NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management of the Company,
the accompanying unaudited financial statements contain all the adjustments (which are of a normal recurring nature) necessary
for a fair presentation. Operating results for the three months ended September 30, 2012 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2013. 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, 2012, as filed with
the Securities and Exchange Commission.
Going Concern
As shown in the accompanying condensed consolidated
financial statements the Company has incurred recurring losses of $949,756 and $883,157 for the three months ended September 30,
2012 and 2011 respectively, and has incurred a cumulative loss of $12,226,133 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 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
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.
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 over FDIC insured limits exposes the Company to cash concentration risk. The Company has no
cash equivalents.
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 1 inputs: 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.
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 September 30, 2012 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.
Reclassifications
Certain amounts in the 2012 condensed consolidated
financial statements have been reclassified for comparative purposes to conform to the presentation in the current year condensed
consolidated financial statements. These reclassifications had no effect on previously reported results.
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 -
PREPAID EXPENSES
Prepaid expenses represent the unexpired terms of
various consulting agreements and expire through August 2013, 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 September 30, 2012 and June 30,
2012 are summarized as follows:
|
|
Estimated
Useful Lives
( Years)
|
|
|
September
30,
2012
|
|
|
June 30,
2012
|
|
|
|
|
|
|
|
|
|
|
|
Legal fees paid in connection with patent
Applications
|
|
|
10
|
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
(12,000
|
)
|
|
|
(11,625
|
)
|
Patent costs, net
|
|
|
|
|
|
$
|
3,000
|
|
|
$
|
3,375
|
|
Amortization expense was $375 for the three months
ended September 30, 2012 and 2011, 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.
Lease Agreement
The Company leases office space in Bay Harbor Islands,
Florida under a month to month 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. Rent expense under all leases
for the three months ended September 30, 2012 and 2011 was $24,358 and $3,900 respectively. Total minimum future rental payments
under all leases with terms in excess of one year are as follows:
Year ending June 30,
|
|
Amount
|
|
|
|
|
|
2013
|
|
|
57,808
|
|
2014
|
|
|
80,931
|
|
2015
|
|
|
48,558
|
|
Total
|
|
$
|
187,297
|
|
Related Party Transactions
The Company’s president has made cash advances
to the Company with an aggregate amount due of $1,422 and $1,422 as of September 30, 2012 and June 30, 2012, respectively. These
advances bear interest at 5.00% per annum.
As of September 30, 2012 and June 30, 2012, the
Company has accrued the amounts of $67,026 and $67,026, respectively, as deferred Officer 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
(UNAUDITED)
NOTE 6 -
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
As of September 30, 2012, the Company has 5,000,000
shares of preferred stock, par value $0.001, authorized and 200,000 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 an 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, the Company has not generated
the minimum revenue amount under the Assignment and Assumption Agreement. As a result, ACI has the right to exercise
its option to purchase the Patent from the Company. If ACI exercises its option to purchase the Patent, the Company
may be unable to continue to develop and manufacture the SmartMetric Biometric Datacard without first entering into an arrangement
with ACI for the right to use the Patent, the terms of which may be unfavorable to the Company. As of September 30,
2012 ACI has given no indication that it intends to exercise its option to purchase the patent.
In accordance with Staff Accounting Bulletin (“SAB”)
topic 5G “Transfers of Non-monetary Assets by Promoters and Shareholders” the Company recorded the transaction at
ACI’s carrying basis of the Patent.
Class A Common Stock
As of September 30, 2012, the Company has 50,000,000
shares of Class A common stock, par value $0.001, authorized and no shares issued and outstanding. The Company in October 2003
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 February and May 2006.
Common Stock
The Company was incorporated on December 18, 2002,
with 45,000,000 shares, par value $0.001. In 2006, the Company amended their articles of incorporation to increase the 45,000,000
shares to 100,000,000 shares. In 2009, the Company further increased the authorized shares to 200,000,000.
As of September 30, 2012, the Company has 122,311,776
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.
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.
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.
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.
Warrants
The Company granted from time to time warrants with
terms of one-year and of six months in connection with private placements at various prices as noted 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 expire October 25, 2012, and 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 expire March 29, 2013, and 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 expired unexercised on June 3, 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 on May 8, 2014.
As of September 30, 2012 and June 30, 2012, the
following is a breakdown of the activity:
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -
STOCKHOLDERS’ EQUITY (DEFICIT)
(CONTINUED)
September 30, 2012:
Outstanding - beginning of period
|
|
|
18,802,820
|
|
Issued
|
|
|
860,000
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
(3,344,721
|
)
|
|
|
|
|
|
Outstanding - end of period
|
|
|
16,318,099
|
|
June 30, 2012:
Outstanding - beginning of period
|
|
|
8,279,028
|
|
Issued
|
|
|
13,802,820
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
(3,279,028
|
)
|
|
|
|
|
|
Outstanding - end of period
|
|
|
18,802,820
|
|
At September 30, 2012, all of the 16,318,099 warrants
are vested and all but 250,000 or the warrants expire at various times through June 30, 2013. 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
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.
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 20, 2011, the Court entered a judgment of
non-infringement in both the Visa and Mastercard Case and the AMEX Case based on the Court’s construction of certain of
the disputed phrases of the asserted claims of the 464 Patent (the “Judgment”).
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 United States District Court, Central District of California, 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.
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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;
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2.
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A preliminary and permanent injunction against both MasterCard and Visa prohibiting each of
them from further infringement of the ‘464 Patent;
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3.
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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:
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4.
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An award to the Company of its costs; and
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5.
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Such other relief as the Court may deem just and proper.
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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 intends to continue to vigorously pursue its infringement
claim in the Visa and MasterCard case.