NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -
ORGANIZATION AND BASIS OF PRESENTATION
SmartMetric, Inc. (the “Company” or “SmartMetric”) was incorporated in the State of Nevada on
December 18, 2002
.
SmartMetric’s main product is a fingerprint sensor-activated card with a finger sensor onboard the card and a built-in rechargeable battery for portable biometric identification. This card may be referred to as a biometric card or the SmartMetric Biometric Datacard. SmartMetric has completed development of its card along with pre mass manufacturing cards but has not yet begun to mass manufacture the biometric fingerprint activated cards.
Going Concern
As shown in the accompanying consolidated financial statements the Company has incurred recurring losses of $
4,688,217
and $
2,709,913
for the years ended June 30, 2013 and 2012 respectively, and has incurred a cumulative loss of $
15,964,594
since inception (December 18, 2002). The Company is currently in the development stage and has spent a substantial portion of its time 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 the final phase of development and mass production being successful as well as product implementation and distribution.
The 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
Development Stage Company
The Company is considered to be in the development stage as defined in ASC 915-10,
"Accounting and Reporting by Development Stage Enterprises".
The Company has devoted substantially all of its efforts to the development of its technology. Additionally, the Company has allocated a substantial portion of its time and investment in bringing its services to the market, and the raising of capital.
Principles of Consolidation
The 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.
F-7
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents. Any amounts of cash in financial institutions which exceed FDIC insured limits exposes the Company to cash concentration risk. The Company has no cash equivalents. At June 30, 2013 and 2012, the Company had cash in excess of FDIC insured limits of $
594,358
and $
0
, respectively.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet for cash, accounts payable, and accrued expenses including payroll withholdings, interest and penalties approximate fair value because of the immediate or short-term maturity of these financial instruments.
ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
Level 1inputs: Quoted prices for identical instruments in active markets.
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs: Instruments with primarily unobservable value drivers.
Research and Development
The Company annually incurs costs on activities that relate to research and development of new technology and products. Research and development costs are expensed as incurred.
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.
F-8
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.
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 June 30, 2013 no accrual for uncertain income tax positions is necessary.
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.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value.
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. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance obligation is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.
F-9
Reclassifications
Certain amounts in the 2012 consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current year consolidated financial statements. These reclassifications had no effect on previously reported results.
F-10
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -
PREPAID EXPENSES
Prepaid expenses represent the unexpired terms of various consulting agreements and expire through September 2014, as well as advance rental payments. These consulting agreements were entered into for the issuance of common stock and warrants and were valued based on the stock price or computed warrant value at the time of the respective agreement.
NOTE 4 -
PATENT COSTS
Patent costs as of June 30, 2013 and June 30, 2012 are summarized as follows:
|
|
Estimated
Useful Lives
( Years)
|
|
June
30,
2013
|
|
June 30,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal fees paid in connection with patent Applications
|
|
|
10
|
|
$
|
15,000
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
|
|
|
(13,125)
|
|
|
(11,625)
|
|
Patent costs, net
|
|
|
|
|
$
|
1,875
|
|
$
|
3,375
|
|
Amortization expense was $1,500 for the years ended June 30, 2013 and 2012, respectively.
NOTE 5 -
COMMITMENTS
Patent License Agreement
Effective
August 1, 2004
, the Company executed a license agreement with Applied Cryptography, Inc. (“ACI”), a corporation controlled by the Company’s president and the owner of certain technology. Pursuant to the license agreement, the Company has the right to make use of this technology for the purpose of developing software and systems to be used by the Company to provide any or all of the following: 1) secure transactions over the Internet from home and office computers; 2) an automatic method for connecting to remote computers; 3) a method of developing targeted advertising to home and/or office computers; and 4) identity verification and access control as provided for in the patent. Pursuant to this license agreement, ACI is to receive
2
% of all revenues generated by the Company on products which utilize this patented technology.
The license fee is to be paid within 45 days of the end of each quarter.
In the event no revenues are generated through the use of any of the licensed patents during a given quarter, no money shall be owed ACI for such quarter. ACI has the right to rescind the license agreement and reclaim all rights and interest in the patents if certain events, such as the Company’s filing for bankruptcy protection or reorganization, occur. The license agreement remains in effect for the lives of the patents. The Company may utilize the technological applications anywhere in the world without limitation. Upon execution of the Assignment and Assumption Agreement on December 11, 2009 (see Note 6), the Patent License Agreement was terminated.
