NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1
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ORGANIZATION AND BASIS OF PRESENTATION
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SmartMetric, Inc. (“SmartMetric”
or the “Company”) was incorporated pursuant to the laws of Nevada on December 18, 2002. SmartMetric is a company engaged
in the technology industry. SmartMetric’s main products are a fingerprint sensor activated payments card and a security card
with a finger sensor and fully functional fingerprint reader embedded inside the card. The SmartMetric biometric cards have a rechargeable
battery allowing for portable biometric identification and card activation. This card is referred to as a biometric card or the
SmartMetric Biometric Card.
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion
of management of the Company, the accompanying unaudited financial statements contain all the adjustments (which are of a normal
recurring nature) necessary for a fair presentation. Operating results for the three months ended September 30, 2018 are not necessarily
indicative of the results that may be expected for the year ending June 30, 2019. For further information, refer to the financial
statements and the footnotes thereto contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018,
as filed with the Securities and Exchange Commission on October 12, 2018.
Going Concern
As
shown in the accompanying condensed consolidated financial statements the Company has sustained recurring losses of $213,327 and
$247,062 for the three months ended September 30, 2018 and 2017 respectively, and has an accumulated deficit of $26,210,237 at
September 30, 2018.
There
is no guarantee that the Company will be able to continue to raise enough capital or generate revenues to sustain its operations.
There is no guarantee regarding the Company’s ability to continue as a going concern.
Management believes that the Company’s
capital requirements will depend on many factors. These factors include product marketing and distribution.
The condensed consolidated financial statements
do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amounts and classification of
recorded liabilities that may be required should the Company be unable to continue as a going concern.
NOTE 2
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Principles of Consolidation
The condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, SmartMetric Australia Pty. Ltd. All significant intercompany
accounts and transactions have been eliminated in consolidation.
NOTE 2
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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Use of Estimates
The preparation of
financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying disclosures. Actual results may differ from those
estimates.
Cash and Cash Equivalents
Cash equivalents are
comprised of certain highly liquid investments with maturity of three months or less when purchased. We maintain our cash in bank
deposit accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts.
Research and Development
Research and development costs are charged
to expense as incurred. Our research and development expenses consist primarily of expenditures for electronics design and engineering,
software design and engineering, component sourcing, component engineering, manufacturing, product trials, compensation and consulting
costs.
Revenue Recognition
The Company has not recognized revenues
to date. The Company anticipates recognizing revenue in accordance with the contracts it enters into for the sale and distribution
of its products.
NOTE 2
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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Accounts Receivable
The Company will extend credit based on
its evaluation of the customers’ financial condition, generally without requiring collateral. Exposure to losses on receivables
is expected to vary by customer due to the financial condition of each customer. The Company will monitor exposure to credit losses
and maintains allowances for anticipated losses considered necessary under the circumstances. The Company has not recorded any
receivables, and therefore no allowance for doubtful accounts.
Uncertainty in Income Taxes
GAAP requires the recognition and measurement
of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates Company tax positions
on an annual basis and has determined that as of September 30, 2018 no accrual for uncertain income tax positions is necessary.
The Company files income tax returns in
the United States (“U.S.”) federal jurisdiction. Generally, the Company is no longer subject to U.S. federal examinations
by tax authorities for fiscal years prior to 2014. The Company does not file in any other jurisdiction and remains open for audit
for all tax years as the statute of limitations does not begin until the returns are filed.
Advertising Costs
The Company will expense the cost associated
with advertising as incurred.
Equipment
Equipment is stated at cost. Depreciation
is computed using the straight-line method over the estimated economic useful lives of the assets ranging from 3 - 5 years.
Loss Per Share of Common Stock
Basic net loss per common share is computed
using the weighted average number of common shares outstanding. The calculation of diluted earnings per share (“EPS”)
includes consideration of dilution arising from common stock equivalents, such as stock issuable pursuant to the exercise of stock
options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share on the consolidated
statement of operations due to the fact that the Company reported a net loss and to do so would be anti-dilutive for the periods
presented.
