NOTES TO CONDENSED 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 and nine months ended March 31, 2016 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2016. 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, 2015, as filed with
the Securities and Exchange Commission.
Going Concern
As shown in the accompanying condensed consolidated
financial statements the Company has sustained recurring losses of $1,016,445 and $1,256,840 for the nine months ended March 31,
2016 and 2015 respectively, and has an accumulated deficit of $22,043,998 at March 31, 2016. 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 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
|
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.
SMARTMETRIC INC.
AND SUBSIDIARY
NOTES TO CONDENSED 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 had no cash
equivalents at March 31, 2016 and June 30, 2015.
Fair Value of Financial Instruments
The carrying amounts reported in the condensed consolidated
balance sheet for cash, accounts payable, and accrued expenses 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.
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
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, 2016 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 2012. 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.
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 complete. The fair value of the equity instrument is charged directly to compensation expense and additional
paid-in capital.
Reclassifications
Certain amounts in the prior period condensed consolidated
financial statements have been reclassified for comparative purposes to conform to the presentation in the current period condensed
consolidated financial statements. These reclassifications had no effect on previously reported results.
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
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 the consulting services, and were valued based on the stock price or computed warrant value at the time of the respective agreements.
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.
During September 2013, the Company acquired license
rights to ACI's BioCentric Cloud Device technology in consideration of the Company's issuance to ACI of 200,000 shares of its Series
B Convertible Preferred Stock. Effective November 5, 2014, the Company increased the number of preferred shares designated as Series
B, and accordingly, the shares were issued to ACI on November 10, 2014.
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 terminated this lease and vacated its Argentina facility in February, 2014. 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 nine months ended March 31, 2016 and 2015 was $24,864 and $28,703, respectively.
Related Party Transactions
The Company’s Chief Executive Officer has made
cash advances to the Company with an aggregate amount due of $0 and $13,960 at March 31, 2016 and June 30, 2015, respectively.
These advances bear interest at the rate of five percent (5%) per annum.
The Company has accrued the amounts of $362,515 and
$267,515 at March 31, 2016 and June 30, 2015, respectively, as deferred Officer’s salary, for the difference between the
Chief Executive Officer’s annual salary and the amounts paid.
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
NOTE
5
-
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
Preferred Stock
As of March 31, 2016, the Company has 5,000,000 shares
of preferred stock, par value $0.001, authorized and 410,000 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”). 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 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.
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.
In July 2013, ACI elected to convert 190,000 shares
of Series B Convertible Preferred Stock, issued in 2012, into 9,500,000 shares of the Company’s common stock.
During September 2013, the Company acquired license
rights to ACI's BioCentric Cloud Device technology in consideration of the Company's issuance to ACI of 200,000 shares of its Series
B Convertible Preferred Stock. Effective November 5, 2014, the Company increased the number of preferred shares designated as Series
B, and accordingly, the shares were issued to ACI on November 10, 2014.
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, which was $0.
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
NOTE
5
-
|
STOCKHOLDERS’
EQUITY (DEFICIT)
(CONTINUED)
|
Class A Common Stock
As of March 31, 2016, 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, add in 2009 to increase the number of authorized shares
to 200,000,000. As a result of a scrievner'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. The actions described in the Information Statement cannot be taken or become effective until at least
twenty (20) calendar days after the Information Statement is first sent or given to the Company’s stockholders.
We expect to file the Amendment with the Secretary of State of Nevada after the end of the twenty (20) calendar day period
described above.
As of March 31, 2016, the Company has 197,447,416
shares of common stock issued and outstanding.
During the three months ended
September 30, 2014, the Company sold for cash 4,893,731 shares and twenty-four month warrants to purchase: (i) 1,375,000 shares
at $0.70 per share, and (ii) 724,500 shares at $1.00 per share, for net proceeds of $307,662.
During the three months ended
December 31, 2014, the Company sold for cash 1,599,994 shares and twelve month warrants to purchase: (i) 1,187,500 shares at $0.70
per share, and (ii) 598,500 shares at $1.00 per share, for net proceeds of $95,750.
During the three months ended
March 31, 2015, the Company sold for cash 4,425,000 shares and twelve month warrants to purchase: (i) 2,375,000 shares at $0.70
per share, and (ii) 1,197,000 shares at $1.00 per share, for net proceeds of $189,557.