During November 2012, the Company acquired license rights to ACI's Medical Keyring Device technology in consideration of the Company's issuance to ACI of
200,000
shares of its Series B Convertible Preferred Stock.
F-11
Lease Agreement
In
February 2012
, the company entered into a facilities lease in Buenos Aires, Argentina for its manufacturing activities. The lease term is from
March 1, 2012
through
January 31, 2015
.
The Company also utilizes offices in Australia, Israel and Las Vegas, Nevada.
The Company’s main office is located in Las Vegas, Nevada.
Rent expense under all leases for the years ended June 30, 2013 and 2012 was $
103,814
and $
46,918
respectively. Total minimum future rental payments under all leases with terms in excess of one year are as follows:
Year ending June 30,
|
|
Amount
|
|
|
|
|
|
|
2014
|
|
$
|
80,931
|
|
2015
|
|
|
48,558
|
|
Total
|
|
$
|
129,489
|
|
Related Party Transactions
The Company’s president has made cash advances to the Company with an aggregate amount due of $
21,572
and $
1,422
as of June 30, 2013 and June 30, 2012, respectively. These advances bear interest at
5.00
% per annum.
As of June 30, 2013 and June 30, 2012, the Company has accrued the amounts of $
61,681
and $
67,026
, respectively, as deferred Officer’s salary for the difference between the president’s annual salary and the amounts paid.
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
As of June 30, 2013, the Company has
5,000,000
shares of preferred stock, par value $
0.001
, authorized and
400,000
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 the preferred stock to be designated as Series B Convertible Preferred Stock (“Series B Convertible Preferred Stock”).
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 all or any one (1) 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 (“liquidation”), 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.
On December 11, 2009, the Company entered into an Assignment and Assumption Agreement with ACI (the “Assignment and Assumption Agreement”). In accordance with the Assignment and Assumption Agreement, ACI conveyed, assigned and transferred to the Company all of ACI’s rights, title and interest in and to the Patent (see Note 5) and delegated to the Company all of its duties and obligations to be performed under the Patent; and the Company hereby accepts the assignment of all of ACI’s rights, title and interest to the Patent and the rights and delegation of duties and obligations and agrees to be bound by and to assume such duties and obligations.
In consideration for the assignment of the Patent, the Company issued
200,000
shares of Series B Convertible Preferred Stock. ACI may only convert these shares into common shares (in accordance with the conversion terms noted herein) upon delivering to the Company, a third party valuation of the assigned Patent conducted by a nationally qualified accounting firm or IP law firm mutually agreed upon between the Company and ACI, indicating that such Patent is valued at a minimum of $
1,000,000
.
In connection with the Assignment and Assumption Agreement, the Company and ACI entered into a 24 month option agreement pursuant to which the Company agreed to grant ACI an option to purchase the Patent from the Company for
100,000
shares of Series B Convertible Preferred Stock, only in the event that the Company fails to generate at least $
1,000,000
in gross revenues attributable to the Patent at the conclusion of 24 months from the date of the Assignment and Assumption Agreement, December 11, 2011.
As of December 11, 2011, ACI did not exercise its option to purchase back the patent within the 24 month option period, and Smartmetric owns, outright, all rights, title and interest in the patent.
On November 12, 2012, the Company issued
200,000
shares of its Series B Convertible Preferred Stock to ACI in consideration for ACI’s patent relating to the Medical Keyring Device.
With its biometric “on/off switch,” both the Medical Keyring and Medical Emergency card can instantly deliver all medical records and imaging (video, stills) to medical care providers (the built-in application is both Windows and Mac compatible). Users can track and update their stored medical information, and provide this vital information in any medical emergency. With its visual display, the Keyring also offers emergency instructions to healthcare providers while its Plug and Play USB connection provides a complete medical history. Used by health insurance companies, the Medical Insurance card can also eliminate insurance fraud by uniquely and securely identifying the valid cardholder.