Stock-Based Compensation
The Company measures expense for issuances
of stock-based compensation to employees and others at fair value of the stock and warrants issued, as this is more reliable than
the fair value of the services received complete. The fair value of the equity instrument is charged directly to compensation expense
and additional paid-in capital.
NOTE 3
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PREPAID EXPENSES
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Prepaid expenses represent
the unexpired terms of various consulting agreements as well as advance rental payments. The Company issued common stock and warrants
as consideration for consulting services and these shares were valued based on the stock price or computed warrant value at the
time of the respective agreements.
Lease Agreement
The Company’s main office is located
in Las Vegas, Nevada. Rent expense under all leases for the three months ended September 30, 2018 and 2017 was $3,349 and $8,985,
respectively.
Related Party Transactions
The Company’s
Chief Executive Officer has made cash advances to the Company with an aggregate amount due of $18,000 and $15,000 at September
30, 2018 and June 30, 2018, respectively. These advances bear interest at the rate of five percent (5%) per annum.
The Company has accrued
the amounts of $710,848 and $663,348 at September 30, 2018 and June 30, 2018, respectively, as deferred officer’s salary,
for the difference between the Chief Executive Officer’s annual salary and the amounts paid.
On September 11, 2017,
we received a license to certain patents from Chaya Hendrick, our founder and CEO, related to our technologies until the expiration
of the patents. As consideration, we issued Chaya Hendrick, or her assigns, (i) 200,000 shares of Series B Convertible Preferred
Stock, (ii) a royalty equal to 5% of gross revenues derived from products sold related to the patents, and (iii) certain minimum
required payments beginning at $50,000 and doubling each year thereafter. The Series B Preferred Shares may be converted at the
election of holder on a basis for 50 common shares for each preferred share at any time or an aggregate of 10,000,000 common shares
in exchange for all 200,000 preferred shares.
NOTE 5
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STOCKHOLDERS’ EQUITY (DEFICIT)
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Preferred Stock
As of September 30,
2018, the Company has 5,000,000 shares of preferred stock, par value $0.001, authorized and 610,000 shares issued and outstanding.
On December 11, 2009,
the Company filed a Certificate of Designation with the State of Nevada, to designate 500,000 shares of preferred stock as Series
B Convertible Preferred Stock (“Series B Convertible Preferred Stock”). Effective November 5, 2014, the number of shares
designated as Series B Convertible Preferred Stock was increased to 1,000,000 shares.
Each share of Series
B Convertible Preferred Stock has a par value of $0.001, and a stated value equal to $5.00 (“Stated Value”). Holders
of the Series B Convertible Preferred Stock are entitled to receive dividends or other distributions with the holders of the common
stock of the Company on an as converted basis when, as, and if declared by the directors of the Company. Holders of the Series
B Convertible Preferred Stock are entitled to convert each share of the Series B Convertible Preferred Stock into fifty (50) shares
of common stock.
Upon any liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary, holders of the Series B Convertible Preferred Stock
are entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to the Stated Value, pro
rata with the holders of the common stock.
NOTE 5
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STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
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Class A Common Stock
As of September 30, 2018, the Company has
50,000,000 shares of Class A common stock, par value $0.001, authorized and no shares issued and outstanding. In October 2003,
the Company issued 50,000,000 shares of Class A common stock at par value ($50,000). These shares were converted into 50,000,000
shares of common stock in 2006.
Common Stock
The Company was incorporated
on December 18, 2002, with 45,000,000 shares of Common Stock, par value $0.001, authorized. The Articles of Incorporation were
amended in 2006 to increase the number of authorized shares to 100,000,000 shares, and in 2009 to increase the number of authorized
shares to 200,000,000. As a result of a screener’s error, the Company previously disclosed in its Quarterly Report on Form
10-Q for the quarters ended September 30, 2015 and December 31, 2015 that it increased the number of authorized shares of common
stock to 300,000,000. On March 31, 2016, our Board of Directors approved an amendment (the “Amendment”) to the Company’s
Articles of Incorporation to increase the total number of shares of authorized capital stock to 305,000,000 shares, par value $0.001
per share, consisting of (i) 300,000,000 shares of Common Stock, up from 200,000,000 shares of Common Stock, and (ii) 5,000,000
shares of Preferred Stock, subject to shareholder approval (the “Proposal”). On March 31, 2016, a majority of the Company’s
stockholders approved the Amendment. The Company filed a definitive information statement on Schedule 14C with the Securities and
Exchange Commission on May 4, 2016 (the “Information Statement”). The Information Statement was furnished to all of
the Company’s shareholders for the purpose of informing them of the action taken by a majority of the Company’s stockholders.
