SMARTMETRIC,
INC. AND SUBSIDIARY
Consolidated Statements Of
Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(805,256
|
)
|
|
$
|
(857,812
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Common stock and warrants issued and issuable for services
|
|
|
—
|
|
|
|
186,130
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Decrease in prepaid expenses and other current assets
|
|
|
48,060
|
|
|
|
(73,380
|
)
|
(Decrease) increase in accounts payable and accrued expenses
|
|
|
58,459
|
|
|
|
(19,508
|
)
|
Increase (decrease) in discounts taken
|
|
|
—
|
|
|
|
—
|
|
Increase in deferred officer’s salary
|
|
|
110,833
|
|
|
|
95,000
|
|
Increase in accrued interest payable
|
|
|
27,936
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(559,968
|
)
|
|
|
(669,570
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Loans from related parties
|
|
|
5,200
|
|
|
|
(5,500
|
)
|
Proceeds from sale of common stock
|
|
|
515,042
|
|
|
|
551,167
|
|
Liability for stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
520,242
|
|
|
|
545,667
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) IN
|
|
|
|
|
|
|
|
|
CASH
|
|
|
(39,726
|
)
|
|
|
(123,903
|
)
|
|
|
|
|
|
|
|
|
|
CASH
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
51,695
|
|
|
|
138,823
|
|
END OF PERIOD
|
|
|
11,969
|
|
|
|
14,920
|
|
CASH PAID DURING THE PERIOD FOR:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Issuance of preferred stock and reduction of additional paid in capital for patent
|
|
$
|
—
|
|
|
$
|
—
|
|
Conversion of Series B Convertible Preferred Stock to Common Stock
|
|
$
|
—
|
|
|
$
|
—
|
|
See
notes to consolidated financial statements.
SMARTMETRIC
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
-
|
ORGANIZATION AND BASIS OF PRESENTATION
|
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 nine months ended March 31, 2018
are not necessarily indicative of the results that may be expected for the year ending June 30, 2018. 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, 2017, as filed with the Securities and Exchange Commission on October 13, 2017, as amended on October 27,
2017.
Going
Concern
As
shown in the accompanying condensed consolidated financial statements the Company has sustained recurring losses of $805,256 and
$857,812 for the nine months ended March 31, 2018 and 2017 respectively, and has an accumulated deficit of $25,163,878 at March
31, 2018. The Company has spent a substantial portion of its time and capital resources in the development of its technology.
There
is no guarantee that the Company will be able to raise enough capital or generate revenues to sustain its operations. These conditions
raise substantial doubt about 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
-
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
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
-
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
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
-
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
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 March 31, 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 2013. 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
-
|
PREPAID EXPENSES
|
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 nine months ended March 31,
2018 and 2017 was $25,589 and $25,120, respectively.
Related
Party Transactions
The
Company’s Chief Executive Officer has made cash advances to the Company with an aggregate amount due of $10,000 and $4,800
at March 31, 2018 and June 30, 2017, respectively. These advances bear interest at the rate of five percent (5%) per annum.
The
Company has accrued the amounts of $631,681 and $520,848 at March 31, 2018 and June 30, 2017, 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
-
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
Preferred
Stock
As
of December 31, 2017, 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
-
|
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
|
Class
A Common Stock
As
of March 31, 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 March 31, 2018, the Company has 245,438,947 shares of common stock issued and outstanding.
|
●
|
During the three
months ended September 30, 2016, the Company sold, for net proceeds of $155,991, units consisting of an aggregate of (i) 3,130,000
shares, (ii) warrants to purchase 1,956,250 shares at $0.70 per share, and (iii) warrants to purchase 985,950 shares at $1.00
per share. The warrants expire at various times through January 15, 2018.
|
|
●
|
During the three
months ended September 30, 2016, the Company issued an aggregate of 1,669,633 shares for consulting services valued at $84,400,
based on the stock price at the time of the respective agreements underlying the services provided.
