, 2013   117,516,665    $0.01 to $.20   $0.10 
                
Exercisable, September 30, 2013   117,516,665    $0.01 to $.20   $0.10 
                
Weighted Average Remaining Life, Exercisable, September 30, 2013 (years)   6.8           

 

NOTE 13 – OPERATING LEASES

 

For the three and nine months ended September 30, 2013 total rent expense under leases amounted to $17,532 and $35,876 and included in general and administrative expense. For the three and nine months ended September 30, 2012 total rent expense under leases amounted to $0. At September 30, 2013, the Company was obligated under various non-cancelable operating lease arrangements for property as follows:

 

2013   $17,532 
2014    71,766 
2015    74,637 
2016    31,605 
       
    $195,540 

 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

At September 30, 2013, seven shareholders of the Company held $550,249 of the senior secured convertible notes payable and at December 31, 2012, five shareholders of the Company held $491,249 of the senior secured convertible notes payable.

 

At September 30, 2013, one shareholder of the Company held $98,000 and at December 31, 2012 held $140,000 of convertible notes payable.

 

At September 30, 2013 and December 31, 2012, three shareholders of the Company held $661,000 of unsecured notes payable.

 

-24-
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements

 

The Company maintains an office at the home of its Vice Chairman. No formal lease agreement exists and no direct rent expense has been incurred. However, related occupancy costs of $0 and $2,199 were incurred during the three and nine months ended September 30, 2013 and $9,360 and $24,523 were incurred during the three and nine months ended September 30, 2012.

 

NOTE 15 – MAJOR CUSTOMERS

 

During the nine months ended September 30, 2013, the Company earned all of its revenue from one customer aggregating $3,140. At September 30, 2013, no amounts were due from that customer. During the nine months ended September 30, 2012, the Company earned all of its revenue from one customer aggregating $13,075. At September 30, 2012, amount due from that customer included in trade accounts receivable was $1,135.

 

NOTE 16 – CONTINGENCIES

 

In October 2010, the Company filed suit in the Western District of Pennsylvania against WS Packaging Group, Inc. (“WS”) alleging that WS infringed on one of the Company’s patents in the manufacture of MONOPOLY game pieces on behalf of McDonald’s Corp. On June 4, 2012, both WS and the Company filed a stipulation to dismiss the action without prejudice and enter into settlement negotiations. Settlement negotiations are ongoing.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Cautionary Statements Regarding Forward-Looking Statements

 

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this quarterly report on Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation thereon or similar terminology or expressions.

 

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:  our ability to raise additional capital, the absence of any operating history or revenue, our ability to attract and retain qualified personnel, our dependence on third party developers who we cannot control, our ability to develop and introduce a new service to the market in a timely manner, market acceptance of our services, our limited experience in a relatively new industry, the ability to successfully develop licensing programs and generate business, rapid technological change in relevant markets, unexpected network interruptions or security breaches, changes in demand for current and future intellectual property rights, legislative, regulatory and competitive developments, intense competition with larger companies, general economic conditions, as well as other factors set forth under the caption “Risk Factors” in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission, and “Item 2 — Management’s Discussions and Analysis of Financial Condition and Results of Operation” below.

 

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.

 

Overview

 

LaserLock Technologies, Inc. is a global leader in providing state-of-the-art authentication solutions to governments, health care providers, high-end retailers and the gaming industry. LaserLock Technologies, Inc. is based in Washington, D.C. and is publicly traded on the OTC Market under the ticker symbol “LLTI”. The Company markets security technology to protect governments, health care providers, high-end retail goods, the gaming industry and branded products from counterfeiting.

 

We were incorporated in Nevada in November 1999. We are a technology company that delivers product and document authentication and security. We plan to develop and market technologies in a variety of applications in the security field.

 

We believe that the technologies we own will enable businesses to reconstruct their overall approaches to corporate security - from counterfeit identification to employee or customer monitoring. Potential applications of our technologies are available in different types of products and industries including gaming, apparel, tobacco, perfume, compact disks, pharmaceuticals, event and transportation tickets, driver’s licenses, insurance cards, passports, computer software, DVDs, and credit cards. We intend to generate sales through licenses of our technology or through direct sales of our technology to end-users.

