Corporate History and Overview
SmartMetric, Inc. (“SmartMetric” or
the “Company”) was incorporated pursuant to the laws of Nevada on December 18, 2002. SmartMetric is a development stage
company engaged in the technology industry. SmartMetric’s main products are a fingerprint sensor activated payments card
and 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 SmartMetric Biometric Technology And Products
SmartMetric's founder, C. Hendrick is the originator
and inventor of various miniature biometric activated devices 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 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, ATM’s as well as banking payments infrastructure. Using the advanced electronic
miniaturization by SmartMetric to make it’s biometric credit/debit cards the company has also turned its attention to creating
a multi-functional biometric building access control and logical network access card. SmartMetric has also turned its attention
to creating a biometric health insurance card with memory for storing a person’s medical files as well as assisting in fighting
medical fraud by using the card to provide in-card biometric identity validation.
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 holders fingerprint has been scanned and verified using
the SmartMetric miniature "in-card" biometric scanner.
There are over 4.8 billion EMV chip cards used
by banks around the world for credit cards, ATM cards and debit cards. SmartMetric sees this existing user base as a natural market
for its advanced security biometric activated card technology. SmartMetric plans to market its in-card biometric solution as a
replacement to the less secure password or PIN used in current cards to card issuing banks and financial institutions.
SmartMetric has completed development of its biometric
card. The company is now presenting its card to major card issuing banks throughout the world. Following feedback from potential
Bank customers, SmartMetric has incorporated new changes into its card including an indicator light as well as an extended battery
life.
Following feedback from card issuers the company
has modified its product to include an area touch sensor. Replacing the cards previous swipe sensor. This change in the product
has been completed and is now being presented to card issuing Banks around the World.
Card issuers may take from 3 months up to 12 months
of internal trials and test marketing prior to placing orders of consequence with SmartMetric.
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.
THE SMARTMETRIC BIOMETRIC IN-CARD FINGERPRINT READER PAYMENTS CARD
The SmartMetric biometric fingerprint activated card has several functions:
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The card holders fingerprint is stored inside the card and NOT on a central computer;
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Interoperable with existing smart card, EMV ATM and Retail Point Of Sale Machines;
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The fingerprint sensor facilitates instant authorization and card user verification;
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Self-powered with its own internal rechargeable battery to allow for fingerprint activation prior to insertion into a card reading device such as an ATM or retail card reading machine;
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In card biometric measurement storage safeguards personal information;
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In card biometric storage permits access, identity and transaction control verification;
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The SmartMetric Biometric Card contains active
and passive components mounted onto a paper-thin circuit board. Reducing a powerful Cortex processor to a very thin component along
with many other complex computer components including memory chips. Mounting them on the super thin board. This has required significant
innovations in electronic manufacturing processes.
The SmartMetric biometric card is also a leading
edge solution in the identity and access control market. Unlike a picture-based identification system, the SmartMetric biometric
card has been designed to operate exclusively with the registered user. And unlike biometric security systems where the biometric
information is stored at a central location, the Company believes that security is significantly increased during the verification
process since the biometric information is embedded in the card itself, in a memory chip protected by encryption and no biometric
data is travelling over a network. The built-in fingerprint scanner is designed to activate the card. Without a match with the
encrypted fingerprint already stored in the card, the SmartMetric Biometric card will not operate.
As an online purchasing/credit card, the biometric
payments card can help protect against identity theft and related fraudulent crimes that consumers can be exposed to when making
purchases over the Internet. Unlike conventional credit cards, which require a consumer to type and deliver sensitive information
over the Internet in order to make a purchase, the biometric card is designed to be inserted into a reader that is connected to
the USB port of a computer. Using a USB port adapter any customer purchasing information can then only be released from the card
when the owner’s finger print unlocks the card. The consumer’s information then travels across the Internet encrypted,
minimizing exposure to interception by hackers and identity thieves.
SmartMetric believes that its biometric security
card, by way of containing information unique to the individual user, protected by the card user’s biometrics, will be useless
in the hands of others. Unlike a picture-based identification system, the SmartMetric biometric card has been designed to operate
exclusively with the registered user. The fingerprint sensor built into the card has been designed to activate the card. Without
a match with the encrypted fingerprint already stored on the card, the biometric Card will not operate.
The SmartMetric access control and identity biometric
card is a card that authorized persons will carry with them and activate to obtain access. Such activation will take place by placing
a finger on a fingerprint sensor on the surface of the card. The SmartMetric biometric cards are designed to be read by both contact
and contactless card acceptor devices. For contact card acceptor devices, the device must touch a chip mounted on the surface of
the biometric card. This contact allows the card to transmit data to the reading device. For contactless acceptor devices, a radio
frequency signal will be sent from the card to a radio frequency signal receiver in the acceptor device. In both types of card
reading devices, the activation signal is sent only when there has been a positive match of the persons fingerprint by the cards
fingerprint sensor. The card reader devices are standard smartcard readers available from a variety of third parties.
