SmartMetric, Inc. - FORM 10-K - October 13, 2010

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EX-32.1 - EXHIBIT 32.1 - SmartMetric, Inc.ex321.htm
EX-32.2 - EXHIBIT 32.2 - SmartMetric, Inc.ex322.htm
EX-31.2 - EXHIBIT 31.2 - SmartMetric, Inc.ex312.htm
EX-31.1 - EXHIBIT 31.1 - SmartMetric, Inc.ex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
 
(Mark One)
 
x
 
  
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For  the fiscal year ended June 30, 2010
 
o
 
  
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  __  to_______________________________


Commission File Number: 333-118801
 
SMARTMETRIC, INC
(Exact name of registrant as specified in its charter)
 

Nevada
  
05-0543557
  
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer identification No.)
  
       
1150 Kane Concourse, Suite 400, Bay Harbor Islands, FL
  
33154
  
(Address of principal executive offices)
  
(Zip Code)
  
       
Registrant’s telephone number, including area code 
  
(305) 495-7190
  
 
Securities registered under Section 12(b) of the Exchange Act:
 
Title of each class
  
Name of each exchange on which registered
N/A
  
N/A
 
Securities registered pursuant to section 12(g) of the Act
 
Common Stock, par value $0.001 per share
 
(Title of Class)
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes      þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes  þ No

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes      o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes      o No

 
 
 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
  
Accelerated filer o
Non-accelerated filer  o (Do not check if a smaller reporting company)
  
Smaller reporting company þ

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Ac t).      
o Yes  þ  No
 
As of June 30, 2010, there are presently 89,212,555 shares of common stock, par value $0.001 issued and outstanding.
 
 

 
 
 


 
 
TABLE OF CONTENTS
 
     
Page
       
PART I
       
Item 1.
DESCRIPTION OF BUSINESS
   2
Item 1A
RISK FACTORS
   7
Item 1B
UNRESOLVED STAFF COMMENTS
   10
Item 2.
DESCRIPTION OF PROPERTY
   10
Item 3.
LEGAL PROCEEDINGS
   10
Item 4.
(REMOVED AND RESERVED)
   10
       
PART II
       
Item 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES
   11
Item 6
SELECT FINANCIAL DATA
   12
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   12
Item 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   14
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   14
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
   15
Item 9A.
CONTROLS AND PROCEDURES
   16
Item 9B.
OTHER INFORMATION
   17
       
PART III
       
Item 10.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(b) OF THE EXCHANGE ACT
   18
Item 11.
EXECUTIVE COMPENSATION
   20
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
   21
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
   21
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
   22
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
   23
       
SIGNATURES
    
 
 
 

 
 
 

 

FORWARD LOOKING STATEMENTS
 
In this annual report, references to “SmartMetric, Inc.,” “Smartmetric,” “SMME,” “the Company,” “we,” “us,” and “our” refer to SmartMetric, Inc.

This Annual Report on Form 10-K contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.
 
Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

 

 
1
 
PART I
 
 
Item 1.    Business
 
Corporate History and Overview

SmartMetric was incorporated pursuant to the laws of Nevada on December 18, 2002.  SmartMetric is a development stage company engaged in the technology industry. SmartMetric has a license to utilize proprietary technology to manufacture and sell a fingerprint sensor activated card with a finger sensor on the board 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 Smartcard."

On September 14, 2004, Mr. Hendrick received a United States patent with regard to the use of the Biometric card. Mr. Hendrick transferred the patent, which was then pending, to Applied Cryptography, Inc., a Nevada corporation, owned by Mr. Hendrick, in June 2004. On August 1, 2004, Applied Cryptography, Inc. entered into a license agreement with SmartMetric pursuant to which SmartMetric has the right to use, manufacture and sell products utilizing the patented technology in perpetuity. This patent was granted on September 14, 2004.

As of June 30, 2010, SmartMetric had a total stockholders' deficiency of $857,926, and cash of $0.  SmartMetric has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on SmartMetric's financial condition, results of operations or liquidity.

The SmartMetric Biometric Card

SmartMetric has designed a biometric card utilizing patented technology licensed to the company.  A prototype of this card was completed in February 2005. The company is in the process of finalizing its biometric card and expects to have a final product by January 2011.  The product, due to exposure in specialty trade publications and numerous press releases, is receiving much interest in the private sector, especially amongst banking entities.  Also, the product has received interest from the governmental sector, including, but not limited to the Department of Homeland Security and the Department of Defense.

SmartMetric believes that its biometric card will have several functions:

·  
The fingerprint sensor will facilitate instant authorization verification;

·  
In card biometric measurement storage will safeguard personal information;

·  
In card biometric storage will permit access, identity and transaction control verification;

·  
Instant identity verification will be secure since such information is contained in the card and not in centralized database
 
The SmartMetric Biometric Smartcard is a credit card size plastic card.  On the cards surface are two components.  The first is a standard Smartcard chip that is a standard interface that connects to USB computer smartcard readers, ATM machines and smartcard able Point Of Sale machines in retail outlets.  The second component is a sensor that protrudes through the cards surface.  This sensor is connected to a sophisticated miniature circuit board that allows the sensor to read a person’s fingerprint and match it with the user’s pre-stored fingerprint encrypted and resident inside the circuit board.

The challenge SmartMetric sought to overcome was having a truly portable Identification credential that incorporated biometrics and yet was the standard size of an employee ID Card or Drivers License.  As it stood standard biometric fingerprint scanners were too large to fit inside a credit card sized card and none were portable needing to be attached to a computer that powered the scanning process thereby not allowing for true portability.   In order to achieve the goal of Biometric portability in the form factor to fit inside a users wallet or purse and work across both computer and banking platforms SmartMetric had to achieve incredible reductions in electronics and develop specialized manufacturing techniques.  The miniaturization to all intents and purposes of a laptop computer circuit board to the size that fits inside a credit card has taken years of research and development.

The SmartMetric Biometric Smartcard contains over 150 active and passive components mounted onto a paper-thin circuit board.  Reducing a powerful ARM processor to a thin sliver of silicon along with many other complex computer components including memory chips and then mounting them on the super thin board has required innovations in electronic manufacturing and the use of Nano technology.

Today SmartMetric has created the World’s first and to its knowledge the only portable biometric fingerprint scanner that resides inside a credit card sized card and acts independently of any other computing device.

 
2
 

Unlike a picture-based identification system, the SmartMetric biometric card has been designed to operate exclusively with the registered user. And unlike biometric security systems where the biometric information is stored at a central location, the Company believes that security cannot be compromised during the verification process since the biometric information is embedded in the card itself, in a memory chip protected by encryption and no data is travelling over a network.  The built-in fingerprint scanner is designed to activate the card. Without a match with the encrypted fingerprint already stored on the card, the Biometric Smartcard will not operate.

In the case of an employee Identity Card application when a match occurs on the card a green light lights up, if no match then a red light is activated on the cards surface.

SmartMetric believes its Biometric Smartcard may be used for a variety of security applications such as airport employee access and identity, building access and identity, computer network access, drivers licenses, passports, and check cashing identity verification, etc.  Additionally, the Biometric Smartcard contains a powerful on-card ARM Processor and up to 1 gigabyte of encrypted memory, enabling the Biometric Smartcard to not only store the full image of a fingerprint but also maintain a database capable of storing information such as medical records, financial or banking records or human resource data.

As an online purchasing card, the Biometric Smartcard helps protect against identity theft and related fraudulent crimes that consumers can be exposed to when making purchases over the internet.  Unlike conventional credit cards, which require a consumer to type and deliver sensitive information over the internet in order to make a purchase, the Biometric Smartcard is designed to be inserted into the USB port of a computer and any purchasing information can only be released from the card when the owner’s fingerprint unlocks the card.  The consumer’s information then travels across the internet encrypted, minimizing exposure to interception by hackers and Identity Thieves.

