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
oNon-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.
















PART I FINANCIAL INFORMATIONITEM 1.
Financial StatementsCondensed Consolidated Balance Sheets ( Unaudited )

1Condensed Consolidated Statements of Operations (Unaudited)

2Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)
3Condensed Consolidated Statements of Cash Flows (Unaudited)

9Notes to Condensed Consolidated Financial Statements (Unaudited)
11ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
35ITEM 4.
Controls and Procedures
35PART II OTHER INFORMATIONITEM 6.
Exhibits

36SIGNATURES

37














PART I - FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS





LaserLock Technologies, Inc. and Subsidiary


(A Development Stage Enterprise)




CONTENTS





PAGECONDENSED CONSOLIDATED BALANCE SHEETS


1CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


2CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT


3 - 8CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


9 - 10NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


11 - 24















LaserLock Technologies, Inc. and Subsidiary


(A Development Stage Enterprise)


Condensed Consolidated Balance Sheets


June 30, 2013 and December 31, 2012


June 30, 2013


December 31, 2012(Unaudited)


(Audited)ASSETSCURRENT ASSETSCash and cash equivalents

$
2,871,840


$
2,994,350Accounts receivable, net of allowance of $0 atJune 30, 2013 and December 31, 2012


6,613



3,473Inventory


39,434



19,980Prepaid expenses


469,737



750,000TOTAL CURRENT ASSETS


3,387,624



3,767,803PROPERTY AND EQUIPMENTCapital equipment


236,026



34,964Less accumulated depreciation


57,326



32,624178,700



2,340OTHER ASSETSDeposits


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



311,832164,446



311,832TOTAL ASSETS

$
3,730,770


$
4,081,975LIABILITIES AND STOCKHOLDERS’ DEFICITCURRENT LIABILITIESAccounts payable and accrued expenses

$
381,977


$
660,493Accrued interest


14,667



97,563Notes payable


50,000



200,000TOTAL CURRENT LIABILITIES


446,644



958,056LONG-TERM LIABILITIESEmbedded derivative liability


1,000,000



-Warrant liability


18,176,165



2,400,000Accrued interest


865,174



975,559Senior secured convertible notes payable


550,249



775,249Convertible notes payable


98,000



140,000Notes payable, net of discount of $11,154 and $13,632 as ofJune 30, 2013 and December 31, 2012


699,846



697,368TOTAL LONG-TERM LIABILITIES


21,389,434



4,988,176CONTINGENCIESSTOCKHOLDERS’ DEFICITConvertible 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 atJune 30, 2013 and 248,244,012 shares issued and 218,448,109 outstanding at December 31, 2012


275,665



248,244Additional paid in capital


20,785,654



11,387,929Treasury stock, at cost (29,795,903 shares at June 30, 2013and 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)


Condensed Consolidated Statements of Operations


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 MonthsCumulative


Ended


Ended


Ended


EndedSince


June 30,


June 30,


June 30,


June 30,Inception


2013


2012


2013


2012NET REVENUESSales

$
464,295


$
-


$
-


$
3,140


$
3,740Royalties


645,180



-



-



-



10,000TOTAL NET REVENUE


1,109,475



-



-



3,140



13,740COST OF SALES


431,741



-



-



2,710



2,036GROSS PROFIT


677,734



-



-



430



11,704OPERATING EXPENSESGeneral and administrative


1,812,367



170,699



35,297



269,008



70,987Legal and accounting


1,706,874



55,651



79,462



168,088



169,809Patent 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



3,380Sales and marketing


5,124,233



52,197



51,954



104,501



100,262Total operating expenses


22,042,020



8,645,834



168,836



9,594,369



344,438LOSS 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



1Interest 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 considerationfor 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 PERCOMMON SHARE





$
(0.04
)

$
(0.00
)

$
(0.11
)

$
(0.00
)BASIC AND DILUTED WEIGHTED AVERAGECOMMON 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




See the accompanying notes to these condensed consolidated financial statements.




