ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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 has an issued patent covering technology that involves connection
to networks using data cards (smart cards and EMV cards). SmartMetric has in addition, 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. This card is referred to as a biometric
card or the SmartMetric Biometric Card.
The SmartMetric Biometric Technology and
Products
SmartMetric’s founder, Chaya 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 size and thickness of a standard
credit card. We believe the SmartMetric biometric payments card provides high level security for credit and debit cards by adding
biometric authentication and activation to EMV chip cards now in use around the world. More than 6 Billion EMV chip debit and credit
cards are now in use globally. The SmartMetric biometric payments card has been manufactured to be totally interoperable with the
EMV chip card readers and banking infrastructure. Using advanced electronic miniaturization developed by SmartMetric to make its
biometric credit/debit cards, the Company has also now developed a multi-functional biometric, identity, 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 aiding travelers with medical
conditions to have transportable medical files protected by their biometrics. We believe such a card could also assist in fighting
medical fraud by using the card to provide in-card biometric identity verification.
SmartMetric has developed its rechargeable
battery powered fingerprint sensor that is of a scale that fits “inside” a standard credit or debit card. The cardholder
stores his or her fingerprint inside the card. To activate the card the person touches 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 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 sensor.
There are over 6 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 biometric activated card technology. SmartMetric is marketing its in-card biometric solution as a replacement to the less
secure password or PIN used in current EMV cards.
SmartMetric has completed development of its
biometric card. The SmartMetric Biometric card is now being presented to banks in various parts of the world both directly and
through product distributors who work in the credit card industry.
As the Company disclosed in its recent Current
Report on Form 8-K filed on December 26, 2017, it reached a manufacturer’s representative agreement with Protec Secure Card,
LLC as national distributor for the SmartMetric Biometric Card. Protec Secure Card is a credit card manufacturer (accredited by
Visa and MasterCard) who has a long history in sales and marketing of specialist credit card products to banks and other credit
card manufacturers in the United States.
In Card Fingerprint Matching and Verification
The SmartMetric Biometric Card incorporates
a rechargeable battery. 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.
The Security Technology Industry –
Multi-Function Security Card
SmartMetric has developed a multi-function
logical and physical access security card the size and thickness of a standard credit card. Utilizing the small size breakthroughs
by the Company in its biometric payments card, SmartMetric has moved forward with a biometric multifunction security, identity
and secure access 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 performing
a biometric fingerprint scan. All functions and operations of the card are subject to a valid fingerprint scan and match of the
card user’s fingerprint.
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 company is now actively marketing its biometric
EMV chip card to banks and financial institutions within the United States, Asia, Latin America and Europe.
SmartMetric continues to actively promote its
biometric card through exhibiting in industry specific conferences and exhibitions. We believe focusing on specific national and
international conferences and exhibitions is proving to be a highly effective method of exposing and presenting our products to
a large number of industry decision makers. SmartMetric is developing a network of distributors and resellers in various parts
of the world to aid and assist in product sales and marketing efforts.
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 $24,866,599 as of December 31, 2017 and anticipate that we will continue to incur additional
losses for the foreseeable future. Through December 31, 2017, 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 $24 million from inception through
December 31, 2017. Cash and cash equivalents at December 31, 2017 were $85,377.
We are actively seeking, on an ongoing
basis, additional funding to fund our continued operations and sales and marketing programs SmartMetric has funded its
activities since 2002 from the sale of equity shares via private placements. While there can be no guarantees of future
financings, the Company continues to raise funds through the sale of equity via direct private placements to existing and new
shareholders. The Company has not and does not intend to receive funds through structured financings such as convertible
notes, debentures or other types of debt financing instruments.
Going Concern
Our auditors’ report on our June 30,
2017 financial statements expressed an opinion that there is a substantial doubt about our ability to continue as a going concern.
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 our 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
December 31, 2017 and 2016
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 December 31, 2017 and 2016, and we do not anticipate generating any revenues during the year ending June 30, 2018. Net loss
for the three months ended December 31, 2017 and 2016 were $260,270 and $311,793, respectively, resulting from the operational
activities described below.
Operating Expenses
Operating expense totaled $249,690 and $311,793
during the three months ended December 31, 2017 and 2016, respectively. The decrease in operating expenses is the result
of the following factors.
|
|
|
|
|
|
|
|
|
Quarter Ended
December 31, 2017
|
|
|
Change in 2017
Versus 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
24,832
|
|
|
$
|
45,755
|
|
|
$
|
(20,923
|
)
|
|
|
(45.7
|
)%
|
General and administrative
|
|
|
224,858
|
|
|
|
266,038
|
|
|
|
(41,180
|
)
|
|
|
(15.5
|
)%
|
Total operating expense
|
|
$
|
249,690
|
|
|
$
|
311,793
|
|
|
$
|
(62,103
|
)
|
|
|
(19.9
|
)%
|
Research and Development
Research and development expenses totaled $24,832
and $45,755 for the three months ended December 31, 2017 and 2016, respectively. The decrease of $20,923, or 45.7%, in 2017 compared
to 2016 was primarily attributable to decreased engineering expenses. Our research and development expenses consist primarily of
expenditures related to engineering.