 

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We have five issued patents and submitted three provisional applications relating to our technology. We also acquired the VerifyMe trademark. These patents seek to accomplish non-intrusive document and product authentication in order to reduce losses caused by unpermitted document reproduction or by product counterfeiting. The technologies involve the utilization of invisible or color shifting/changing inks, which are compatible with today’s printing machines. The inks may be used with certain printing systems such as offset, flexographic, silkscreen, gravure, and laser. Based upon the Company’s experience, we believe that the ink technologies may be incorporated into existing manufacturing processes.

  

Strategic Outlook

 

We believe that the security and authentication industries will continue to grow over time, especially as counterfeiting becomes easier with advances in technology. Within the market, we intend to provide our products to government bodies and merchants in the consumer products, gaming and financial services industries.

 

Sustained spending on technology, our ability to raise additional financing, and the continued growth of the security and authentication markets are all external conditions that may affect our ability to execute our business plan. In addition, certain potential customers may view our small size and limited financial resources as a negative even if they prefer our products to those of our competitors.

 

Our primary strategic objective over the next 12-24 months is to successfully market our products and generate revenue that is sufficient to cover our operating expenses and support additional growth over the next several years. We plan to achieve this objective through a targeted marketing program. As we grow, we intend to hire additional professionals to develop new products and market our products.

 

We believe that our near-term success will depend particularly on our ability to develop customer awareness and confidence in our products. Since we have limited capital resources, we will need to closely manage our expenses and conserve our cash by continually monitoring any increase in expenses and reducing or eliminating unnecessary expenditures. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies in the development stage, particularly given that we operate in rapidly evolving markets, that we have limited financial resources, and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties.

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2013 and 2012

 

The following discussion analyzes our results of operations for the three months ended September 30, 2013 and 2012. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.

 

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Net Income (Loss) for Three Months Ended September 30, 2013 and 2012

 

Net Revenue/Net Income (Loss)

 

We are a development stage company and have not generated significant revenue since our inception.  For the three months ended September 30, 2013 and 2012, we generated $0 and $3,289 of total net revenues, respectively.  Our net income (loss) increased $8,365,536 to $8,210,193 for the three months ended September 30, 2013 compared to ($155,343) for the three months ended September 30, 2012, primarily as a result of fair value adjustments to our outstanding warrant liability offset by operating and interest expenses.

  

Cost of Sales

 

For the three months ended September 30, 2013 and 2012, we incurred costs of sales of $0 and $2,047, respectively. 

 

General and Administrative Expenses

 

General and administrative expenses increased $213,380 to $232,291 for the three months ended September 30, 2013 from $18,911 for the three months ended September 30, 2012.  The increase is attributable to increases in depreciation, insurance, office expenses, payroll taxes and rent.  The increases primarily resulted from the hiring of employees and the opening of an office in Washington D.C.

 

Legal and Accounting

 

Legal and accounting fees increased $105,638 to $110,187 for the three months ended September 30, 2013 from $4,549 for the three months ended September 30, 2012.   The increase in legal and accounting fees between the periods was primarily related to patent costs and costs associated with the Form S-1 Registration filed with the Securities and Exchange Commission in August 2013.

 

Payroll Expenses

 

Payroll expenses were $344,539 for the three months ended September 30, 2013, an increase of $344,539 from $0 for the three months ended September 30, 2012.  The increase relates to the hiring of additional employees.

 

Research and Development

 

Research and development expenses were $158,030 and $493, respectively, for the three months ended September 30, 2013 and 2012, an increase of $157,537, of which $137,500 represented non-cash charges.  The increase in research and development expenses was due to primarily to the technology service agreement entered into on December 31, 2012 and the allocation of resources to the research and development effort.

  

Sales and Marketing

 

Sales and marketing expenses for the three months ended September 30, 2013 were $78,225 as compared to $55,463 for the three months ended September 30, 2012, an increase of $22,762.   The expenses consisted largely of expenses for marketing the new technology associated with the patents and the new patent applications, as well as a more active marketing program in 2013.

 

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Interest Expense

 

During the three months ended September 30, 2013, the Company incurred interest expense of $42,700 as compared to $77,169 for the three months ended September 30, 2012, a decrease of $34,469. The decrease in interest expense is a result of a reduction in interest expense from the conversion and settlement of various notes payable in previous years and quarters.

