VerifyMe, Inc. - FORM 10-Q - August 29, 2012

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EX-31 - VerifyMe, Inc.ex311.htm
EX-32 - VerifyMe, Inc.ex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

☐ 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.)
         
  837 Lindy Lane Bala Cynwyd, PA     19004  
   (Address of Principal Executive Offices)   (Zip Code)  
         
   (610) 668-1952    
     (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 ☐ 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 ☐ 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  ☑ 
(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 ☑

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 145,144,603 shares of common stock outstanding at August 27, 2012.

 

 
 

PART I FINANCIAL INFORMATION  
       
ITEM 1.     Financial Statements     2
Condensed Consolidated Balance Sheets ( unaudited )    3
Condensed Consolidated Statements of Operations (Unaudited)    4
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)   5
Condensed Consolidated Statements of Cash Flows (Unaudited)     6
Condensed Consolidated notes to financial statements( Unaudited ) 7
ITEM 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 21
ITEM 4.     Controls and Procedures     21
       
PART II OTHER INFORMATION  
       
ITEM 6.     Exhibits     22
SIGNATURES      23

 

1
 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)     3
                 
                 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)     4
                 
                 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited) 5
                 
                 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)     6
                 
                 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     7

 

 

2
 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Balance Sheets

June 30, 2012 and December 31, 2011

 

            June 30, 2012   December 31, 2011
            (Unaudited)    
Assets              
                 
CURRENT ASSETS            
Cash and cash equivalents       $                         147,380 $                         53,573
Inventory         33,101   35,137
Deferred finance charges         5,000                              13,625
Prepaid expenses                                               -                            117,760
                 
TOTAL CURRENT ASSETS       $                           185,481 $                          220,095
                 
PROPERTY AND EQUIPMENT                  
Capital equipment         32,604   32,604
Less accumulated depreciation         32,604   32,604
                                                -                                       -  
                 
Patent costs, net of accumulated amortization of $84,411 and $78,851 as of June 30, 2012 and December 31, 2011     115,464   118,618
                 
TOTAL ASSETS       $                    300,945 $                      338,713
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT          
                 
CURRENT LIABILITIES              
Accounts payable and accrued expenses     $                     1,828,298 $                1,583,853
Notes payable                                   250,000                              50,000
                 
TOTAL CURRENT LIABILITIES                                2,078,298                         1,633,853
                 
LONG-TERM LIABILITIES              
Senior secured convertible notes payable                                   781,500                            781,500
Convertible notes payable         140,000                            140,000
Notes payable, net of discount of $16,111 and $18,589 as of              
  June 30, 2012 and December 31, 2011                                1,094,889                         1,092,411
                 
TOTAL LONG-TERM LIABILITIES                              2,016,389                         2,013,911
                 
CONTINGENCIES              
                 
STOCKHOLDERS' DEFICIT              
                 
Preferred Stock, $ .001 par value; 75,000,000 shares authorized;              
   no shares issued and outstanding                                               -                                       -
Common stock, $ .001 par value; 175,000,000 shares authorized;               
   174,940,506 shares issued and 145,144,603 outstanding at                   
   June 30, 2012 and December 31, 2011         174,940   174,940
                 
Additional paid in capital         8,817,382   8,817,382
                 
Treasury stock (29,795,903 shares at June 30, 2012  and December 31, 2011)                                 (113,389)                          (113,389)
                 
Deficit accumulated during the development stage                          (12,672,675)                   (12,187,984)
                 
STOCKHOLDERS' DEFICIT                            (3,793,742)                     (3,309,051)
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT   $                     300,945 $                   338,713

 

See the accompanying notes to the condensed consolidated financial statements.

 

3
 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited)

For the Three and Six Months Ended June 30, 2012 and 2011

And for the Period November 10, 1999 (Date of Inception) to June 30, 2012 

 

        Three Months   Three Months   Six Months   Six Months
    Cumulative   Ended   Ended   Ended   Ended
     Since   June 30,   June 30,   June 30,   June 30,
    Inception   2012   2011   2012   2011
                     
NET REVENUES                    
Sales $                        457,866 $                       - $                       - $                  3,740 $                   900
Royalties                             645,180                             -   3,690   10,000   5,580
                     
TOTAL NET REVENUE                          1,103,046                             -                    3,690                    13,740                    6,480
                     
COST OF SALES                             426,984                             -                           -   2,036   373
                     