As an online money transfer card, the company has developed software and systems to allow money to be transferred from one card to another over the internet with user confirmation of transaction by both sender and receiver.  Much as in the same way that digital files are transferred in a process called Peer to Peer transfer.  Because fingerprint activation is required at both ends of the transaction the sending and receiving party’s can be confident that only the appropriate person is receiving the funds.  This allows the low cost of internet communication to now be used for person to person money transfer.

SmartMetric believes that its biometric card, by way of containing information unique to the individual user, will be useless in the hands of others. Unlike a picture-based identification system, the SmartMetric biometric card has been designed to operate exclusively with the registered user. And unlike biometric security systems where the biometric information is stored at a central location, we believe that confirmation of identify with the SmartMetric system may not be interrupted during the verification process or while it is stored at the remote location since the biometric information is embedded in the card, itself, in a memory chip protected by encryption. The fingerprint sensor built into the card has been designed to activate the card. Without a match with the encrypted fingerprint already stored on the card, the biometric card will not operate.

The SmartMetric biometric card is a card that authorized persons will carry with them and activate to obtain access. Such activation will take place by placing a finger on a fingerprint sensor. The SmartMetric biometric cards are designed to be read by both contact and contactless card acceptor devices. For contact card acceptor devices, the device must touch a chip mounted on the surface of the Biometric card. This contact allows the card to transmit data to the reading device. For contactless acceptor devices, a radio frequency signal will be sent from the card to a radio frequency signal receiver in the acceptor device. In both types of acceptor devices, the activation signal is sent only when there has been a positive match of fingerprint by fingerprint sensor. The card acceptor devices are available from several different third parties and do not require any licenses.

The company expects that the memory and computational capacities of the biometric card will be used to store a template of each user's fingerprint(s). The memory capacity will store a template of a user's fingerprint(s). The computational capacity will be used to process a digitized image from the fingerprint sensor to confirm a match (or no match) with the fingerprint template. Additional computational processes such as increased Cryptography will depend on the requirements of specific customers.

SmartMetric believes its biometric card may be used for a variety of security applications such as airport employed access and identity, building access and identity, computer network access, drivers licenses, passports and check cashing identity verification.

Fingerprint Sensor

The fingerprint sensor used in the SmartMetric biometric card is known as the "Metric 60" fingerprint sensor. The Metric 60 allows for fingerprints which are either wet or dry to be recognized or authenticated. It is also pressure sensitive. SmartMetric purchases the fingerprint sensor from an unrelated third party, but has no signed agreement with such party. The fingerprint sensor is available from other suppliers. SmartMetric has designed a method of integrating the fingerprint sensor on the card, which is then connected to a microprocessor, which is connected to a rechargeable power supply in the card and a memory chip for storage, retrieval and matching of the fingerprint on the card.

The SmartMetric biometric card has been designed to utilize a rechargeable, lithium polymer battery. Because this battery is available in a variety of shapes and sizes, SmartMetric can design its cards in similar variety of shapes. This lithium polymer battery is owned and manufactured by a third party unaffiliated with SmartMetric. This battery will be integrated into the card. SmartMetric has located a supplier for this battery and has purchased battery’s that meet the requirements and specifications of the Biometric Card.

 
3
 

While SmartMetric has already purchased these batteries, other raw materials which are part of the product have been purchased as well.  Examples include, but are not limited to, microchips, memory chips and processor chips.  The sources and availability of these materials are numerous and readily available, and should not affect the ability of SmartMetric to meet future demand.

The SmartMetric card has been designed to meet the International Standard Organization 7816 Flex requirements so that it will not break or crack when bent or flexed. The prototype card has been designed to meet ISO requirements for crush test, drop test and nail test. It has been designed to operate in a wide range of temperatures.

The Biometric card has been designed to offer the option of a built-in radio frequency transmitter for contactless entry and identity verification.

The Security Technology Industry

 Biometrics

Biometric technologies identify users by electronically capturing a specific biological or behavioral characteristic of that individual, such as a fingerprint or voice or facial feature, and creating a unique digital identifier from that characteristic. Because this process relies on largely unalterable human characteristics, positive identification can be achieved independent of any information possessed by the individual seeking authorization.

The process of identity authentication typically requires that a person present for comparison one or more of the following factors:

·  
Something known such as a password, PIN or mother's maiden name;

·  
Something carried such as a token, card, or key; or

·  
Something physical such as fingerprint, voice pattern, signature motion, facial shape or other biological or behavioral characteristic.
 
Comparison of biological and behavioral characteristics has historically been the most reliable and accurate of the three factors, but has also been the most difficult and costly to implement into a single product that can automatically verify the identity of a user accessing a computer network or the Internet. However, recent advances in biometric collection technologies (both biometric hardware products and their associated processing software) have increased the speed and accuracy and reduced the cost of implementing biometrics in commercial environments. Management believes that individuals, Web site operators, government organizations, and businesses will increasingly use this method of identity authentication.

Biometrics refers to the automatic identification of a person based on his/her physiological or behavioral characteristics. This method of identification is preferred over traditional methods involving passwords and personal identification numbers ("PINs") for various reasons: (i) the person to be identified is required to be physically present at the point of identification to be identification; (ii) identification based on biometric techniques obviates the need to remember a password or carry a token. By replacing PINs, biometric techniques can potentially prevent unauthorized access to or fraudulent use of cellular phones, Biometric cards, desktop PCs, workstations and computer networks. It can be used during transactions conducted via telephone and Internet (e-commerce and e-banking). In automobiles, biometrics could replace keys-less entry devices.

PINs and passwords may be forgotten, and token-based methods of identification, e.g., passports and driver's licenses, may be forged, stolen or lost. Various types of biometric systems are being used for real-time identification, with the most popular based on face recognition and fingerprint matching. Other biometric systems utilize iris and retinal scanning, speech, facial thermograms and hand geometry.

A biometric system is essentially a pattern recognition system, which makes a personal identification by determining the authenticity of a specific physiological or behavioral characteristic possessed by the user. An important issue in designing a practical system is to determine how an individual is identified.

There are two different ways to resolve a person's identity: verification and identification. Verification (Am I whom I claim I am?) involves confirming or denying a person's claimed identity. In identification, one has to establish a person's identity (Who am I?).

The SmartMetric biometric card has been designed as a credit-card sized plastic card embedded with an integrated circuit chip and biometric fingerprint sensor. While we have completed a prototype of this card, we are in the process of completing the final product. The SmartMetric card has been designed to provide not only memory capacity, but also computational capability along with secure non-refutable identification of the user. We believe that the self-containment of SmartMetric's card will make it substantially resistant to attack, as it will not need to depend upon potentially vulnerable external resources. Because of this characteristic, we expect that the SmartMetric biometric card may be used in different applications which require strong security protection and authentication.
 
 
4
 

The physical structure of a card is specified by the International Standards Organization ("ISO") 7810, 7816/1 and 7816/2. Generally, it is made up of three elements. The plastic card is the most basic one and has the dimensions of 85.60mm x 53.98 x 0.80mm. A printed circuit and an integrated circuit chip are embedded on the card.

The SmartMetric card has been designed so that the printed circuit conforms to ISO standard 7816/3 which provides five connection points for power and data. It will be hermetically fixed in the recess provided for the card and will be burned onto the circuit chip, filled with a conductive material and sealed with contracts protruding. The printed circuit is a part of, and not distinct from, the Biometric card. The printed circuit is intended to protect the circuit chip from mechanical stress and static electricity. Communication with the chip will be accomplished through contacts that overlay the printed circuit. The integrated circuit chip defines the capability of a smart chip. Typically, an integrated circuit chip consists of a microprocessor, read only memory (ROM), non-static random access memory and electrically erasable programmable read only memory which will retain its state when the power is removed. The current circuit chip is made from silicon, which is not flexible and particularly easy to break. In order to avoid breakage when the card is bent, the chip is restricted to only a few millimeters in size.