The memory and computational capacities of the
biometric card are used to store a user's fingerprint(s). The computational capacity is used to process a digitized image from
the fingerprint sensor to confirm a match (or no match) with the fingerprint template. Additional computational processes such
as increased cryptography will depend on the requirements of specific customers.
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 to SmartMetric’s specifications
and is unaffiliated with the Company. 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 sources
and availability of these materials are numerous and readily available, and should not affect the ability of SmartMetric to meet
future demand. However, SmartMetric does re-engineer a number of important components at silicon level to achieve the
component size required to fit inside a Credit Card. Both the supply of memory and processors in silicon wafers may
be interrupted at any time based on global silicon supply/demand issues and the re-engineering of silicon by SmartMetric may also
cause end component supply problems from time to time which may affect production and sale of the Cards.
The biometric card has been designed to offer the
option of a built-in radio frequency transmitter for contactless long range access and identity verification. Another
version of the card incorporates a short range RFID contactless chip that is also turned off and on using the card users fingerprint
verification on the Card.
The thinness form factor of many of the components
including the processor itself being an unpackaged wafer of silicon has also resulted in the Company having to develop its own
process for mass electronic assembly. The Company was also challenged in the process of encapsulating the electronics in plastic
creating the credit card sized biometric fingerprint activated card.
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 combination of adjusting the pressure and heat
required using special polymers together with a trade secret process that protects the silicon that is mounted directly onto the
internal electronics circuit board.
T
he Security Technology Industry
SmartMetric Biometric Multi-Function Security Card
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 cards 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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Logical access smartcard card chip for insertion into a card reader attached to a computer or network
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RFID transceiver for physical access i.e. doorways, elevators, etc.
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Validation indicator light that glows green immediately following a fingerprint validation
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Rechargeable battery to power the card
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Size and thickness of a credit card
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Changeable security code on reverse of card for additional log on security
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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:
• Something known such as a password, PIN
or mother's maiden name; • Something carried such as a token, card, or key; or • something physical such as fingerprint,
voice pattern, signature motion, facial shape or other biological or behavioral characteristic.
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 various reasons: (i) the person to be identified
is required to be physically present at the point of identification to be identification; (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, it is made up of three elements. The plastic card is the
most basic one and has the dimensions of 85.60mm x 53.98 x 0.80mm, with an electronic circuit board inlay and an contact chip that
are embedded in the card.
The SmartMetric card has been designed so that
it conforms 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 ATM’s
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.
Sales and Marketing
We plan to market and sell our product to commercial
and banking interests in the private sector and governmental agencies.
The company is now actively marketing its biometric
EMV chip card to Banks and Financial Institutions within the United States and Europe. The company also has sales representation
in Australia and sales and marketing discussions under way with Financial Institutions in the Far East, Latin America and Asia.
The company will be exhibiting industry conferences
and exhibitions as part of its ongoing sales and marketing efforts
There are more than 4.8 Billion EMV chip cards
in use by Banks and Financial Institutions around the world according the standards body EMVco.
Manufacturing
The Company designs and develops its technology.
It uses various companies to make and supply components that make up the SmartMetric biometric card. Current production capacity
is approximately 250,000 cards per week and this can be substantially increased in co-ordination with our electronics assembler.
SmartMetric’s President & CEO in the
card lamination factory.
Intellectual Property
We rely on patents, licenses, trade secrets, trademarks,
copyright registrations and non-disclosure agreements to establish and protect our proprietary rights in our technologies and products.
A number of Patents are in process (Patents Pending) that cover critical aspects of the engineering and function of the SmartMetric
biometric card. The founder of SmartMetric, Chaya Hendrick is the inventor of these patents and has provided SmartMetric with an
option over biometric card related pending patents invented by her.
Some of the most recent patents pending have not
been disclosed on the publicly searchable USPTO database of filed for patents and remain trade secrets within the company. Publishing
of such patents pending will be done in due course.
Patents
Our technology is also dependent upon unpatented
trade secrets. However, trade secrets are difficult to protect. In an effort to protect our trade secrets, we have a policy of
requiring our employees, consultants and advisors to execute non-disclosure agreements. The principle shareholder of SmartMetric
and technology inventor, C. Hendrick, through various corporate investment vehicles and companies also owns other technologies,
patents, and has financial interest in other technology companies. C. Hendrick, under an executed employment agreement is not subject
to any restriction on using and owning any technology, methodology, process or invention created by C. Hendrick.
