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SMME > SEC Filings for SMME > Form 10-Q on 20-May-2014All Recent SEC Filings

Show all filings for SMARTMETRIC, INC.

Form 10-Q for SMARTMETRIC, INC.


20-May-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

In this quarterly report on Form 10-Q ("Report"), references to "SmartMetric," "SMME," "the Company," "we," "us," and "our" refer to Smartmetric, Inc.

The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements. You can identify these statements by forward-looking words such as "plan," "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors" in our Annual Report on Form 10-K as of and for the year ended June 30, 2013 and other periodic reports filed with the United States Securities and Exchange Commission ("SEC"). Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company's actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this Report, except as required by law. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.

Overview

Incorporated in 2002, SmartMetric and its founder and CEO, C. Hendrick, have been engaged in research and development of a biometric security solution which would authenticate the identity of a person in a self-contained credit card-sized device. SmartMetric's Biometric Datacard has been designed to use an on-board finger print sensor which is embedded in the card along with an integrated circuit chip which will provide varying degrees of encrypted memory 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. To date, SmartMetric has had no reportable sales revenues.

Products

Biometric Fingerprint Activated Payments and Identity Cards:

Prior plans called for the manufacturing of the SmartMetric biometric cards after the Company built not only a special factory that meets security conditions of the card companies but also that the Company configure specialized mass production machines that would allow for the specialized manufacturing process required to laminate sub micro thin silicon components that are mounted on a circuit board in order to create SmartMetric biometric credit and debit cards.

The Company has now developed a pre-lamination encasing technique that provides protection of the card components against heat and pressure experienced during the card plastic lamination process and as well protecting the card with a thin hardened impervious coating of its circuit board in order to thwart reverse engineering by those who would seek to copy SmartMetric's electronics and design.

With the newly developed "pre-lamination encasing" the Company is now able to safely outsource mass plastic card manufacturing to contract card manufacturers. Thereby saving SmartMetric significant capital and lead times in achieving high volume manufacturing.

The Company intends to market its biometric payments card directly to banks as well as forging marketing relationships with banking card industry Companies.

MedicalKeyring:

In the last quarter of 2013 the Company released on a small release basis, its MedicalKeyring product. The release was via limited radio advertising in New York with the focus on testing the market for the product and radio advertising directing interested consumers to the company website for information and product purchasing. The Company received interest from the advertising with orders placed on its website. The numbers of orders placed however were insignificant but did show that there was interest in the product. With a small number of users feedback of the product was obtained which in turn has confirmed the functional use and benefit of the product as a portable storage device of a person's medical files while protecting these files with the SmartMetric fingerprint activation technology. Experience was also gained in respect of the functionality of the products software that in turn has lead us to undertake further work on developing and improving the products internal software and interface. The Company has decided to focus its engineering development resources on its Biometric payments card product at this point in time rather than spreading its development resources across two new product releases. After discussions with a major United States retailer, the Company has decided to now begin selling the MedicalKeyring in either the last quarter of 2014 of the beginning of 2015. In the meantime discussions are taking place with Health Fund industry companies in respect of offering the MedicalKeyring to consumers.

Our ability to continue as a going concern prior to the generation of sales is almost exclusively dependent upon our ability to raise capital, specifically through sales of unregistered securities. The ability to raise capital through private placement sales is very unpredictable, thus greatly influencing the Company's ability to continue as a going concern.

Research & Development:

The Company's ongoing research and development is being undertaken by engineering contractors working for SmartMetric in Israel and Argentina.

Sales & Marketing:

SmartMetric anticipates selling its biometric card to banks as a state of the art protection against identity theft and financial fraud for $50.00 a card. The company plans to have the card released to the public through banks and financial institutions as a special anti-fraud and anti-identity theft premium card that is offered to their banking customers.

Discussions are being held concerning the offering by banks directly to their banking customers, the SmartMetric biometric protected card as a premium credit/debit card with a monthly premium card fee to the consumer set by the banks between $4.95 to $9.95 per month.

The SmartMetric cards made for use in the financial services industry are EMV chip cards that have the chip in an off state that is turned on after the card user touches the fingerprint reader sensor. The cards are designed to be fully operative with existing point of sale machines and ATM's that take EMV chip cards.

There has been in excess of 1.6 billion EMV chip cards already issued globally. The first phase of marketing and sales by SmartMetric will be concentrated on regions around the World that already have significant EMV credit and debit card adoption.

The Company is developing a fingerprint activated identity verification and verified entry card based on the Company's development of its banking EMV chip card. The Company foresees a great deal of opportunity in the security and identity validation industries from both Government and Business customers

SmartMetric does not believe its business is seasonal.