|
|
●
|
During the three
months ended December 31, 2016, the Company sold, for net proceeds of $272,904, units consisting of an aggregate of (i) 5,470,000
shares, (ii) warrants to purchase 3,418,750 shares at $0.70 per share, and (iii) warrants to purchase 1,723,050 shares at
$1.00 per share. The warrants expire at various times through January 31, 2018.
|
|
●
|
During the three
months ended December 31, 2016, the Company issued an aggregate of 5,000,000 shares for consulting services valued at $550,000
based on the stock price at the time of the respective agreements underlying the services provided.
|
|
●
|
During the three
months ended March 31, 2017, the Company sold, for net proceeds of $127,247.50, units consisting of an aggregate of (i) 2,550,000
shares, (ii) warrants to purchase 1,593,750 shares at $0.70 per share, and (iii) warrants to purchase 803,250 shares at $1.00
per share. The warrants expire at various times through September 27, 2018.
|
|
●
|
During the three
months ended March 31, 2017, the Company issued an aggregate of 2,423,000 shares of common stock for consulting services valued
at $283,955, based on the stock price at the time of the respective agreements underlying the services provided.
|
|
●
|
During the three
months ended June 30, 2017, the Company sold, for net proceeds of $242,157, units consisting of an aggregate of (i) 7,450,000
shares, (ii) warrants to purchase 3,031,250 shares at $0.70 per share, and (iii) warrants to purchase 1,527,750 shares at
$1.00 per share. The warrants expire at various times through October 20, 2018.
|
|
●
|
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.
|
|
●
|
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
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
NOTE 5
-
|
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
|
Warrants
From
time to time the Company granted warrants in connection with private placements of securities, as described herein.
In
July 2015, as consideration for a consulting agreement, the Company issued warrants to purchase 300,000 shares of its common stock
at an exercise price of $0.01 per share. The warrants are fully vested and exercisable for five-years. The Company valued the
warrants using the Black-Scholes method with the following criteria: stock price of $0.14; volatility 150%; term 5 years; and
risk-free rate of 1.71%. The criteria yielded a per-warrant value of $0.14, resulting in a total value of $42,000 for the 300,000
warrants. The Company recorded the charge to consulting expense over the three-month term of the consulting agreement. During
the three months ended September 30, 2016, the Company recorded a charge of $35,000 to consulting expense, which is included in
other general and administrative expenses in the condensed consolidated statement of operations.
In
April 2016, as partial consideration for consulting services rendered, the Company authorized to be issued warrants to purchase
1,000,000 shares of its common stock at an exercise price of $0.03 per share (“$0.03 Warrants”), and 2,000,000 warrants
to purchase shares of its common stock at an exercise price of $0.08 per share (“$0.08 Warrants,” and, together with
the $0.03 Warrants, the “Warrants”). The Warrants are fully vested and exercisable for three-years. The Company valued
the Warrants using the Black-Sholes option pricing model with the following criteria: stock price of $0.11; volatility 136%; term
3 years; and risk-free rate of 0.92%. The criteria yielded a per-warrant value of $0.10 for the $0.03 Warrants, and a per-warrant
value of $0.09 for the $0.08 Warrants, resulting in a total value of $280,000 for the Warrants. The expense has been included
in other general and administrative expenses in the consolidated statement of operations.
As
of March 31, 2018 and June 30, 2017, the following is a breakdown of the warrant activity:
March
31, 2018:
Outstanding - June 30, 2017
|
|
|
|
20,276,399
|
|
Issued
|
|
|
|
7,868,500
|
|
Exercised
|
|
|
|
—
|
|
Expired
|
|
|
|
13,639,400
|
|
Outstanding - March 31, 2018
|
|
|
|
14,505,499
|
|
June
30, 2017:
Outstanding - June 30, 2016
|
|
|
12,540,199
|
|
Issued
|
|
|
15,040,000
|
|
Exercised
|
|
|
—
|
|
Expired
|
|
|
(7,303,800
|
)
|
Outstanding - June 30, 2017
|
|
|
20,276,399
|
|
NOTE 5
-
|
STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
|
At
March 31, 2018, all of the 14,505,499 warrants are vested and (i) 11,205,499 warrants expire at various times
prior to February 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
-
|
SUBSEQUENT EVENTS
|
There
were no subsequent events at the time of filing.