Government Regulation
There are currently no governmental regulations,
which have any bearing on the raw materials or the manufacturing of our payments card products. United States Federal Departments
such as the Department Of Defense have rules and regulations concerning security features of smart cards used as identity or building
and cyber access cards. These regulations stipulate a specific licensing and testing protocol for such cards.
Banking Industry Self Regulation
The EMV chip used in chip cards are subject to licensing and testing
by the banking controlled body called EMVco. EMVco is an acronym standing for Europay, MasterCard and Visa. These international
payments card networks where the founding parties of EMVco.
Individual payments networks such as Visa, Mastercard, Europay, American
Express, Union Pay Dinners and JCB all have their own individual licensing and testing standards and processes. SmartMetric
is dealing with one of these significant global payments networks for both licensing, testing and approval.
Payments Network Licensing, Testing and Approvals
SmartMetric’s EMV chip and related software
are approved from a global payments network. SmartMetric is proceeding with product testing and final approvals for its card to
work on a global payment network thereby assuring interoperability and function of the SmartMetric card with Point Of Sale readers
and ATM’s around the world.
No assurances can be given regarding the timing
and ultimate approvals as these are given by the global payments network. Having stated that the EMV chip used by SmartMetric
is now licensed and approved along with the EMV software. Card type testing is outstanding and yet to be completed
Research and Development
Our research and development program is focused
on ongoing development of new products built on our existing biometric card. We continue to refine our technology and develop further
improvements to our biometric card products. We have finalized our first biometric EMV payments card product. We have also
concluded the design and electronic engineering for our soon-to-be released multi-function security and access control biometric
cards. Research and development will continue as the Company continues to innovate and develop new biometric card based
products. Future biometric card based products the company is now working on, include but are not limited to; (a) health
insurance card with stored in card medical records (b) national identity card (c) drivers licenses.
The company has developed and is continuing to
develop its own embedded systems and application software that works with the SmartMetric Biometric Card. This development software
and systems and ongoing electronic design and development requires the company to continue to expend time and financial resources
on significant software development. Contractor electronic and software engineers are engaged by and working for SmartMetric in
Tel Aviv, Israel and Buenos Aires, Argentina.
Competition
Various potential competitors have announced products
similar to that of SmartMetric’s.
Employees
As of the date of this annual report, we have
one full time employee, our CEO and President, Chaya Hendrick.. We primarily use direct contract hires in administration and engineering,
as is common in the information technology world. All work product developed by all of our engineers remains the intellectual
property of SmartMetric. Engineers who work for SmartMetric under contract are primarily based in Tel Aviv, Israel.
Some software engineering is conducted in Buenos Aires, Argentina.
Corporate
History
We
were incorporated in the State of Nevada on December 18, 2002 and our principal office is located in Las Vegas, Nevada. Since
our inception, we have invested a substantial portion of our efforts and financial resources in the development of our products.
We have generated no revenues from the sale of our products and have experienced substantial net operating losses.
Where
to Find More Information
We
make our public filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and all exhibits and amendments to these reports. These materials are available on the Company’s website at
www.smartmetric.com
or on the SEC’s web site,
http://www.sec.gov
. You may also read or copy any materials
we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Alternatively, you may obtain copies of these
filings, including exhibits, by writing or telephoning us at:
SMARTMETRIC
3960
Howard Hughes Parkway, Suite 500
Las
Vegas, NV 89109
Attn:
Chief Executive Officer
Tel:
702 990 3687
We
have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in
this Annual Report, may adversely affect our business, operating results and financial condition. The uncertainties and risks
enumerated below as well as those presented elsewhere in this Annual Report should be considered carefully in evaluating us, our
business and the value of our securities. The following important factors, among others, could cause our actual business, financial
condition and future results to differ materially from those contained in forward-looking statements made in this Annual Report
or presented elsewhere by management from time to time.
Risks
Related to Our Financial Position and Need to Raise Additional Capital
We
have a limited operating history as a company, and may not be able to effectively operate our business.
Our
limited staff and operating history means that there is a high degree of uncertainty regarding our ability to:
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develop
our technologies and proposed products;
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identify,
hire and retain the needed personnel to implement our business plan and sell our products;
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Manage
our growth and / or successfully scale our business; or
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respond
to competition.
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No
assurances can be given as to exactly when, if at all, we will be able to fully develop, and take the necessary steps to derive
any revenues from our proposed products.
Raising
capital may be difficult as a result of our history of losses and limited operating history in our current stage of development.
When
making investment decisions, investors typically look at a company’s management, earnings and historical performance in
evaluating the risks and operations of the business and the business’s future prospects. Our history of losses and relatively
limited operating history in our current stage of development makes such evaluation, as well as any estimation of our future performance,
substantially more difficult. As a result, investors may be unwilling to invest in us or on terms or conditions which are acceptable.