-2-







LaserLock Technologies, Inc. and Subsidiary


(A Development Stage Enterprise)


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


For the Period November 10, 1999 (Date of Inception) to June 30, 2013




Convertible

















DeficitPreferred


Common











AccumulatedStock


Stock


Deferred


Additional





During theNumber of





Number of





Consulting


Paid-In


Treasury


DevelopmentShares


Amount


Shares


Amount


Fees


Capital


Stock


Stage


TotalIssuance of initial 4,278,000 shares on November 10, 1999

$
-


$
-



4,278,000


$
4,278


$
-


$
16,595


$
-


$
-


$
20,873Issuance of shares of common stock in exchange for services


-



-



1,232,000



1,232



-



35,728



-



-



36,960Issuance of shares of common stock


-



-



2,090,000



2,090



-



60,610



-



-



62,700Stock 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
)


52,730Issuance of shares of common stock


-



-



5,449,999



5,450



-



921,050



-



-



926,500Issuance 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



-



-



50,350Amortization of deferred consulting fees


-



-



-



-



20,117



-



-



-



20,117Net loss


-



-



-



-



-



-



-



(367,829
)


(367,829
)Balance, December 31, 2000


-



-



13,289,999



13,290



(20,683
)


1,094,868



-



(421,942
)


665,533Issuance of shares of common stock


-



-



217,500



218



-



77,723



-



-



77,941Issuance of shares of common stock and stock options for acquisition of subsidiary


-



-



2,000,000



2,000



-



736,000



-



-



738,000Issuance of stock options


-



-



-



-



-



15,000



-



-



15,000Exercise of options


-



-



1,450,368



1,450



-



230,609



-



-



232,059Fair value of non-employee stock options


-



-



-



-



-



323,250



-



-



323,250Amortization of deferred consulting fees


-



-



-



-



20,683



-



-



-



20,683Net 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

















DeficitPreferred


Common











AccumulatedStock


Stock


Deferred


Additional





During theNumber of





Number of





Consulting


Paid-In


Treasury


DevelopmentShares


Amount


Shares


Amount


Fees


Capital


Stock


Stage


TotalIssuance of shares of common stock


-



-



3,376,875



3,377



-



687,223



-



-



690,600Fair value of non-employee stock options


-



-



-



-



-



94,000



-



-



94,000Salary due to shareholder contributed capital


-



-



-



-



-



15,000



-



-



15,000Return of shares of common stock related to purchase priceadjustment


-



-



(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
)


270,014Issuance of shares of common stock


-



-



22,512,764



22,512



-



1,387,109



-



-



1,409,621Fair value of non-employee stock options


-



-



-



-



-



213,300



-



-



213,300Issuance of shares of common stock in exchange for services


-



-



143,000



143



-



23,857



-



-



24,000Stock 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
)


760,080Stock issuance costs


-



-



-



-



-



(25,000
)


-



-



(25,000
)Fair value of non-employee stock options


-



-



-



-



-



493,600



-



-



493,600Issuance of shares of common stock


-



-



18,600,000



18,600



-



939,881



-



-



958,481Net 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

















DeficitPreferred


Common











AccumulatedStock


Stock


Deferred


Additional





During theNumber of





Number of





Consulting


Paid-In


Treasury


DevelopmentShares


Amount


Shares


Amount


Fees


Capital


Stock


Stage


TotalFair value of non-employee stock options


-



-



-



-



-



286,762



-



-



286,762Issuance of shares of common stock


-



-



3,000,000



3,000



-



102,000



-



-



105,000Net 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



-



-



215,463Fair value of employee stock options


-



-



-



-



-



135,098



-



-



135,098Fair value of warrants issued for deferred finance charges


-



-



-



-



-



392,376



-



-



392,376Exercise of warrants


-



-



5,550,000



5,550



-



49,950



-



-



55,500Exercise of options


-



-



4,300,000



4,300



-



(3,870
)