Furthermore, it is our intent that the physical interface which allows data exchange between the integrated circuit chip and the card acceptor device will be limited to 9600 bits per second. The communication line is intended to be a bi-directional serial transmission line, which conforms to ISO standard 7816/3. We intend that all the data exchanges will be under the control of the central processing unit in the integrated circuit chip. Card commands and input data will be sent to the chip that responds with status words and output data upon the receipt of these commands and data. Information will be sent in half duplex mode (transmission of data is in one direction at a time). This protocol, together with the restriction of the bit rate, is designed to prevent massive data attack on the card.

In general, the size, the thickness and bend requirements for the biometric card were designed to protect the card from being spoiled physically. However, this also limits the memory and processing resources that may be placed on the card. In the past, industry participants have encountered particular difficulty in attempting to integrate high memory chips and finger sensor technology that will withstand both the size constraints and physical daily usage such as bending in a user's wallet sitting in his back pocket. We believe our biometric card has met and overcome the physical demands of the credit card to produce what is a powerful on-card computer processor with state-of-the-art biometric technology. However, we believe that additional engineering is necessary to reduce the size to the circuitry of the card prototype. We expect that such re-engineering will be complete by January 2011.

Sales and Marketing

When we have completed the prototype of our biometric card and received any required regulatory approval, we plan to market and sell our product to banking interests in the private sector and governmental agencies such as the Department of Homeland Security and the Department of Defense.  As noted previously, we have received interest in the product from the aforementioned.

We do not currently have a marketing or sales force or a distribution arrangement in place.  We will need to expend resources to develop our own marketing and sales force or enter into third-party distribution arrangements.

Manufacturing

We expect to outsource manufacturing of our Biometric cards once we have sales orders. We do not intend to purchase any plants or significant equipment.   Because SmartMetric does not own or rent a manufacturing facility, we will enter into a contract with a manufacturing facility to produce our Biometric cards.  Although we have engaged in preliminary negotiations with two potential manufacturers, no contract has been signed.

Intellectual Property

We rely on patents, licenses, trade secrets, trademarks, copyright registrations and non-disclosure agreements to establish and protect our proprietary rights in our technologies and products.
 
 
5
 

Patents

Applied Cryptography, Inc., a company owned and controlled by Colin Hendrick, President and CEO of SmartMetric, owns the patent for a Biometric card process. This patent has been licensed to SmartMetric. The patent expires September 30, 2014.

The patent asserts claims to the following processes:

·  
A system for managing digital rights of digital content over a network.

·  
A data card contains user information including digital rights information specific to a users, the data card having memory component for enabling information to be stored within the data card.

·  
A data card reader is adapted to access the user information contained on the data card when the data card is in communication with a card reading device.

·  
A data processor in communication with the data card reader is adapted to be connected to the network.

·  
An application program resides on the memory component of the data card, the application program being configured to operate in conjunction with a universal language for creating and controlling digital rights, to manage user rights of the digital content available on the network based on the digital rights information specific to the user which is contained on the data card.

License Agreements

On August 1, 2004, SmartMetric entered into a license agreement with Applied Cryptography, Inc., a Nevada corporation which is owner of certain technology for which a patent was issued from the United States. Pursuant to the license agreement, SmartMetric has the right to make use of this technology for the purpose of developing software and systems to be used by SmartMetric to provide certain applications including 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; 4) identity verification and access control as provided for in the patent. Colin Hendrick, President, Chief Executive Officer and Chairman of the Board of Directors of SmartMetric, is the sole officer and shareholder of Applied Cryptography, Inc.

Pursuant to this license agreement, Applied Cryptography, Inc. will receive 2% of all revenues generated by SmartMetric on products which utilize this patented technology. The license fee will be paid on a quarterly basis based on revenues received during that quarter. The license fee shall be due within 45 days of the end of each quarter. In the event no revenues were generated through the use of any of the licensed patents during a given quarter, no money shall be owed Applied Cryptography, Inc. for such quarter. Late license fees shall accrue interest at a rate of 2% per quarter. Applied Cryptography, Inc. may rescind the license agreement and reclaim all rights and interest in the patents if certain events, such as SmartMetric's filing for bankruptcy protection or reorganization, occur.

This license agreement will remain in effect for the life of the patent. SmartMetric may utilize their patented technological applications anywhere in the world without limitation.

Our technology is also dependent upon unpatented trade secrets.  However, trade secrets are difficult to protect.  In an effort to protect our trade secrets, we have a policy of requiring our employees, consultants and advisors to execute non-disclosure agreements.  These agreements provide that confidential information developed or made known to an individual during the course of their relationship with us must be kept confidential, and may not be used, except in specified circumstances.  In addition, our employees are parties to agreements that require them to assign to us all inventions and other technology that they create while employed by us.

Research and Development

Our research and development program is focused on completing development of our Biometric card.  We continue to refine existing technology and develop further improvements to our product.  We are in the very final stages of finalizing the product.  We expect research and development costs to trend lower in fiscal year ending June 30, 2011, due to the product expected to be ready for market in January 2011.  Almost all research and development costs now center around an adjustment being made to a second antenna in the card.
 
Competition

SmartMetric is a company involved in identity management. This industry is dominated by several large international corporations such as BioNetrix, Keyware, Gemplus and Precise Biometrics, all of which manufacture and/or distribute and market identity management products. These companies and many others are more established than SmartMetric, which will put it at a competitive disadvantage. For example, Precise Biometrics, a company whose stock is listed on the Stockholm Stock Exchange, sells products which utilize its patented biometric fingerprint authentication technology which allows it to isolate the characteristic features of a human fingerprint and to match such features with a stored template to secure identity. However, Precise Biometrics is publicly traded and better funded then SmartMetric, and thus better known. SmartMetric's licensed patent allows for such data to be stored on a credit card sized device; however, SmartMetric only has a prototype of its biometric card.

 
 
6
 
 
BioNetrix offers a solution for systems security - user authentication and sign on. This company was founded in 1997.

Keyware was founded in 1996 and went public in 2000 and is headquartered in Brussels, Belgium.  While Keyware’s primary business model is transaction processing, they maintain a significant platform in identity tracking technology and maintain a competitive advantage through high capitalization.

Gemplus manufactures a powerful, yet user friendly software focusing on bar-code technology.  Gemplus incorporates identity verification tools within  their software.  Gemplus maintains a large internet presence and their software is easily downloadable, making them a market force.

SmartMetric is a newcomer to this industry, with no proven track record and an untested product. We are not as well known as our potential competitors, nor are we certain our card will work as intended or that it will meet clients' needs. We are at a competitive disadvantage when compared to those better known, better funded and experienced identity management companies. SmartMetric will be competing with these as well as smaller and mid-size identity management manufactures, distributors, and developers.

Employees

As of the date of this annual report, SmartMetric has two full time employees including Colin Hendrick, SmartMetric’s CEO, and no part-time employees. None of these employees belongs to any union.

Government Regulation

There are currently no governmental regulations which have any bearing on the raw materials or the manufacturing of our product.

 
Item 1A. Risk Factors.
 
Our independent auditors have expressed doubt about our ability to continue our activities as a going concern, which may hinder our ability to obtain future financing.

Since we have been focused on developing our propriety technology for availability of commercialization, we have suffered recurring losses from operations. The continuation of our Company as a going concern is dependent upon our Company attaining and maintaining profitable operations and raising additional capital. The financial statements do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should our Company discontinue operations.