GROSS PROFIT                             676,062                             -                    3,690                    11,704                    6,107
                     
OPERATING EXPENSES                    
      Research and development                             865,752                     2,123                    5,050   3,380                    5,050
      Patent costs                               65,000                             -                           -                              -                           -
      Legal and Accounting                          1,431,821                   79,462                  34,630   169,809   44,599
      Sales and Marketing                          5,531,231                   51,954                103,000   100,262   154,778
      General and administrative                          3,807,542                   35,297                    91,381   70,987     131,162
    Total operating expenses                        11,701,346                 168,836                234,061                  344,438                335,589
                     
LOSS BEFORE OTHER INCOME                      (11,025,284)               (168,836)              (230,371)                (332,734)              (329,482)
                     
OTHER INCOME (EXPENSE)                    
Interest income                               63,664                            1                           7                             1   58
Interest expense                        (2,065,019)                 (80,251)                (84,295)                (151,958)              (168,468)
Gain on debt forgiveness                             184,242                             -                184,242                              -                184,242
Gain on disposition of assets                                 4,722                             -                           -                              -                           -
                         (1,812,391)                 (80,250)                  99,954                (151,957)                  15,832
                     
LOSS BEFORE INCOME TAX BENEFIT                      (12,837,675)               (249,086)              (130,417)                (484,691)              (313,650)
                     
INCOME TAX BENEFIT                           (165,000)                             -                           -                              -                           -
                     
NET LOSS $                  (12,672,675) $          (249,086) $        (130,417) $  $          (484,691) $         (313,650)
                     
BASIC AND DILUTED NET LOSS PER                    
    COMMON SHARE     $              (0.00) $              (0.00) $              (0.00) $              (0.00)
                     
BASIC AND DILUTED WEIGHTED AVERAGE                    
    COMMON SHARES OUTSTANDING              145,144,603         138,343,237           145,144,603         147,008,538

 

 

See the accompanying notes to the condensed consolidated financial statements.

 

4
 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)

For the Period November 10, 1999 (Date of Inception) to June 30, 2012

 

            Deficit  
  Common       Accumulated   
  Stock   Deferred Additional During the  
   Number of    Treasury Consulting Paid-In Development  
   Shares  Amount Stock Fees Capital 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                         -                      -                     -                -                       -                (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                         -                      -                     -                -                       -              (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                         -                      -                     -                -                       -           (1,052,299)        (1,052,299)
               
Balance, December 31, 2001         16,957,867            16,958                     -                -        2,477,450           (1,474,241)          1,020,167
               
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)    
             (1,000,000)            (1,000)                     -                -          (353,000)                           -           (354,000)
Net loss                         -                      -                           -           (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                          -                      -                     -                -                       -           (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                          -                      -                     -                -                       -           (1,406,506)        (1,406,506)
               
Balance, December 31, 2004         60,590,506            60,590                     -                -        5,903,685           (5,183,620)             780,655
               
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)
               
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 Decemberr 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)
               
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       (113,389)                -        8,817,382         (12,187,984)        (3,309,051)
               
Net loss for the six months ended June 30, 2012                         -                      -                     -                -                       -              (484,691)           (484,691)
               
Balance at June 30, 2012       145,144,603 $       174,940 $    (113,389) $             - $     8,817,382 $      (12,672,675) $     (3,793,742)

 

 

 

See the accompanying notes to the condensed consolidated financial statements.

 

5
 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30, 2012 and 2011

And for the Period November 10, 1999 (Date of Inception) to June 30, 2012

 

 

      Six Months  Six Months
   Cumulative  Ended  Ended
   Since  June 30,  June 30,
   Inception  2012  2011
CASH FLOWS FROM OPERATING ACTIVITIES         
Net cash used in operating activities  $(6,775,995)  $(103,787)  $(151,931)
                
CASH FLOWS FROM INVESTING ACTIVITIES               
Purchase of property and equipment   (35,749)   —      —   
Purchase of intangibles   (219,875)   (2,406)   —   
Proceeds from sale of assets   6,738    —      —   
                
