VRME 10-Q Quarterly Report Sept. 30, 2012 | Alphaminr
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VRME 10-Q Quarter ended Sept. 30, 2012

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Income Statement
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10-Q 1 t74828_10q.htm FORM 10-Q t74828_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
o QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
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.)
837 Lindy Lane Bala Cynwyd, PA
19004
(Address of Principal Executive
Offices) 		(Zip Code)
(610) 668-1952
(Registrant’s Telephone
Number, Including Area Code)
(Former Name, Former Address and Former Fiscal year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days). Yes o No þ
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 o No þ
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: 145,144,603 shares of common stock outstanding at October 31, 2012.
1
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
CONTENTS

PAGE
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ DEFICIT (Unaudited)
3 - 7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
8 - 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
10 - 19
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
September 30, 2012 and December 31, 2011

September 30, 2012
December 31, 2011
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$ 63,833 $ 53,573
Accounts receivable, net of allowance of $0 at
September 30, 2012 and December 31, 2011
3,473 -
Inventory
31,554 35,137
Deferred finance charges
1,063 13,625
Prepaid expenses
- 117,760
TOTAL CURRENT ASSETS
99,923 220,095
PROPERTY AND EQUIPMENT
Capital equipment
32,604 32,604
Less accumulated depreciation
32,604 32,604
- -
Patent costs, net of accumulated amortization of
$87,179 and $78,851 as of September 30, 2012
and December 31, 2011
112,696 118,618
TOTAL ASSETS
$ 212,619 $ 338,713
LIABILITIES AND STOCKHOLDERS ’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses
$ 1,882,437 $ 1,583,853
Notes payable
740,000 50,000
TOTAL CURRENT LIABILITIES
2,622,437 1,633,853
LONG-TERM LIABILITIES
Senior secured convertible notes payable
781,500 781,500
Convertible notes payable
140,000 140,000
Notes payable, net of discount of $14,872 and $18,589 as of
September 30, 2012 and December 31, 2011
606,128 1,092,411
TOTAL LONG-TERM LIABILITIES
1,527,628 2,013,911
CONTINGENCIES
STOCKHOLDERS ’ DEFICIT
Preferred Stock, $ .001 par value; 75,000,000 shares authorized;
no shares issued and outstanding
- -
Common stock, $ .001 par value; 175,000,000 shares authorized;
174,940,506 shares issued and 145,144,603 outstanding at
September 30, 2012 and December 31, 2011
174,940 174,940
Additional paid in capital
8,829,020 8,817,382
Treasury stock, at cost (29,795,903 shares at September 30, 2012
and December 31, 2011)
(113,389 ) (113,389 )
Deficit accumulated during the development stage
(12,828,017 ) (12,187,984 )
STOCKHOLDERS ’ DEFICIT
(3,937,446 ) (3,309,051 )
TOTAL LIABILITIES AND STOCKHOLDERS ’ DEFICIT
$ 212,619 $ 338,713
See the accompanying notes to the condensed consolidated financial statements.
-1-
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
For the Three and Nine Months Ended September 30, 2012 and 2011
And for the Period November 10, 1999 (Date of Inception) to September 30, 2012

Three Months
Three Months
Nine Months
Nine Months
Cumulative
Ended
Ended
Ended
Ended
Since
September 30,
September 30,
September 30,
September 30,
Inception
2012
2011
2012
2011
NET REVENUES
Sales
$ 461,155 $ 3,289 $ - $ 7,029 $ 900
Royalties
645,180 - 2,404 10,000 7,984
TOTAL NET REVENUE
1,106,335 3,289 2,404 17,029 8,884
COST OF SALES
429,031 2,047 - 4,083 373
GROSS PROFIT
677,304 1,242 2,404 12,946 8,511
OPERATING EXPENSES
Research and development
866,245 493 1,000 3,873 6,050
Patent costs
65,000 - - - -
Legal and Accounting
1,436,370 4,549 3,500 174,358 48,099
Sales and Marketing
5,586,694 55,463 51,274 155,725 206,052
General and administrative
3,826,453 18,911 28,289 89,898 159,451
Total operating expenses
11,780,762 79,416 84,063 423,854 419,652
LOSS BEFORE OTHER INCOME
(11,103,458 ) (78,174 ) (81,659 ) (410,908 ) (411,141 )
OTHER INCOME (EXPENSE)
Interest income
63,664 - - 1 58
Interest expense
(2,142,187 ) (77,169 ) (82,940 ) (229,126 ) (251,408 )
Gain on debt forgiveness
184,242 - - - 184,242
Gain on disposition of assets
4,722 - - - -
(1,889,559 ) (77,169 ) (82,940 ) (229,125 ) (67,108 )
LOSS BEFORE INCOME TAX BENEFIT
(12,993,017 ) (155,343 ) (164,599 ) (640,033 ) (478,249 )
INCOME TAX BENEFIT
(165,000 ) - - - -
NET LOSS
$ (12,828,017 ) $ (155,343 ) $ (164,599 ) $ (640,033 ) $ (478,249 )
BASIC AND DILUTED NET LOSS PER
COMMON SHARE
$ (0.00 ) $ (0.00 ) $ (0.00 ) $ (0.00 )
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING
145,144,603 145,144,603 145,144,603 146,387,227
See the accompanying notes to the condensed consolidated financial statements.