Due to the uncertainty of our ability to meet our current operating expenses, in their report on the annual financial statements for the years ended June 30, 2010 and 2009, our independent registered accounting firm included an explanatory paragraph regarding the doubt about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the status of the Company.

The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity securities by us could result in a significant/substantial dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. If the Company should fail to continue as a going concern, you may lose the value of your investment in the Company.

We have a limited operating history upon which to base an investment decision.
 
We were formed in December 2002 but have a limited operating history as a company. As a result, there is very limited historical performance upon which to evaluate our prospects for achieving our business objectives. Our prospects must be considered in light of the risks, difficulties and uncertainties frequently encountered by development stage entities.

To date, we have generated only losses, which are expected to continue for the foreseeable future.
 
For the years ended June 30, 2010 and 2009, we incurred a net loss of $1,611,652 and $1,103,089, respectively.  We may not be able to achieve expected results, including any guidance or outlook it may provide from time to time. We may continue to incur losses and may be unable to achieve or maintain profitability. We cannot assure you that our net losses and negative cash flow will not accelerate and surpass our expectations nor can we assure you that we will ever generate any net income or positive cash flow.

Our business depends upon our ability to keep pace with the latest technological changes, and our failure to do so could make us less competitive in our industry.
 
The market for our services is characterized by rapid change and technological improvements. Failure to respond in a timely and cost-effective way to these technological developments may result in serious harm to our business and operating results. As a result, our success will depend, in part, on our ability to develop and market service offerings that respond in a timely manner to the technological advances of available to our customers, evolving industry standards and changing preferences.

Our key personnel and directors are critical to our business, and such key personnel may not remain with our company in the future.
 
We depend on the continued employment of its senior executive officers and other key management and technical personnel. If any of its key personnel were to leave and not be replaced with sufficiently qualified and experienced personnel, our business could be adversely affected. In particular, our current strategy to penetrate the market for contactless logical access identification and transaction solutions is heavily dependent on the vision, leadership and experience of its chief executive officer, Colin Hendrick.

Our continued success will depend, to a significant extent, upon the performance and contributions of our senior management and upon our ability to attract, motivate and retain highly qualified management personnel and employees. We depend on our key senior management to effective manage our business in a highly competitive environment. If one or more of our key officers join a competitor or form a competing company, we may experience interruptions in product development, delays in bringing products to market, difficulties in our relationships with customers and loss of additional personnel, which could significantly harm our business, financial condition, operating results and projected growth.

 
7
 


Rapid technological changes could make our service less attractive.
 
The smart card, biometric identification and personal identification industries are characterized by rapid technological change, frequent new product innovations, changes in customer requirements and expectations and evolving industry standards. If we are unable to keep pace with these changes, our business may be harmed. Products using new technologies, or emerging industry standards, could make our technologies less attractive. If addition, we may face unforeseen problems when developing our products, which could harm our business. Furthermore, our competitors may have access to technologies not available to us, which may enable them to produce products of greater interest to consumers or at a more competitive cost.

Consumer avoidance of software which collect, store or use personally-identifiable data could adversely affect our business.
 
Consumer sentiment regarding privacy issues is constantly evolving. Such consumer sentiment may affect the buying public’s interest in our current or future service offerings. If some areas, consumer groups and individual consumers have already begun to vigorously lobby against, or otherwise express significant concern over, the collection, storage and/or use of personally-identifiable information. In addition, there has been an effort to impede the collection of fingerprinting as a way to identify individuals; however, we do not see this as a barrier to our technology. Accordingly, privacy concerns of consumers may influence certain industry sectors from collecting digital biometric information on a person as well as putting biometric and biographical data on a smart card forcing some industries to refrain from offering products or using products that could harm the biometric personal identification industry. Moreover, strong consumer attitudes often precipitate new regulations like the ones described above. If we fail to successfully monitor and consider the privacy concerns of consumers, our business and prospectus could be harmed.

If we are not able to adequately protect our intellectual property, we may not be able to compete effectively.
 
Our ability to compete depends in part upon the strength of our proprietary rights in our technologies, brands and content. We have relied on a combination of U.S. and foreign patents, copyrights, trademark, trade secret laws and license agreements to establish and protect our intellectual property and proprietary rights through the years. The efforts we have taken to protect our intellectual property and proprietary rights may not be sufficient or effective at stopping unauthorized use of our intellectual property and proprietary rights. In addition, effective trademark, patent, copyright and trade secret protection may not be available or cost-effective in every country in which our products are made available. There may be instances where we are not able to fully protect or utilize our intellectual property in a manner that maximizes competitive advantage. If we are unable to protect our intellectual property and proprietary rights from unauthorized use, the value of our products may be reduced, which could negatively impact our business. Our inability to obtain appropriate protections for our intellectual property may also allow competitors to enter our markets and produce or sell the same or similar products. In addition, protecting our intellectual property and other proprietary rights is expensive and diverts critical managerial resources. If any of the foregoing were to occur, or if we are otherwise unable to protect our intellectual property and proprietary rights, our business and financial results could be adversely affected.

If we are forced to resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive. In addition, our proprietary rights could be at risk if we are unsuccessful in, or cannot afford to pursue, those proceedings.

If we infringe on the rights of third parties, we may not be able to sell our products, and we may have to defend against litigation and pay damages.
 
If a third party were to assert that our products infringe on its patent or other intellectual property rights, we could incur substantial litigation costs and be forced to pay substantial damages. Third-party infringement claims, regardless of their outcome, would not only consume significant financial resources, but would also divert our management’s time and attention. Such claims could also cause our customers or potential customers to purchase competitors’ products or defer or limit their purchase or use of our affected products until resolution of the claim. If any of our products are found to violate third-party intellectual property rights, we may have to re-engineer one or more of our products, or we may have to obtain licenses from third parties to continue offering our products without substantial re-engineering. Our efforts to re-engineer or obtain licenses could require significant expenditures and may not be successful.

Sales of our products depend on the development of emerging applications in their target markets and on diversifying and expanding our customer base in new markets and geographic regions, and with new products.
 
Our intent is to market and sell our products primarily to the private sector while addressing emerging applications that have not yet reached a stage of mass adoption or deployment. The market for some of these solutions (electronic biometric fingerprinting) is at an early stage of deployment in the private sector compared to other forms of services that try to identify a person by their name and social security number. Additionally, we have a strategy of expanding sales of existing products into new geographic markets.  Our target market initially will begin in South America and Australia.
 
8
 
Disruption in the global financial markets may adversely impact the availability and cost of credit.
 
We may seek or need to raise additional funds. Our ability to obtain financing for general corporate and commercial purposes or acquisitions depends on operating and financial performance, and is also subject to prevailing economic conditions and to financial, business and other factors beyond our control. The global credit markets and the financial services industry have been experiencing a period of unprecedented turmoil characterized by the bankruptcy, failure or sale of various financial institutions. An unprecedented level of intervention from the U.S. and other governments has been seen. As a result of such disruption, our ability to raise capital may be severely restricted and the cost of raising capital through such markets or privately may increase significantly at a time when we would like, or need, to do so. Either of these events could have an impact on our flexibility to fund our business operations, make capital expenditures, pursue additional expansion or acquisition opportunities, or make another discretionary use of cash and could adversely impact our financial results.

Continuing disruption in the global financial markets may adversely impact customers and customer spending patterns.
 
Continuing disruption in the global financial markets as a result of the ongoing global financial uncertainty may cause consumers, businesses and governments to defer purchases in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, demand for our products could decrease and differ materially from their current expectations. Further, some of our customers may require substantial financing in order to fund their operations and make purchases from us. The inability of these customers to obtain sufficient credit to finance purchases of our products and meet their payment obligations to us or possible insolvencies of our customers could result in decreased customer demand, an impaired ability for us to collect on outstanding accounts receivable, significant delays in accounts receivable payments, and significant write-offs of accounts receivable, each of which could adversely impact our financial results.