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 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
SmartMetric Biometric Technology and Products
SmartMetric’s
Chief Executive Officer and 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 currently 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 (“Protec Secure Card”) 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 $25,163,878 as of March 31, 2018 and anticipate that
we will continue to incur additional losses for the foreseeable future. Through March 31, 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
$25 million from inception through March 31, 2018. Cash and cash equivalents at March 31, 2018 were $11,969.
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 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 March 31, 2018 and 2017, and we do not anticipate generating any revenues
during the year ending June 30, 2018. Net loss for the three months ended March 31, 2018 and 2017 were $296,029 and $250,659,
respectively, resulting from the operational activities described below.
Operating
Expenses
Operating
expense totaled $288,331 and $250,659 during the three months ended March
31, 2018 and 2017, respectively. The increase in operating expenses is the result of the following factors.
|
|
|
|
|
|
|
|
|
Quarter
Ended
March 31, 2018
|
|
|
Change
in 2018
Versus 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
64,413
|
|
|
$
|
48,923
|
|
|
$
|
15,490
|
|
|
|
31.7
|
%
|
General and administrative
|
|
|
223,918
|
|
|
|
201,736
|
|
|
|
22,182
|
|
|
|
11.0
|
%
|
Total operating expense
|
|
$
|
288,331
|
|
|
$
|
250,659
|
|
|
$
|
38,922
|
|
|
|
15.5
|
%
|
Research
and Development
Research
and development expenses totaled $64,413 and $48,923 for the three months ended March 31, 2018 and 2017, respectively. The increase
of $15,490, or 31.7%, 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 $223,918 and $201,736 for the three months ended March 31, 2018 and 2017, respectively. The
increase of $22,182 or 11.0%, in 2018 compared to 2017 was primarily the result of an increase 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 $7,698 and $0 for the three months ended March 31, 2018 and 2017, respectively.
|
|
|
|
|
|
|
|
|
Quarter
Ended
March 31, 2018
|
|
|
Change
in 2018
Versus 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
7,698
|
|
|
|
—
|
|
|
|
(7,698
|
)
|
|
|
(100
|
)%
|
Total operating expense
|
|
$
|
7,698
|
|
|
$
|
—
|
|
|
$
|
(7,698
|
)
|
|
|
(100
|
)%
|
Interest
income (expense)
We
had net interest expense of $7,698 in the three months ended March 31, 2018 compared to no net interest expense for the three
months ended March 31, 2017. The increase of $7,698 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 Nine Months Ended March 31, 2018 and 2017
We
did not have revenue for the nine months ending March 31, 2018 and 2017, and we do not anticipate generating any revenues during
the year ending June 30, 2018. Net loss for the nine months ended March 31, 2018 and 2017 was $805,256 and $857,812, respectively,
resulting from the operational activities described below.
Operating
Expenses
Operating
expense totaled $777,319 and $857,812 during the nine months ended March 31, 2018 and 2017, respectively. The decrease in
operating expenses is the result of the following factors.
|
|
|
|
|
|
|
|
|
Nine
Months Ended
March 31, 2018
|
|
|
Change
in 2018
Versus 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
105,845
|
|
|
$
|
146,523
|
|
|
$
|
(40,678
|
)
|
|
|
(27.8
|
)%
|
General and administrative
|
|
|
671,474
|
|
|
|
711,289
|
|
|
|
(39,815
|
)
|
|
|
(5.