-2-
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
For the Period November 10, 1999 (Date of Inception) to September 30, 2012

Deficit
Common
Accumulated
Stock
Deferred
Additional
During the
Number of
Treasury
Consulting
Paid-In
Development
Shares
Amount
Stock
Fees
Capital
Stage
Total
Issuance of initial 4,278,000 shares on November 10, 1999
4,278,000 $ 4,278 $ - $ - $ 16,595 $ - $ 20,873
Issuance of shares of common stock in exchange for services
1,232,000 1,232 - - 35,728 - 36,960
Issuance of shares of common stock
2,090,000 2,090 - - 60,610 - 62,700
Stock issuance costs
- - - - (13,690 ) - (13,690 )
Net loss
- - - - - (54,113 ) (54,113 )
Balance, December 31, 1999
7,600,000 7,600 - - 99,243 (54,113 ) 52,730
Issuance of shares of common stock
5,449,999 5,450 - - 921,050 - 926,500
Issuance of shares of common stock in exchange for services
240,000 240 - (40,800 ) 40,560 - -
Stock issuance costs
- - - - (16,335 ) - (16,335 )
Fair value of non-employee stock options grants
- - - - 50,350 - 50,350
Amortization of deferred consulting fees
- - - 20,117 - - 20,117
Net loss
- - - - - (367,829 ) (367,829 )
Balance, December 31, 2000
13,289,999 13,290 - (20,683 ) 1,094,868 (421,942 ) 665,533
Issuance of shares of common stock
217,500 218 - - 77,723 - 77,941
Issuance of shares of common stock and stock options for
acquisition of subsidiary
2,000,000 2,000 - - 736,000 - 738,000
Issuance of stock options
- - - - 15,000 - 15,000
Exercise of options
1,450,368 1,450 - - 230,609 . 232,059
Fair value of non-employee stock options
- - - - 323,250 - 323,250
Amortization of deferred consulting fees
- - - 20,683 - - 20,683
Net loss
- - - - - (1,052,299 ) (1,052,299 )
Balance, December 31, 2001
16,957,867 16,958 - - 2,477,450 (1,474,241 ) 1,020,167
See the accompanying notes to the condensed consolidated financial statements.
-3-
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited) (Continued)
For the Period November 10, 1999 (Date of Inception) to September 30, 2012
Deficit
Common
Accumulated
Stock
Deferred
Additional
During the
Number of
Treasury
Consulting
Paid-In
Development
Shares
Amount
Stock
Fees
Capital
Stage
Total
Issuance of 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 the condensed consolidated financial statements.
-4-
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited) (Continued)
For the Period November 10, 1999 (Date of Inception) to September 30, 2012
Deficit
Common
Accumulated
Stock
Deferred
Additional
During the
Number of
Treasury
Consulting
Paid-In
Development
Shares
Amount
Stock
Fees
Capital
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 the condensed consolidated financial statements.
-5-
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited) (Continued)
For the Period November 10, 1999 (Date of Inception) to September 30, 2012
Deficit
Common
Accumulated
Stock
Deferred
Additional
During the
Number of
Treasury
Consulting
Paid-In
Development
Shares
Amount
Stock
Fees
Capital
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 the condensed consolidated financial statements.
-6-
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited) (Continued)
For the Period November 10, 1999 (Date of Inception) to September 30, 2012
Deficit
Common
Accumulated
Stock
Deferred
Additional
During the
Number of
Treasury
Consulting
Paid-In
Development
Shares
Amount
Stock
Fees
Capital
Stage
Total
Issuance of shares for services
1,000,000 1,000 - - 29,000 - 30,000
Contribution of common stock from related parties
(12,000,000 ) - (95,594 ) - 95,594 - -
Purchase of common stock for treasury
(17,795,903 ) - (17,795 ) - - - (17,795 )
Sale of common stock
15,500,000 15,500 - - 384,500 - 400,000
Issuance of shares for stock issuance costs
2,100,000 2,100 - - (2,100 ) - -
Stock issuance costs
- - - - (40,000 ) - (40,000 )
Exercise of options
1,000,000 1,000 - 9,000 - 10,000
Fair value of warrants issued in conjunction with debt financing
- - - - 21,275 - 21,275
Fair value of employee stock options
- - - - 47,658 - 47,658
Fair value of non-employee stock options
- - - 48,374 - 48,374
Net loss for the year ended December 31, 2011
- - - - - (665,113 ) (665,113 )
Balance at December 31, 2011
145,144,603 174,940 (113,389 ) - 8,817,382 (12,187,984 ) (3,309,051 )
Fair value of non-employee stock options
- - - 11,638 - 11,638
Net loss for the nine months ended September 30, 2012
- - - - - (640,033 ) (640,033 )
Balance at September 30, 2012
145,144,603 $ 174,940 $ (113,389 ) $ - $ 8,829,020 $ (12,828,017 ) $ (3,937,446 )
See the accompanying notes to the condensed consolidated financial statements.
-7-
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
For the Nine Months Ended September 30, 2012 and 2011
And for the Period November 10, 1999 (Date of Inception) to September 30, 2012)

Nine Months
Nine Months
Cumulative
Ended
Ended
Since
September 30,
September 30,
Inception
2012
2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities
$ (6,859,542 ) $ (187,334 ) $ (241,289 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment
(35,749 ) - -
Purchase of intangibles
(219,875 ) (2,406 ) (1,440 )
Proceeds from sale of assets
6,738 - -
Net cash used in investing activities
(248,886 ) (2,406 ) (1,440 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock
4,491,447 - 400,000
Proceeds from exercise of stock options
242,369 - 10,000
Proceeds from issuance of stock options
15,000 - -
Proceeds from exercise of warrants
55,500 - -
Proceeds from issuance of notes payable
2,789,000 200,000 -
Repayments of notes payable
(196,500 ) - (58,500 )
Payment for treasury stock
(17,795 ) - (17,795 )
Debt issuance costs
(62,000 ) - -
Stock issuance costs
(144,760 ) - (40,000 )
Net cash provided by financing activities
7,172,261 200,000 293,705
NET DECREASE IN CASH AND CASH EQUIVALENTS
63,833 10,260 50,976
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
- 53,573 77,330
CASH AND CASH EQUIVALENTS - END OF PERIOD
$ 63,833 $ 63,833 $ 128,306
See the accompanying notes to the condensed consolidated financial statements.