In accordance with Staff Accounting Bulletin (“SAB”) topic 5G “Transfers of Non-monetary Assets by Promoters and Shareholders” the Company recorded these transactions at ACI’s carrying basis of the Patents.
F-13
Class A Common Stock
As of June 30, 2013, 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
. The articles of incorporation were amended in 2006 to increase the number of authorized shares to
100,000,000
shares, and again in 2009 to increase the number of authorized shares to
200,000,000
.
As of June 30, 2013, the Company has
147,698,950
shares of common stock issued and outstanding.
From October 2003 to June 2004, the Company issued
8,560,257
shares to investors at $
0.01
for $
85,602
.
From August 2005 to February 2006, the Company sold a total of
743,648
shares of common stock at $
1.50
per share in its public offering resulting in gross proceeds of $
1,115,472
. The net proceeds to the Company after deducting $
138,471
in offering costs, was $
977,001
.
From May 2006 to June 2006, the Company sold a total of
192,464
units at $
1.15
per Unit in private placements resulting in gross proceeds of $
221,334
and net proceeds of $
221,296
. Each unit consisted of one share of common stock and one warrant exercisable for 12 months from the date of issue into one share of common stock at $1.50 per share.
In July 2006, the Company sold a total of
56,522
units at $
1.15
per Unit in private placements resulting in net proceeds of $
65,000
. In August and September 2006, the Company sold a total of
128,377
units at prices ranging between $
0.60
to $
0.79
per unit in private placements resulting in net proceeds of $
83,558
. In the three months ended December 31, 2006, the Company sold a total of
344,115
units at prices ranging from $
0.48
to $
1.00
per unit in private placements resulting in net proceeds of $
229,284
. In the six months ended March 31, 2007, the Company sold a total of
297,228
Units at prices ranging from $
0.55
to $
1.00
per unit in private placements resulting in net proceeds of $
200,641
. In the three months ended June 30, 2007, the Company sold a total of
382,645
units at prices ranging from $
0.36
to $
0.56
per unit in private placements resulting in net proceeds of $
181,866
. Each unit consisted of one share of common stock and one warrant exercisable for 12 months from the date of issue into one share of common stock at $1.50 per share.
F-14
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -
STOCKHOLDERS’ EQUITY (DEFICIT)
(CONTINUED)
Common Stock
(Continued)
In the year ended June 30, 2007, the Company also authorized the issuance of a total of
82,893
Units to various parties for services rendered relating to the public offering and the private placements and a total of
108,612
shares of common stock to various parties relating to the financings.
In the three months ended September 30, 2007, the Company sold a total of
903,813
units at prices ranging from $
0.30
to $
0.34
per unit in private placements resulting in net proceeds of $
297,633
. In the three months ended December 31, 2007, the Company sold a total of
332,500
units at prices ranging from $
0.20
to $
0.25
per unit in private placements resulting in net proceeds of $
64,284
. In the three months ended March 31, 2008, the Company sold a total of
1,042,300
units at a price of $
0.20
per unit in private placements resulting in net proceeds of $
207,967
. In the three months ended June 30, 2008, the Company sold a total of
2,961,203
units at prices ranging from $
0.20
to $
0.25
per unit in private placements resulting in net proceeds of $
597,542
. Each unit consisted of one share of common stock and one warrant exercisable for 12 months from the date of issue into one share of common stock at $1.00 per share.
On March 25, 2008, the Company sold
200,000
shares of its common stock at a price of $
0.10
per share resulting in net proceeds of $
20,000
. In the year ended June 30, 2008, the Company sold
1,189,818
shares of its common stock at prices ranging from $
0.07
to $
0.13
per share resulting in net proceeds of $
112,798
.
In the three months ended September 30, 2007, the Company authorized the issuance of a total of
80,000
shares, valued at $
24,000
to non-officer directors of the Company for services rendered.
On January 14, 2008, the Company issued a total of
2,107,000
shares of its common stock, valued at $
421,400
to its attorney and two consultants for services rendered. On February 26, 2008, the Company issued
140,000
shares of common stock, valued at $
28,000
to its attorney for services rendered.