During the three months ended
March 31, 2015, the Company issued 296,250 shares for consulting services valued at $17,775, based on the stock price at the time
of the respective agreements underlying the services provided.
During the three months ended
June 30, 2015, the Company sold for cash 4,362,500 shares and twenty-four month warrants to purchase: (i) 2,668,750 shares at $0.70
per share, and (ii) 1,345,050 shares at $1.00 per share, for net proceeds of $212,934.
During the three months ended
June 30, 2015, the Company issued 1,415,062 shares for consulting services valued at $71,435, based on the stock price at the time
of the respective agreements underlying the services provided.
During the three months ended
September 30, 2015, the Company sold for cash 2,150,000 shares and warrants to purchase: (i) 2,687,500 shares at $0.70 per share,
and (ii) 1,354,500 shares at $1.00 per share, for net proceeds of $214,633. The warrants expire at various times through June 2016.
During the three months ended
December 31, 2015, the Company sold for cash 5,242,000 shares and warrants to purchase: (i) 3,276,250 shares at $0.70 per share,
and (ii) 1,651,230 shares at $1.00 per share, for net proceeds of $261,477. The warrants expire at various times through October
28, 2016.
During the three months ended
March 31, 2016, the Company sold for cash 2,140,000 shares and warrants to purchase: (i) 1,337,500 shares at $0.70 per share, and
(ii) 674,100 shares at $1.00 per share, for net proceeds of $106,771. The warrants expire at various times through January 15,
2018.
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
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 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 set to expire
October 25, 2014 (as extended) but have been further extended by the Company and expired on October 25, 2015. The March warrants,
which were set to expire March 29, 2015 (as extended) but have been further extended by the Company and expired on March 29, 2016.
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 set to expire on June 3, 2014 (as extended) but have were further extended
by the Company and expired on June 3, 2015.
In connection with the extension
of the above referenced warrants during the year ended June 30, 2014, which were partial consideration in connection with a new
consulting agreement, the Company assigned a value of $209,300 using the Black-Scholes option pricing model. The Company recorded
the charge to consulting expenses over the term of the new consulting agreement.
In July 2015, the Company issued
warrants to purchase 300,000 shares of its common stock at an exercise price of $0.01 per share, as partial consideration for a
consulting agreement. The Company valued the warrants using the Black-Scholes method with the following criteria: stock price of
$0.14; strike price of $0.01; volatility 150% and interest rate of 1.71%. The criteria yielded a warrant value of $0.14, resulting
in a 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 nine months ended March 31, 2016, the Company recorded a charge of $42,000 to consulting
expense, which is included in other general and administrative expenses in the condensed consolidated statement of operations.
As of March 31, 2016 and June
30, 2015, the following is a breakdown of the warrant activity:
March 31, 2016:
Outstanding - June 30, 2015
|
|
|
29,475,626
|
|
Issued
|
|
|
11,281,080
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
(25,461,860
|
)
|
Outstanding - March 31, 2016
|
|
|
11,619,479
|
|
June 30, 2015:
Outstanding - June 30, 2014
|
|
|
19,004,326
|
|
Issued
|
|
|
11,471,300
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
(1,000,000
|
)
|
Outstanding - June 30, 2015
|
|
|
29,475,626
|
|
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
|
NOTE
5 -
|
STOCKHOLDERS’
EQUITY (DEFICIT)
(CONTINUED)
|
At March 31, 2016, all of the 11,619,479 warrants
are vested and 11,319,479 warrants expire at various times through January 31, 2018, 2.5 million warrants expired on March 29,
2016, and 300,000 warrants expire on July 12, 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.
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”).
In October 2013, the Court, held that the Defendants did not infringe on the ‘464 Patent.
VISA and MasterCard asked the Court to award them attorneys' fees and costs approximating $3 million. SmartMetric opposed this request, which SmartMetric
believed was without merit because SmartMetric filed its suit in good faith and had litigated the case in an objectively reasonable
manner.
On March 25, 2015, Court denied both Visa and Mastercard’s motion for fees and costs. A notice
of appeal has been lodged with the Court by Mastercard while Visa declined to lodge an appeal and the time for such an appeal by
Visa has now passed.
On February 9, 2016, the Federal
Circuit Court in Washington DC handed down a decision denying the Mastercard appeal and thereby removing the potential $1.5 million
charge against the Company.