As of September 30, 2018, the Company has 254,650,085 shares
of common stock issued and outstanding.
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On September 11, 2017, we received a license to certain patents from Chaya Hendrick, our founder and CEO, related to our technologies until the expiration of the patents. As consideration, we issued Chaya Hendrick, or her assigns, (i) 200,000 shares of Series B Convertible Preferred Stock, (ii) a royalty equal to 5% of gross revenues derived from products sold related to the patents, and (iii) certain minimum required payments beginning at $50,000 and doubling each year thereafter. The Series B Preferred Shares may be converted at the election of holder on a basis for 50 common shares for each preferred share at any time or an aggregate of 10,000,000 common shares in exchange for all 200,000 preferred shares.
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During the three months ended September 30, 2017, the Company sold for cash 2,500,000 shares of common stock and warrants to purchase: (i) 937,500 shares at $0.70 per share, (ii) 500,000 shares at $0.20 per share, (iii) 472,500 shares at $1.00 per share and (iv) 252,000 shares at $0.50 per share for net proceeds of $114,625. The warrants expire at various times through September 28, 2019
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During the three months ended September
30, 2017, the Company issued 362,864 shares of common stock for consulting services valued at $21,825, based on the stock price
at the time of the respective agreements underlying the services provided.
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During the three months ended December
31, 2017, the Company sold for cash 8,319,000 shares of common stock and warrants to purchase: (i) 3,250,000 shares at $0.20 per
share and (ii) 1,638,000 shares at $0.50 per share, for net proceeds of $259,362. The warrants expire at various times through
December 29, 2019
During the three months ended December
31, 2017, the Company issued 212,164 shares of common stock for consulting services valued at $15,000, based on the stock price
at the time of the respective agreements underlying the services provided.
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During the three months ended March 31,
2018, the Company sold for cash 2,850,000 shares of common stock and warrants to purchase: (i) 2,051,250 shares at $0.70 per share
and (ii) 929,250 shares at $1.00 per share, for net proceeds of $142,305. The warrants expire at various times through February
21, 2020.
During the three months ended March 31,
2018, the Company issued 508,620 shares of common stock for consulting services valued at $30,000, based on the stock price at
the time of the respective agreements underlying the services provided.
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During the three months ended June 30, 2018, the Company
sold for cash 2,646,100 shares of common stock and warrants to purchase: (i) 1,536,625 shares at $0.70 per share and (ii) 774,459
shares at $1.00 per share, for net proceeds of $119,738. The warrants expire at various times through June 15, 2020.
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During
the three months ended September 30, 2018, the Company sold for cash 4,624,153 shares of common stock for net proceeds of $145,770
and warrants to purchase (i) 3,699,988 shares at $0.25, (ii) 60,000 shares at $0.30, (iii) 30,000 shares at $0.50, (iv) 301,875
shares at $0.70 and (v) 151,970 shares at $1.00.
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NOTE 5
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STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
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Warrants
From time to time the Company granted warrants
in connection with private placements of securities, as described herein.
As of September 30, 2018 and June 30, 2018,
the following is a breakdown of the warrant activity:
September 30, 2018:
Outstanding - June 30, 2018
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14,842,583
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Issued
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4,243,833
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Exercised
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—
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Expired
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1,692,000
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Outstanding - September 30, 2018
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17,394,416
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June 30, 2018:
Outstanding - June 30, 2017
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20,276,399
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Issued
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12,341,584
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Exercised
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—
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Expired
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(17,775,400
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)
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Outstanding - June 30, 2018
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14,842,583
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NOTE 5
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STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
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At September 30, 2018,
all of the 17,394,416 warrants are vested and (i) 14,094,416 warrants expire at various times prior to October 2020, (ii) 3,000,000
warrants expire in September 2019, (iii) and 300,000 warrants expire in July 2020.
