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EX-32.2 - EXHIBIT 32.2 - VerifyMe, Inc.ex32-2.htm
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EX-32.1 - EXHIBIT 32.1 - VerifyMe, Inc.ex32-1.htm

 


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 June 30, 2013
 
o 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)
 
837 Lindy Lane
Bala Cynwyd, PA 19004
(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 o
 
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 o
 
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
o
Accelerated file
o
Non-accelerated filer
o
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 o 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 August 12, 2013.
 
 
 

 

 
 
 
 

 

 
 
 
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 - 24
 
 
 

 


LaserLock Technologies, Inc. and Subsidiary
 (A Development Stage Enterprise)
June 30, 2013 and December 31, 2012
             
   
June 30, 2013
   
December 31, 2012
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 2,871,840     $ 2,994,350  
Accounts receivable, net of allowance of $0 at June 30, 2013 and December 31, 2012
    6,613       3,473  
Inventory
    39,434       19,980  
Prepaid expenses
    469,737       750,000  
                 
TOTAL CURRENT ASSETS
    3,387,624       3,767,803  
                 
PROPERTY AND EQUIPMENT
               
Capital equipment
    236,026       34,964  
Less accumulated depreciation
    57,326       32,624  
      178,700       2,340  
                 
OTHER ASSETS
               
Deposits
    37,197       -  
Patents and Trademark, net of accumulated amortization of $98,839 and $92,302 as of June 30, 2013 and December 31, 2012
    127,249       311,832  
      164,446       311,832  
                 
TOTAL ASSETS
  $ 3,730,770     $ 4,081,975  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
  $ 381,977     $ 660,493  
Accrued interest
    14,667       97,563  
Notes payable
    50,000       200,000  
                 
TOTAL CURRENT LIABILITIES
    446,644       958,056  
                 
LONG-TERM LIABILITIES
               
Embedded derivative liability
    1,000,000       -  
Warrant liability
    18,176,165       2,400,000  
Accrued interest
    865,174       975,559  
Senior secured convertible notes payable
    550,249       775,249  
Convertible notes payable
    98,000       140,000  
Notes payable, net of discount of $11,154 and $13,632 as of June 30, 2013 and December 31, 2012
    699,846       697,368  
                 
TOTAL LONG-TERM LIABILITIES
    21,389,434       4,988,176  
                 
CONTINGENCIES
               
                 
STOCKHOLDERS DEFICIT
               
 
               
Convertible Preferred Stock, $ .001 par value; 75,000,000 shares authorized; 33,333,333 shares issued and outstanding as of June 30, 2013 and no shares issed and outstanding at December 31, 2012
    1,000,000       -  
                 
Common stock, $ .001 par value; 675,000,000 shares authorized; 275,665,122 shares issued and 245,869,220 outstanding at June 30, 2013 and 248,244,012 shares issued and 218,448,109 outstanding at December 31, 2012
    275,665       248,244  
                 
Additional paid in capital
    20,785,654       11,387,929  
                 
Treasury stock, at cost (29,795,903 shares at June 30, 2013 and December 31, 2012)
    (113,389 )     (113,389 )
                 
Deficit accumulated during the development stage
    (40,053,238 )     (13,387,041 )
                 
STOCKHOLDERS’ DEFICIT
    (18,105,308 )     (1,864,257 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 3,730,770     $ 4,081,975  
 
See the accompanying notes to these condensed consolidated financial statements.
 
-1-
 

 


LaserLock Technologies, Inc. and Subsidiary
 (A Development Stage Enterprise)
For the Three and Six Months Ended June 30, 2013 and 2012
And for the Period November 10, 1999 (Date of Inception) to June 30, 2013
                               
         
Three Months
   
Three Months
   
Six Months
   
Six Months
 
   
Cumulative
   
Ended
   
Ended
   
Ended
   
Ended
 
   
Since
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
Inception
   
2013
   
2012
   
2013
   
2012
 
                               
NET REVENUES
                             
Sales
  $ 464,295     $ -     $ -     $ 3,140     $ 3,740  
Royalties
    645,180       -       -       -       10,000  
                                         