In the year ended June 30, 2009, the Company issued
1,059,394
shares of stock for services rendered valued at $
105,939
;
662,027
shares of common stock in private placements at prices ranging from $
0.08
to $
0.10
resulting in net proceeds of $
49,587
; and
3,750,569
units at a price of $
0.10
resulting in net proceeds of $
393,757
. Each unit consisted of one share of common stock and one warrant exercisable for 12 months from the date of issue into one share of common stock at $1.00 per share.
In the year ended June 30, 2010, the Company has received $
154,004
of stock subscriptions for
1,540,040
shares which has been recorded as a liability for stock to be issued. In addition, the Company issued
3,000,000
shares of common stock for investor relations services on November 9, 2009 at a value of $
300,000
($
0.10
per share), and
525,000
shares for consulting services on December 15, 2009 at a value of $
34,125
($
0.065
per share). The Company issued
1,333,333
shares of common stock for legal services on April 28, 2010 at a value of $
66,289
($
0.05
per share). The related expense is included in other general and administrative expenses in the consolidated statement of operations. The company issued
44,795
units in private placements at a price of $
0.05
per share and $
10.00
per unit, representing
8,959,000
shares and net proceeds of $
446,750
.
In the year ended June 30, 2011, the Company sold
34,030
units (representing
8,216,262
shares of stock and warrants to purchase an additional
2,279,028
shares), for net proceeds of
1,999,200
. In addition, the Company issued
2,225,750
shares of common stock for legal and consulting services at a value of $
460,029
.
In the three months ended June 30, 2011, the Company issued
1,000,000
shares of common stock for services rendered at a value of $
282,730
(
0.28273
per share).
In the three months ended September 30, 2011, the Company issued
2,512,500
shares for legal and consulting services valued at $
869,125
. These issued shares represent legal services of $
27,767
in the current period and satisfaction of the liability to issue
1,000,000
shares with an aggregate value of $
841,358
.
F-15
During the three months ended September 30, 2011, the Company sold
66.894
units representing
3,344,721
shares and twelve month warrants to purchase an additional
3,344,721
shares at $
0.80
per share for net proceeds of $
668,113
.
Each unit was offered at $10,000 and consisted of 50,000 shares and one twelve month warrant to buy an additional 50,000 shares at $0.80 per share.
During the three months ended December 31, 2011 the Company sold
11.5
units representing
575,000
shares and twelve month warrants to purchase an additional
575,000
shares at $
0.80
per share for net proceeds of $
114,800
.
Each unit was offered at $10,000 and consisted of 50,000 shares and one twelve month warrant to buy an additional 50,000 shares at $0.80 per share.
During the three months ended March 31, 2012, the Company issued
765,713
shares for legal and consulting services valued at $
102,881
.
During the three months ended March 31, 2012, the Company sold
149.96
units representing
7,498,099
shares and twelve month warrants to purchase an additional
7,498,099
shares at $
0.80
per share for net proceeds of $
999,059
.
Units were offered at $5,000 and $10,000 and consisted of 50,000 shares and one twelve month warrant to purchase an additional 50,000 shares at $0.80 per share.
During the three months ended June 30, 2012, the Company sold
2,135,000
shares for cash and twelve month warrants to purchase an additional
2,135,000
shares for net proceeds of $
426,487
. Each share was valued at $
0.20
.
During the three months ended June 30, 2012, the Company authorized to be issued
3,881,978
shares for services. These shares ranged in value from $
0.05
to $
0.26
.
F-16
During the three months ended September 30, 2012, the Company sold
860,000
shares and twelve month warrants to purchase an additional
860,000
shares at $
0.80
per share for net proceeds of $
171,758
.
During the three months ended September 30, 2012, the Company authorized to be issued
4,379,122
shares for legal and consulting services valued at $
627,899
.
During the three months ended December 31, 2012, the Company sold for cash
200,000
shares and twelve month warrants to purchase an additional
200,000
shares at $
0.80
per share.
The Company also sold for cash
125,000
shares and twelve month warrants to purchase an additional
125,000
shares at $
0.50
per share.
Total net proceeds received was $
60,041
.
During the three months ended December 31, 2012, the Company authorized to be issued
5,575,000
shares for consulting services valued at $
1,115,000
.
During the three months ended March 31, 2013, the Company sold for cash
4,131,328
shares and twelve month warrants to purchase an additional
4,131,328
shares at $
0.50
per share for net proceeds of $
672,380
.
