NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1
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ORGANIZATION AND BASIS OF PRESENTATION
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SmartMetric, Inc. (the “Company” or “SmartMetric”)
was incorporated in the State of Nevada on December 18, 2002. SmartMetric’s main product is a fingerprint 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 six months ended December 31, 2016 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2017. 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, 2016, 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 $607,153 and $740,350 for the six months ended December 31, 2016 and 2015
respectively, and has an accumulated deficit of $23,862,121 at December 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
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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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 December 31, 2016 and June 30, 2016.
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
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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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 December 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.
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.
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 3
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PREPAID EXPENSES
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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.
Lease Agreement
The Company’s main office is located in Las Vegas,
Nevada. Rent expense under all leases for the six months ended December 31, 2016 and 2015 was $17,955 and $15,379, respectively.
Related Party Transactions
The Company’s Chief Executive Officer has made
cash advances to the Company with an aggregate amount due of $22,300 at December 31, 2016 and June 30, 2016. These advances bear
interest at the rate of five percent (5%) per annum.
The Company has accrued the amounts of $457,515 and $394,181
at December 31, 2016 and June 30, 2016, 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
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STOCKHOLDERS’ EQUITY (DEFICIT)
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Preferred Stock
As of December 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 preferred stock as Series B Convertible Preferred Stock
(“Series B Convertible Preferred Stock”). Effective November 5, 2014, the number of shares designated as Series B Convertible
Preferred Stock was increased to 1,000,000 shares.
Each share of Series B Convertible Preferred Stock has
a par value of $0.001, and a stated value equal to $5.00 (“Stated Value”). Holders of the Series B Convertible Preferred
Stock are entitled to receive dividends or other distributions with the holders of the common stock of the Company on an as converted
basis when, as, and if declared by the directors of the Company. Holders of the Series B Convertible Preferred Stock are entitled
to convert each share of the Series B Convertible Preferred Stock into fifty (50) shares of common stock.
Upon any liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary, holders of the Series B Convertible Preferred Stock are entitled to receive out of the
assets, whether capital or surplus, of the Company an amount equal to the Stated Value, pro rata with the holders of the common
stock.
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5
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STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
Class A Common Stock
As of December 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.
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Common Stock
The Company was incorporated on December 18, 2002, with
45,000,000 shares of Common Stock, par value $0.001, authorized. The Articles of Incorporation were amended in 2006 to increase
the number of authorized shares to 100,000,000 shares, and in 2009 to increase the number of authorized shares to 200,000,000.
As a result of a screener's error, the Company previously disclosed in its Quarterly Report on Form 10-Q for the quarters ended
September 30, 2015 and December 31, 2015 that it increased the number of authorized shares of common stock to 300,000,000. On March
31, 2016, our Board of Directors approved an amendment (the “Amendment”) to the Company’s Articles of Incorporation
to increase the total number of shares of authorized capital stock to 305,000,000 shares, par value $0.001 per share, consisting
of (i) 300,000,000 shares of Common Stock, up from 200,000,000 shares of Common Stock, and (ii) 5,000,000 shares of Preferred Stock,
subject to shareholder approval (the “Proposal”). On March 31, 2016, a majority of the Company’s stockholders
approved the Amendment. The Company filed a definitive information statement on Schedule 14C with the Securities and Exchange Commission
on May 4, 2016 (the “Information
Statement”). The Information Statement was furnished to all of the Company’s
shareholders for the purpose of informing them of the action taken by a majority of the Company’s stockholders.
As of December 31, 2016, the Company has 219,819,799
shares of common stock issued and outstanding.
During the three months ended September
30, 2015, the Company sold for cash 2,150,000 shares of common stock 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 expired at various times through
June 2016.
During the three months ended December
31, 2015, the Company sold for cash 5,242,000 shares of common stock 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 expired at various times through
October 28, 2016.
During the three months ended March
31, 2016, the Company sold for cash 2,140,000 shares of common stock 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.