TOTAL NET REVENUE
    1,109,475       -       -       3,140       13,740  
                                         
COST OF SALES
    431,741       -       -       2,710       2,036  
                                         
GROSS PROFIT
    677,734       -       -       430       11,704  
                                         
OPERATING EXPENSES
                                       
General and administrative
    1,812,367       170,699       35,297       269,008       70,987  
Legal and accounting
    1,706,874       55,651       79,462       168,088       169,809  
Patent costs
    65,000       -       -       -       -  
Payroll expenses (a)
    12,153,779       8,204,468       -       8,740,797       -  
Research and development
    1,179,767       162,819       2,123       311,975       3,380  
Sales and marketing
    5,124,233       52,197       51,954       104,501       100,262  
Total operating expenses
    22,042,020       8,645,834       168,836       9,594,369       344,438  
                                         
LOSS BEFORE OTHER INCOME
    (21,364,286 )     (8,645,834 )     (168,836 )     (9,593,939 )     (332,734 )
                                         
OTHER INCOME (EXPENSE)
                                       
Interest income
    63,665       1       1       1       1  
Interest expense
    (2,264,651 )     (32,978 )     (80,251 )     (74,219 )     (151,958 )
Loss on extinguishment of debt
    (1,221,875 )     (1,221,875 )     -       (1,221,875 )     -  
Change in fair value of warrants
    (12,780,374 )     (858,864 )             (12,780,374 )     -  
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       -       -       -       -  
      (18,853,952 )     (2,113,716 )     (80,250 )     (17,072,258 )     (151,957 )
                                         
LOSS BEFORE INCOME TAX BENEFIT
    (40,218,238 )     (10,759,550 )     (249,086 )     (26,666,197 )     (484,691 )
                                         
INCOME TAX BENEFIT
    (165,000 )     -       -       -       -  
                                         
NET LOSS
    (40,053,238 )   $ (10,759,550 )     (249,086 )     (26,666,197 )     (484,691 )
                                         
Less: Deemed dividend distribution
    (1,000,000 )     -       -       (1,000,000 )     -  
                                         
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
  $ (41,053,238 )   $ (10,759,550 )   $ (249,086 )   $ (27,666,197 )   $ (484,691 )
                                         
BASIC AND DILUTED NET LOSS PER COMMON SHARE
          $ (0.04 )   $ (0.00 )   $ (0.11 )   $ (0.00 )
                                         
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
            240,935,887       145,144,603       233,374,035       145,144,603  
 
(a) - includes share based compensation of $8,987,750 cumulative, $7,939,629 for the three months ended June 30,2013, $8,272,227 for the six months ended June 30, 2013 and $0 for the three and six months ended June 30, 2012
 
See the accompanying notes to these condensed consolidated financial statements.
 
-2-
 

 


LaserLock Technologies, Inc. and Subsidiary
 (A Development Stage Enterprise)
For the Period November 10, 1999 (Date of Inception) to June 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
    -       -       -       -       -       -       -       (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  

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) (Continued)
For the Period November 10, 1999 (Date of Inception) to June 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
    -       -       -       -       -       -       -       (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  
 
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) (Continued)
For the Period November 10, 1999 (Date of Inception) to June 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) (Continued)
For the Period November 10, 1999 (Date of Inception) to June 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 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 )
 
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) (Continued)
For the Period November 10, 1999 (Date of Inception) to June 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) (Continued)
For the Period November 10, 1999 (Date of Inception) to June 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  
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
    -       -       -       -       -       8,272,227       -       -       8,272,227  
Deemed dividend distribution
    -       -       -       -       -       (1,000,000 )     -       -       (1,000,000 )
Net loss for the year ended June 30, 2013
    -       -       -       -       -       -       -       (26,666,197 )     (26,666,197 )
                                                                         
Balance at June 30, 2013 (Unaudited)
    33,333,333     $ 1,000,000       245,869,220     $ 275,665     $ -     $ 20,785,654     $ (113,389 )   $ (40,053,238 )   $ (18,105,308 )

See the accompanying notes to these condensed consolidated financial statements.
 