 

Change in  fair value of warrants

 

During the three months ended September 30, 2013, the Company incurred a gain on the change in the fair value of warrants of $9,676,165 as compared to $0 for the three months ended September 30, 2012.  The increase resulted from the valuation of warrants associated with the Investment Agreement entered into on December 31, 2012 and the Subscription Agreement entered into on January 31, 2013.  The value of the warrant liability has decreased because the stock price has decreased.

 

Change in  fair value embedded derivative liability

 

Change in fair value of embedded derivative liability increased $500,000 to $1,500,000 at September 30, 2013 resulting in an additional expense. The change in the liability was attributed to change in the fair value of the Company’s stock price.

 

Comparison of the Nine Months Ended September 30, 2013 and 2012

 

The following discussion analyzes our results of operations for the nine months ended September 30, 2013 and 2012. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.

 

Net Loss for Nine Months Ended September 30, 2013 and 2012

 

Net Revenue/Net Loss

 

We are a development stage company and have not generated significant revenue since our inception.  For the nine months ended September 30, 2013 and 2012, we generated $3,140 and $17,029 in net revenues.  Our net loss increased $17,815,971 to $18,456,004 for the nine months ended September 30, 2013 compared to $640,033 for the nine months ended September 30, 2012, as a result of increases in expenses primarily resulting from share based compensation and the valuation of warrant liability and embedded derivative liability associated with the Investment Agreement entered into on December 31, 2012 and the Subscription Agreement entered into on January 31, 2013 as described below.

 

Cost of Sales

 

For the nine months ended September 30, 2013 and 2012, we incurred proprietary technology costs of sales of $2,710 and $4,083.

 

General and Administrative Expenses

 

General and administrative expenses increased $411,401 to $501,299 for the nine months ended September 30, 2013 from $89,898 for the nine months ended September 30, 2012.  The increase is primarily attributable to increases in depreciation and amortization of $43,000, insurance of $136,000, office expenses of $89,000, payroll taxes of $64,000, rent expense of $36,000.  The increases primarily resulted from the hiring of employees and the opening of an office in Washington D.C.

 

-29-
 

 

Legal and Accounting

 

Legal and accounting fees increased $103,917 to $278,275 for the nine months ended September 30, 2013 from $174,358 for the nine months ended September 30, 2012.   The increase in legal and accounting fees between the periods was primarily related to the patent infringement lawsuit during the nine months ended September 30, 2013, with similar legal fees being incurred for the Subscription Agreement entered into on January 31, 2013. Further costs were incurred for patents and costs associated with our Form S-1 Registration Statement filed with the Securities and Exchange Commission in August 2013.

 

Payroll Expenses

 

Payroll expenses were $9,085,336 for the nine months ended September 30, 2013, an increase of $9,085,336 from $0 for the nine months ended September 30, 2012.  The increase relates to the hiring of eight additional employees as well as stock based compensation of $8,427,202 for the board of directors and the employees. The Vice Chairman and President and Chief Executive Officer also received their stock options related to their employment agreements in June 2013, which were valued at $7,535,400.

 

Research and Development

 

Research and development expenses were $470,005 and $3,873, respectively, for the nine months ended September 30, 2013 and 2012, an increase of $466,132, of which $137,500 represented non-cash charges.  The increase in research and development expenses was due to primarily to the technology service agreement entered into on December 31, 2012 and the allocation of resources to the research and development effort.

  

Sales and Marketing

 

Sales and marketing expenses for the nine months ended September 30, 2013 were $182,726 as compared to $155,725 for the nine months ended September 30, 2012, an increase of $27,001.   The expenses consisted largely of expenses for marketing the new technology associated with the patents and the new patent applications, as well as a more active marketing program in 2013.

 

Interest Expense

 

During the nine months ended September 30, 2013, the Company incurred interest expense of $116,918, as compared to $229,125 for the nine months ended September 30, 2012, a decrease of $112,207. The decrease in interest expense is a result of the conversion and settlement of various notes payable in previous years and quarters.

 

Loss on extinguishment of debt

 

The loss from extinguishment of debt was $1,221,875 for the nine months ended September 30, 2013, compared to $0 for the nine months ended September 30, 2012. The increase in loss on extinguishment of debt is a result of the excess fair value of the common stock issued over the value of the notes payable and accrued interest that were retired in the three months ended September 30, 2013.