Net cash used in investing activities   (248,886)   (2,406)   —   
                
CASH FLOWS FROM FINANCING ACTIVITIES               
Proceeds from issuance of common stock   4,491,447    —      400,000 
Proceeds from exercise of stock options   242,369    —      10,000 
Proceeds from issuance of stock options   15,000    —      —   
Proceeds from exercise of warrants   55,500    —      —   
Proceeds from issuance of notes payable   2,789,000    200,000    —   
Repayments of notes payable   (196,500)   —      (33,500)
 Payment for treasury stock   (17,795)   —      (17,795)
Debt issuance costs   (62,000)   —      —   
Stock issuance costs   (144,760)   —      (40,000)
                
Net cash provided by financing activities   7,172,261    200,000    318,705 
                
NET INCREASE IN CASH AND               
CASH EQUIVALENTS   147,380    93,807    166,774 
                
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD   —      53,573    77,330 
                
CASH AND CASH EQUIVALENTS - END OF PERIOD  $147,380   $147,380   $244,104 
                
SUPPLEMENTAL DISCLOSURE OF NON-CASH               
INVESTING AND FINANCING ACTIVITIES:               
Cash paid during the year for:               
Interest  $39,440   $—     $1,125 
                
 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  $312,041   $—     $—   
                
Fair value of beneficial conversion option  $400,000   $—     $—   
                
Fair value of warrants issued as debt discount  $78,043   $—     $21,275 
                
Issuance of common stock for stock issuance costs  $2,100   $—     $2,100 
                
Issuance of options as stock cost for treasury stock  $5,594   $—     $5,594 

 

 

See the accompanying notes to the condensed consolidated financial statements.

6
 

 

LaserLock Technologies, Inc. and Subsidiaries

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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 generally accepted accounting principles 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, 2011 as filed with the Securities and Exchange Commission.  Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

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 loss, comprehensive loss is equal to net loss.

 

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses and notes payable.  The carrying value of cash, accounts receivable, accounts payable and accrued expenses 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 classifies the fair value of its notes payable and convertible debt within level 2 of the fair value hierarchy based on observable inputs used to estimate fair value.

 

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.  Because the Company reported a net loss for the three and six months ended June 30, 2012 and 2011, common stock equivalents, including convertible debt, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same.

 

Segment Information

The Company is organized and operates as one operating segment wherein the Company’s patented technologies are utilized to address counterfeiting issues primarily in the gaming industry. 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.  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 condensed consolidated financial statements. 

 

 

 

7
 

 

 

LaserLock Technologies, Inc. and Subsidiaries

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recently Adopted Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04 (“ASC Update 2011-04”), Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. This ASU is intended to update the fair value measurement and disclosure requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements.  Some of the amendments clarify the Board’s intent about application of existing fair value measurement requirements, while others change a particular principle or requirement for measuring or disclosing fair value measurement information.  The amendments in this update are for interim and annual periods beginning after December 15, 2011.  The Company adopted the provisions of this ASU, and the required changes in presentation and disclosure requirements have been included in the June 30, 2012 financial statements.  The adoption did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

As of June 30, 2012, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

 

NOTE 2 – GOING CONCERN

 

The accompanying condensed consolidated 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 during the development stage. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Since inception, the Company has focused on developing and implementing our business plan. The Company has not recently paid salaries to management and is utilizing subcontractors on a work for hire basis to continue the operations of the Company. The Company believes that its existing cash resources will not be sufficient to sustain operations during the next twelve months. The Company intends to raise funds through the sale of debt and equity securities. The issuance of additional equity would result in dilution to the 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.

 

Even if the Company is successful in raising sufficient capital to complete the development of its products, the Company’s ability to continue in business as a viable going concern can only be achieved when revenues reach a level that sustains business operations. If sufficient 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 June 30, 2012. Successful completion of the Company’s development program and, ultimately 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 debt financing or equity investment or achieve an adequate sales level.

 

8 
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 3 – PATENTS

 

The Company has five issued 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 years). Amortization expense for patents was $2,792 and $5,560 for the three and six months ended June 30, 2012, respectively. Amortization expense for patents was $2,715 and $5,431 for the three and six months ended June 30, 2011, respectively. Future estimated annual amortization for the remaining six months ending December 31, 2012 is $6,000. Future estimated annual amortization over the next five years is approximately $11,000 per year for the years ending December 31, 2013 through 2017.