-8-
 

 


LaserLock Technologies, Inc. and Subsidiary  
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2013 and 2012
And for the Period November 10, 1999 (Date of Inception) to June 30, 2013)
(Unaudited)

         
Six Months
   
Six Months
 
   
Cumulative
   
Ended
   
Ended
 
   
Since
   
June 30,
   
June 30,
 
   
Inception
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
  $ (40,053,238 )   $ (26,666,197 )   $ (484,691 )
Adjustments to reconcile net loss to net cash used in operating activities
                       
Fair value of options issued in exchange for services
    10,689,459       8,272,227       -  
Accretion of interest on deferred finance charges
    453,625       -       8,625  
Accretion of discount on notes payable
    445,714       2,478       2,478  
Change in fair value warrant liability
    12,780,374       12,780,374       -  
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
    570,804       40,749       5,560  
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
    (6,613 )     (3,140 )     -  
Inventory
    (39,434 )     (19,454 )     2,036  
Prepaid expenses
    (69,737 )     280,263       117,760  
Deposit
    (37,197 )     (37,197 )      
Increase in liabilities
               
Accounts payable and accrued expenses
    2,386,651       (220,671 )     244,445  
Net cash used in operating activities
  $ (8,392,170 )   $ (1,352,902 )   $ (103,787 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchase of property and equipment
    (48,682 )     (10,573 )     -  
Purchase of intangibles
    (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
    2,871,840       (122,510 )     93,807  
                         
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
    -       2,994,350       53,573  
                         
CASH AND CASH EQUIVALENTS - END OF PERIOD
  $ 2,871,840     $ 2,871,840     $ 147,380  

See the accompanying notes to these condensed consolidated financial statements.
 
-9-
 

 

 
LaserLock Technologies, Inc. and Subsidiary  
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows  (Continued)
For the Years Ended June 30, 2013 and 2012
And for the Period November 10, 1999 (Date of Inception) to June 30, 2013

         
Six Months
   
Six Months
 
   
Cumulative
   
Ended
   
Ended
 
   
Since
   
June 30,
   
June 30,
 
   
Inception
   
2013
   
2012
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
                 
Cash paid during the year for:
                 
Interest
  $ 53,336     $ 13,896     $ -  
                         
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 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
  $ 1,400,000     $ 1,000,000     $ -  
                         
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-
 

 

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 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, 2012 as filed with the Securities and Exchange Commission (the “SEC”).  Operating results for the six months ended June 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 accounting principles generally accepted in the United States 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 cash, accounts receivable, accounts payable and accrued expenses, embedded derivative, warrant liability and notes payable.  The carrying value of cash, 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.
 
-11-
 

 

 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and certificates of deposit and commercial paper with original maturities of 90 days or less to be cash or cash equivalents.
 
Concentration of Credit Risk Involving Cash and Cash Equivalents
The Company’s cash and cash equivalents are 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 five 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 $312 and $34,212 for the three and six months ended June 30, 2013 and $0 for the three and six months ended June 30, 2012.
 
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 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 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.
 
-12-
 

 

 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.
 
Income Taxes
The Company follows FASB ASC 740 when accounting for 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 ASC 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. 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 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 approximately $21,953 and $5,756 for the three and six months ended June 30, 2013 and $0 for the three and six months ended June 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 six months ended June 30, 2013 were $137,500 and $275,000 and $0 for the three and six months ended June 30, 2012.
 
-13-
 

 


NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, 2013 and 2012, common stock equivalents, including 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. In accordance with 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 ASC 280 can be found in the consolidated financial statements.

Recently Adopted Accounting Pronouncements
As of June 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.

Recently Issued Accounting Pronouncements Not Yet Adopted
As of June 30, 2013, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

NOTE 2 – 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 six months ended June 30, 2013, the Company capitalized patent costs of $3,511 and $21,594 and $0 and $2,406 for the three and six months ended June 30, 2012. Amortization expense for patents was $3,262 and $6,495 for the three and six months ended June 30, 2013 and $2,792 and $5,560 for the three and six months ended June 30, 2012. Future estimated annual amortization over the next five years is approximately $13,000 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 3 – INCOME TAXES
 
Income tax expense was $0 for the three and six months ended June 30, 2013 and 2012.
 