If we are unable to secure additional financing, we may need to materially scale back our business plan and/or operations or cease
operations altogether.
We
are an early-stage company, have no product revenues, are not profitable and may never be profitable.
From
inception through June 30, 2017, we have raised approximately $23,000,000 million through the sale of our securities. During
this same period, we have recorded an accumulated deficit of approximately $24,346,047 million. Our net losses for the two
most recent fiscal years ended June 30, 2017, and 2016 were $1,086,091 and $2,227,324, respectively. No sales and have never
generated revenues and we anticipate none will be generated for the foreseeable future. We expect to incur significant
operating losses for the foreseeable future as we continue the development of our products. Accordingly, we will need
additional capital to fund our continuing operations and any expansion plans. Since we do not generate any revenue, the most
likely source of such additional capital is the sale of our securities. To the extent that we raise additional capital by
issuing equity securities, our stockholders are likely to experience dilution with regard to their percentage ownership of
the company, which may be significant. If we raise additional capital by incurring debt, we could incur significant interest
expense and become subject to covenants that could affect the manner in which we conduct our business, including securing
such debt obligations with our assets.
To
date, we have generated only losses, which are expected to continue for the foreseeable future.
For the years ended June 30, 2017 and 2016,
we incurred a net loss of $1,086,091 and $2,227,324, respectively. We may not be able to achieve expected results, including
any guidance or outlook it may provide from time to time.
We
may continue to incur losses and may be unable to achieve profitability. We cannot assure you that our net losses and negative
cash flow will not accelerate and surpass our expectations nor can we assure you that we will ever generate any net income or
positive cash flow.
We may not be able to continue as a going
concern if we do not obtain additional financing by December 31, 2017.
Since our inception, we have funded our operations
primarily through the sale of our securities. Our cash and cash equivalents balance at June 30, 2017 was $51,695. Based on our
current expected level of operating expenditures, we expect to only be able to fund our operations through the second quarter (ending
December 31, 2017) of fiscal year ending June 30, 2018, at which time we will need additional capital. Our ability to continue
as a going concern is wholly dependent upon obtaining sufficient capital to fund our operations. We have no committed sources of
additional capital and our access to capital funding is always uncertain. Accordingly, despite our ability to secure capital in
the past, we cannot assure you that we will be able to secure additional capital through financing transactions, including issuance
of debt, or through other means. In the event that we are not able to secure additional funding, we may be forced to curtail operations,
delay or stop ongoing clinical trials, cease operations altogether or file for bankruptcy.
Our
auditors have expressed substantial doubt about our ability to continue as a going concern.
Our auditors’ report on our June 30,
2017 financial statements expressed an opinion that our capital resources as of the date of their audit report were not sufficient
to sustain operations or complete our planned activities for the upcoming year unless we raised additional funds. Our current cash
level raises substantial doubt about our ability to continue as a going concern past December 31, 2017. If we do not obtain additional
funds by such time, we may no longer be able to continue as a going concern and will cease operation which means that our shareholders
will lose their entire investment.
We
entered into a royalty and licensing agreement with Chaya Hendrick, our CEO, which requires substantial payments by us on an annual
basis and additionally in the event gross revenues are derived, which could harm our financial position.
Pursuant
to a licensing and royalty agreement, entered into on September 11, 2017 by the Company and Chaya Hendrick, our founder and CEO,
we received a license to certain patents related to our technologies until the expiration of such patents in exchange for the
following : (i) Issuance of 200,000 Series B Convertible Preferred Shares, (ii) 5% of gross revenues derived from the sale of
products derived from the patents, and (iii) annual payments beginning at $50,000 per annum, increased by 100% of each previous
year (offset against 5% gross revenue royalty payments). We believe these patents are instrumental our business plan and if we
are unable to make such required payments under the plan, Chaya Hendrick may terminate the agreement, which may materially impact
our business plan. Furthermore, there can be no assurances that we will be able to continue to meet our financial obligations
under the terms of the agreement unless we are able to raise additional capital through the sale of our securities or derive revenue
from some other source.
As
of June 30, 2017, we owe Chaya Hendrick, our CEO, $520,848 in deferred salary, of which the failure to pay could result in Chaya
Hendrick’s termination of employment, the result of which would materially harm our business.