 

NOTE 4 - 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% annum during the extension period. In June 2011, the due date of $90,000 of the notes was extended to September 2013, $95,000 of the notes was extended to September 2014 and the due date of $596,500 of the notes was extended to September 2015. The interest rate associated $762,500 of the extended notes in June 2011 is 10% per annum, while the remaining $19,000 is at 12% per annum. As of June 30, 2012 and December 31, 2011, the outstanding principal balance on these notes was $781,500. Accrued interest at June 30, 2012 and December 31, 2011 amounted to $560,930 and $521,665, respectively. Interest expense for the three and six months ended June 30, 2012 was $19,633 and $39,266, respectively. Interest expense for the three and six months ended June 30, 2011 was $24,000 and $48,000, respectively.

 

Purchasers of the notes were issued 8,000,000 10-year warrants exercisable into the Company’s shares of common stock 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, 2012, the Company has received $70,000 for the exercise of 7,000,000 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.

 

 

 

 

9
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 5 - 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. The Notes are unsecured.

 

In June 2011, the noteholder of the $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. Additionally, the noteholder agreed in writing to suspend its right to convert its notes until such time as the Company’s authorized shares have been increased. Remaining shares to be potentially issued under this convertible note issue are 26,250,000.

 

As of June 30, 2012 and December 31, 2011, the remaining principal balance on the notes was $140,000.  Accrued interest at June 30, 2012 and December 31, 2011 amounted to $71,750 and $64,750, respectively. Interest expense for the three and six months ended June 30, 2012 and 2011 was $3,500 and $7,000 for both periods, respectively.

 

NOTE 6 - NOTES PAYABLE

 

Notes payable consists of the following:

 

 

June 30, 2012

December 31, 2011

Unsecured notes payable; interest at 10% per annum; principal and accrued interest due at maturity from April 2013 through September 2015 $761,000 $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

 400,000 400,000

 

Less: Debt discount

 (16,111) (18,589)
  1,344,889 1,142,411
Less: Current portion     250,000      50,000
Long-term portion $1,094,889 $1,092,411
     

 

10
 

  

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 6 – NOTES PAYABLE (Continued)

 

At June 30, 2012 and December 31, 2011, accrued interest on notes payable was $457,398 and $362,806. Interest expense for the three and six months ended June 30, 2012 was $51,567 and $94,592, respectively. Interest expense for the three and six months ended June 30, 2011 was $41,942 and $86,592, respectively.

 

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 six units. Each unit consists of a $50,000, 8% Series A Note Payable, due September 30, 2011, and a non-detachable warrant to purchase two million shares of the Company’s common stock. During 2009, the Company sold four units, issued $200,000 of 8% Series A Notes Payable, issued eight million warrants, and raised $180,000, net of commission of $20,000. In January 2010, the Company sold 0.5 units, issued $25,000 of 8% Series A Notes Payable, issued one 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. For the three and six months ended June 30, 2011, amortization of deferred finance charges was $7,682 and $15,724, respectively. No amortization was recorded for the three and six months ended June 30, 2012, since the deferred finance charges were fully amortized as of December 31, 2011.

 

In June 2011, the maturity date on the $150,000 of the 8% Series A Notes Payable and the term on the associated six 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 six 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 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 are 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 June 30, 2012 and December 31, 2011, the unaccreted debt discount related to warrants issued in conjunction with the 8% Series A Notes payable was $16,111 and $18,589, respectively. For the three and six months ended June 30, 2012, interest expense from the accretion of the debt discount was $1,239 and 2,478, respectively. For the three and six months ended June 30, 2011, interest expense from the accretion of the debt discount was $4,910 and $9,820, respectively.

 

 

 

11
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 6 – NOTES PAYABLE (Continued)

 

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 10 - 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.

 

  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 the life of the notes payable. For the three and six months ended June 30, 2012 and 2011, amortization of deferred finance charges was $4,313 and $8,625 for both periods, respectively.

 

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:

 

       

2012 $50,000  
2013 690,000  
2014 95,000  
2015 1,447,500  
2016 -  

 

12
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

  

 

NOTE 7 – 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 June 30, 2012, there were 3,100,000 options that had been issued and exercised, 13,625,996 options that had been issued and were unexercised, and 1,274,004 options that were 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.