As of December 31, 2012, the Company had net operating loss carryforwards 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 six months ended June 30, 2013, and there was no accrual for uncertain tax positions as of June 30, 2013.  Tax years from 2009 through 2012 remain subject to examination by major tax jurisdictions.

There is no income tax benefit for the losses for the three and six months ended June 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-
 

 

 
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% 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 June 30, 2013 and December 31, 2012, the outstanding principal balance on these notes was $550,249 and $775,249.  Accrued interest at June 30, 2013 and December 31, 2012 amounted to $457,918 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.
 
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. 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 noteholder 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.

-15-
 

 


NOTE 5 - CONVERTIBLE NOTES PAYABLE (Continued)

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 June 30, 2013 and December 31, 2012, the remaining principal balance on the notes was $98,000 and $140,000.  Accrued interest at June 30, 2013 and December 31, 2012 amounted to $84,700 and $78,750.
 
NOTE 6 - NOTES PAYABLE
 
Notes payable consists of the following:
 
   
June 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
    (11,154 )     (13,632 )
      749,846       897,368  
                 
Less: Current portion
     50,000       200,000  
Long-term portion
  $ 699,846     $ 697,368  

At June 30, 2013 and December 31, 2012 accrued interest on notes payable was $337,223 and $394,281.

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.
 
-16-
 

 


NOTE 6 - NOTES PAYABLE (Continued)

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 .5 units, 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 June 30, 2013 and December 31, 2012, the unaccreted debt discount related to warrants issued in conjunction with the 8% Series A Notes payable was $11,154 and $13,632. For the three and six months ended June 30, 2013 accreted interest expense from the accretion of the debt discount was $1,239 and $2,478 and for the three and six months ended June 30, 2012, accreted interest expense from the accretion of the debt discount was $1,239 and $2,478. 

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.
 
-17-
 

 


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 12 - 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 two years.  For the three and six months ended June 30, 2013 and 2012 amortization of deferred finance charges was $0 and $4,312.

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     1,348,095  
  2016     -  
  2017     -  
 
-18-
 

 

 
NOTE 7 – 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, 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 June 30, 2013, the value of the warrants increased to $11,184,749 resulting in charges to expenses of $527,734 and $8,784,749 for the three and six months ended June 30. 2013.

NOTE 8 – 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.
 
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 FASB 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 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 June 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.

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 June 30, 2013, the value of the warrants increased to $6,991,416 resulting in an increase in expenses of $331,130 for the three months ended June 30, 2013 and a charge to expenses of $6,991,416 for the six months ended June 30, 2013.

-19-
 

 


NOTE 8 – CONVERTIBLE PREFERRED STOCK (Continued)
 
The Convertible Preferred Stock have 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.

NOTE 9 – STOCKHOLDERS’ EQUITY

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 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.

NOTE 10 – 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 March 31, 2013, there are 13,590,996 options that have been issued and exercised, 4,335,000 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.
 
-20-
 

 


NOTE 10 – STOCK OPTIONS AND WARRANTS (Continued)
 
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.
  
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 $3,766,850 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 $3,766,850 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 six months ended June 30, 2103 was $12,496 and $45,820.
 
-21-
 

 

NOTE 10 – STOCK OPTIONS AND WARRANTS (Continued)
 
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 of which $5,000 was expensed during the three months ended March 31, 2013 and the remainder will be expensed over the vesting terms.  The options were terminated during the three months ended June 30, 2013.  The total expense for the three and six months ended June 30, 2013 was $(5,000) and $0.
 
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 six months ended June 30, 2103 was $54,995 and $293,308.
 
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 $459,961 of which $229,981 was expensed immediately, an additional $57,495 was expensed during the three months ended June 30, 2013, and the remainder will be expensed over the vesting term.
 