During the three months ended June
30, 2016, the Company sold for cash 7,590,000 shares of common stock and warrants to purchase: (i) 4,743,750 shares at $0.70 per
share, and (ii) 2,390,850 shares at $1.00 per share, for net proceeds of $378,784. The warrants expire at various times through
January 15, 2018.
During the three months ended June
30, 2016, the Company authorized to be issued 5,000,000 shares of common stock for consulting services valued at $550,000, based
on the stock price at the time of the respective agreements underlying the services provided.
During the three months ended September
30, 2016, the Company sold for cash 3,030,000 shares of common stock and warrants to purchase: (i) 1,893,750 shares at $0.70 per
share, and (ii) 954,450 shares at $1.00 per share, for net proceeds of $151,016. The warrants expire at various times through January
15, 2018.
During the three months ended September
30, 2016, the Company authorized to be issued 1,669,633 shares of common stock for consulting services valued at $84,400, based
on the stock price at the time of the respective agreements underlying the services provided.
During the three months ended December
31, 2016, the Company sold for cash 5,570,000 shares of common stock and warrants to purchase: (i) 3,481,250 shares at $0.70 per
share, and (ii) 1,754,550 shares at $1.00 per share, for net proceeds of $282,859. The warrants expire at various times through
January 31, 2018.
SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5
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STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
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Warrants
From time to time the Company granted warrants in connection
with private placements of securities, as described herein.
In July 2015, as consideration for
a consulting agreement, the Company issued warrants to purchase 300,000 shares of its common stock at an exercise price of $0.01
per share. The warrants are fully vested and exercisable for five-years. The Company valued the warrants using the Black-Scholes
method with the following criteria: stock price of $0.14; volatility 150%; term 5 years; and risk-free rate of 1.71%. The criteria
yielded a per-warrant value of $0.14, resulting in a total value of $42,000 for the 300,000 warrants. The Company recorded the
charge to consulting expense over the three-month term of the consulting agreement. During the three months ended September 30,
2016, the Company recorded a charge of $35,000 to consulting expense, which is included in other general and administrative expenses
in the condensed consolidated statement of operations.
In April 2016, as partial consideration
for consulting services rendered, the Company authorized to be issued warrants to purchase 1,000,000 shares of its common stock
at an exercise price of $0.03 per share (“$0.03 Warrants”), and 2,000,000 warrants to purchase shares of its common
stock at an exercise price of $0.08 per share (“$0.08 Warrants,” and, together with the $0.03 Warrants, the “Warrants”).
The Warrants are fully vested and exercisable for three-years. The Company valued the Warrants using the Black-Sholes option pricing
model with the following criteria: stock price of $0.11; volatility 136%; term 3 years; and risk-free rate of 0.92%. The criteria
yielded a per-warrant value of $0.10 for the $0.03 Warrants, and a per-warrant value of $0.09 for the $0.08 Warrants, resulting
in a total value of $280,000 for the Warrants. The expense has been included in other general and administrative expenses in the
consolidated statement of operations.
As of December 31, 2016 and June
30, 2016, the following is a breakdown of the warrant activity:
December 31, 2016:
Outstanding - June 30, 2016
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12,540,199
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Issued
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8,084,000
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Exercised
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|
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-
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Expired
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(94,000
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)
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Outstanding - December 31, 2016
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20,530,199
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June 30, 2016:
Outstanding - June 30, 2015
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29,475,626
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Issued
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21,415,680
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Exercised
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-
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Expired
|
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(38,351,107
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)
|
Outstanding - June 30, 2016
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|
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12,540,199
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SMARTMETRIC INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 5
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STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
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At December 31, 2016, all of the 20,530,199 warrants
are vested and 17,230,199 warrants expire at various times through January 2018, 3,000,000 warrants expire in September 2019, and
300,000 warrants expire in July 2020.
The Company provides for income taxes at the end of each
interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the Company’s
estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.
The Company has estimated its effective tax rate to be
0%, based primarily on losses incurred and the uncertainty of realization of the tax benefit of such losses.
From time to time, the Company may be a plaintiff or
defendant in various legal proceedings arising in the normal course of our business. We know of no material, active, pending or
threatened proceedings against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any
material proceeding or pending litigation.