The Company provides for income taxes at
the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the
Company’s estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.
The Company has estimated its effective tax rate to be 0%, based
primarily on losses incurred and the uncertainty of realization of the tax benefit of such losses.
From time to time we
may be a defendant or plaintiff in various legal proceedings arising in the normal course of our business. As of the date of this
Quarterly Report, there are no material pending legal or governmental proceedings relating to us or properties to which we are
a party, and, to our knowledge, there are no material proceedings to which any of our directors, executive officers or affiliates
are a party adverse to us or which have a material interest adverse to us.
NOTE 8
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SUBSEQUENT EVENTS
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There were no subsequent
events at the time of filing.
ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Overview
SmartMetric, Inc. (“SmartMetric”
or the “Company”) was incorporated pursuant to the laws of Nevada on December 18, 2002. SmartMetric is a company engaged
in the technology industry. SmartMetric has an issued patent covering technology that involves connection to networks using data
cards (smart cards and EMV cards). In addition, SmartMetric holds the sole license to five issued patents covering features of
its biometric fingerprint activated cards. SmartMetric’s main products are a fingerprint sensor activated payments card and
a security card with a finger sensor and fully functional fingerprint reader embedded inside the card. The cards have a rechargeable
battery allowing for portable biometric identification and card activation. These cards are herein sometimes referred to as a biometric
card or the SmartMetric Biometric Card.
The Market For Biometric Credit Cards
Nearly
579 million biometric credit/debit cards
will be in use over the next five (5) years according to an independent market
research company. Goode Intelligence* reports that there is a significant market opportunity for biometric payment cards
and forecasts that by 2023 there will be almost 579 million biometric payment cards in use around the world.
“Contactless card payments
are even outperforming mobile in many regions. Many consumers prefer to use a contactless payment card over a mobile payment equivalent
and according to Goode Intelligence research, many users would like to use cards in contactless mode for higher value
transactions. Biometric payment cards not only offer improved security by removing the PIN but also allow frictionless payments
for higher value transactions,” stated Good Intelligence.
SmartMetric engaged
an outside independent research company to survey a statistical relevant sample of Visa credit card holders in the United States.
One of the questions asked showed that nearly 67% of these credit card holders would be willing to pay $69.95 for a biometric
secured credit card. If this consumer purchase enthusiasm were to come to fruition via sales, than hundreds of millions of biometric
cards would be sold in the United States alone.
The survey asked:
Would you pay for a safer biometric secured credit card that
has a built-in fingerprint reader for your protection?
*
Goode Intelligence
is an independent
analyst
and
consultancy
company that provides quality advice to global decision makers in business
and technology.
Goode Intelligence
works in information security, mobile security, authentication and identity verification, biometrics, enterprise mobility and
mobile commerce sectors.
Founded in
2007 by Alan Goode and headquartered in London, Goode. Intelligence helps both technology providers, investors and IT purchasers
make strategic business decisions based on quality research, insight and consulting.
The SmartMetric Biometric Technology
and Products
SmartMetric’s founder, Chaya Hendrick
is the originator and inventor of various miniature biometric activated cards, including the SmartMetric biometric fingerprint
activated payments card with an embedded fully functional fingerprint reader inside. the card. The card is the size and thickness
of a standard credit card. The SmartMetric biometric payments card provides for high level security for credit and debit cards
by adding biometric authentication and activation to Europay, MasterCard and Visa (“EMV”) chip cards in use around
the world. The SmartMetric biometric payments card has been manufactured to be totally interoperable with existing EMV chip card
readers, ATMs as well as banking payments infrastructure. Using the advanced electronic miniaturization by SmartMetric to make
its biometric credit/debit cards the Company has also created a multi-functional biometric building access control and logical
network access card. Since July 1, 2018, SmartMetric has commenced efforts towards creating a biometric health insurance card with
memory for storing a person’s medical files, including medical images. This allows a person to securely take with them their
private medical files inside the card when traveling away from home. For the first time, a person’s complete medical files
can be stored in a credit card-sized card and the information is only able to be accessed by the card holder’s own fingerprint.