A summary of incentive stock option transactions for employees since December 31, 2012 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
    43,500,000       0.05 - 0.15       0.04  
Exercised
    (900,000 )     0.00125       -  
Expired/Returned
    (500,000 )     0.05       -  
                         
Outstanding, June 30, 2013
    57,866,667     $ 0.05 to $0.15     $ 0.05  
                         
Exercisable, June 30, 2013
    50,116,667     $ 0.05 to $0.15     $ 0.06  
                         
                         
Weighted Average Remaining Life, Exercisable, June 30, 2013 (years)
    9.8                  
 
-22-
 

 

 
NOTE 10 – STOCK OPTIONS AND WARRANTS (Continued)
 
The following tables summarize non-employee stock option/warrant activity of the Company since December 31, 2012:
 
               
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, June 30, 2013
    117,516,665     $ 0.01 to $.20     $ 0.10  
                         
Exercisable, June 30, 2013
    117,516,665     $ 0.01 to $.20     $ 0.10  
                         
Weighted Average Remaining Life, Exercisable, June 30, 2013 (years)
    5.7                  
 
NOTE 11 - OPERATING LEASES
 
For the three and six months ended June 30, 2013 total rent expense under leases amounted to $12,344 and $18,344.  For the three and six months ended June 30, 2012 total rent expense under leases amounted to $0.  At June 30, 2013, the Company was obligated under various non-cancelable operating lease arrangements for property as follows:
 
       
2013
  $ 35,064  
2014
    71,766  
2015
    74,637  
2016
    31,605  
         
    $ 213,072  
 
-23-
 

 

 
NOTE 12 – RELATED PARTY TRANSACTIONS
 
At June 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 June 30, 2013 and December 31, 2012 one shareholder of the Company held $98,000 of convertible notes payable.
 
At June, 30, 2013, three shareholders of the Company held 661,000 of unsecured notes payable and at  December 31, 2012 two shareholders of the Company held $561,000 of unsecured notes payable.
 
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 $1,000 and $2,199 were incurred during the three and six months ended June 30, 2013 and $6,804 and $15,163 were incurred during the three and six months ended June 30, 2012.
 
NOTE 13 – MAJOR CUSTOMERS
 
During the six months ended June 30, 2013, the Company earned all of its revenue from one customer aggregating $3,140.  At June 30, 2013, amounts due from that customer included in trade accounts receivable were $3,140.  During the six months ended June 30, 2012, the Company earned all of its revenue from one customer aggregating $12,000.  At June 30, 2012, amounts due from that customer included in trade accounts receivable were $2,000.
 
NOTE 14 – 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 15 – SUBSEQUENT EVENTS
 
On August 5, 2013, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933, registering the distribution by one of its stockholders to its own stockholders of 44,444,444 shares of common stock and 87,777,777 shares of common stock underlying warrants, for an aggregate registration of 132,222,221 shares of common stock.
 
In August 2013, VerifyMe converted 12,222,222 shares of Preferred Stock into 12,222,222 shares of common stock.
 
-24-
 

 

 
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. 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.
 
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.
 
-25-
 

 

 
We have five issued patents and submitted three provisional applications relating to our technology. We also acquired the VerifyMe trademark and on April 15, 2013 launched the VerifyMe application in the Apple Store. The initial release was intended to raise awareness of the Company's digital authentication solutions. A new more sophisticated application is intended to be offered later in the year and will be placed in the Apple Store as an application for purchase. The Company’s 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 June 30, 2013 and 2012
 
The following discussion analyzes our results of operations for the three months ended June 30, 2013 and 2012. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.
 
-26-
 

 

 
 
Net 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, 2013 and 2012, we generated no net revenues.  Our net loss increased $10,510,464 to $10,759,550 for the three months ended June 30, 2013 compared to $249,086 for the three months ended June 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 three months ended June 30, 2013 and 2012, we incurred no costs of sales. 
 
General and Administrative Expenses
 
General and administrative expenses increased $135,402 to $170,699 for the three months ended June 30, 2013 from $35,297 for the three months ended June 30, 2012.  The increase is attributable to increases in depreciation of $34,000, insurance of $36,000, office expenses of $37,000, other operating expenses of $4,000 and payroll taxes of $12,000 and rent expense of $12,000.  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 decreased $23,811 to $55,651 for the three months ended June 30, 2013 from $79,462 for the three months ended June 30, 2012.   The decrease in legal and accounting fees between the periods was primarily related to the patent infringement lawsuit during the three months ended June 30, 2012, with no similar legal fees during the three months ended June 30, 2013.
 