Failure to properly manage the implementation of customer projects in our business may result in costs or claims against us, and our financial results could be adversely affected.
 
In our business, deployments of our solution often involve large-scale projects. The quality of our performance on such projects depends in large part upon our ability to manage relationships with customers and to effectively manage the implementation of solutions in such projects and to deploy appropriate resources, including its own project managers and third party subcontractors, in a timely manner. Any defects or errors or failures to meet clients’ expectations could result in damage to our reputation or even claims for substantial monetary damages.  Moreover, a portion of our revenues are derived from fixed price contracts. Changes in the actual and estimated costs and time to complete fixed-price, time-certain projects may result in revenue adjustments for contracts where revenue is recognized under the percentage of completion method. Finally, if we miscalculate the amount of resources or time we need to complete a project for which it has agreed to capped or fixed fees, our financial results could be adversely affected.

Our products may have defects, which could damage our reputation, decrease market acceptance of our products, cause us to lose customers and revenue and result in costly litigation or liability.
 
Our products, such as digital fingerprint devices, may contain defects for many reasons, including defective design or manufacture, defective material or software interoperability issues. Products as complex as those we offer, frequently develop or contain undetected defects or errors. Despite testing defects or errors may arise in our existing or new products, which could result in loss of revenue, market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, and increased service and maintenance cost. Defects or errors in our products and solutions might discourage customers from purchasing future products and. Often, these defects are not detected until after the products have been shipped. If any of our products contain defects or perceived defects or have reliability, quality or compatibility problems or perceived problems, our reputation might be damaged significantly, we could lose or experience a delay in market acceptance of the affected product or products and might be unable to retain existing customers or attract new customers. In addition, these defects could interrupt or delay sales. In the event of an actual or perceived defect or other problem, we may need to invest significant capital, technical, managerial and other resources to investigate and correct the potential defect or problem and potentially divert these resources from other development efforts. If we are unable to provide a solution to the potential defect or problem that is acceptable to its customers, we may be required to incur substantial product recall, repair and replacement and even litigation costs. These costs could have a material adverse effect on our business and operating results.

We will provide warranties on certain product sales and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or to replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior twelve months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to recognize additional cost of sales may be required in future periods. In addition, because our customers rely on secure authentication and identification of a such cardholder to prevent unauthorized access to programs, PC’s, networks, or facilities, a malfunction of or design defect in its products (or even a perceived defect) could result in legal or warranty claims against us for damages resulting from security breaches. If such claims are adversely decided against us, the potential liability could be substantial and have a material adverse effect on our business and operating results. Furthermore, the possible publicity associated with any such claim, whether or not decided against us, could adversely affect our reputation. In addition, a well-publicized security breach involving smart card-based or other security systems could adversely affect the market’s perception of products like ours in general, or our products in particular, regardless of whether the breach is actual or attributable to our products. Any of the foregoing events could cause demand for our products to decline, which would cause its business and operating results to suffer.

We have a limited number of suppliers of key components, and may experience difficulties in obtaining components for which there is significant demand.

 
9
 

We rely upon a limited number of suppliers for some key components of our products. Our reliance on a limited number of suppliers may expose us to various risks including, without limitation, an inadequate supply of components, price increases, late deliveries and poor component quality. In addition, some of the basic components we use in our products, such as biometric fingerprint devices and various smart card technologies may at any time be in great demand. This could result in components not being available to us in a timely manner or at all, particularly if larger companies have ordered more significant volumes of those components, or in higher prices being charged for components. Disruption or termination of the supply of components or software used in our products could delay shipments of these products. These delays could have a material adverse effect on our business and operating results and could also damage relationships with current and prospective customers.
 
•
Difficulties in staffing;
•
Adequate resources of qualified technicians, engineers/assemblers, and programmers;
•
Potentially adverse tax consequences;
•
Unexpected changes in regulatory requirements;
•
Tariffs and other trade barriers;
•
export controls;
•
Political and economic instability;
•
Lack of control over the manufacturing process and ultimately over the quality of our products;
•
late delivery of our products, whether because of limited access to product components, transportation delays andinterruptions, difficulties in staffing, or disruptions such as natural disasters;
•
Capacity limitations of our manufacturers, particularly in the context of new large contracts for its products, whetherbecause its manufacturers lack the required capacity or are unwilling to produce the quantities we desire; and
•
Obsolescence of our hardware products at the end of the manufacturing cycle.
 
Item 1B. Unresolved Staff Comments.
 
Not Applicable.
 
Item 2.    Properties.
 
Our executive offices are located at 1150 Kane Concourse, Suite 400, Bay Harbor Islands, Florida 33154.  We lease this office space on a “month-to-month basis”.  Rent expense for the years ended June 30, 2010 and 2009 were $17,500 and $66,325, respectively.

We believe that our existing facilities will be adequate for our current needs and that additional space will be available as needed.  The material terms of our property leases are set forth in the table below.
 
Location
  
Use
  
Square Feet
  
Rent Payments
  
Term
  
Leased From
1150 Kane Concourse, Suite 400, Bay Harbor Islands, Florida 33154
   Offices   Approximately 850 square feet
     
  $1,300 per month   monthly   June 2008
                                                                                                                 
Item 3.    Legal Proceedings.
   
Except as described below, we know of no material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.
 
On July 27, 2010, the Company filed a second amended complaint (the “Amended 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. (collectively, the “Defendants”) alleging patent infringement on the Company’s patent, U.S. Patent 6,792,464 (the “’464 Patent”).  On August 12, 2010, Defendants filed a Joint Motion to Dismiss the Company’s Amended Complaint.  On September 16, 2010, the Court denied Defendants’ Motion to Dismiss.

Item 4.    Removed and Reserved.
 
This item was removed and reserved pursuant to SEC Release No. 33-9089A issued on February 23, 2010.

 
10
 

PART II
 
 
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
 
Market Information
 
Our common stock has been traded over-the-counter on the Over-the-Counter (“OTC”) Bulletin Board and “Pink Sheets” since April 7, 2006 under the symbol SMME and the market for the stock has been relatively inactive. The range of high and low bid quotations for the quarters of the last two years ended June 30, 2010 is listed below. The quotations are taken from the OTC Bulletin Board. They reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
 
Quarter Ended
  
Low Bid
    
High Bid
  
Quarter Ended September 30, 2008  
     0.07       0.25  
Quarter Ended December 31, 2008  
     0.08       0.18  
Quarter Ended March 31, 2009  
     0.06       0.18  
Quarter Ended June 30, 2009  
     0.08       0.19  
Quarter Ended September 30, 2009  
     0.04       0.17  
Quarter Ended December 31, 2009  
     0.05       0.16  
Quarter Ended March 31, 2010  
     0.04       0.09  
Quarter Ended June 30, 2010  
     0.03       0.17  

As of October 12, 2010, we had approximately 869 shareholders of record of our common stock, including the shares held in street name by brokerage firms. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.  Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.

Dividends

Any payment of dividends will be within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating and financial condition of the Company. At the present time, the Company's anticipated financial capital requirements are such that it intends to follow a policy of retaining earnings in order to finance the development of its business.

Securities authorized for issuance under equity compensation plans

As of the date of this report, we do not have any securities authorized for issuance under any equity compensation plans and we do not have any equity compensation plans.
  
Penny Stock Regulations

Our shares of common stock are subject to the "penny stock" rules of the Securities Exchange Act of 1934 and various rules under this Act. In general terms, "penny stock" is defined as any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rules provide that any equity security is considered to be a penny stock unless that security is registered and traded on a national securities exchange meeting specified criteria set by the SEC, issued by a registered investment company, and excluded from the definition on the basis of price (at least $5.00 per share), or based on the issuer's net tangible assets or revenues. In the last case, the issuer's net tangible assets must exceed $3,000,000 if in continuous operation for at least three years or $5,000,000 if in operation for less than three years, or the issuer's average revenues for each of the past three years must exceed $6,000,000.