-8-
LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended September 30, 2012 and 2011
And for the Period November 10, 1999 (Date of Inception) to September 30, 2012
Nine Months
Nine Months
Cumulative
Ended
Ended
Since
September 30,
September 30,
Inception
2012 2011
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Cash paid during the year for:
Interest
$ 39,440 $ - $ 5,245
Income taxes
$ - $ - $ -
Return of shares of common stock related to
purchase price adjustment
Common stock
(1,000 ) - -
Additional paid-in capital
(353,000 ) - -
Intangible assets
$ (354,000 ) $ - $ -
Issuance of common stock and stock options
for acquisition of subsidiary
$ 738,000 $ - $ -
Proceeds from common stock sales applied directly
to debt and financing expenses repayment
$ 55,270 $ - $ -
Fair value of warrants issued for deferred finance charges
$ 392,376 $ - $ -
Fair value of stock issued for conversion of notes payable
$ 312,041 $ - $ -
Fair value of beneficial conversion option
$ 400,000 $ - $ -
Fair value of warrants issued as debt discount
$ 78,043 $ - $ 21,275
Issuance of common stock for stock issuance costs
$ 2,100 $ - $ 2,100
Issuance of options as stock cost for treasury stock
$ 5,594 $ - $ 5,594
See the accompanying notes to the condensed consolidated financial statements.
-9-
LaserLock Technologies, Inc. and Subsidiaries
(A Development Stage Enterprise)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements are presented in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 915 for development stage entities.  The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission.  Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012.
Comprehensive Income
The Company follows FASB ASC 220 in reporting comprehensive income.  Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.  Since the Company has no items of other comprehensive loss, comprehensive loss is equal to net loss.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses and notes payable.  The carrying value of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturities. The Company believes the carrying amount of its notes payable and convertible debt approximates its fair value based on rates and other terms currently available to the Company for similar debt instruments.  The Company classifies the fair value of its notes payable and convertible debt within level 2 of the fair value hierarchy based on observable inputs used to estimate fair value.
Loss Per Share
The Company follows FASB ASC 260 when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share.  Because the Company reported a net loss for the three and nine months ended September 30, 2012 and 2011, common stock equivalents, including convertible debt, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same.
Segment Information
The Company is organized and operates as one operating segment wherein the Company’s patented technologies are utilized to address counterfeiting issues primarily in the gaming industry. In accordance with FASB ASC 280, Segment Reporting, the chief operating decision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company.  Since the Company operates in one segment and provides one group of similar products, all financial segment and product line information required by FASB ASC 280 can be found in the consolidated financial statements.
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Adopted Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04 (“ASC Update 2011-04”), Amendments to AchieveCommon Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS . This ASU is intended to update the fair value measurement and disclosure requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements.  Some of the amendments clarify the Board’s intent about application of existing fair value measurement requirements, while others change a particular principle or requirement for measuring or disclosing fair value measurement information.  The amendments in this update are for interim and annual periods beginning after December 15, 2011.  The Company adopted the provisions of this ASU, and the required changes in presentation and disclosure requirements have been included in the September 30, 2012 condensed consolidated financial statements.  The adoption did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements Not Yet Adopted
As of September 30, 2012, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.
NOTE 2 – GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses and experienced negative cash flow during its development stage. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Since inception, the Company has focused on developing and implementing our business plan. The Company has not recently paid salaries to management and is utilizing subcontractors on a work for hire basis to continue the operations of the Company. The Company believes that its existing cash resources will not be sufficient to sustain operations during the next twelve months. The Company intends to raise funds through the issuance of debt and equity securities. The issuance of additional equity would result in dilution to the existing shareholders. If the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to the Company, the Company may be unable to execute upon its the business plan or pay costs and expenses as they are incurred, which could have a material adverse effect on its business, financial condition and results of operations.
Even if the Company is successful in raising sufficient capital to complete the development of its products, the Company’s ability to continue in business as a viable going concern can only be achieved when revenues reach a level that sustains business operations. If sufficient funding cannot be obtained in the short term, the Company will need to reduce monthly expenditures to a level that will enable the Company to continue until such funds can be obtained.
The Company is in the development stage at September 30, 2012. Successful completion of the Company’s development program and, ultimately the attainment of profitable operations are dependent upon future events, including obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company’s cost structure. However, there can be no assurances that the Company will be able to secure additional debt financing or equity investment or achieve an adequate sales level.
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
NOTE 3 – PATENTS
The Company has five issued patents for anti-counterfeiting technology. Accordingly, costs associated with the registration of these patents and legal defense have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents (17 years). Amortization expense for patents was $2,768 and $8,328 for the three and nine months ended September 30, 2012, respectively. Amortization expense for patents was $2,731 and $8,162 for the three and nine months ended September 30, 2011, respectively. Future estimated annual amortization for the remaining three months ending December 31, 2012 is approximately $3,000. Future estimated annual amortization over the next five years is approximately $11,000 per year for the years ending December 31, 2013 through 2017.
NOTE 4 - SENIOR SECURED CONVERTIBLE NOTES PAYABLE
In February 2006, the Company commenced a private placement of up to $800,000 principal amount of 10% senior secured convertible promissory notes due twelve months from the date of issue to certain Company shareholders and other accredited investors. As of December 31, 2006, the Company completed this private placement by selling all notes payable totaling $800,000. The notes are secured by a first priority lien on all of the tangible and intangible personal property of the Company. In May 2007, the due date of these notes was extended to August 2008 and the interest rate increased to 12% per annum during the extension period. In June 2011, the due date of $90,000 of the notes was extended to September 2013, $95,000 of the notes was extended to September 2014 and the due date of $596,500 of the notes was extended to September 2015. The interest rate associated with $762,500 of the extended notes in June 2011 is 10% per annum, while the remaining $19,000 is at 12% per annum. As of September  30, 2012 and December 31, 2011, the outstanding principal balance on these notes was $781,500. Accrued interest at September 30, 2012 and December 31, 2011 amounted to $580,563 and $521,665, respectively. Interest expense for the three and nine months ended September 30, 2012 was $19,633 and $58,898, respectively. Interest expense for the three and nine months ended September 30, 2011 was $21,763 and $69,763, respectively.