Payroll Expenses
 
Payroll expenses were $8,204,468 for the three months ended June 30, 2013, an increase of $8,204,468 from $0 for the three months ended June 30, 2012.  The increase related to the hiring of eight additional employees as well as stock based compensation of $7,939,629 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 $7,534,000.
 
Research and Development
 
Research and development expenses were $162,819 and $2,123, respectively, for the three months ended June 30, 2013 and 2012, an increase of $160,696, of which $137,500 represented non-cash charges.  The increase in research and development expenses was due 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 June 30, 2013 were $52,197 as compared to $51,954 for the three months ended June 30, 2012, an increase of $243.   The expenses consisted largely of expenses for marketing the new technology associated with the patents and the new patent applications.
 
-27-
 

 

 
Interest Expense
 
During the three months ended June 30, 2013, the Company incurred interest expense of $32,978 as compared to $80,251 for the three months ended June 30, 2012, a decrease of $47,273. The decrease in interest expense was a result of a reduction in interest expense from 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 three months ended June 30, 2013, compared to $0 for the three months ended June 30, 2012.  The increase in interest expense was 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 June 30, 2013.
 
Change in  fair value of warrants
 
During the three months ended June 30, 2013, the Company incurred an unrealized loss on the market value of warrants of $858,864 as compared to $0 for the three months ended June 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 values of the warrants have increased because the stock price has risen and the difference between the warrant exercise price and the stock price has increased.
 
Comparison of the Six Months Ended June 30, 2013 and 2012
 
The following discussion analyzes our results of operations for the six months ended June 30, 2013 and 2012. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.
 
Net 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, 2013 and 2012, we generated $3,140 and $13,740 in net revenues.  Our net loss increased $26,181,506 to $26,666,197 for the six months ended June 30, 2013 compared to $484,691 for the six months ended June 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 six months ended June 30, 2013 and 2012, we incurred proprietary technology costs of sales of $2,710 and $2,036.
 
General and Administrative Expenses
 
General and administrative expenses increased $198,021 to $269,008 for the six months ended June 30, 2013 from $70,987 for the six months ended June 30, 2012.  The increase is attributable to increases in depreciation of $34,000, insurance of $71,000, office expenses of $48,000, other operating expenses of $10,000 and payroll taxes of $17,000 and rent expense of $18,000.  The increases primarily resulted from the hiring of employees and the opening of an office in Washington D.C.
 
-28-
 

 

 
Legal and Accounting
 
Legal and accounting fees decreased $1,721 to $168,088 for the six months ended June 30, 2013 from $169,809 for the six months ended June 30, 2012.   The decrease in legal and accounting fees between the periods was primarily related to the patent infringement lawsuit during the six months ended June 30, 2012, with similar legal fees being incurred for the Subscription Agreement entered into on January 31, 2013.
 
Payroll Expenses
 
Payroll expenses were $8,740,797 for the six months ended June 30, 2013, an increase of $8,740,797 from $0 for the six months ended June 30, 2012.  The increase related to the hiring of eight additional employees as well as stock based compensation of $8,272,227 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 $7,534,000.
 
Research and Development
 
Research and development expenses were $311,975 and $3,380, respectively, for the six months ended June 30, 2013 and 2012, an increase of $308,595, of which $275,000 represented non-cash charges.  The increase in research and development expenses was due 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 six months ended June 30, 2013 were $104,501 as compared to $100,262 for the six months ended June 30, 2012, an increase of $4,239.   The expenses consisted largely of expenses for marketing the new technology associated with the patents and the new patent applications.
 
Interest Expense
 
During the six months ended June 30, 2013, the Company incurred interest expense of $74,219, as compared to $151,958 for the six months ended June 30, 2012, a decrease of $77,739. The decrease in interest expense was 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 six months ended June 30, 2013, compared to $0 for the six months ended June 30, 2012.  The increase in interest expense was 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 six months ended June 30, 2013.
 