During the three months ended June 30, 2013, the Company sold for cash
10,097,331
shares and twelve month warrants to purchase an additional
10,097,331
shares at $
0.50
per share for net proceeds of $
1,499,793
.
Warrants
From time to time the Company granted warrants in connection with private placements of securities, as described herein.
In October 2009, the Company executed a warrant agreement with an investor relations company for
5,000,000
warrants to be issued in two tranches. The first tranche of
2,500,000
warrants (the “October warrants”) has been issued in October 2009, and the second tranche of
2,500,000
warrants has been issued on March 31, 2010 (the “March warrants”). The October warrants, which were initially set to expire October 25, 2012 but have been extended by the Company to expire on October 25, 2014, have strike prices as follows:
1,000,000
at $
0.10
per share;
1,000,000
at $
0.15
per share; and
500,000
at $
0.20
per share. The March warrants, which were initially set to expire March 29, 2013 but have been extended by the Company to expire on March 29, 2015, have strike prices as follows:
500,000
at $
0.20
per share;
1,000,000
at $
0.25
per share; and
1,000,000
at $
0.30
per share.
In June 2011, the Company issued warrants to purchase
1,000,000
shares of its common stock at an exercise price of $
0.50
per share as partial consideration for a consulting agreement. These warrants were initially set to expire on
June 3, 2012
but have been extended by the Company to expire on
June 3, 2014
.
In connection with the extension of the above referenced warrants, the Company assigned a value of $
364,077
using the Black-Scholes option pricing model.
The Company recorded the charge to consulting expenses, included as a component of other general and administrative expenses, during the six months ended December 31, 2012.
In May 2012, the Company issued warrants to purchase
250,000
shares of its common stock at an exercise price of $
0.50
per share, as partial consideration for a consulting agreement for public relations services. The warrants expire in
May 2014
.
As of June 30, 2013 and June 30, 2012, the following is a breakdown of the activity:
F-17
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -
STOCKHOLDERS’ EQUITY (DEFICIT)
(CONTINUED)
June 30, 2013:
Outstanding - beginning of year
|
|
|
18,802,820
|
|
Issued
|
|
|
16,507,578
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
(13,552,820)
|
|
|
|
|
|
|
Outstanding - end of year
|
|
|
21,757,578
|
|
June 30, 2012:
Outstanding - beginning of year
|
|
|
8,279,028
|
|
Issued
|
|
|
13,802,820
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
(3,279,028)
|
|
|
|
|
|
|
Outstanding - end of year
|
|
|
18,802,820
|
|
At June 30, 2013, all of the
21,757,578
warrants are vested and
15,507,578
warrants expire at various times through June 30, 2014,
250,000
warrants expire on May 8, 2014,
1
million warrants expire on June 20, 2014,
2.5
million warrants expire on October 25, 2014, and
2.5
million warrants expire on March 29, 2015.
The Company valued the May 2012 warrants using the Black-Scholes method with the following criteria: stock price of $
0.26
; strike price of $
0.50
; volatility
148
% and interest rate of
0.27
%. The criteria yielded an option value of $
0.16
resulting in a value of $
39,266
for the
250,000
warrants. The expense has been included in other general and administrative expenses in the consolidated statement of operations.
NOTE 7 -
INCOME TAXES
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company recognizes interest and penalties related to income tax matters as a component of income tax expense.
At June 30, 2013 and 2012, deferred tax assets consist of the following:
|
|
2013
|
|
2012
|
|
Net operating loss carryforward
|
|
$
|
4,495,399
|
|
$
|
3,610,256
|
|
Warrant issuances
|
|
|
171,374
|
|
|
171,374
|
|
Other
|
|
|
22,604
|
|
|
23,775
|
|
Valuation allowance
|
|
|
(4,689,377)
|
|
|
(3,805,405)
|
|
|
|
$
|
-
|
|
$
|
-
|
|
A reconciliation of the activity related to the liability for gross unrecognized tax benefits during fiscal 2013 and 2012 is as follows:
|
|
Year ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Balance as of beginning of fiscal year
|
|
$
|
164,869
|
|
$
|
114,835
|
|
Increases related to prior year positions
|
|
|
-
|
|
|
50,034
|
|
Balance as of June 30,
|
|
$
|
164,869
|
|
$
|
164,869
|
|
The increase related to prior year positions recorded in 2012 was primarily related to expenses for warrants issued by the Company for services and represents a timing difference only.