 

Change in  fair value of warrants

 

During the nine months ended September 30, 2013, the change in fair value of the Company’s warrants was $3,104,209 as compared to $0 for the nine months ended September 30, 2012.  The change resulted from the valuation of warrants associated with the Investment Agreement entered into on December 31, 2012 and the Subscription Agreement entered into on January 31, 2013.  The values of the warrants have decreased because the stock price has decreased.

 

-30-
 

 

Change in  fair value embedded derivative liability

 

Change in fair value of embedded derivative liability increased $500,000 to $1,500,000 at September 30, 2013 resulting in an additional expense. The change in the liability was attributed to change in the fair value of the Company’s stock price.

 

Fair value of warrants in excess of consideration for convertible preferred stock

 

During the nine months ended September 30, 2013, the Company incurred a change in the fair value of warrants that were issued in excess of consideration for convertible preferred stock of $2,995,791 as compared to $0 for the nine months ended September 3, 2012.  The change resulted from the valuation of warrants associated with the Subscription Agreement entered into on January 31, 2013.

 

Liquidity and Capital Resources

 

As of September 30, 2013, we had cash on hand of $2,216,100.

 

Net cash used in operating activities for the nine months ended September 30, 2013 increased to $2,008,642 from $187,334 for the nine months ended September 30, 2012, an increase of $1,821,308. The increase in net cash used in operating activities is mainly related to the expansion of operations including hiring employees, increased marketing efforts and opening an office in Washington, D.C.

 

Net cash used in investing activities, consisting of equipment purchases and patent costs, was $32,527 for the nine months ended September 30, 2013 and $2,406 for the nine months ended September 30, 2012, an increase of $30,121.

 

Net cash provided by financing activities was $1,262,919 and $200,000, respectively, for the nine months ended September 30, 2013 and 2012.  The net cash provided by financing activities for the nine months ended September 30, 2013 relates to $1 million from the sale of the Company’s preferred stock and a warrant, and $262,919 in proceeds received from the issuance of common stock and exercise of stock options. The net cash provided by financing activities for the nine months ended September 30, 2012 was a result of additional debt financing of $200,000 obtained during the three months ended June 30, 2012. 

 

The Company is in the development stage. During the nine months ended September 30, 2013, the Company’s operational resources were used primarily to fund general and administrative expenses, hire employees and expand the continuing sales and marketing program. 

 

The Company has entered into two new agreements which are expected to significantly improve revenues in the fourth quarter.

 

The first, with American Banknote Corporation, is an exclusive worldwide strategic partnership that will incorporate the company’s newest technology, “SecureLight+” into drivers’ licenses, national ID cards, passports, debit and credit cards, smart cards and postage stamps.

 

The second agreement is with Gaming Partners International, the leading provider of casino currency worldwide. This agreement pertains to the testing of the Company’s new invisible QR code technology on gaming chips and playing cards and is one of the most secure anti-counterfeiting tools on the market. The technology enables verification with a proprietary mobile phone application.

 

As we have not realized significant revenues since our inception, we have financed our operations through private offerings of debt and equity securities.  We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution.  The following sets forth our primary sources of capital during the previous two years.

 

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The following agreements were executed on December 31, 2012 and provided the Company with $2 million in funding.

 

Investment Agreement

 

The Company entered into an Investment Agreement with VerifyMe, Inc. (“VerifyMe”) on December 31, 2012 (the “Investment Agreement”). Under the terms of the Investment Agreement, VerifyMe  purchased 22,222,222 shares of the Company’s common stock as well as a warrant to purchase 22,222,222 shares of the Company’s common stock for $1 million.  In addition, a Subscription Agreement (discussed below) was to be entered into on or before January 31, 2013.

 

Registration Rights Agreement

 

In connection with the Investment Agreement, the Company entered into a Registration Rights Agreement with VerifyMe (the “Registration Rights Agreement”), pursuant to which VerifyMe can demand at any time on or after four months after December 31, 2012, that the Company file a registration statement relative to shares owned by VerifyMe.  If the Company has not filed the demand registration statement by the later of (i) two (2) months after the date of the request of demand registration and (ii) six (6) months after the date of the Registration Rights Agreement (such date, the “Filing Date”), then, (i) the Company shall not issue any (A) capital stock, (B) evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for capital stock (“Convertible Securities”), or (C) rights, options or warrants to subscribe for, purchase or otherwise acquire capital stock or Convertible Securities to anyone other than the stockholder until it files the demand registration statement, (ii) beginning on the day following the Filing Date, the applicable exercise price shall be reduced by $0.01, (iii) until the Company has filed the registration statement with the SEC, on each subsequent one (1) month anniversary of the filing date, the applicable exercise price shall be reduced by $0.01, and (iv) all common stock held by the stockholder and all common stock held by the Company to be granted by the Company in respect of the exercise of the warrants, shall automatically convert into a class of preferred stock of the Company, established by the Company on terms acceptable to the stockholder, which such class of preferred stock shall have voting rights representing 51% of the aggregate voting power of the Company.