Purchasers of the notes were issued 8,000,000 10-year warrants exercisable into the Company’s shares of common stock at an exercise price of $0.01 per share. The warrants were valued at $392,376 and recorded as a debt discount on the notes payable. The Company used the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 169% and 284%, risk-free interest rate between 3.6% and 4.5% and expected warrant life of ten years. The deferred finance charges were amortized over one year, which was the original term of the notes. As of September 30, 2012, the Company has received $70,000 for the exercise of 7,000,000 of the warrants.
In addition, if an equity financing with total proceeds of more than $5,000,000 occurs while any notes are outstanding, holders of the 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.
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
NOTE 5 - CONVERTIBLE NOTES PAYABLE
During 2007, the Company commenced a private placement of up to $400,000 principal amount of 10% Convertible Promissory Notes originally due in August 2008 (the “Notes”). The Company raised $375,000 under this private placement in 2007 and the remaining $25,000 was raised in 2008. Holders of Notes will have the right, at their option, to convert the outstanding principal and interest of the Notes into shares of the Company’s Series A Preferred Stock at any time and from time to time at the option of the holder at the initial conversion price of $0.005333 per share. The Notes are unsecured.
In June 2011, the noteholder of the $140,000 under this convertible note issue agreed to extend the maturity date of these notes to September 30, 2015 at an interest rate of 10% per annum. Additionally, the noteholder agreed in writing to suspend its right to convert its note until such time as the Company’s authorized shares have been increased. Remaining shares to be potentially issued under this convertible note issue are 26,250,000.
As of September 30, 2012 and 2011, the remaining principal balance on the notes is $140,000.  Accrued interest at September 30, 2012 and December 31, 2011 amounted to $75,250 and $64,750, respectively. Interest expense for the three and nine months ended September 30, 2012 and 2011 was $3,500 and $10,500 for both periods, respectively.
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
NOTE 6 - NOTES PAYABLE
Notes payable consists of the following:
September 30,
2012
December 31, 2011
Unsecured notes payable; interest at 10% per annum; principal and accrued interest due at maturity from April 2013 through September 2015
$ 761,000 $ 561,000
Series A notes payable; interest at 8% per annum; principal and accrued interest due at extended maturity date in September 2015
150,000 150,000
Series A notes payable; interest at 8% per annum; principal and accrued interest due at maturity in October 2011 (past due)
50,000 50,000
Notes payable, interest at 25% per annum; principal and interest due September 2013
400,000 400,000
Less: Debt discount
(14,872 ) (18,589 )
1,346,128 1,142,411
Less: Current portion
740,000 50,000
Long-term portion
$ 606,128 $ 1,092,411
At September 30, 2012 and December 31, 2011, accrued interest on notes payable was $506,256 and $362,806, respectively. Interest expense for the three and nine months ended September 30, 2012 was $48,858 and $143,450, respectively. Interest expense for the three and nine months ended September 30, 2011 was $39,546 and $126,138, respectively.
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
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. For the three and nine months ended September 30, 2011, amortization of deferred finance charges was $3,550 and $10,649, respectively. No amortization was recorded for the three and nine months ended September 30, 2012, since the deferred finance charges were fully amortized as of December 31, 2011.
In June 2011, the maturity date on $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 relative fair value of the warrants issued in conjunction with the 8% Series A Notes Payable have been treated as a debt discount with an offsetting credit to additional paid-in capital. The debt discount related to the warrant issuances are being accreted to interest expense over the term of the notes. When the warrants were revalued the incremental amount of $21,275 was also treated as additional debt discount and is being accreted over the new term of the 8% Series A Notes Payable. As of September 30, 2012 and December 31, 2011, the unaccreted debt discount related to warrants issued in conjunction with the 8% Series A Notes payable was $14,872 and $18,589, respectively. For the three and nine months ended September 30, 2012, interest expense from the accretion of the debt discount was $1,239 and $3,717, respectively. For the three and nine months ended September 30, 2011, interest expense from the accretion of the debt discount was $6,149 and $16,176, respectively.
Private Placement of 25% Notes Payable
In 2010, the Company issued $400,000 in notes payable in order to finance a patent infringement lawsuit (see Note 10 - Contingencies to these condensed consolidated financial statements). The notes payable accrue interest at 25% per annum and mature upon the earlier of September 1, 2013 or the date on which the Company receives net proceeds from the patent infringement claim. In addition to the base interest of 25% per annum, the lenders are entitled to Bonus Interest equal to the following:
a.
First monies realized by the Company from its share of the net proceeds of the lawsuit shall be allocated and paid to the Lender until the principal and base interest accruing has been fully paid.
b.
The next monies from the net proceeds of the litigation settlement will be paid to the Company to reimburse for out-of-pocket legal costs related to the lawsuit.
c.
The next $825,000 of proceeds will be split 50%/50% between the Company and the Lenders.
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
NOTE 6 - NOTES PAYABLE (Continued)
d.
The next $1 million realized by the Company shall be allocated 90% to the Company and 10% to the Lenders.
e.
The next $1 million realized by Company shall be allocated 85% to Company and 15% to Lenders.
f.
All remaining proceeds realized by Company shall be allocated 80% to Company and 20% to Lenders.