We
currently have not paid $520,848 in salary owed to Chaya Hendrick pursuant to Chaya Hendrick’s employment agreement outstanding
with us as of June 30, 2017. While Chaya Hendrick continues to support the Company and continues to operate as its CEO, president
and chairman of the Board of Directors, there can be no assurances that this will continue if we fail to back salaries and future
salary owed. Additionally, as of July 1, 2017, all prior and future deferred salary owed will bear interest at a rate of 7% per
annum. In the event Chaya Hendrick terminates employment for lack of payment, the Company believes such loss would cause irreparable
harm to our product development, and would materially harm our business prospects. Additionally, there can be no assurances that
Chaya would not attempt to foreclose on our assets in order to satisfy such debt obligations.
Risks
Relating to our Stage of Development and Business
Our
potential competitors have significantly greater resources than we have, which may make competing difficult.
We
compete against numerous companies, many of which have substantially greater resources than we have. Several such competitors
have large teams of engineers and scientists that attempt to develop products and technologies similar to ours. Companies such
as MaterCard, Visa, Gemalko, Giesecke & Devrient, Oberthur Card Systems, as well as others, have substantially greater financial,
research, manufacturing and marketing resources than we do. As a result, such competitors may find it easier to compete in our
industry and bring competing products to market.
Our
business depends upon our ability to keep pace with the latest technological changes, and our failure to do so could make us less
competitive in our industry.
The
market for our services is characterized by rapid change and technological improvements. Failure to respond in a timely and cost-effective
way to these technological developments may result in serious harm to our business and operating results. As a result, our success
will depend, in part, on our ability to develop and market service offerings that respond in a timely manner to the technological
advances of available to our customers, evolving industry standards and changing preferences.
Our
key personnel and directors are critical to our business, and such key personnel may not remain with our company in the future.
We
depend on the continued employment of its senior executive officers and other key management and technical contracted personnel.
If any of its key personnel were to leave and not be replaced with sufficiently qualified and experienced personnel, our business
could be adversely affected. In particular, our current strategy to penetrate the market for contactless logical access identification
and transaction solutions is heavily dependent on the vision, leadership and experience of its Chairman and CEO, C. Hendrick.
Our
continued success will depend, to a significant extent, upon the performance and contributions of our senior management and upon
our ability to attract motivate and retain highly qualified management personnel and employees. We depend on our key senior management
to effective manage our business in a highly competitive environment. If one or more of our key officers join a competitor or
form a competing company, we may experience interruptions in product development, delays in bringing products to market, difficulties
in our relationships with customers and loss of additional personnel, which could significantly harm our business, financial condition,
operating results and projected growth.
Rapid
technological changes could make our services or products less attractive.
The
smart card, biometric identification and personal identification industries are characterized by rapid technological change, frequent
new product innovations, changes in customer requirements and expectations and evolving industry standards. If we are unable to
keep pace with these changes, our business may be harmed. Products using new technologies, or emerging industry standards, could
make our technologies less attractive. If addition, we may face unforeseen problems when developing our products, which could
harm our business. Furthermore, our competitors may have access to technologies not available to us, which may enable them to
produce products of greater interest to consumers or at a more competitive cost.
Sales
of our products depend on the development of emerging applications in their target markets and on diversifying and expanding our
customer base in new markets and geographic regions, all of which may be financially burdensome or unsuccessful.
Our
intent is to market and sell our products primarily to the private sector while addressing emerging applications that have not
yet reached a stage of mass adoption or deployment. The market for some of these solutions (electronic biometric fingerprinting)
is at an early stage of deployment in the private sector compared to other forms of services that try to identify a person through
simpler means (by their name, social security number, etc.) Additionally, we have a strategy of expanding sales of existing products
into new geographic markets. Our target market initially will begin in South America and Australia. In the event that we are unable
to adequately develop our applications or gain traction in these emerging markets, or that the cost of the foregoing is too great,
our business may be harmed.
Continuing
disruption in the global financial markets may adversely impact customers and customer spending patterns.
Continuing
disruption in the global financial markets as a result of the ongoing global financial uncertainty may cause consumers, businesses
and governments to defer purchases in response to tighter credit, decreased cash availability and declining consumer confidence.
Accordingly, demand for our products could decrease and differ materially from their current expectations. Further, some of our
customers may require substantial financing in order to fund their operations and make purchases from us. The inability of these
customers to obtain sufficient credit to finance purchases of our products and meet their payment obligations to us or possible
insolvencies of our customers could result in decreased customer demand, an impaired ability for us to collect on outstanding
accounts receivable, significant delays in accounts receivable payments, and significant write-offs of accounts receivable, each
of which could adversely impact our financial results.
Risks
Related to Our Intellectual Property
If
we are not able to adequately protect our intellectual property, we may not be able to compete effectively.
Our
ability to compete depends in part upon the strength of our proprietary rights in our technologies, brands and content. The efforts
we have taken to protect our intellectual property and proprietary rights may not be sufficient or effective at stopping unauthorized
use of our intellectual property and proprietary rights. In addition, effective trademark, patent, copyright and trade secret
protection may not be available or cost-effective in every country in which our products are made available. There may be instances
where we are not able to fully protect or utilize our intellectual property in a manner that maximizes competitive advantage.