 

After receiving extensions to the required timing as outlined above, the Company filed a Form S-1 Registration Statement under the Securities and Exchange Act of 1933 on August 5, 2013.

 

Technology and Service Agreement

 

In connection with the Investment Agreement, the Company entered into a Technology and Service Agreement with VerifyMe (the “Technology and Service Agreement ”), pursuant to which VerifyMe purchased warrants of the Company to purchase 22,222,222 shares of the Company’s common stock for $1 million.  Additionally, the Company executed a services agreement with Zaah Technologies, Inc. (“Zaah”) concurrently with this agreement (the “Zaah Technology and Service Agreement”).  The Company is to use up to $550,000 of the proceeds from the Technology and Service Agreement for the purpose of the Company’s hiring (i) a full-time Chief Technology Officer or Chief Information Officer and (ii) two full-time business developers.

 

Technology and Service Agreement with Zaah

 

Under the Zaah Technology and Service Agreement, Zaah will provide the Company (a) twelve (12) months of technical support, (b) up to twelve (12) days of meetings annually between the respective management teams of the Company and Zaah, (c) updates to technology as agreed in writing between the Company and Zaah, and (d) twelve (12) months of technical hosting.

 

The Company is required to pay Zaah the following:

 

(a)$450,000 on the date of the agreement (December 31, 2012), consisting of $250,000 in cash and warrants to purchase 4,444,444 shares of common stock under a cashless exercise initially at an exercise price of $0.045 on the terms set forth under the warrants issued by the Company to Zaah, dated as of December 31, 2012,

 

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(b)$100,000, accrued in full as of the date of the agreement, but payable in twelve (12) months from the date hereof to a designee of Zaah’s selection, with a right to convert (at Zaah’s sole discretion, from time to time at any time) to shares of common stock at the prevailing market price per share of common stock (which, as long as the common stock is listed, shall be the closing price on the last trading day prior to such issuance or sale of the common stock as traded on a national securities exchange, the NASDAQ Global Market, the NASDAQ Capital Market, or another nationally recognized trading system (including Pink OTC Markets, Inc.)), and

 

(c)a commission of 10% of the revenue generated by any Company transaction originated through the efforts of Zaah, as substantiated by a written agreement between the Company and Zaah, specifically referencing the transaction in which Zaah is entitled to such commission, payable by the Company to Zaah in cash. Such payment shall be made on the earlier of (i) the date of the signing of such transaction, (ii) the date of the closing of such transaction, or (iii) any date on which any funds are paid to the Company in respect to such transaction.

 

Patent and Technology License Agreement

 

In connection with the Investment Agreement, the Company entered into a Patent and Technology License Agreement with VerifyMe, pursuant to which VerifyMe granted the Company exclusive and non-exclusive licenses relative to a specific list of patents in return for the following:

 

(a)Payment 1, payable upon execution of the agreement on December 31, 2012: The sum of One Hundred Thousand Dollars ($100,000), to be paid by issuing (i) a number of shares of common stock, of the Company equal to (x) $100,000 divided by (y) $0.045 (2,222,222 shares) and (ii) cashless exercise warrants to purchase an equal number of shares exercisable at a price of Ten Cents ($0.10) per share with a term of five (5) years.

 

(b)Payment 2, payable on January 1, 2014: The sum of Four Hundred Thousand Dollars ($400,000), to be paid by issuing (i) a number of shares equal to (x) $400,000 divided by (y) a price which equals a 10% discount to market and (ii) cashless exercise warrants to purchase an equal number of shares exercisable at a price of Ten Cents ($0.10) per share with a term of five (5) years.