The Lenders have a security interest in the Company’s patent infringement claim in which the Lender has the right to the net proceeds of this lawsuit to satisfy outstanding principal and interest under the notes.
As part of the private placement of the 25% notes payable, the Company incurred debt placement fees of $34,500 in 2010. These debt placement fees have been treated as deferred finance charges and are being amortized to interest expense over the life of the notes payable.  For the three and nine months ended September 30, 2012, amortization of deferred finance charges was $3,937 and $12,562, respectively.   For the three and nine months ended September 30, 2011, amortization of deferred finance charges was $4,313 and $12,938, respectively.
Aggregate Maturities of Long-term Debt
Aggregate maturities of the senior secured convertible notes, convertible notes and notes payable over the next five years are as follows:
2012 $ 50,000
2013 690,000
2014 95,000
2015 1,447,500
2016 -
NOTE 7 – STOCK OPTIONS AND WARRANTS
During 1999, the Board of Directors (“Board”) of the Company adopted, with the approval of the stockholders, a Stock Option Plan. In 2000, the Board superseded that plan and created a new Stock Option Plan, pursuant to which it is authorized to grant options to purchase up to 1.5 million shares of common stock. On December 17, 2003, the Board, with approval of the stockholders, superseded this plan and created the 2003 Stock Option Plan (the “Plan”). Under the Plan the Company is authorized to grant options to purchase up to 18,000,000 shares of common stock to the Company’s employees, officers, directors, consultants, and other agents and advisors. The Plan is intended to permit stock options granted to employees under the Plan to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan, which are not intended to qualify as Incentive Stock Options, are deemed to be non-qualified options (“Non-Statutory Stock Options”). As of September 30, 2012, there are 3,100,000 options that have been issued and exercised, 13,825,996 options that have been issued and are unexercised, and 1,074,004 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.
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
NOTE 7 – 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.
On July 16, 2012, the Company issued an option to purchase 200,000 shares of the Company’s common stock at an exercise price of $.05, with a term of ten years, to a consultant. The fair value of options issued was $11,638.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 133%, risk-free interest rate of 1.5% and expected option life of ten years. These options granted were fully vested as of the date of the agreement. As a result, the Company recorded $11,638 of consulting expense for the three and nine months ended September 30, 2012.
The following tables summarize non-employee stock option/warrant activity of the Company since December 31, 2011:

Weighted Average
Option/Warrant
Exercise
Exercise
Shares
Price
Price
Outstanding, December 31, 2011
15,385,996 $ .00125 to $.20 $ 0.01
Granted
200,000 0.05 0.05
Exercised
- - -
Expired
- - -
Outstanding, September 30, 2012
15,585,996 $ .00125 to $.20 $ 0.01
Exercisable, September 30, 2012
15,585,996 $ .00125 to $.20 $ 0.01
Weighted Average Remaining Life,
Exercisable, September 30, 2012 (years)
5.9
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
NOTE 7 – STOCK OPTIONS AND WARRANTS (Continued)
A summary of incentive stock option transactions for employees since December 31, 2011 is as follows:
Weighted Average
Option
Exercise
Exercise
Shares
Price
Price
Outstanding, December 31, 2011
6,390,000 $ 0.00125 $ 0.00125
Granted
- - -
Exercised
- - -
Expired/Returned
- - -
Outstanding, September 30, 2012
6,390,000 $ 0.00125 $ 0.00125
Exercisable, September 30, 2012
6,390,000 $ 0.00125 $ 0.00125
Weighted Average Remaining Life,
Exercisable, September 30, 2012 (years)
8.6
All employee option holders have agreed in writing to suspend their right to exercise their outstanding options until such time as the Company’s authorized shares have been increased. No consideration was required to be paid to the employee option holders resulting from this agreement.
NOTE 8 – RELATED PARTY TRANSACTIONS
At September 30, 2012 and December 31, 2011, four shareholders of the Company held $357,500 of the senior secured convertible notes payable.
At September 30, 2012, two shareholders of the Company held $761,000 of unsecured notes payable. At December 31, 2011, one shareholder of the Company held $561,000 of unsecured notes payable.
The Company maintains its office at the home of its Chief Executive Officer and President. No formal lease agreement exists and no direct rent expense has been incurred. However, related occupancy costs of $9,360 and $24,523 were incurred during the three and nine months ended September 30, 2012, respectively. Occupancy costs for the three and nine months ended September 30, 2011 were $1,857 and $7,760, respectively.
NOTE 9 – MAJOR CUSTOMERS AND VENDORS
During the nine months ended September 30, 2012 and 2011, the Company earned a substantial portion of its revenue from one customer. During the nine months ended September 30, 2012 and 2011, revenue from this customer aggregated $13,075 and $7,984, respectively .  At September 30, 2012 and 2011, the amount due from this customer included in trade accounts receivable was $1,135 and $0, respectively.
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LaserLock Technologies, Inc. and Subsidiary
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
NOTE 10 – CONTINGENCIES
In October 2010, the Company filed suit in the Western District of Pennsylvania against WS Packaging Group, Inc. (“WS”) alleging that WS infringed on one of the Company’s patents in the manufacture of MONOPOLY game pieces on behalf of McDonald’s Corp. On June 4, 2012, both WS and the Company filed a stipulation to dismiss the action without prejudice and enter into settlement negotiations. Settlement negotiations are ongoing.
NOTE 11 – SUBSEQUENT EVENTS

Effective October 8, 2012, the Company entered into a three year agreement with Norman Gardner as Vice Chairman of the Board 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 Mr. Gardner to purchase 5% of the shares of the Company’s common stock at an exercise price of $.05 per share, subsequent to the Company receiving funding of $2.5 millon.

Effective October 16, 2012, the Company entered into a three year agreement with Neil Alpert as President and Chief Operating 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 Mr. Alpert to purchase 5% of the shares of the Company’s common stock at an exercise price of $.05 per share, subsequent to the Company receiving funding of $2.5 million.