6
|
)%
|
Total operating expense
|
|
$
|
777,319
|
|
|
$
|
857,812
|
|
|
$
|
(80,493
|
)
|
|
|
(9.4
|
)%
|
Research
and Development
Research
and development expenses totaled $105,845 and $146,523 for the nine months ended March 31, 2018 and 2017, respectively. The decrease
of $40,678, or 27.8%, in 2018 compared to 2017 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 $671,474 and $711,289 for the nine months ended March 31, 2018 and 2017, respectively. The
decrease of $39,815 or 5.6%, 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 $27,937 and $0 for the nine months ended March 31, 2018 and 2017, respectively.
|
|
|
|
|
|
|
|
|
Nine
Months Ended
March 31, 2018
|
|
|
Change
in 2018
Versus 2017
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
27,937
|
|
|
|
—
|
|
|
|
(27,937
|
)
|
|
|
(100
|
)%
|
Total operating expense
|
|
$
|
27,937
|
|
|
$
|
—
|
|
|
$
|
(27,937
|
)
|
|
|
(100
|
)%
|
Interest
income (expense)
We
had net interest expense of $27,937 in the nine months ended March 31, 2018
compared to no net interest expense for the nine months ended March 31, 2017. The increase of $27,937
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 $25,163,878 as of March 31, 2018 and anticipate that
we will continue to incur additional losses for the foreseeable future. Through March 31, 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
$25 million from inception through March 31, 2018. Cash and cash equivalents at March 31, 2018 were $11,969.
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.
|
|
Nine
months ended
March
31,
|
|
|
Change
in 2018 versus
2017
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
$
|
51,695
|
|
|
$
|
138,823
|
|
|
$
|
(87,128
|
)
|
|
|
(62.8
|
)%
|
Net cash used in operating
activities
|
|
|
(559,968
|
)
|
|
|
(675,070
|
)
|
|
|
115,102
|
|
|
|
17.1
|
%
|
Net cash used in investing
activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash provided
by financing activities
|
|
|
520,242
|
|
|
|
551,167
|
|
|
|
(49,925
|
)
|
|
|
(9.4
|
1)%
|
Cash at end of period
|
|
|
11,969
|
|
|
|
14,920
|
|
|
|
(2,951)
|
|
|
|
(19.8
|
)%
|
Net
Cash Used in Operating Activities
Net cash used in operating activities was
$559,968 and $675,070 for the nine months ended March 31, 2018 and 2017, respectively. The decrease of $115,102 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 nine months ended March 31, 2018 and 2017, respectively.
Net
Cash Provided by Financing Activities
During
the nine months ended March 31, 2018, we received net proceeds of $520,242 from the sales of our securities, compared to $551,167
for the nine months ended March 31, 2018. The decrease was due to fewer sales of the Company’s securities in private placements.
We are actively seeking sources of financing to fund our continued operations and research and development programs.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are not required to provide the information required by this item as we are considered a smaller reporting company, as defined
by Rule 229.10(f)(1).
ITEM
4. CONTROLS AND PROCEDURES
We
maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized
that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions.
As
of March 31, 2018, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were not effective, due to material weaknesses in our internal control over financial reporting, in ensuring that information
required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods
specified for each report and that such information is accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Management identified material weaknesses in our internal control over financial reporting related
to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) a lack of segregation
of duties within accounting functions.
Limitations
on Controls
Management
does not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial
reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon
certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation
of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected. The Company’s disclosure controls and procedures
are designed to provide reasonable assurance of achieving their objectives and the Company’s chief executive officer and
chief financial officer have concluded that the Company’s disclosure controls and procedures are effective at that reasonable
assurance level.
Changes
in Internal Controls
During
the nine months ended March 31, 2018, there have been no changes in our internal control over financial reporting that have materially
affected or are reasonably likely to materially affect our internal controls over financial reporting.