At June 30, 2013, the Company had a net operating loss carryforwards in the amount of $
13,221,763
available to offset future taxable income through 2032, which will begin to expire in 2022.
The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods. A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the period ended June 30, 2013 and 2012 is summarized as follows:
|
|
2013
|
|
2012
|
|
Tax on income before income tax
|
|
|
34.00
|
%
|
|
34.00
|
%
|
Effect of nontemporary differences
|
|
|
(0.66)
|
%
|
|
(1.04)
|
%
|
Effect of NOL true-up adjustment
|
|
|
(14.48)
|
%
|
|
0.00
|
%
|
Change in valuation allowance
|
|
|
(18.86)
|
%
|
|
(32.96)
|
%
|
|
|
|
0.00
|
%
|
|
0.00
|
%
|
The total amount of unrecognized tax benefits can change due to tax examination activities, lapse of applicable statutes of limitations and the recognition and measurement criteria under the guidance related to accounting for uncertainty in income taxes. The Company does not believe any significant increases or decreases will occur within the next twelve months.
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 2009. 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.
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -
LITIGATION
On July 27, 2010, the Company filed a second amended complaint (the “Visa and Mastercard Complaint”) in the United States District Court, Central District of California (the “Court”), Case No. 2:10-cv-01864, against MasterCard, Inc. and Visa, Inc. alleging patent infringement on the Company’s patent, U.S. Patent 6,792,464 (the “’464 Patent”) (the “Visa and Mastercard Case”).
On December 7, 2010, the Company filed a complaint (the “AMEX Complaint”) in the Court, Case No. CV10-9371 JHN (MANx), against American Express Company (“AMEX”) alleging patent infringement on the 464 Patent (the “AMEX Case”).
On June 30, 2011, the Company filed a Notice of Appeal to the Judgment in the AMEX Case against what the Company believes to be erroneous definition and limitations placed on the 464 patent as a result of wrongful interpretation. On July 1, 2011, the Company filed a Notice of Appeal to the Judgment in the Visa and Mastercard Case against what the Company believes to be erroneous interpretation of definitions and limitations placed on the 464 patent by the Court.
On August 29, 2011, the Company filed a complaint in the Court, against Master Card, Inc. (“MasterCard”) and Visa, Inc. (“Visa”) alleging patent infringement on the 464 patent. The Company is seeking the following relief from MasterCard and Visa:
1.
|
For an order pursuant to 35 U.S.C. section 271 declaring that both MasterCard and Visa have infringed one or more claims of the ‘464 Patent;
|
2.
|
A preliminary and permanent injunction against both MasterCard and Visa prohibiting each of them from further infringement of the ‘464 Patent;
|
3.
|
An award of actual damages the Company has suffered by reason of the infringement charged in the complaint in an amount not less than a reasonable royalty on both MasterCard’s and Visa’s infringement of the ‘464 Patent:
|
4.
|
An award to the Company of its costs; and
|
5.
|
Such other relief as the Court may deem just and proper.
|
On April 11, 2012, the United States Court of Appeals for the Federal Circuit (the "Appeals Court") affirmed the Judgment of the Court in the Visa and Mastercard case and the AMEX case. While the Appeals Court affirmed the Judgment, it stated that the Court erroneously limited the definition of network service providers even though its construction of "insertion of said data card into said data card reader" was correct. Moreover, the Court stated that it saw no reason why a data card that communicates with a card reader using an embedded antenna cannot also be inserted into a data card reader to immediately trigger an application program.
The Company has served a claim for damages and paid up royalty for an aggregate amount of $
13.4
billion in connection with its patent infringement litigation against Mastercard and Visa, Inc.
In October 2013, the Court held that the Defendants did not infringe on the ‘464 Patent. The Company believes this holding is in error and plans to appeal the ruling.
The Company intends to continue to vigorously pursue its infringement claim in the Visa and MasterCard case.
F-19