In October 2012, the Company entered into an agreement with a related party noteholder whereby $250,000 of the 25% Notes Payable and $200,000 of the unsecured notes payable plus accrued interest on these notes payable of $131,565 will be fully satisfied in exchange for the issuance of 12,923,622 shares of the Company’s common stock ($.045 per share).

In October 2012, the Company completed a private placement equity offering in which $250,000 was received in exchange for 5,555,556 shares of the Company’s common stock and warrants to purchase 5,555,556 shares of Company’s common stock at an exercise price of $.10 per share with a term of 3 years.
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Cautionary Statements Regarding Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included or incorporated by reference in this quarterly report on Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objective of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation thereon or similar terminology or expressions.
We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:  our ability to raise additional capital, the absence of any operating history or revenue, our ability to attract and retain qualified personnel, our dependence on third party developers who we cannot control, our ability to develop and introduce a new service to the market in a timely manner, market acceptance of our services, our limited experience in a relatively new industry, the ability to successfully develop licensing programs and generate business, rapid technological change in relevant markets, unexpected network interruptions or security breaches, changes in demand for current and future intellectual property rights, legislative, regulatory and competitive developments, intense competition with larger companies, general economic conditions, as well as other factors set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission, and “Item 2 — Management’s Discussions and Analysis of Financial Condition and Results of Operation” below.
All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.
Overview
We were incorporated in Nevada in November 1999. We are a technology development company that delivers product and document authentication and security. We plan to develop and market technologies in a variety of applications in the security fields.
We believe that the technologies we own will enable businesses to reconstruct their overall approaches to corporate security from counterfeit identification to employee or customer monitoring. Potential applications of our technologies are available in different types of products and industries - e.g., gaming, apparel, tobacco, perfume, compact disks, pharmaceuticals, event and transportation tickets, driver’s licenses, insurance cards, passports, computer software, DVDs, and credit cards. We intend to generate sales through licenses of our technology or through direct sales of our technology to end-users.
We have filed a total of five patent applications relating to our technology, which have all been issued. These patents seek to accomplish non-intrusive document and product authentication in order to reduce losses caused by unpermitted document reproduction or by product counterfeiting. The technologies involve the utilization of invisible or color shifting/changing inks, which are compatible with today’s printing machines. The inks may be used with certain printing systems such as offset, flexographic, silkscreen, gravure, and laser. Based upon the Company’s experience, we believe that the ink technologies may be incorporated into existing manufacturing processes. We believe that some of our patents may have non-security applications and we are attempting to commercialize these opportunities.
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Strategic Outlook
We believe that the security and authentication industries will continue to grow over time, especially as counterfeiting becomes easier with advances in technology. Within the market, we intend to provide our products to government bodies, and merchants in the consumer products, gaming and financial services industries.
Sustained spending on technology, our ability to raise additional financing, and the continued growth of the security and authentication markets are all external conditions that may affect our ability to execute our business plan. In addition, certain potential customers may view our small size and limited financial resources as a negative even if they prefer our products to those of our competitors.
Our primary strategic objective over the next 12-24 months is to raise additional financing in order to successfully market our products and generate revenue that is sufficient to cover our operating expenses and support additional growth over the next several years.
We believe that our near-term success will depend particularly on our ability to develop customer awareness and confidence in our products. Since we have limited capital resources, we will need to closely manage our expenses and conserve our cash by continually monitoring any increase in expenses and reducing or eliminating unnecessary expenditures. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies in the development stage, particularly given that we operate in rapidly evolving markets, that we have limited financial resources, and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties.
Results of Operations
Comparison of the Three Months Ended September 30, 2012 and 2011
The following discussion analyzes our results of operations for the three months ended September 30, 2012 and 2011. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.
Net Loss for Three Months Ended September 30, 2012 and 2011
Net Revenue/Net Loss
We are a development stage company and have not generated significant revenue since our inception.  For the three months ended September 30, 2012 and 2011, we generated net revenues of $3,289 and $2,404, respectively.  Our net loss decreased $9,256 to $155,343 for the three months ended September 30, 2012 compared to $164,599 for the three months ended September 30, 2011, as a result of reductions in expenses as further described below.
Cost of Sales
For the three months ended September 30, 2012 and 2011, we incurred costs of sales of $2,047 and $0. There were no ink sales in 2011 (only royalties), thus no cost of sales was recorded in 2011.
Research and Development
Research and development expenses were $493 and $1,000, respectively, for the three months ended September 30, 2012 and 2011, a decrease of $507. The decrease in research and development expenses was due to the timing of research and development activities.
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Legal and Accounting
Legal and accounting fees increased $1,049 to $4,549 for the three months ended September 30, 2012 from $3,500 for the three months ended September 30, 2011.   The increase in legal and accounting fees in 2012 was primarily related to preparation of filings to bring the Company back into compliance with the filing requirement under the Exchange Act.
Sales and Marketing
Sales and marketing expenses for the three months ended September 30, 2012 were $55,463 as compared to $51,274 for the three months ended September 30, 2011, an increase of $4,189.   The expenses consisted largely of expenses for marketing the new technology associated with the SecureLight patent issued in 2011. The increase resulted from a more active marketing program in 2012.
General and Administrative
For the three months ended September 30, 2012 general and administrative expenses were $18,911, a decrease of $9,378 from $28,289 for the three months ended September 30, 2011.  The decrease resulted primarily from a decrease in consulting expenses incurred when compared to the prior year.
Interest Expense
During the three months ended September 30, 2012, the Company incurred interest expense of $77,169, as compared to $82,940 for the three months ended September 30, 2011, a decrease of $5,771. The decrease in interest expense directly correlates to the decrease in the interest rate negotiated for the extension of certain notes payable in June 2011.