If we are unable to protect our intellectual property and proprietary rights from unauthorized use, the value of our products
may be reduced, which could negatively impact our business. Our inability to obtain appropriate protections for our intellectual
property may also allow competitors to enter our markets and produce or sell the same or similar products. In addition, protecting
our intellectual property and other proprietary rights is expensive and diverts critical managerial resources. If any of the foregoing
were to occur, or if we are otherwise unable to protect our intellectual property and proprietary rights, our business and financial
results could be adversely affected. If we are forced to resort to legal proceedings to enforce our intellectual property rights,
the proceedings could be burdensome and expensive. In addition, our proprietary rights could be at risk if we are unsuccessful
in, or cannot afford to pursue, those proceedings.
We
may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property
rights and we may be unable to protect our rights to, or use of, our technology.
Some
or all of our patent applications may not issue as patents, or the claims of any issued patents may not afford meaningful protection
for our technologies or products. In addition, patents issued to us or our licensors, if any, may be challenged and subsequently
narrowed, invalidated or circumvented. Patent litigation is widespread in our industry and could harm our business. Litigation
might be necessary to protect our patent position or to determine the scope and validity of third-party proprietary rights. If
we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company would
have the right to ask the court to rule that such patents are invalid and/or should not be enforced against that third party.
These lawsuits are expensive and we may not have the required resources to pursue such litigation or to protect our patent rights.
In addition, there is a risk that the court might decide that these patents are not valid and that we do not have the right to
stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld,
the court could refuse to stop the other party on the ground that such other party’s activities do not infringe on our rights
contained in these patents.
Furthermore,
a third party may claim that we are using inventions covered by their patent rights and may go to court to stop us from engaging
in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could
materially increase our operating expenses and divert the attention of managerial and technical personnel. There is a risk that
a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered
by the patents. In addition, there is a risk that a court would order us to pay the other party damages for having violated the
other party’s patents. It is not always clear to industry participants, including us, which patents cover various types
of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not
always uniform.
Because some patent applications in the United States may be maintained in secrecy until the patents are issued,
patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after
filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have
not filed patent applications for technology covered by our issued patents or that we were the first to invent the technology.
Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent
application may have priority over our patent applications and could further require us to obtain rights to issued patents covering
such technologies.
If
another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference
or other proceeding in the U.S. Patent and Trademark Office, or the PTO, or a court to determine priority of invention in the
United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful,
resulting in a loss of our United States patent position with respect to such inventions.
Some
of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have
substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation
could have a material adverse effect on our ability to raise the capital necessary to continue our operations.
Risks
Relating to Market Approval and Government Regulations
We
may be unable to comply with our reporting and other requirements under federal securities laws.
The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the United States Securities and Exchange
Commission, or SEC, and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and
financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting, would be expected to materially increase
the Company’s legal and financial compliance costs and make some activities more time-consuming and more burdensome. Presently
we qualify as a non-accelerated filer. Accordingly, we are exempt from the requirements of Section 404(b) and our independent
registered public accounting firm is not required to audit the design and operating effectiveness of our internal controls and
management’s assessment of the design and the operating effectiveness of such internal controls. In the event that we become
an accelerated filer, we will be required to expend substantial capital in connection with compliance.
We
do not have effective internal controls over our financial reporting.
Because
of our limited resources, management has concluded that our internal control over financial reporting may not be effective in
providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles. Effective internal controls over financial
reporting and disclosure controls and procedures are necessary for us to provide reliable financial and other reports and effectively
prevent fraud. If we cannot provide reliable financial or SEC reports or prevent fraud, investors may lose confidence in our SEC
reports, our operating results and the trading price of our common stock could suffer materially and we may become subject to
litigation.
Compliance
with changing regulation of corporate governance and public disclosure may result in additional expenses and will divert time
and attention away from revenue generating activities.
Changing
laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002
and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated
with accessing the public markets and public reporting. Our management team invests significant time and financial resources to
comply with both existing and evolving standards for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from developing our business to compliance activities which could have
an adverse effect on our business.
Our
technology relies on our ability to gain the acceptance and approval of large banking / credit card institutions, the failure
to do so may materially harm our business.
In
the event that our SmartMetric BioMetric Card does not gain acceptance / approval amongst the large card issuing institutions
in the United States and abroad, our cards will not be provided for use to customers. We currently have no plans to open our own
bank / credit card issuing institution and accordingly, we plan to rely on our ability to have our products accepted within the
banking / credit card industries. Our failure to do so will have a material impact on our ability to generate revenues and continue
to operate our business.