The company is in discussion with significant health membership organizations concerning the offering of the SmartMetric Biometric
Medical Records card to their respective members.
SmartMetric has developed its rechargeable
battery powered fingerprint reader that is of a scale that fits “inside” a standard credit or debit card. The cardholder
has stored inside the card his or her fingerprint. To activate the card the person swipes the fingerprint sensor, the sensor is
connected to an internal microprocessor that manages the fingerprint sensor fingerprint image capture and comparison matching with
the pre-stored fingerprint of the cardholder held in the internal electronic memory of the card. The card has a surface mounted
EMV chip as found on EMV banking chip cards that is activated or turned on only after a card holder’s fingerprint has been
scanned and verified using the SmartMetric miniature “in-card” biometric scanner.
There are over seven (7) billion EMV chip
cards used by banks around the world for credit cards, ATM cards and debit cards according to EMVco. SmartMetric sees this existing
user base as a natural market for its advanced biometric activated card technology for the credit and debit card market. SmartMetric
has established a network of card manufacturers and technology distributors to market its in-card biometric products to card issuing
banks and in the case of the SmartMetric biometric security card, to businesses.
SmartMetric has completed development of
its biometric card and is now actively marketing its card to major card issuing banks throughout the world in partnership with
established card distributors and dealers.
We believe the SmartMetric biometric payments
card, with a built-in rechargeable battery and EMV banking industry contact interface chip (which activates following a fingerprint
match on the card), is the first of its kind in the world.
In Card Fingerprint Matching and Verification
The SmartMetric Biometric card incorporates
a rechargeable, lithium polymer battery. This battery is rechargeable, very thin and has been designed by SmartMetric to fit inside
the SmartMetric fingerprint credit card sized card. This battery is manufactured by a third party unaffiliated with the Company
to SmartMetric’s specifications. This battery is embedded inside the card.
Other components needed for manufacture
of the SmartMetric Biometric Card include, but are not limited to, sensors, microchips, memory chips and processor chips. The ultra-thin
circuit board developed by SmartMetric has, in total, nearly 200 active and passive components. The sources and availability of
these materials are numerous, readily available and should not affect the ability of SmartMetric to meet future demand. The supply
of memory processors and passive components may be interrupted at any time based on global supply/demand issues. We have not experienced
component supply issues to date and the Company, as a matter of policy, has alternative component sources to mitigate and protect
against supply chain issues.
The biometric card has been designed to
offer the option of a built-in radio frequency transmitter for contactless access and identity verification. The RFID contactless
chip transmission is turned on using the card users fingerprint verification.
The thinness form factor of many of the
components, has also resulted in the Company having to develop its own process for high volume electronic assembly. The Company
has also successfully overcome the challenge of developing a process of encapsulating the electronics in plastic to create the
credit card sized biometric fingerprint activated card that also has an internal rechargeable battery.
Standard credit card manufacturing utilizes
machines that require high pressure and high temperature in fusing top and bottom sheets of plastic together thereby encasing any
electronics inside the card. Given the complexity of the card’s electronics and vulnerability to an assembly process involving
high heat and high pressure, damage to the electronic circuitry was a major challenge for the Company to overcome. Research and
development activities of the Company allowed the Company to achieve this ability through a trade secret process that protects
the silicon and internal battery that is mounted directly onto the card’s internal electronics circuit board.
The Security Technology Industry
SmartMetric Biometric Multi-Function Security Card
The Access management
market is estimated to grow from USD 8.09 billion in 2016 to USD 14.82 billion by 2021
SmartMetric has developed a multi-function
logical and physical access security card this size and thickness of a standard credit card. Utilizing the small size breakthroughs
by the Company in its biometric payments card development, SmartMetric has successfully developed a biometric security card that
can easily fit inside a person’s wallet.