Comparison of the Nine Months Ended September 30, 2012 and 2011
The following discussion analyzes our results of operations for the nine months ended September 30, 2012 and 2011. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.
Net Loss for Nine Months Ended September 30, 2012 and 2011
Net Revenue/Net Loss
We are a development stage company and have not generated significant revenue since our inception.  For the nine months ended September 30, 2012 and 2011, we generated net revenues of $17,029 and $8,884, respectively.  Our net loss increased $161,784 to $640,033 for the nine months ended September 30, 2012 compared to $478,249 for the nine months ended September 30, 2011, as a result of increased expenses in 2012 and a gain on debt forgiveness of $184,242, which was recorded in 2011 and is further described below.
Cost of Sales
Cost of sales increased $3,710 to $4,083 for the nine months ended September 30, 2012 compared to $373 for the nine months ended September 30, 2011. The increase in cost of sales was due to an increase in the sale of ink and penlights in 2012 compared to 2011.
Research and Development
Research and development expenses were $3,873 and $6,050, respectively, for the nine months ended September 30, 2012 and 2011, a decrease of $2,177. The decrease in research and development expenses was due to the timing of researching and development activities.
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Legal and Accounting
Legal and accounting fees increased $126,259 to $174,358 for the nine months ended September 30, 2012 from $48,099 for the nine months ended September 30, 2011.   The increase in legal and accounting fees in 2012 was primarily related to a patent infringement lawsuit as well as for preparation of filings to bring the Company back into compliance with the filing requirement under the Exchange Act.
Sales and Marketing
Sales and marketing expenses for the nine months ended September 30, 2012 were $155,725 as compared to $206,052 for the nine months ended September 30, 2011, a decrease of $50,327.   The expenses consisted largely of expenses associated with marketing the new technology associated with the SecureLight patent issued in 2011 and were reduced in 2012 as a result of cost conservation measures.
General and Administrative
For the nine months ended September 30, 2012 general and administrative expenses were $89,898, a decrease of $69,553 from $159,451 for the nine months ended September 30, 2011.  The decrease resulted primarily from decreases in consulting expenses of $41,000, insurance expense of $13,000 and payroll expenses of $46,000 related to share based compensation, offset by increases in occupancy costs of $15,000, miscellaneous expenses of $5,000 and office expenses of $11,000.
Interest Expense
During the nine months ended September 30, 2012, the Company incurred interest expense of $229,126, as compared to $251,408 for the nine months ended September 30, 2011, a decrease of $22,282. The decrease in interest expense directly correlates to the decrease in the interest rate negotiated for the extension of certain notes payable in June 2011.
Gain on Debt Forgiveness
During the nine months ended September 30, 2011, the Company received a benefit of $184,242 in debt forgiveness, as compared to $0 for the nine months ended September 30, 2012. This gain on debt forgiveness was the result of management’s negotiation with a vendor in the second quarter of 2011 to forgive amounts due that vendor.
Liquidity and Capital Resources
As of the date of this report, we had cash on hand of $388,117.
Net cash used in operating activities for the nine months ended September 30, 2012 decreased to $187,334 from $241,289 for the nine months ended September 30, 2011 a decrease of $53,955. The decrease in net cash used in operating activities is mainly related to increases in accounts payable and accrued expenses and a decrease in prepaid expenses.
Net cash used in investing activities, consisting of patent costs, was $2,406 for the nine months ended September 30, 2012. Investing activities for the nine months ended September 30, 2011, consisting of patent costs, was $1,440.
Net cash provided by financing activities was $200,000 and $293,705, respectively, for the nine months ended September 30, 2012 and 2011. The net cash provided by financing activities for the nine months ended September 30, 2012 was a result of additional debt financing of $200,000 obtained during the three months ended June 30, 2012. The net cash provided by financing activities for the nine months ended September 30, 2011 relates to $410,000 in proceeds received from the issuance of common stock and exercise of stock options, offset by payments of stock issuance costs of $40,000, repayments of notes payable of $58,500 and payment for treasury stock of $17,795.
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In February 2006, the Company commenced a private placement of up to $800,000 principal amount of senior secured convertible promissory notes. As of September 30, 2012, $781,500 of these notes was outstanding. In June 2011, the due dates on these notes were extended as follows: $90,000 in September 2013; $95,000 in September 2014; $596,500 in September 2015. The interest rate associated with $762,500 of the notes is 10% per annum, while the remaining $19,000 of the notes is at 12% per annum. In addition, if an equity financing with total proceeds of more than $5,000,000 occurs while any notes are outstanding, holders of notes will have the right, at their option, to convert the outstanding principal and interest of the notes into shares at a discount of 30% of the price per share in the qualified financing. Accrued interest on these notes at September 30, 2012 amounted to $580,563.
During 2007, the Company commenced a private placement of up to $400,000 principal amount of 10% Convertible Promissory Notes. As of September 30, 2012, the outstanding principal balance on the notes was $140,000.  Holders of Notes will have the right, at their option, to convert the outstanding principal and interest of the Notes into shares of the Company’s Series A Preferred Stock at any time and from time to time at the option of the holder at the initial conversion price of $0.005333 per share. The Notes are unsecured.
In June 2011, the noteholder of the $140,000 under this convertible note issue agreed to extend the maturity date of these notes to September 30, 2015 at an interest rate of 10% per annum. Additionally, the noteholder agreed in writing to suspend its right to convert its notes until such time as the Company’s authorized shares have been increased. Remaining shares to be potentially issued under this convertible note issue are 26,250,000.  Accrued interest on these notes at September 30, 2012 amounted to $75,250.
As of September 30, 2012, the Company has outstanding unsecured notes payable of $761,000, which bear interest at the rate of 10% per annum. In April 2012, $200,000 of these notes were issued with a maturity date of April 2013. During June 2011, the due date of $561,000 of these notes was extended to September 30, 2015. As of September 30, 2012, accrued interest on these notes payable amounted to $251,861.