 

 

13
 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 7 – STOCK OPTIONS AND WARRANTS (Continued)

 

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    15,385,996     $.00125 to $.20    $0.01 
                  
 Granted    —      —      —   
 Exercised    —      —      —   
 Expired    —      —      —   
                  
 Outstanding, June 30, 2012    15,385,996    $.00125 to $.20   $0.01 
                  
 Exercisable, June 30, 2012    15,385,996    $.00125 to $.20   $0.01 
                  
 Weighted Average Remaining Life,                
  Exercisable, June 30, 2012 (years)    5.9           
                  
                  

 

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

 

 

         Weighted Average
   Option  Exercise  Exercise
   Shares  Price  Price
                  
                  
 Outstanding, December 31, 2011    6,390,000   $0.00125   $0.00125 
                  
 Granted    —      —      —   
 Exercised    —      —      —   
 Expired/Returned    —      —      —   
                  
 Outstanding, June 30, 2012    6,390,000   $0.00125   $0.00125 
                  
 Exercisable, June 30, 2012    6,390,000   $0.00125   $0.00125 
                  
 Weighted Average Remaining Life,                
  Exercisable, June 30, 2012 (years)    8.8           
                  

 

14
 

 

 

LaserLock Technologies, Inc. and Subsidiary

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

At June 30, 2012 and December 31, 2011, five shareholders of the Company held $577,500 of the senior secured convertible notes payable.

 

One shareholder held $140,000 of convertible notes payable as of June 30, 2012 and December 31, 2011.

 

At June 30, 2012, three shareholders of the Company held $836,500 of unsecured notes payable. At December 31, 2011, two shareholders of the Company held $636,500 of unsecured notes payable.

 

The Company maintains its office at the home of its Chief Executive Officer and President. No formal lease agreement exists and no direct rent expense has been incurred. However, related occupancy costs of $6,804 and $15,163 were incurred during the three and six months ended June 30, 2012, respectively. Occupancy costs for the three and six months ended June 30, 2011 were $2,917 and $5,903, respectively.

 

NOTE 9 – MAJOR CUSTOMERS AND VENDORS

 

During the six months ended June 30, 2012, the Company earned a substantial portion of its revenue from one customer totaling $12,000. During the six months ended June 30, 2011, the Company earned a substantial portion of its revenue from two customers totaling $5,580 and $900, respectively.

 

NOTE 10 – 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.

 

NOTE 11 – SUBSEQUENT EVENTS

 

Options

In July 2012, the Company issued an option to purchase 200,000 shares of the Company’s common stock at an exercise price of $0.05, with a term of ten years, to a consultant in exchange for future services.

 

Employment Agreement

The Chief Executive Officer’s employment agreement was extended to November 2017, with an increase in salary from $180,000 to $220,000 effective July 2012. In addition, the Company will continue to pay all ongoing expenses for the property location of the corporate headquarters, which is owned by the Chief Executive Officer.

 

 

15
 

 

 

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 our Annual Report on Form 10-K for the year ended December 31, 2011 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

 

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

 

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 - e.g., 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.

 

We have filed a total of five patent applications relating to our technology, which have all been issued. 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. We believe that some of our patents may have non-security applications and we are attempting to commercialize these opportunities.

 

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 raise additional financing in order 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 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 June 30, 2012 and 2011

 

The following discussion analyzes our results of operations for the three months ended June 30, 2012 and 2011. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.

 

Net Loss for Three Months Ended June 30, 2012 and 2011

 

Revenue/Net Loss

 

We are a development stage company and have not generated significant revenue since our inception.  For the three months ended June 30, 2012 and 2011, we generated revenues of $0 and $3,690, respectively.  Our net loss increased $118,669 to $249,086 for the three months ended June 30, 2012 compared to $130,417 for the three months ended June 30, 2011, as a result of increased expenses as further described below.

 

Cost of Sales

 

For the three months ended June 30, 2012 and 2011, we incurred costs of sales of $0.

 

Research and Development

 

Research and development expenses were $2,123 and $5,050, respectively, for the three months ended June 30, 2012 and 2011. The decrease in research and development expenses was due to the timing of research and development activities.

 

 

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Legal and Accounting

 

Legal and accounting fees increased $44,832 to $79,462 for the three months ended June 30, 2012 from $34,630 for the three months ended June 30, 2011.   The increase in legal and accounting fees in 2012 was primarily related to a patent infringement lawsuit as well as for preparation of filings to bring the Company back into compliance with the filing requirement under the Exchange Act.

 

Sales and Marketing

 

Sales and marketing expenses for the three months ended June 30, 2012 were $51,954 as compared to $103,000 for the three months ended June 30, 2011, a decrease of $51,046.   The expenses consisted largely of expenses associated with marketing the new technology associated with the SecureLight patent issued in 2011 and were reduced in 2012 as a result of cost conservation measures.  