As with the biometric payments card, the SmartMetric security
card has an internal rechargeable battery that is used to power the card’s internal processor used in the biometric fingerprint
scan. All functions and operations of the card are subject to a valid fingerprint scan and match of the card user.
The main features of the SmartMetric biometric security card
are:
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1.
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Logical access smartcard card chip for insertion into a card reader attached to a computer or network
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2.
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RFID transceiver for physical access i.e. doorways, elevators, etc.
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3.
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Validation indicator light that glows green immediately following a fingerprint validation
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4.
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Rechargeable battery to power the card
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5.
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Size and thickness of a credit card
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6.
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Changeable security code on reverse of card for additional log on security
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Cybersecurity
and identity validation for network access control, physical building entry and secure on-the-spot identity security is now handled
by the revolutionary biometric activated cyber and ID multi-function security card which has been developed by SmartMetric after
over a decade of R&D.
From
governments to the workplace, better, stronger security is desired across the enterprise. Our new biometric multifunction security
card provides a revolutionary biometric based solution that is portable, easily integrated and backward compatible to existing
backend security infrastructure.
The
new multifunction biometric security card by SmartMetric is a revolutionary leap forward in the Cyber and Access Security world
according to SmartMetric.
Access
management market is estimated to grow from USD 8.09 billion in 2016 to USD 14.82 billion by 2021, at a CAGR of 12.9% between
2016 and 2021 according to a recent research report by KBV Research in a publication titled Identity & Access Management Market
– Global Forecast by Marqual IT Solutions Pvt. Ltd (KBV Research) November 2016 KBV Research is a name owned by IT
Solutions Pvt. Ltd.
Biometrics
Biometric technologies identify users by
electronically capturing a specific biological or behavioral characteristic of that individual, such as a fingerprint or voice
or facial feature, and creating a unique digital identifier from that characteristic. Because this process relies on largely unalterable
human characteristics, positive identification can be achieved independent of any information possessed by the individual seeking
authorization.
The process of identity authentication
typically requires that a person present for comparison with one or more of the following factors:
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Something known such as a password, PIN or mother’s maiden name;
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Something carried such as a token, card, or key; or
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something physical such as fingerprint, voice pattern, signature motion, facial shape or other biological or behavioral characteristic.
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Comparison of biological and behavioral
characteristics has historically been the most reliable and accurate of the three factors but has also been the most difficult
and costly to implement into a single product that can automatically verify the identity of a user accessing a computer network
or the Internet. However, recent advances in biometric collection technologies (both biometric hardware products and their associated
processing software) have increased the speed and accuracy and reduced the cost of implementing biometrics in commercial environments.
Management believes that individuals, website operators, government organizations, and businesses will increasingly use this method
of identity authentication.
Biometrics refers to the automatic identification
of a person based on his/her physiological or behavioral characteristics. This method of identification is preferred over traditional
methods involving passwords and personal identification numbers (“PINs”) for two reasons: (i) the person to be identified
is required to be physically present at the point of identification to be identification; and (ii) identification based on biometric
techniques obviates the need to remember a password or carry a token. By replacing PINs, biometric techniques can potentially prevent
unauthorized access to or fraudulent use of cellular phones, Biometric cards, desktop PCs, workstations and computer networks.
It can be used during transactions conducted via telephone and Internet (e-commerce and e-banking). In automobiles, biometrics
could replace keys-less entry devices. The SmartMetric fingerprint activated credit card that has the fingerprint encased inside
the credit card has been developed to replace the less secure PIN’s for credit and debit cards.
PINs and passwords may be forgotten, may
be hacked and token-based methods of identification, e.g., passports and driver’s licenses, may be forged, stolen or lost.
Various types of biometric systems are being used for real-time identification, with the most popular based on facial recognition
and fingerprint matching. Other biometric systems utilize iris and retinal scanning, speech, facial thermograms and hand geometry.
Of the biometric options available to work with a credit or debit card, fingerprint scanning is the only biometric methodology
that has been successfully reduced in size to fit inside such cards.
A biometric system is essentially a pattern
recognition system, which makes a personal identification by determining the authenticity of a specific physiological or behavioral
characteristic possessed by the user. An important issue in designing a practical system is to determine how an individual is identified.