Risks
Relating to the Development and Manufacturing of Our Products
We
currently rely on third party manufacturers and suppliers for certain components of our product; with such parties being, to some
extent, outside of our control.
We
currently have limited internal manufacturing capability, and intend to rely on third party contract manufacturers or suppliers
for the foreseeable future. Accordingly, factors outside of our control may result in material manufacturing delays and product
shortages, which could delay or otherwise negatively impact our manufacturing and product development plans. Should we be forced
to manufacture our proposed products, we cannot give any assurance that we would be able to develop internal manufacturing capabilities.
In the event that we seek third party suppliers or alternative manufacturers, they may require us to purchase a minimum amount
of materials or could require other unfavorable terms. Any such event could materially impact our business prospects and could
delay the development and manufacturing of our products. Moreover, we cannot give any assurance that the contract manufacturers
or suppliers that we select will be able to supply our products in a timely or cost-effective manner or in accordance with our
specifications.
We
have a limited number of suppliers of key components, and may experience difficulties in obtaining components for which there
is significant demand, which would materially impact our business prospects.
We
rely upon a limited number of suppliers for some key components of our products. Our reliance on a limited number of suppliers
may expose us to various risks including, without limitation, an inadequate supply of components, price increases, late deliveries
and poor component quality. In addition, some of the basic components we use in our products, such as biometric fingerprint devices
and various smart card technologies may at any time be in great demand. This could result in components not being available to
us in a timely manner or at all, particularly if larger companies have ordered more significant volumes of those components, or
in higher prices being charged for components. Disruption or termination of the supply of components or software used in our products
could delay shipments of these products. The following delays / factors from our third party suppliers could have a material adverse
effect on our business and operating results and could also damage relationships with current and prospective customers:
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Difficulties
in staffing;
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Adequate
resources of qualified technicians, engineers/assemblers, and programmers;
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Potentially
adverse tax consequences;
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Unexpected
changes in regulatory requirements;
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Tariffs
and other trade barriers;
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Export
controls;
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Political
and economic instability; and
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Late
delivery of our products.
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We
utilize third party manufacturing plants for silicon for the manufacturing our products, which, in the event of growth would need
to use large quantities of silicon, for which raw material shortages may occur.
While
we currently use silicon in our products, and no shortage currently exists of these materials, there can be no assurances that
there will not be a shortage in the future, which may materially impact our manufacturing capabilities, growth prospects, and
ability to generate revenue in the future.
Risks
Related to our Securities
Our
board of directors has broad discretion to issue additional securities.
We are authorized under our certificate of incorporation to issue up to 305,000,000 shares consisting of 300,000,000
shares of common stock and 5,000,000 “blank check” shares of preferred stock. Shares of our blank check preferred stock
provide the board of directors with broad authority to determine voting, dividend, conversion, and other rights. As of June 30,
2017, we have issued and outstanding 226,172,799 shares of common stock and 410,000 shares of Series B Preferred Stock that are
convertible into 20,500,000 shares of common stock at the election of the holder. Additionally, we have 20,276,399 shares of common
stock reserved upon the exercise of outstanding purchase warrants. Accordingly, as of June 30, 2017 we are entitled to issue up
to 33,050,802 additional shares of common stock, and 4,959,000 additional shares of “blank check” preferred stock.
Our board may generally issue those common and preferred shares, or convertible securities to purchase those shares, without further
approval by our shareholders. Any additional preferred shares we may issue could have such rights, preferences, privileges, and
restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion
rights, redemption rights and liquidation provisions.
It
is likely that we will issue additional securities to raise capital in order to further our business plans. It is also likely
that we will issue additional securities to directors, officers, employees and consultants as compensatory grants in connection
with their services. Any issuances could be made at a price that reflects a discount to, or a premium from, the then-current market
price of our common stock. These issuances would dilute the percentage ownership interest of our current shareholders, which would
have the effect of reducing your influence on matters on which our stockholders vote, and might dilute the net tangible book value
per share of our common stock.
Future
sales of our common stock could cause our stock price to fall.
Transactions
that result in a large amount of newly issued shares become readily tradable, or other events that cause current stockholders
to sell shares, could place downward pressure on the trading price of our common stock. In addition, the lack of a robust trading
market may require a stockholder who desires to sell a large number of shares of common stock to sell the shares in increments
over time to mitigate any adverse impact of the sales on the market price of our stock. If our stockholders sell, or the market
perceives that our stockholders intend to sell for various reasons, substantial amounts of our common stock in the public market,
including shares issued upon the exercise of outstanding warrants, the market price of our common stock could fall. Sales of a
substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem reasonable or appropriate. We may become involved in securities class action litigation
that could divert management’s attention and harm our business.