Trading in shares of penny stock is subject to additional sales practice requirements for broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse), and certain institutional investors. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of the security and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security. Finally, monthly statements must be sent disclosing recent price information for the penny stocks. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of shareholders to sell their shares.
 

 
11
 

Recent Sales of Unregistered Securities
 
The following summarizes the securities that we sold during the fiscal year ended June 30, 2010 without registering the securities under the Securities Act:

In the three months ended September 30, 2009, the Company sold 9,720 Units (representing 1,944,000 shares of common stock and 486,000 warrants) at a price of $10.00 per Unit in private placements resulting in net proceeds of $96,875.  Each Unit consists of 200 shares of common stock and 50 warrants exercisable for 12 months from the date of issue into one share of common stock at $0.50 per share.

In the three months ended December 31, 2009, the Company sold 8,050 Units (representing 1,610,000 shares of common stock and 402,500 warrants) at a price of $10.00 per Unit in private placements resulting in net proceeds of $80,375.  Each Unit consists of 200 shares of common stock and 50 warrants exercisable for 12 months from the date of issue into one share of common stock at $0.50 per share. These Units represent a total of 1,944,000 shares of common stock and 486,000 warrants.

In the three months ended March 31, 2010, the Company sold 14,650 Units (representing 2,930,000 shares of common stock and 732,500 warrants) at a price of $10.00 per Unit in private placements resulting in net proceeds of $146,205.  Each Unit consists of 200 shares of common stock and 50 warrants exercisable for 12 months from the date of issue into one share of common stock at $0.50 per share.

In the three months ended June 30, 2010, the Company sold 12,375 Units (representing 2,475,000 shares of common stock and 618,750 warrants) at a price of $10.00 per Unit in private placements resulting in net proceeds of $123,295.  Each Unit consists of 200 shares of common stock and 50 warrants exercisable for 12 months from the date of issue into one share of common stock at $0.50 per share.

Unless otherwise noted in this section, with respect to the sale of unregistered securities referenced above, all transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and Regulation D or Regulation S promulgated under the 1933 Act. In each instance, the purchaser had access to sufficient information regarding SmartMetric so as to make an informed investment decision. More specifically, we had a reasonable basis to believe that each purchaser was an "accredited investor" as defined in Regulation D or Regulation S of the 1933 Act and otherwise had the requisite sophistication to make an investment in SmartMetric's securities.
 
Item 6.    Selected Financial Data.
 
 Not Applicable.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion of the financial condition and results of operation of the Company for the fiscal years ended June 30, 2010 and 2009 should be read in conjunction with the selected financial data, the financial statements and the notes to those statements that are included elsewhere in this registration statement. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this registration statement. We use terms such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
 
General
 
Incorporated in 2002, SmartMetric and its founder and CEO, Colin 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 card 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 one gigabyte of memory capacity. SmartMetric has recently completed a prototype of its card but has not yet begun to manufacture the biometric cards utilizing its licensed technology. To date, SmartMetric has had no sales revenues.
 
A prototype of our biometric card was completed in February 2005 and we have been adjusting and developing software for the card since that date.  The finished product will be the prototype or model for our biometric cards, which will be manufactured upon receipt of customer orders.   We are in the process of revising some of the engineering of the prototype so as to decrease the size of the circuitry contained in the card. We expect that the revised prototype will be completed by January 2011.

We expect to outsource manufacturing of our biometric cards once we have sales orders. We do not intend to purchase any plants or significant equipment.   Because SmartMetric does not own or rent a manufacturing facility, we will enter into a contract with a manufacturing facility to produce our biometric cards.  Although we have engaged in preliminary negotiations with two potential manufacturers, no contract has been signed.

Our ability to continue as a going concern 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.  Loans from the Officer to the Company can sustain our operations in the event of a serious slowdown in capital funding, however we believe this to be a solution very short in scope, unable to sustain the Company for long periods of time.

 
12
 

 
We currently have two full time employees, including Colin Hendrick, our President and Chief Executive Officer. Once we have begun to generate sales, we intend to hire additional employees.
 
SmartMetric does not believe its business is seasonal in any way.
 
Results of Operations
 
Comparison of the Year Ended June 30, 2010 and 2009

Revenue and Net Income (Loss)

For the fiscal year ended June 30, 2010, there were $0 sales revenues and a net loss of $1,611,652. For the year ended June 30, 2009, there were $0 sales revenues and a net loss of $1,103,089. This increased loss of $508,563 or 46.1% is the result of an increase in shares issued for services.
 
General and Administrative Expenses

General and administrative expenses for the year ended June 30, 2010 were $1,336,211, an increase of $659,022 or 97.3% compared to $677,189 for the comparable period in 2009. The increase was primarily attributable to shares issued for services.

Research and Development Expenses

Research and development expenses for the year ended June 30, 2010 were 87,348, a decrease of $163,088 or 65.1% compared to $250,436 for the comparable period in 2009. The decrease was primarily attributable to a slowdown in prototype development due to the transitioning to a new manufacturer.

Interest Expenses
 
There was $18,093 interest expense for the year ended June 30, 2010 compared to $5,464 for the comparable period in 2009, an increase of $12,629 or 231.1%.  The increase was primarily attributable to an increased outstanding balance of payroll taxes.

Income Tax Expenses

Income tax for the year ended June 30, 2010 was $0, unchanged from June 30, 2009.
 
Liquidity and Capital Resources

Cash and Cash Equivalents
 
Our cash and cash equivalents were $42,519 at the beginning of the year ended June 30, 2010 and decreased to $0 by the end of such period, a decrease of $42,519 or 100%.  The decrease was attributable to the inconsistency in capital funding.
 
Net cash used in operating activities

Net cash used by operating activities was $502,835 for the year ended June 30, 2010, compared to $667,242 for the same period in 2009.  The difference was primarily due to increased general and administrative expenses.
 
Net cash used in investing activities
 
Net cash used in investing activities was $0 for the year ended June 30, 2010, unchanged from June 30, 2009.
 
Net cash provided by financing activities

Net cash provided by financing activities was $460,316 for the year ended June 30, 2010, as compared to $443,344 from the same period ending June 30, 2009. The difference was primarily due to a related party loan from the Company’s C.E.O.

The company continues to be in the development stage.  Our ability to bear the costs associated towards bringing the product to market is highly dependent upon capital funding, which is unpredictable and sporadic.  Differences from year-to-year in various cost categories can vary from 0% to 250%.  The Company transition from one manufacturer to another caused a delay in development.  We expect the product to be in mass production prior to December 31, 2011, with an initial concentration on markets in South America and Australia.  These markets are most “product-friendly” due to their current banking regulations.  Eventually, we will market the product in the United States with an initial concentration on the United States government.

 
13
 


Contractual Obligations and Off-Balance Sheet Arrangements.

There are currently no contractual obligations or off-balance sheet arrangements.

 Critical accounting policies and estimates
 
The 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 (See Note 2 in the Notes to Financial Statements).
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Interest Rates.

Our exposure to market risk for changes in interest rates relates primarily to our short-term investments; thus, fluctuations in interest rates would not have a material impact on the fair value of these investments. At October 11, 2010, we had approximately $61,627 in cash and cash equivalents. A hypothetical 5% increase or decrease in either short term or long term interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of these instruments.

Item 8.     Financial Statements and Supplementary Data.

Our audited consolidated financial statements for the fiscal years ended June 30, 2010 and 2009, together with the reports of the independent certified public accounting firms thereon and the notes thereto, are presented beginning at page F-1.
 