 

(c)Payment 3, payable on January 1, 2015: The sum of Four Million Five Hundred Thousand Dollars ($4,500,000), to be paid by issuing (i) a number of shares equal to (x) $4,500,000 divided by (y) a price which equals a 10% discount to market and (ii) cashless exercise warrants to purchase an equal number of shares exercisable at a price of Ten Cents ($0.10) per share with a term of five (5) years.

 

(d)Future Payments Contingent: The Company’s payment of Payment 2 and Payment 3 is contingent. To the extent that VerifyMe does not develop and license to the Company at a time subsequent to Payment 1, further technology and/or a further patent right related to the local, mobile and cloud based biometric security systems, then any payments not already paid, will no longer be due to VerifyMe, this nonperformance being a likelihood, more likely than not.

 

Asset Purchase Agreement

 

In connection with the Investment Agreement, the Company entered into an Asset Purchase Agreement with VerifyMe, pursuant to which the Company purchased trademark rights, software and a domain name at a purchase price of $100,000 to be paid by issuing shares equal to $100,000/0.045 (2,222,222 shares) and cashless exercise warrants to purchase an equal number of shares at an exercise price of ten cents per share with a term of five years.

 

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 The warrants associated with these Agreements are subject to anti-dilution adjustments outlined in the Agreements.  In accordance with ASC 815, the warrants were classified as a liability in the total amount of $2.4 million at December 31, 2012.  In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings.  For the three months ended September 30, 2013, the value of the warrants decreased to $8,616,673 resulting in other income of $9,559,492.

 

The following agreement was executed on January 31, 2013 and provided the Company with $1 million in funding:

 

Subscription Agreement

 

VerifyMe subscribed to purchase 33,333,333 shares of the Company’s preferred stock and a warrant to purchase 33,333,333 shares of the Company’s common stock for $1 million at an exercise price of $0.12.  This agreement was executed on January 31, 2013.

 

At any time within two years after January 31, 2013, the subscriber has the right, but not the obligation to require the Company to repurchase all, but not less than all, of the capital stock of the Company and warrants exercisable for capital stock of the Company held by subscriber in exchange for the price originally paid by the subscriber therefor upon the occurrence of any of the following events:(i) the consummation of any bona fide business acquisition, (ii) the incurring of any indebtedness by the Company in an amount in excess of $2 million, (iii) the issuance or sale of any security having a preference on liquidation senior to common stock, or (iv) the sale by the Company of capital stock or warrants exercisable for its capital stock at a price below $0.03 per share.

 

In accordance with ASC 480 and 815, the Preferred Stock has been classified as permanent equity and has been valued at $1 million.

 

The conversion feature of the Preferred Stock is an embedded derivative, which is classified as a liability in accordance with ASC 815 and was valued in accordance with ASC 470 as a beneficial conversion feature at a fair market value of $1 million at January 31, 2013.  This was classified as an embedded derivative liability and a discount to Preferred Stock.  Because the Preferred Stock can be converted at any time, the full amount was accreted and classified as a reduction to the discount on Preferred Stock and a deemed dividend distribution in the full amount of $1 million.

 

At September 30, 2013, the fair value of the embedded derivative (beneficial conversion feature) was evaluated based on the fair value of the Company’s stock price as compared to the Preferred A conversion price. The fair value of the embedded derivative at September 30, 2013 increased by $500,000 to $1,500,000.

 

The warrants associated with the Preferred Stock were also classified as a liability and valued at a fair value of $2,995,791 at January 31, 2013.  Because this amount was entirely in excess of the transaction price, this amount was recorded as a charge to expenses of $2,995,791.  In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings.  For the three months ended September 30, 2013, the value of the warrants decreased to $3,300,000 resulting in other income of $3,691,416.

 

In August 2013, VerifyMe elected to convert in a cashless transaction an equal number of Preferred A stock valued at $366,667 to 12,222,222 shares of common stock.

 

During the second quarter of 2012, the Company received $200,000 for a 10% unsecured note payable, due April 27, 2013.  In December 2012, this note payable and accrued interest of $9,167 was converted into 4,703,711 shares of the Company’s common stock.

 

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In October 2012, the Company commenced private placements consisting of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock at an exercise price of $0.10 per share.  The shares and warrants were sold in units with each unit comprised of one share and one warrant at a purchase price of $0.045 and $0.05 per unit.  As of December 31, 2012, the Company sold 21,888,889 units that raised $1,060,000 for the Company.