General and Administrative
General and administrative expenses totaled
$224,858 and $266,038 for the three months ended December 31, 2017 and 2016, respectively. The decrease of $41,180 or 15.5%, in
2017 compared to 2016 was primarily the result of a decrease in consulting expense. 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 $10,580 and
$0 for the three months ended December 31, 2017 and 2016, respectively.
|
|
|
|
|
|
|
|
|
Quarter Ended
December 31, 2017
|
|
|
Change in 2017
Versus 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
10,580
|
|
|
|
—
|
|
|
|
(10,580
|
)
|
|
|
(100
|
)%
|
Total operating expense
|
|
$
|
10,580
|
|
|
$
|
—
|
|
|
$
|
(10,580
|
)
|
|
|
(100
|
)%
|
Interest income (expense)
We had net interest expense of $10,580 in the
three months ended December 31, 2017 compared to no net interest expense for the three months ended December 31, 2016. The increase
of $10,580 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.
Comparison of the Six Months Ended December
31, 2017 and 2016
We did not have revenue for the six months
ending December 31, 2017 and 2016, and we do not anticipate generating any revenues during the year ending June 30, 2018. Net loss
for the six months ended December 31, 2017 and 2016 were $509,227 and $607,153, respectively, resulting from the operational activities
described below.
Operating Expenses
Operating expense totaled $488,989 and $607,153
during the six months ended December 31, 2017 and 2016, respectively. The decrease in operating expenses is the result
of the following factors.
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31, 2017
|
|
|
Change in 2017
Versus 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
41,432
|
|
|
$
|
97,600
|
|
|
$
|
(56,168
|
)
|
|
|
(57.5
|
)%
|
General and administrative
|
|
|
447,557
|
|
|
|
509,553
|
|
|
|
(61,996
|
)
|
|
|
(12.2
|
)%
|
Total operating expense
|
|
$
|
488,989
|
|
|
$
|
607,153
|
|
|
$
|
(118,164
|
)
|
|
|
(19.5
|
)%
|
Research and Development
Research and development expenses totaled $41,432
and $97,600 for the six months ended December 31, 2017 and 2016, respectively. The decrease of $56,168, or 57.5%, in 2017 compared
to 2016 was primarily attributable to decreased engineering expenses. Our research and development expenses consist primarily of
expenditures related to engineering.
General and Administrative
General and administrative expenses totaled
$447,557and $509,553 for the six months ended December 31, 2017 and 2016, respectively. The decrease of $61,996 or 12.2%, in 2017
compared to 2016 was primarily the result of a decrease in consulting expense. 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 $20,238 and
$0 for the six months ended December 31, 2017 and 2016, respectively.
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31, 2017
|
|
|
Change in 2017
Versus 2016
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
20,238
|
|
|
|
—
|
|
|
|
(20,238
|
)
|
|
|
(100
|
)%
|
Total operating expense
|
|
$
|
20,238
|
|
|
$
|
—
|
|
|
$
|
(20,238
|
)
|
|
|
(100
|
)%
|
Interest income (expense)
We had net interest expense of $20,238 in the
six months ended December 31, 2017 compared to no net interest expense for the three months ended December 31, 2016. The increase
of $20,238 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 $24,866,599 as of December 31, 2017 and anticipate that we will continue to incur additional
losses for the foreseeable future. Through December 31, 2017, 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 $24 million from inception through
December 31, 2017. Cash and cash equivalents at December 31, 2017 were $85,377.
Our auditors’ report on our June 30,
2017 financial statements expressed an opinion that there is a substantial doubt about our ability to continue as a going concern.
We are actively seeking sources of financing
to fund our continued operations and research and development programs. To raise additional capital, we may sell shares of equity
or debt securities. There can be no assurance that we will be able to complete any financing transaction in a timely manner or
on acceptable terms or otherwise. If we are not able to raise additional cash, we may be forced to further delay, curtail, or cease
development of our product candidates, or cease operations altogether.
|
|
Six months ended
December 31,
|
|
|
Change in 2017 versus
2016
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
$
|
51,695
|
|
|
$
|
138,823
|
|
|
$
|
(87,128
|
)
|
|
|
(62.8
|
)%
|
Net cash used in operating activities
|
|
|
(335,505
|
)
|
|
|
(502,332
|
)
|
|
|
166,827
|
|
|
|
(33.2
|
)%
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
369,187
|
|
|
|
477,210
|
|
|
|
108,023
|
|
|
|
(22.6
|
)%
|
Cash at end of period
|
|
|
85,377
|
|
|
|
113,701
|
|
|
|
28,324
|
|
|
|
(24.9
|
)%
|
Net Cash Used in Operating Activities
Net cash used in operating activities was $335,505
and $502,332 for the six months ended December 31, 2017 and 2016, respectively. The decrease of $166,827 in cash used during 2017
compared to 2016 was primarily attributable to decrease in consultant costs.
Net Cash Used in Investing Activities
Cash used in investing activities was $0 and
$0 for the six months ended December 31, 2017 and 2016, respectively.
Net Cash Provided by Financing Activities
During the six months ended December 31, 2017,
we received net proceeds of $369,187 from the sales of our securities, compared to $477,210 for the six months ended December 31,
2016. The decrease was due to reduced private placement sales. We are actively seeking sources of financing to fund our continued
operations and research and development programs.