Change in  fair value of warrants
 
During the six months ended June 30, 2013, the Company incurred an unrealized loss on the market value of warrants of $12,780,374 as compared to $0 for the six months ended June 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 values of the warrants have increased because the stock price has risen and the difference between the warrant exercise price and the stock price has increased.
 
-29-
 

 

 
Fair value of warrants in excess of consideration for convertible preferred stock
 
During the six months ended June 30, 2013, the Company incurred an unrealized loss on the market value of warrants that were issued in excess of consideration for convertible preferred stock of $2,995,791 as compared to $0 for the six months ended March 31, 2012.  The loss resulted from the valuation of warrants associated with the Subscription Agreement entered into on January 31, 2013.
 
Liquidity and Capital Resources
 
As of the date of this report, we had cash on hand of approximately $2,600,000.
 
Net cash used in operating activities for the six months ended June 30, 2013 increased to $1,352,903 from $103,787 for the six months ended June 30, 2012, an increase of $1,249,116. 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 six months ended June 30, 2013 and $2,406 for the six months ended June 30, 2012, an increase of $30,121.
 
Net cash provided by financing activities was $1,262,919 and $200,000 respectively, for the six months ended June 30, 2013 and 2012.  The net cash provided by financing activities for the six months ended June 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 Company is in the development stage. During the six months ended June 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.
 
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.
 
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.
 
-30-
 

 

 
               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 was entitled to demand at any time on or after four months after December 31, 2012, that the Company file a registration statement relative to shares and warrants owned by VerifyMe and warrants held by Zaah Technologies, Inc. (“Zaah”).  If the Company did not file 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.
 
On July 3, 2013, the Company and VerifyMe entered into a Letter Agreement and Amendment to Registration Rights Agreement extending the deadline for the Company to file the demand registration statement to July 22, 2013. Under the terms of the agreement, VerifyMe and Zaah agreed to waive any and all penalties against the Company for failure to file the demand registration statement before July 22, 2013. In addition, the Company was notified that it is not required to register the warrants held by Zaah in the demand registration statement.

 

On July 22, 2013, the Company and VerifyMe entered into a Letter Agreement and Second Amendment to Registration Rights Agreement extending the deadline for the Company to file the demand registration statement to August 1, 2013. Under the terms of agreement, VerifyMe and Zaah agreed to waive any and all penalties against the Company for failure to file the demand registration statement before August 1, 2013.

 

The Company and VerifyMe agreed to file the demand registration statement on August 5, 2013 with no penalty to the Company for failure to file the demand registration statement in a timely manner.
 
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 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,
  
 
 (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
 
-31-
 

 

 
 
 (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 not 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.
 
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 six months ended June 30, 2013, the value of the warrants increased to $11,184,749 resulting in a charge to expenses of $8,784,749.
 
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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 $1million.

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.

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.  For the six months ended June 30, 2013, the value of the warrants increased to $6,991,416 resulting in a charge to expenses of $331,130.

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.
 
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.  
 
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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.
 
Off-Balance Sheet Arrangements
 
As of June 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.
 
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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 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
 
 ITEM 4. CONTROLS AND PROCEDURES.
 
As of June 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 and Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 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 and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
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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 June 30, 2013.
 
PART II – OTHER INFORMATION
 
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
 
On June 6, 2013, the company issued 7,400,000 shares of the company’s common stock for the retirement of three notes payable totalling $225,000 and accrued interest of $181,125. 
 
 
ITEM 6. EXHIBITS
 
3.1

Certificate of Amendment to Amended and Restated Articles of Incorporation of LaserLock Technologies, Inc., dated as of May 23, 2013 (filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 30, 2013 and incorporated herein by reference).

   
10.1 Nonqualified Stock Option Grant Agreement between LaserLock Technologies, Inc. and Michael Chertoff, dated as of May 4, 2013 (option grant on identical terms and for same amount of options as pursuant to agreement filed as an exhibit to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2013 and incorporated herein by reference).
   
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 Chief 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 Chief 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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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  14, 2013
 By: 
/s/ Scott A. McPherson
 
   
Scott A. McPherson
Chief Financial Officer
 
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