There are two different ways to resolve
a person’s identity; verification and identification. Verification (Am I whom I claim I am?) involves confirming or denying
a person’s claimed identity. In identification, one has to establish a person’s identity (Who am I?).
As stated above, the SmartMetric fingerprint
biometric card has been designed as a credit-card sized card embedded with an integrated circuit, contact chip and biometric fingerprint
sensor. The SmartMetric card has been designed to provide not only memory capacity, but also computational capability along with
secure non-refutable identification of the user. We believe that the self-containment of SmartMetric’s card makes it substantially
resistant to attack, as it will not need to depend upon vulnerable external resources. Because of this characteristic, we expect
that the SmartMetric biometric card may be used in different applications, which require strong security protection and authentication.
The physical structure of a card is specified by the International
Standards Organization (“ISO”). Generally, this structure is made up of three elements: (i) the plastic card, which
is the most basic one and has the dimensions of 85.60mm x 53.98 x 0.80mm; (ii) an electronic circuit board inlay; and (iii) a contact
chip that are embedded in the card.
The SmartMetric card has been designed
to conform to ISO standards. The electronic circuit inlay is a part of, and not distinct from, the biometric card.
The communication line between the card
and ATMs and other standard Smart Card reading devices is bi-directional serial transmission, which conforms to ISO standards.
Card commands and input data are sent to the chip that responds with status words and output data upon the receipt of these commands
and data. Information is sent in half duplex mode (transmission of data is in one direction at a time). This protocol, together
with the restriction of the bit rate, is designed to prevent data attack on the card. Other data protection systems are utilized
inside the card including advanced encryption.
In general, the size, the thickness and
bend requirements for the biometric card were designed to protect the card from being spoiled physically.
Going Concern
Our
auditors’ report on our June 30, 2018 financial statements expressed an opinion that there is no guarantee regarding the
Company’s ability to continue as a going concern. The company continues to rely on direct equity investment in the company
through the sale of shares by way of private placement offerings to purchase shares in the Company. The company has funded itself
by way of private placement equity share sales since inception.
Critical Accounting Policies
We have prepared our financial statements
in conformity with accounting principles generally accepted in the United States, which requires management to make significant
judgments and estimates 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 expenses during the reporting period. We base these significant
judgments and estimates on historical experience and other applicable assumptions we believe to be reasonable based upon information
presently available. These estimates may change as new events occur, as additional information is obtained and as our operating
environment changes. These changes have historically been minor and have been included in the financial statements as soon as they
became known. Actual results could materially differ from our estimates under different assumptions, judgments or conditions.
All of the Company’s significant
accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, to our financial statements, included
elsewhere in this Quarterly Report. We have identified the following as our significant accounting policies and estimates, which
are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the
presentation of our financial condition and results of operations and could potentially result in materially different results
under different assumptions, judgments or conditions.
We believe the following critical accounting
policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:
Use of Estimates
-
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Actual results
may differ from those estimates.
Cash and Equivalents
-
Cash equivalents are comprised of certain highly liquid investments with maturity of three months or less when purchased. We maintain
our cash in bank deposit accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such
accounts.
Research and Development Costs
-
Research and development costs are charged to expense as incurred. Our research and development expenses consist primarily of expenditures
for electronics design and engineering, software design and engineering, component sourcing, component engineering, manufacturing,
product trials, compensation and consulting costs.
Results of Operations
Comparison of the Three Months Ended
March 31, 2018 and 2017
Our results of operations have varied significantly
from year to year and quarter to quarter and may vary significantly in the future. We did not have revenue for the three months
ending September 30, 2018 and 2017. Net loss for the three months ended September 30, 2018 and 2017 were $213,327 and $247,062,
respectively, resulting from the operational activities described below.