Results of Operations

Comparison of the Nine Months Ended March 31, 2014 and 2013

Revenue and Net Loss

For the nine months ended March 31, 2014, there was no revenue and a net loss of $2,524,781. For the nine months ended March 31, 2013, there was no revenue and a net loss of $3,534,727. This decreased loss of $1,009,946 or 28.6% resulted primarily from lower general and administrative expenses.

General and Administrative Expenses

General and administrative expenses for the nine months ended March 31, 2014 were $1,945,214, a decrease of $814,648 or 29.5% compared to $2,759,862 for the comparable period in 2013. This decrease was primarily attributed to lower consulting expenses.

Research and Development Expenses

Research and development expenses for the nine months ended March 31, 2014 were $437,067 a decrease of $203,631 or 31.8% compared to $640,698 for the comparable period in 2013. This decrease was primarily attributable to lower engineering expenses.

Income Tax Expense

Income tax expense for the nine months ended March 31, 2014 was $0, unchanged from the comparable period in 2013.

Comparison of the Three Months Ended March 31, 2014 and 2013

Revenue and net loss

For the three months ended March 31, 2014, there was no revenue and a net loss of $814,780. For the three months ended March 31, 2013, there was no revenue and a net loss of $1,109,202. This decreased loss of $294,422 or 26.5% resulted primarily from lower research and development costs.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2014 were $708,790, a decrease of $9,262 or 1.3% compared to $718,052 for the comparable period in 2013. This decrease was primarily attributed to lower consulting expenses.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2014 were $58,490 a decrease of $285,160 or 83.0% compared to $343,650 for the comparable period in 2013. This decrease was primarily attributable to lower engineering expenses.

Income Tax Expense

Income tax expense for the three months ended March 31, 2014 was $0, unchanged from the comparable period in 2013.

Liquidity and Capital Resources

The Company is a development stage company and has spent a majority of resources and time in developing its technology. There is no guarantee that the Company can continue to raise enough capital or generate revenues to sustain its operations. These conditions raise a substantial doubt about the Company's ability to continue as a going concern. Management believes that the Company's capital requirements will depend on a number of factors including the final phase of product development and the development of its production process 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 amount and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.

At March 31, 2014, the Company had an accumulated deficit of $18,489,375 and it is likely that the Company will incur additional losses in the future. While we have funded our operations since inception from operations and through private placements of equity securities, there can be no assurance that adequate financing will continue to be available to us and, if available, on terms that are favorable to us.

We believe that we will require additional financing to carry out our intended objectives during the next twelve months. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern.

A downturn in the United States stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock or the debt securities may cause us to be subject to restrictive covenants. There is a risk of dilution whenever the Company sells securities to raise capital. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Cash

Our cash balance was $62,869 at March 31, 2014 compared with $804,257 at June 30, 2013. The decrease was primarily attributable to higher general and administrative expenses and no revenues.

Net cash used in operating activities

Net cash used in operating activities was $1,019,423 for the nine months ended March 31, 2014, a decrease of $634,378, or 38.4% from the comparable period in 2013. The Company is largely dependent on the capital it raises to fund operations. When capital is raised the development process is accelerated, and when cash flows are decreased the Company conserves its cash by delaying development and other operating costs.

Net cash used in investing activities

Net cash used in investing activities was $0 for the nine months ended March 31, 2014, unchanged from the comparable period in 2013.

Net cash provided by financing activities

Net cash provided by financing activities was $278,035 for the nine months ended March 31, 2014, a decrease of $590,347 or 68.0% from the comparable period in 2013. The decrease was based on lower private placement equity shares.

Contractual Obligations and Off-Balance Sheet Arrangements.

There were no off-balance sheet arrangements as of March 31, 2014 and June 30, 2013.

In connection with an Assignment and Assumption Agreement with Applied Cryptography, Inc. ("ACI"), a corporation controlled by the Company's president and the owner of certain technology, ACI conveyed, assigned and transferred to the Company all of ACI's rights, title and interest in and to its patents (collectively, the "Patent") and delegated to the Company all of its duties and obligations to be performed under the Patent.

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.

Critical accounting policies and estimates

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us 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 periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

Intangible assets

SmartMetric issued 200,000 of its Series B Convertible Preferred Stock to ACI during the period in exchange for the Medical Keyring Device. The Company acquired license rights to ACI's BioCentric Cloud Device technology in consideration of the Company's obligation to issue to ACI of 200,000 shares of its Series B Convertible Preferred Stock.

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