 

General and Administrative

 

For the three months ended June 30, 2012 general and administrative expenses were $35,297, a decrease of $56,084 from $91,381 for the three months ended June 30, 2011.  The decrease resulted primarily from a decrease in insurance expense of $2,000, occupancy costs of $2,000, office expenses of $5,000 and payroll expenses of $48,000 related to share based compensation.

 

Interest Expense

 

During the three months ended June 30, 2012, the Company incurred interest expense of $80,251, as compared to $84,295 for the three months ended June 30, 2011. The decrease in interest expense directly correlates to the decrease in the interest rate negotiated for the extension of certain notes payable in June 2011.

 

Gain on Debt Forgiveness

 

During the three months ended June 30, 2011, the Company received a benefit of $184,242 in debt forgiveness, as compared to $0 for the three months ended June 30, 2012. This gain on debt forgiveness was the result of management’s negotiation with a vendor in the second quarter of 2011 to forgive amounts due that vendor.

 

Comparison of the Six Months Ended June 30, 2012 and 2011

 

The following discussion analyzes our results of operations for the six months ended June 30, 2012 and 2011. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.

 

Net Loss for Six Months Ended June 30, 2012 and 2011

 

Revenue/Net Loss

 

We are a development stage company and have not generated significant revenue since our inception.  For the six months ended June 30, 2012 and 2011, we generated revenues of $13,740 and $6,480.  Our net loss increased $171,041 to $484,691 for the six months ended June 30, 2012 compared to $313,650 for the six months ended June 30, 2011, as a result of increased expenses as further described below.

 

Cost of Sales

 

Cost of sales increased $1,663 to $2,036 for the six months ended June 30, 2012 compared to $373 for the six months ended June 30, 2011. The increase in cost of sales was due to an increase in revenue in 2012 compared to 2011.

 

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Research and Development

 

Research and development expenses were $3,380 and $5,050, respectively, for the six months ended June 30, 2012 and 2011. The decrease in research and development expenses was due to the timing of researching and development activities.

 

Legal and Accounting

 

Legal and accounting fees increased $125,210 to $169,809 for the six months ended June 30, 2012 from $44,599 for the six months ended June 30, 2011.   The increase in legal and accounting fees in 2012 was primarily related to a patent infringement lawsuit as well as for preparation of filings to bring the Company back into compliance with the filing requirement under the Exchange Act.

 

Sales and Marketing

 

Sales and marketing expenses for the six months ended June 30, 2012 were $100,262 as compared to $154,778 for the six months ended June 30, 2011, a decrease of $54,516.   The expenses consisted largely of expenses associated with marketing the new technology associated with the SecureLight patent issued in 2011 and were reduced in 2012 as a result of cost conservation measures.  

 

General and Administrative

 

For the six months ended June 30, 2012 general and administrative expenses were $70,987, a decrease of $60,175 from $131,162 for the six months ended June 30, 2011.  The decrease resulted primarily from a decrease in office expenses of $12,000, insurance expense of $10,000 and payroll expenses of $48,000 related to share based compensation, offset by an increase in occupancy costs of $9,000.

 

Interest Expense

 

During the six months ended June 30, 2012, the Company incurred interest expense of $151,958, as compared to $168,468 for the six months ended June 30, 2011, a decrease of $16,510. The decrease in interest expense directly correlates to the decrease in the interest rate negotiated for the extension of certain notes payable in June 2011.

 

Gain on Debt Forgiveness

 

During the six months ended June 30, 2011, the Company received a benefit of $184,242 in debt forgiveness, as compared to $0 for the six months ended June 30, 2012. This gain on debt forgiveness was the result of management’s negotiation with a vendor in the second quarter of 2011 to forgive amounts due that vendor.

 

Liquidity and Capital Resources

 

As of the date of this report, we had cash on hand of $96,150.

 

Net cash used in operating activities for the six months ended June 30, 2012 decreased to $103,787 from $151,931 for the six months ended June 30, 2011 a decrease of $48,144. The decrease in net cash used in operating activities is mainly due to related to increases in accounts payable and accrued expenses and a decrease in prepaid expenses.

 

Net cash used in investing activities, consisting of patent costs, was $2,406 for the six months ended June 30, 2012. There were no investing activities for the six months ended June 30, 2011.