 
 
14
 
 
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – JUNE 30, 2010
F-2 
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – JUNE 30, 2009
F-3 
   
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2010 AND 2009
F-4 
   
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2010 AND 2009 WITH CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
F-5 
   
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE PERIOD DECEMBER 18, 2002 (INCEPTION) TO JUNE 30, 2010
F-6 
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2010 AND 2009 WITH CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
F-8
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2010 AND 2009
F-9 to F-23 


 

 
F - 1
 
 
Report of Independent Registered Public Accounting Firm


 
To the Board of Directors and Stockholders
 
Smartmetric, Inc. and Subsidiary
 
We have audited the accompanying consolidated balance sheet of Smartmetric, Inc. and Subsidiary (a development stage company) (the “Company”) as of June 30, 2010, and the related consolidated statements of income, stockholders’ deficit and cash flows for the year ended June 30, 2010.  The consolidated financial statements for the period from inception (December 18, 2002) to June 30, 2009 were audited by other auditors whose reports included an explanatory paragraph that expressed substantial doubt about the Company’s ability to continue as a going concern.  The consolidated financial statements for the period from inception (December 18, 2002) to June 30, 2009 include total revenues and net loss of $0 and $5,069,772, respectively.  Our opinion on the statements of operations, stockholders’ deficit and cash flows for the period from inception (December 18, 2002) to June 30, 2009, insofar as it relates to amounts for prior periods through June 30, 2009, is based solely on the report of the other auditors.  The Company’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Smartmetric, Inc. and Subsidiary as of June 30, 2010, and the results of its operations and its cash flows for the year ended June 30, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in process of developing its technology and has not generated any revenue to this point, however, has been successful in raising funds in their private placements. The lack of profitable operations and the need to continue to raise funds raise significant doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 

/s/ Daszkal Bolton LLP
Boca Raton, Florida
October 13, 2010
 

 
F - 2
 
 
Report of Independent Registered Public Accounting Firm
 
To the Directors of
Smartmetric, Inc. and Subsidiary

We have audited the accompanying balance sheet of Smartmetric, Inc. and Subsidiary (the "Company") (a development stage company) as of June 30, 2009, and the related statements of operations, changes in stockholders' equity (deficit) and cash flows for the year ended June 30, 2009 and the statements of operations, changes in stockholders’ equity (deficit) and cash flows for the period December 18, 2002 (Inception) through June 30, 2009. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Smartmetric, Inc. and Subsidiary (a development stage company) as of June 30, 2009, and the results of its statements of operations, changes in stockholders’ equity (deficit), and cash flows for year ended June 30, 2009 in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is in process of developing its technology and has not generated any revenue to this point, however, has been successful in raising funds in their private placements. The lack of profitable operations and the need to continue to raise funds raise significant doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/KBL, LLP
KBL, LLP

New York, NY
October 15, 2009
 
 
 
F - 3
 

SMARTMETRIC, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2010 AND 2009
   
June 30,
  
Assets
  
2010
    
2009
  
             
Current assets:
            
  Cash
   $ -     $ 42,519  
  Prepaid expenses and other current assets
     4,069       38,758  
                 
    Total current assets
     4,069       81,277  
                 
Equipment, less accumulated depreciation of
                
  $15,984 and $13,599, respectively
     -       2,385  
                 
Other assets:
                
  Patent costs, less accumulated amortization
                
    of $8,625 and $7,125, respectively
     6,375       7,875  
                 
                 
Total assets
   $ 10,444     $ 91,537  
                 
Liabilities and Stockholders' Equity
                
                 
Current liabilities:
                
  Accounts payable and accrued expenses
   $ 160,614     $ 129,244  
  Liability for stock to be issued
     154,004       146,454  
  Cash overdraft
     15,141       -  
  Deferred Officer salary
     82,424       -  
  Shareholder loan
     19,916       -  
  Payroll taxes, withholdings and accrued
                
    interest and penalties
     436,271       240,677  
                 
    Total current liabilities
     868,370       516,375  
                 
                 
  Total liabilities
     868,370       516,375  
                 
Commitments and contingencies
                
                 
Stockholders' deficit
                
  Preferred stock, $.001 par value; 5,000,000 shares
                
    authorized, 200,000 and 0 shares issued and outstanding, respectively
     200       -  
  Common stock, $.001 par value; 200,000,000 shares
                
    authorized, issued and outstanding 89,212,555 and
                
    75,546,222 shares, respectively
     89,212       75,546  
  Additional paid-in capital
     5,734,086       4,569,388  
Deficit accumulated during the development stage
     (6,681,424 )     (5,069,772 )
                 
    Total stockholders' deficit
     (857,926 )     (424,838 )
                 
Total liabilities and stockholders' deficit
   $ 10,444     $ 91,537  
 
See notes to consolidated financial statements.

 
 
F - 4
 
 
SMARTMETRIC, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
WITH CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
               
During the
  
               
Development
  
   
Year
    
Year
    
Stage
  
   
Ended
June 30,
    
Ended
June 30,
    
(December 18, 2002
  
   
2010
    
2009
     to June 30, 2010)  
                     
Revenues
   $ -     $ -      $ -  
                         
Expenses:
                        
  Officer's salary
     170,000       170,000       935,000   
  Other general and administrative
     1,336,211       677,189       4,789,496  
  Research and development
     87,348       250,436       900,947  
                         
    Total expenses
     1,593,559       1,097,625       6,625,443   
                         
Loss from operations
     (1,593,559 )     (1,097,625 )     (6,625,443  )
                         
Interest income
     -       -       657   
Interest expense
     (18,093 )     (5,464 )     (56,638 )
                         
Net loss
   $ (1,611,652 )   $ (1,103,089 )    $ (6,681,424   )
                         
Net loss per share, basic and diluted
   $ (0.02 )   $ (0.02 )        
                         
Weighted average number of common shares outstanding, basic and diluted
     82,365,131       71,908,264          
                         
                         
                         
See notes to consolidated financial statements.
 
 
 
F - 5
 
 

SMARTMETRIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD DECEMBER 18, 2002 (INCEPTION) THROUGH JUNE 30, 2010
 
                                                       
                                              Deficits        
                                              Accumulated        
                 Class A     Common           Additional     During        
    Preferred Stock     Common Stock    
Stock
          
Paid-in
    
Developmental
        
   
Shares
    
Amount
    
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Stage
    
Total
  
                                                       
Balance,
December 18,
2002
     -     $ -       -     $ -       -     $ -     $ -     $ -     $ -  
                                                                         
Net loss for the
period December
18, 2002
(inception)
through June
30, 2003
     -       -       -       -       -       -       -       (60 )     (60 )
                                                                         
Balance
June 30, 2003
     -       -       -       -       -       -       -       (60 )     (60 )
                                                                         
Shares issued of
Class A Common
stock
     -       -       50,000,000       50,000       -       -       -       -       50,000  
                                                                         
Shares issued of
common stock
for cash
     -       -       -       -       8,560,257       8,560       77,042       -       85,602  
                                                                         
Net loss for the
year
     -       -       -       -       -       -       -       (35,978 )     (35,978 )
                                                                         
Balance, June 30,
2004
     -       -       50,000,000       50,000       8,560,257       8,560       77,042       (36,038 )     99,564  
                                                                         
Costs associated
with sale of
common stock
subject to
possible
rescission
     -       -       -       -       -       -       (95,877 )     -       (95,877 )
                                                                         
Net loss for the
year
     -       -       -       -       -       -       -       (258,355 )     (258,355 )
                                                                         
Balance June 30,
2005
     -       -       50,000,000       50,000       8,560,257       8,560       (18,835 )     (294,393 )     (254,668 )
                                                                         
Shares issued of
common stock
for cash, net of
offering
costs of $138,509
     -       -       -       -       936,112       936       1,197,361       -       1,198,297  
                                                                         