 

On November 13, 2012, an employee and a consultant exercised options to purchase in the aggregate 10,490,996 shares of the Company’s common stock at an exercise price of $.00125 per share that raised $13,114 for the Company.

 

On December 20, 2012, an investor exercised warrants to purchase 333,333 shares of the Company’s common stock at $0.15 per share, that raised $50,000 for the Company.

 

In January and February 2013, the Company received $185,000 from the sales of 3,700,000 units from private placements consisting of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock at an exercise price of $0.10 per share.  The shares and warrants were sold in units with each unit comprised of one share and one warrant at a purchase price of $.05 per unit.

 

In January, 2013, the Company commenced private placements consisting of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock at an exercise price of $0.12 per share.  The shares and warrants were sold in units with each unit comprised of one share and one warrant at a purchase price of $.045 per unit.  The company sold 1,111,111 units and raised $50,000 as of the date of this report.

 

On February 1, 2013, an investor exercised a warrant to purchase 1 million shares of the Company’s common stock that raised $10,000 for the Company.

 

In February and March 2013, four investors exercised options to purchase 3,335,000 shares of the Company’s common stock that raised $17,919 for the Company.

 

Since our inception, we have focused on developing and implementing our business plan.  Our business plan is dependent on our ability to raise capital through private placements of our common stock and/or preferred stock, through the possible exercise of outstanding options and warrants, through debt financing and/or through a future public offering of our securities. There is no assurance that we will raise sufficient capital in order to meet our goals of implementing a sales and marketing effort to introduce our products.  We believe that our existing cash resources will be sufficient to sustain our operations during the next twelve months, however, we may need to raise additional funds in the future.  We intend to raise such financing through private placements and/or the sale of debt and equity securities.  The issuance of additional equity would result in dilution to our existing shareholders.  If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.

 

Even if we are successful in raising sufficient capital, our ability to continue in business as a viable going concern can only be achieved when our revenues reach a level that sustains our business operations. While it is impossible to predict the amount of revenues, if any, that we may receive from our products, we presently believe, based solely on our internal projections, that we will generate revenues sufficient to fund our planned business operations if the products are marketed effectively in accordance with our plans.  There can be no assurance that we will raise sufficient proceeds, or any proceeds, for us to implement fully our proposed business plan.  Moreover, there can be no assurance that even if our products are marketed effectively, that we will generate revenues sufficient to fund our operations.  In either situation, we may not be able to continue our operations and our business might fail.

 

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Off-Balance Sheet Arrangements

 

As of September 30, 2013, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Critical Accounting Policies

 

Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.

 

Stock-based Compensation

 

We account for stock-based compensation under the provisions of FASB ASC Topic 718,  Compensation—Stock Compensation   (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.

 

We account for stock-based compensation awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees   (“ASC 505-50”). Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

 

All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Any stock options issued to non-employees are recorded as an expense and additional paid-in capital in stockholders’ equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each period.

 

Revenue Recognition

 

In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition (Codified in FASB ASC 605), we recognize revenue when (i) persuasive evidence of a customer or distributor arrangement exists, (ii) a retailer, distributor or wholesaler receives the goods and acceptance occurs, (iii) the price is fixed or determinable, and (iv) collectibility of the sales revenues is reasonably assured. Subject to these criteria, the Company recognizes revenue from product sales, consisting mainly of pigments and penlights, upon shipment to the customer.  Royalty revenue is recognized upon receipt of notification from a customer that the Company’s product has been used in the customer’s production process.

 

Recently Issued Accounting Pronouncements

 

Recently issued accounting pronouncements are discussed in Note 1 of the Notes to Consolidated Financial Statements contained elsewhere in this report.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

 

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ITEM 4. CONTROLS AND PROCEDURES.

 

As of September 30, 2013, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer.  Based upon that evaluation, our Chief Executive Officer concluded that, as of September 30, 2013, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.

 

We have added controls relative to contractual legal documents to facilitate better internal control over financial reporting identified in connection with the evaluation that occurred during our fiscal quarter ended September 30, 2013.

 

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PART II – OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

     
     
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS     XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

LASERLOCK TECHNOLOGIES, INC.

 

Date: November 19, 2013 By:  /s/ Neil Alpert  
    Neil Alpert  
    Chief Executive Officer

 

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