-



-



430Shares 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



-



-



55,000Net 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



-



-



47,692Fair value of employee stock options


-



-



-



-



-



67,651



-



-



67,651Recognition of beneficial conversion feature


-



-



-



-



-



375,000



-



-



375,000Net 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

















DeficitPreferred


Common











AccumulatedStock


Stock


Deferred


Additional





During theNumber of





Number of





Consulting


Paid-In


Treasury


DevelopmentShares


Amount


Shares


Amount


Fees


Capital


Stock


Stage


TotalFair value of non-employee stock options


-



-



-



-



-



28,752



-



-



28,752Fair value of employee stock options


-



-



-



-



-



19,720



-



-



19,720Fair value of warrants issued in conjunction with debt financing


-



-



-



-



-



25,000



-



-



25,000Net 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



-



-



1,524Fair value of warrants issued in conjunction with debt financing


-



-



-



-



-



15,450



-



-



15,450Issuance of shares for services


-



-



7,200,000



7,200



-



40,500



-



-



47,700Shares issued for conversion of notes payable


-



-



48,750,000



48,750



-



263,291



-



-



312,041Net 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



-



-



364Fair value of warrants issued in conjunction with debt financing


-



-



-



-



-



20,143



-



-



20,143Issuance of shares for services


-



-



25,950,000



25,950



-



182,650



-



-



208,600Net 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

















DeficitPreferred


Common











AccumulatedStock


Stock


Deferred


Additional





During theNumber of





Number of





Consulting


Paid-In


Treasury


DevelopmentShares


Amount


Shares


Amount


Fees


Capital


Stock


Stage


TotalIssuance of shares for services


-



-



1,000,000



1,000



-



29,000



-



-



30,000Contribution 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



-



-



400,000Issuance 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



-



-



10,000Fair value of warrants issued in conjunction with debt financing


-



-



-



-



-



21,275



-



-



21,275Fair value of employee stock options


-



-



-



-



-



47,658



-



-



47,658Fair value of non-employee stock options


-



-



-



-



-



48,374



-



-



48,374Net 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



-



-



46,500Issuance of shares of common stock


-



-



44,111,111



44,111



-



1,015,889



-



-



1,060,000Issuance of stock for licensing


-



-



2,222,222



2,222



-



97,778



-



-



100,000Issuance of stock for trademarks, etc.


-



-



2,222,222



2,222



-



97,778



-



-



100,000Shares issued for conversion of notes payable and accrued interest


-



-



12,923,622



12,925



-



568,639



-



-



581,564Exercise of options


-



-



10,490,996



10,491



-



2,622



-



-



13,113Exercise of warrants


-



-



333,333



333



-



49,667



-



-



50,000Fair value of employee stock options


-



-



-



-



-



332,036



-



-



332,036Fair value of non-employee stock options


-



-



-



-



-



11,638



-



-



11,638Forgiveness of debt - related party


-



-



-



-



-



349,000



-



-



349,000Net 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

















DeficitPreferred


Common











AccumulatedStock


Stock


Deferred


Additional





During theNumber of





Number of





Consulting


Paid-In


Treasury


DevelopmentShares


Amount


Shares


Amount


Fees


Capital


Stock


Stage


TotalIssuance of shares of preferred stock


33,333,333


$
1,000,000



-



-



-



-



-



-



1,000,000Issuance of shares of common stock


-



-



4,811,111



4,811



-



230,189



-



-



235,000Shares issued for conversion of notes payable and accrued interest


-



-



18,275,000



18,275



-



1,871,725



-



-



1,890,000Exercise of options


-



-



3,335,000



3,335



-



14,584



-



-



17,919Exercise of warrants


-



-



1,000,000



1,000



-



9,000



-



-



10,000Fair value of employee stock options


-



-



-



-



-



8,272,227



-



-



8,272,227Deemed 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 FlowsFor 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 MonthsCumulative


Ended


EndedSince


June 30,


June 30,Inception


2013


2012CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(40,053,238
)

$
(26,666,197
)

$
(484,691
)Adjustments to reconcile net loss to net cash used inoperating activitiesFair value of options issued in exchange for services