During the year ended June 30, 2017 we issued
an aggregate of 22,437,633 shares of common stock. All of such common stock will be available for resale pursuant to rule 144 on
December 31, 2017, at the latest, provided we continue to comply with our SEC reporting obligations.
As of June 30, 2017, we had 226,172,799 shares
of common stock and 410,000 shares of Series B Preferred Stock issued and outstanding (not including 200,000 shares of Series B
Preferred Stock issued in September 2017). As of June 30, 2017, we had reserved for issuance (i) 20,500,000 shares of our common
stock issuable upon the conversion of 410,000 shares of Series B Preferred Stock and (ii) 20,276,399 shares of our common stock
issuable upon exercise of outstanding warrants. We cannot predict if future issuances or sales of our common stock, or the availability
of our common stock for sale, would harm the market price of our common stock or our ability to raise capital.
We
have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future.
We
have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable
future. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur
if the market price of our common stock appreciates.
If
securities or industry analysts do not publish research or reports or if they publish unfavorable research or reports, an active
market for our common stock may not develop and the price of our common stock could decline.
We
are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume. Even if we come to the attention of such persons, they may be reluctant to
follow or recommend an unproven company such as ours until such time as we became more seasoned and viable. Generally, the trading
market for a company’s securities depends in part on the research and reports that securities or industry analysts publish.
We currently have limited research coverage by securities and industry analysts. As a consequence, there may be periods of time
when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer with significant research coverage.
We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or if developed,
will be sustained, or that current trading levels could be sustained or not diminish. In addition, in the event any analysts downgrades
our securities, the price of our shares would likely decline. If one or more of these analysts ceases to cover us or fails to
publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common
stock and its trading volume, if any, to decline.
Our
common stock may be considered a “penny stock,” and may be subject to additional sale and trading regulations that
may make it more difficult to sell.
Our
common stock may be considered a “penny stock.” The principal result or effect of being designated a penny stock is
that securities broker-dealers participating in sales of our common stock may be subject to the penny stock regulations set forth
in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and
dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s
account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions
in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably
determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has
sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide
the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above;
and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s
financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult
and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in
the market or otherwise.
Because
certain of our stockholders control a significant number of shares of our common stock, they may have effective control or influence
over actions requiring stockholder approval.
Our
directors, executive officers and principal stockholders, and their respective affiliates, beneficially own approximately 33.60%
of our outstanding shares of common stock. As a result, these stockholders, acting together, would great influence on the outcome
of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale
of all or substantially all of our assets. In addition, these stockholders, acting together, would have strong influence on the
management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common
stock by:
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delaying,
deferring or preventing a change in corporate control;
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impeding
a merger, consolidation, takeover or other business combination involving us; or
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discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
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Failure
to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse
effect on our business and operating results and stockholders could lose confidence in our financial reporting.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, our operating results could be harmed. Failure to achieve and maintain an effective
internal control environment, regardless of whether we are required to maintain such controls, could also cause investors to lose
confidence in our reported financial information, which could have a material adverse effect on our stock price. The Company’s
management assessed the design and operating effectiveness of internal control over financial reporting as of June 30, 2017 based
on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In connection with the assessment described above, management identified the control deficiencies that represent
material weaknesses at June 30, 2017. See “Item 9. Controls and Procedures” for more detailed discussion.
We
have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable
future. Any return on investment may be limited to the value of our common stock.
No
cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future
operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would
depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may
consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment
will only occur if our stock price appreciates.
The
requirements of being a public company may strain our resources, divert management’s attention and affect our ability to
attract and retain qualified board members.
The
Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and
financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures
and internal controls for financial reporting. For example, Section 404 of the Sarbanes-Oxley Act of 2002 requires that our management
report on, and our independent auditors attest to, the effectiveness of our internal controls structure and procedures for financial
reporting. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete.
We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the
time we will be required to do so. If we fail to do so, or if in the future our chief executive officer, chief financial officer
or independent registered public accounting firm determines that our internal controls over financial reporting are not effective
as defined under Section 404, we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Furthermore,
investor perceptions of our company may suffer, and this could cause a decline in the market price of our common stock. Irrespective
of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results
of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our
operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent
auditors. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet
our ongoing obligations as a public company, which will increase costs. Our management team and other personnel will need to devote
a substantial amount of time to new compliance initiatives and to meeting the obligations that are associated with being a public
company, which may divert attention from other business concerns, which could have a material adverse effect on our business,
financial condition and results of operations. In addition, because our management team has limited experience managing a public
company, we may not successfully or efficiently manage our transition into a public company.