Operating Expenses
Operating expense totaled $200,864 and
$237,404 during the three months ended September 30, 2018 and 2017, respectively. The increase in operating expenses is the
result of the following factors.
|
|
Quarter Ended
September 30
|
|
|
Change in 2018
Versus 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer salary
|
|
$
|
47,500
|
|
|
$
|
47,500
|
|
|
$
|
-
|
|
|
|
(0
|
)%
|
Research and development
|
|
|
29,360
|
|
|
|
16,600
|
|
|
|
12,760
|
|
|
|
76.9
|
%
|
General and administrative
|
|
|
124,004
|
|
|
|
173,304
|
|
|
|
(49,300
|
)
|
|
|
(28.4
|
)%
|
Total operating expense
|
|
$
|
200,864
|
|
|
$
|
237,404
|
|
|
$
|
(36,540
|
)
|
|
|
(15.4
|
)%
|
Research and Development
Research and development expenses totaled
$29,360 and $16,600 for the three months ended September 30, 2018 and 2017, respectively. The increase of $12,760, or 76.9%, in
2018 compared to 2017 was primarily attributable to increased engineering expenses. Our research and development expenses consist
primarily of expenditures related to engineering.
General and Administrative
General and administrative expenses totaled
$171,504 and $220,804 for the three months ended September 30, 2018 and 2017, respectively. The decrease of $49,300 or 28.4%, in
2018 compared to 2017 was primarily the result of a decrease in consulting expenses. Our general and administrative expenses consist
primarily of expenditures related to employee compensation, legal, accounting and tax, other professional services, and general
operating expenses.
Other Income (Expense)
Other income (expense) totaled $12,463
and $9,658 for the three months ended September 30, 2018 and 2017, respectively.
|
|
Quarter Ended
September 30
|
|
|
Change in 2018
Versus 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
12,463
|
|
|
|
9,658
|
|
|
|
2,805
|
|
|
|
29.0
|
%
|
Total operating expense
|
|
$
|
12,463
|
|
|
$
|
9,658
|
|
|
$
|
2,805
|
|
|
|
29.0
|
%
|
Interest income (expense)
We had net interest expense of $12,463
in the three months ended September 30, 2018 compared to $9,658 net interest expense for the three months ended September 30, 2017.
The increase of $2,805 was attributable to interest expenses related to accrued but unpaid salary of our CEO pursuant to an amended
and restated employment agreement entered into on July 1, 2017.
Liquidity and Capital Resources
We have incurred losses since our inception
in 2002 as a result of significant expenditures for operations and research and development and the lack of any revenue. We have
an accumulated deficit of approximately $26,210,237 as of September 30, 2018 and anticipate that we will continue to incur additional
losses for the foreseeable future. Through September 30, 2018, we have funded our operations through the private sale of our equity
securities and exercises of options and warrants, resulting in gross proceeds of approximately $26 million from inception through
September 30, 2018. Cash and cash equivalents at September 30, 2018 were $11,179.
|
|
Three months ended
September 30,
|
|
|
Change in 2018 versus
2017
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
$
|
4,427
|
|
|
$
|
51,695
|
|
|
$
|
(47,268
|
)
|
|
|
(91.4
|
)%
|
Net cash used in operating activities
|
|
|
142,018
|
|
|
|
155,968
|
|
|
|
(13,950
|
)
|
|
|
(8.9
|
)%
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
148,770
|
|
|
|
109,824
|
|
|
|
38,946
|
|
|
|
35.5
|
%
|
Cash at end of period
|
|
|
11,179
|
|
|
|
5,551
|
|
|
|
5,628
|
|
|
|
101.4
|
%
|
Net Cash Used in Operating Activities
Net cash used in operating activities was
$142,018 and $155,968 for the three months ended September 30, 2018 and 2017, respectively. The decrease of $13,950 in cash used
during 2018 compared to 2017 was primarily attributable to a decrease in consultant costs.
Net Cash Used in Investing Activities
Cash used in investing activities was $0
and $0 for the three months ended September 30, 2018 and 2017, respectively.
Net Cash Provided by Financing Activities
During
the three months ended September 30, 2018, we received net proceeds of $148,770 from the sales of our securities, compared to
$109,824 for the three months ended September 30, 2017. The increase was due to higher sales of the Company’s securities
in private placements. We continue to seek funding through private placement sales of equity to fund our continued operations,
sales and marketing and ongoing research and development programs.