 

Net cash provided by financing activities was $200,000 and $318,705, respectively, for the six months ended June 30, 2012 and 2011. The net cash provided by financing activities for the six months ended June 30, 2012 was a result of additional debt financing of $200,000 obtained during the six months ended June 30, 2012. The net cash provided by financing activities for the six months ended June 30, 2011 relates to $410,000 in proceeds received from the issuance of common stock and exercise of stock options, offset by payments of stock issuance costs of $40,000, repayments of notes payable of $33,500 and payment for treasury stock of $17,795.

 

In February 2006, the Company commenced a private placement of up to $800,000 principal amount of senior secured convertible promissory notes. As of June 30, 2012, $781,500 of these notes were outstanding. In June 2011, the due dates on these notes were extended as follows: $90,000 in September 2013; $95,000 in September 2014; $596,500 in September 2015. The interest rate associated with $762,500 of the notes is 10% per annum, while the remaining $19,000 of the notes is at 12% per annum. 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. Accrued interest on these notes at June 30, 2012 amounted to $560,930. 

 

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During 2007, the Company commenced a private placement of up to $400,000 principal amount of 10% Convertible Promissory Notes. As of June 30, 2012, the outstanding principal balance on the notes was $140,000.  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. The Notes are unsecured.

 

In June 2011, the noteholder of the $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. Additionally, the noteholder agreed in writing to suspend its right to convert its notes until such time as the Company’s authorized shares have been increased. Remaining shares to be potentially issued under this convertible note issue are 26,250,000.  Accrued interest on these notes at June 30, 2012 amounted to $71,750.

 

As of June 30, 2012, the Company has outstanding unsecured notes payable of $761,000, which bear interest at the rate of 10% per annum. In April 2012, $200,000 of these notes were issued with a maturity date of April 2013. During June 2011, the due date of $561,000 of these notes was extended to September 30, 2015. As of June 30, 2012, accrued interest on these notes payable amounted to $232,002.

 

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 warrant to purchase 2,000,000 shares of the Company’s common stock. The notes are unsecured. The Company sold 4.5 units under this private placement. As of June 30, 2012, $200,000 of these 8% Series A Notes Payable remain outstanding. In June 2011, $150,000 of the 8% Series A Notes Payable and the associated 6,000,000 warrants were extended to September 30, 2015. The remaining $50,000 was due in October 2011 and is currently past due. Accrued interest on the 8% Series A Notes Payable at June 30, 2012 amounted to $44,667.

 

In 2010, the Company issued $400,000 in notes payable in order to finance a patent infringement lawsuit (see Contingencies Note 10 to the 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.

 

  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.

 

Accrued interest on these 25% notes payable at June 30, 2012 amounted to $180,729.

 

The Company is in the development stage. During the six months ended June 30, 2012, the Company’s operational resources were used primarily to fund general and administrative expenses to continue operations and a significantly reduced sales and marketing program. 

 

As we have not realized significant revenues since our inception, we have financed our operations through public and 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.  

 

Since our inception, we have focused on developing and implementing our business plan.   Our business plans are 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 the products.  We believe that our existing cash resources will not be sufficient to sustain our operations during the next twelve months.  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 upon 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.

 

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Even if we are successful in raising sufficient capital in order to complete the marketing program for our products, 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.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2012, 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 Condensed Consolidated Financial Statements contained elsewhere in this report.

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

 

ITEM 4. CONTROLS AND PROCEDURES.

 

As of June 30, 2012, 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 and Principal Financial Officer. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that, as of June 30, 2012, our disclosure controls and procedures were not 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 and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure, because of the material weakness described below.

 

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected. A material weakness in the Company’s internal controls exists in that there is limited segregation of duties amongst the Company’s employees with respect to the Company’s preparation and review of the Company’s financial statements. This material weakness is a result of the Company’s limited number of personnel. This material weakness may affect management’s ability to effectively review and analyze elements of the financial statement closing process and prepare financial statements in accordance with U.S. GAAP.

 

There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 6. EXHIBITS

  
31.1Certification of Chief Executive Officer and 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.
  
32.1Certification of Chief Executive Officer and 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.INSXBRL Instance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
  
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRL 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: August 29, 2012 By: /s/ Norman A. Gardner

Norman A. Gardner

Chairman of the Board,

Chief Executive Officer,

and President

 

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VerifyMe, Inc. Reports