10,689,459



8,272,227



-Accretion of interest on deferred finance charges


453,625



-



8,625Accretion of discount on notes payable


445,714



2,478



2,478Change in fair value warrant liability


12,780,374



12,780,374



-Fair value of warrants in excess of consideration for convertiblepreferred 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



5,560Gain 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 assetsAccounts receivable


(6,613
)


(3,140
)


-Inventory


(39,434
)


(19,454
)


2,036Prepaid expenses


(69,737
)


280,263



117,760Deposit


(37,197
)


(37,197
)Increase in liabilitiesAccounts payable and accrued expenses


2,386,651



(220,671
)


244,445Net cash used in operating activities

$
(8,392,170
)

$
(1,352,902
)

$
(103,787
)CASH FLOWS FROM INVESTING ACTIVITIESPurchase 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 ACTIVITIESProceeds 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



-



200,000Repayments 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



200,000NET INCREASE (DECREASE) IN CASH ANDCASH EQUIVALENTS


2,871,840



(122,510
)


93,807CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD


-



2,994,350



53,573CASH 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 MonthsCumulative


Ended


EndedSince


June 30,


June 30,Inception


2013


2012SUPPLEMENTAL 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 topurchase price adjustmentCommon stock


(1,000
)


-



-Additional paid-in capital


(353,000
)


-



-Intangible assets

$
(354,000
)

$
-


$
-Issuance of common stock and stock optionsfor acquisition of subsidiary

$
738,000


$
-


$
-Proceeds from common stock sales applied directlyto 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 payableand 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 – SUMMARYOF 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, 2012Unsecured notes payable; interest at 10% per annum; principal and accrued interest due at maturity in September 2015

$
561,000


$
561,000Series A notes payable; interest at 8% per annum; principal and accrued interest due at extended maturity date in September 2015


150,000



150,000Series A notes payable; interest at 8% per annum; principal and accrued interest due at maturity in October 2011 (past due)


50,000



50,000Notes payable, interest at 25% per annum; principal and interest due September 2013


-



150,000Less: Debt discount


(11,154
)


(13,632
)749,846



897,368Less: Current portion


50,000



200,000Long-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

$
50,0002014


-2015


1,348,0952016


-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 AverageOption/Warrant


Exercise


ExerciseShares


Price


PriceOutstanding, December 31, 2011


6,390,000


$
0.00125


$
0.00125Granted


15,000,000



0.05 - 0.15



0.06Transferred 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



0.06Granted


43,500,000



0.05 - 0.15



0.04Exercised


(900,000
)


0.00125



-Expired/Returned


(500,000
)


0.05



-Outstanding, June 30, 2013


57,866,667


$
0.05 to $0.15


$
0.05Exercisable, June 30, 2013


50,116,667


$
0.05 to $0.15


$
0.06Weighted 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 AverageOption/Warrant


Exercise


ExerciseShares


Price


PriceOutstanding, December 31, 2011


15,585,996


$
0.00125 to $0.20


$
0.01Granted


72,422,221


0.05 to 0.10



0.08Transferred 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



0Granted


38,144,444


0.10 to 0.15



0.03Exercised


(3,435,000
)


0.00125 - 0.07



-Expired


-



-



-Outstanding, June 30, 2013


117,516,665


$
0.01 to $.20


$
0.10Exercisable, June 30, 2013


117,516,665


$
0.01 to $.20


$
0.10Weighted 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

$
35,0642014


71,7662015


74,6372016


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’SDISCUSSION 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.




-32-










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.




-33-









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.





-34-









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.




-35-









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 Document101.SCH
XBRL Taxonomy Extension Schema Document101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document101.DEF
XBRL Taxonomy Extension Definition Linkbase Document101.LAB
XBRL Taxonomy Extension Label Linkbase Document101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document





-36-









SIGNATURE





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





LASERLOCK TECHNOLOGIES, INC.





Date: August14, 2013
By:
/s/ Scott A. McPhersonScott A. McPherson

Chief Financial Officer




-37-