Shares issued of
common stock
for services
rendered
     -       -       -       -       20,000       20       19,980       -       20,000  
                                                                         
Conversion of
loan payable
and accrued
interest to
common shares
     -       -       -       -       40,000       40       62,360       -       62,400  
                                                                         
Conversion of
Class A common
shares to
common shares
     -       -       (50,000,000 )     (50,000 )     50,000,000       50,000       -       -       -  
                                                                         
Net loss for the
year
     -       -       -       -       -       -       -       (1,225,045 )     (1,225,045 )
 
 
 
F - 6
 
 
                                                                         
Balance June 30,
2006
     -       -       -       -       59,556,369       59,556       1,260,866       (1,519,438 )     (199,016 )
                                                                         
Shares issued of
common stock
for cash
     -       -       -       -       1,208,887       1,209       759,140       -       760,349  
                                                                         
Shares issued of
common stock
for services
rendered
     -       -       -       -       191,505       192       (192 )     -       -  
                                                                         
Net loss for the
year
     -       -       -       -       -       -       -       (1,050,189 )     (1,050,189 )
                                                                         
Balance June 30,
2007
     -       -       -       -       60,956,761       60,957       2,019,814       (2,569,627 )     (488,856 )
                                                                         
Shares issued of
common stock
for cash
     -       -       -       -       6,629,634       6,629       1,293,595       -       1,300,224  
                                                                         
Shares issued of
common stock
for services
rendered
     -       -       -       -       2,327,000       2,327       471,073       -       473,400  
                                                                         
Net loss for the
year
     -       -       -       -       -       -       -       (1,397,056 )     (1,397,056 )
                                                                         
Balance June 30,
2008
     -       -       -       -       69,913,395       69,913       3,784,482       (3,966,683 )     (112,288 )
                                                                         
Transfer of
shares from
temporary equity
to common stock
     -       -       -       -       160,837       161       241,095       -       241,256  
                                                                         
Shares issued of
common stock
for cash
     -       -       -       -       4,412,596       4,413       438,931       -       443,344  
                                                                         
Shares issued of
common stock
for services
rendered
     -       -       -       -       1,059,394       1,059       104,880       -       105,939  
                                                                         
Net loss for the
year
     -       -       -       -       -       -       -       (1,103,089 )     (1,103,089 )
                                                                         
Balance June 30,
2009
     -       -       -       -       75,546,222       75,546       4,569,388       (5,069,772 )     (424,838 )
                                                                         
Shares issued
for patent
     200,000       200       -       -       -       -       (200 )     -       -  
                                                                         
Shares issued of
common stock and
warrants for cash
     -       -       -       -       8,808,000       8,808       431,592       -       440,400  
                                                                         
Shares issued of
common stock
for services
rendered
     -       -       -       -       4,858,333       4,858       395,556       -       400,414  
                                                                         
Warrants issued
for services
rendered
     -       -       -       -       -       -       337,750       -       337,750  
                                                                         
Net loss for the
year
                                                                        
      -       -       -       -       -       -       -       (1,611,652 )     (1,611,652 )
Balance June 30,
2010
     200,000     $ 200       -     $ -       89,212,555     $ 89,212       5,734,086     $ (6,681,424 )   $ (857,926 )

See notes to consolidated financial statements.
 
F - 7
 


                 
SMARTMETRIC, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2010 AND 2009
WITH CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
 
                   
               
CUMULATIVE
  
         
TOTALS
  
    YEARS ENDED    
SINCE
  
   
JUNE 30,
    
DECEMBER
  
   
2010
    
2009
     18, 2002  
                     
CASH FLOWS FROM OPERATING ACTIVITIES
                        
  Net loss
   $ (1,611,652 )   $ (1,103,089 )   $ (6,681,424 )
                         
  Adjustments to reconcile net loss to net cash
    used in operating activities:
                        
    Depreciation
     2,385       4,284       15,984  
    Amortization
     1,500       1,500       8,625  
    Common stock and warrants issued for consulting services
     738,164       105,939       1,337,503  
    Interest accrued on convertible notes payable
     -       -       2,400  
                         
  Changes in assets and liabilities
                        
    (Increase) decrease in prepaid expenses
     34,689       13,143       (4,069 )
    Increase in accounts payable and accrued expenses
     31,370       61,358       160,614  
    Increase in deferred Officer salary
     82,424       -       82,424  
    Increase in cash overdraft
     15,141       -       15,141  
    Increase in payroll taxes, accrued interest and penalties
     195,594       103,169       436,271  
    Increase in liability for stock to be issued
     7,550       146,454       154,004  
    Total adjustments
     1,108,817       435,847       2,208,897  
                         
    Net cash (used in) operating activities
     (502,835 )     (667,242 )     (4,472,527 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                        
  Acquisition of equipment
     -       -        (15,984 )
  Patent costs
     -       -       (15,000 )
                         
    Net cash (used in) investing activities
     -       -        (30,984 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                        
    Proceeds from notes payable
     -       -        60,000  
    Loans from related parties
     19,916       -       74,343  
    Repayments of loans from related parties
     -       -       (54,427 )
    Stock subscriptions received from private placements
     440,400       443,344       3,446,594  
    Sale of common stock in public offering
     -       -       1,115,472  
    Public offering costs incurred
     -       -       (138,471 )
                         
      Net cash provided by financing activities
     460,316       443,344        4,503,511  
                         
NET INCREASE (DECREASE) IN
                        
  CASH AND CASH EQUIVALENTS
     (42,519 )     (223,898 )      -  
                         
CASH AND CASH EQUIVALENTS-
                        
  BEGINNING OF PERIOD
     42,519       266,417        -  
                         
CASH AND CASH EQUIVALENTS-END OF PERIOD
   $ -     $ 42,519     $ -  
                         
CASH PAID DURING THE YEAR FOR:
                        
  Income taxes
   $ -     $ -     $ -  
  Interest expense
   $ -     $ -     $ 28,174  
                         
                         
               
See notes to consolidated financial statements.

 
F - 8
 
 
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1 -                       ORGANIZATION AND BASIS OF PRESENTATION

SmartMetric, Inc. (the “Company” or “SmartMetric”) was incorporated in the State of Nevada on December 18, 2002. The Company is developing a credit card size plastic card embedded with an integrated circuit chip and biometric fingerprint sensor which provides identification of the user (the “SmartMetric Smart Card”) to market to government agencies, corporations, and organizations interested in identification cards.




 
F - 9
 
 
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 -                       ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

Going Concern

As shown in the accompanying condensed consolidated financial statements the Company has incurred recurring losses of $1,611,652 and $1,103,089 for the year ended June 30, 2010 and 2009 respectively, and has incurred a cumulative loss of $6,681,424 since inception (December 18, 2002).  In addition, the Company has a working capital deficit in the amount of $857,926 as of June 30, 2010. The Company is currently in the development stage and has been spending a majority of its time in the development of their 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 being successful as well as product implementation and distribution.

The consolidated financial statements do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amounts and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.


NOTE 2 -                       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                 Development Stage Company

The Company is considered to be in the development stage as defined in ASC 915-10, "Accounting and Reporting by Development Stage Enterprises". The Company has devoted substantially all of its efforts to the development of their technology.  Additionally, the Company has allocated a substantial portion of its time and investment in bringing its services to the market, and the raising of capital.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, SmartMetric Australia Pty. Ltd.  All significant intercompany accounts and transactions have been eliminated in consolidation.




 
F - 10
 
 
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 -                       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to derivative liabilities, bad debts, 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.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, 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.

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 the SmartCard.

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 at June 30, 2010.  Accounts receivable will generally be due within 30 days.
 


 
F - 11
 
 
SMARTMETRIC INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 -                       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                 Uncertainty in Income Taxes