In August 2009, the Company commenced a private placement of up to $300,000 consisting of up to 6 units. Each unit consists of a $50,000, 8% Series A Note Payable, due September 30, 2011, and a warrant to purchase 2,000,000 shares of the Company’s common stock. The notes are unsecured. The Company sold 4.5 units under this private placement. As of September 30, 2012, $200,000 of these 8% Series A Notes Payable remain outstanding. In June 2011, $150,000 of the 8% Series A Notes Payable and the associated 6,000,000 warrants were extended to September 30, 2015. The remaining $50,000 was due in October 2011 and is currently past due. Accrued interest on the 8% Series A Notes Payable at September 30, 2012 amounted to $48,667.
In 2010, the Company issued $400,000 in notes payable in order to finance a patent infringement lawsuit (see Contingencies Note 10 to the condensed consolidated financial statements). The notes payable accrue interest at 25% per annum and mature upon the earlier of September 1, 2013 or the date on which the Company receives net proceeds from the patent infringement claim. In addition to the base interest of 25% per annum, the lenders are entitled to Bonus Interest equal to the following:
a.
First monies realized by the Company from its share of the net proceeds of the lawsuit shall be allocated and paid to the Lender until the principal and base interest accruing has been fully paid.
b.
The next monies from the net proceeds of the litigation settlement will be paid to the Company to reimburse for out-of-pocket legal costs related to the lawsuit.
c.
The next $825,000 of proceeds will be split 50%/50% between the Company and the Lenders.
d.
The next $1 million realized by the Company shall be allocated 90% to the Company and 10% to the Lenders.
e.
The next $1 million realized by the Company shall be allocated 85% to Company and 15% to Lenders.
f.
All remaining proceeds realized by the Company shall be allocated 80% to Company and 20% to Lenders.
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Accrued interest on these 25% notes payable at September 30, 2012 amounted to $205,729.
In October 2012, the Company entered into an agreement with a related party noteholder whereby $250,000 of the 25% Notes Payable and $200,000 of the unsecured notes payable plus accrued interest on these notes payable of $131,565 will be fully satisfied in exchange for the issuance of 12,923,622 shares of the Company ’ s common stock ($.045 per share).
In October 2012, the Company completed a private placement equity offering in which $250,000 was received in exchange for 5,555,556 shares of the Company’s common stock and warrants to purchase 5,555,556 shares of Company’s common stock at an exercise price of $.10 per share with a term of 3 years.
The Company is in the development stage. During the nine months ended September 30, 2012, the Company’s operational resources were used primarily to fund general and administrative expenses to continue operations and a significantly reduced sales and marketing program.
As we have not realized significant revenues since our inception, we have financed our operations through public and private offerings of debt and equity securities.  We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution.
Since our inception, we have focused on developing and implementing our business plan.   Our business plans are dependent on our ability to raise capital through private placements of our common stock and/or preferred stock, through the possible exercise of outstanding options and warrants, through debt financing and/or through a future public offering of our securities. There is no assurance that we will raise sufficient capital in order to meet our goals of implementing a sales and marketing effort to introduce the products.  We believe that our existing cash resources will not be sufficient to sustain our operations during the next twelve months. We intend to raise such financing through private placements and/or the sale of debt and equity securities.  The issuance of additional equity would result in dilution to our existing shareholders.  If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.
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Even if we are successful in raising sufficient capital in order to complete the marketing program for our products, our ability to continue in business as a viable going concern can only be achieved when our revenues reach a level that sustains our business operations. While it is impossible to predict the amount of revenues, if any, that we may receive from our products, we presently believe, based solely on our internal projections, that we will generate revenues sufficient to fund our planned business operations if the products are marketed effectively in accordance with our plans.  There can be no assurance that we will raise sufficient proceeds, or any proceeds, for us to implement fully our proposed business plan.  Moreover there can be no assurance that even if our products are marketed effectively, that we will generate revenues sufficient to fund our operations.  In either situation, we may not be able to continue our operations and our business might fail.
Off-Balance Sheet Arrangements
As of September 30, 2012, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Critical Accounting Policies
Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.
Stock-based Compensation
We account for stock-based compensation under the provisions of FASB ASC Topic 718,  Compensation—Stock Compensation   (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.
We account for stock-based compensation awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees   (“ASC 505-50”). Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Any stock options issued to non-employees are recorded as an expense and additional paid-in capital in stockholders’ equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each period.
Revenue Recognition
In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition (Codified in FASB ASC 605), we recognize revenue when (i) persuasive evidence of a customer or distributor arrangement exists, (ii) a retailer, distributor or wholesaler receives the goods and acceptance occurs, (iii) the price is fixed or determinable, and (iv) collectibility of the sales revenues is reasonably assured. Subject to these criteria, the Company recognizes revenue from product sales, consisting mainly of pigments and penlights, upon shipment to the customer.  Royalty revenue is recognized upon receipt of notification from a customer that the Company’s product has been used in the customer’s production process.
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Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
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Not Applicable
As of September 30, 2012, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that, as of September 30, 2012 , our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure, because of the material weakness described below.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected. A material weakness in the Company’s internal controls exists in that there is limited segregation of duties amongst the Company’s employees with respect to the Company’s preparation and review of the Company’s financial statements. This material weakness is a result of the Company’s limited number of personnel. This material weakness may affect management’s ability to effectively review and analyze elements of the financial statement closing process and prepare financial statements in accordance with U.S. GAAP.
There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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31.1
Certification of Chief Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.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: October 31, 2012 By: /s/ Norman A. Gardner
Norman A. Gardner
Chairman of the Board,
Chief Executive Officer,
and President
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