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, 2012





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.)101 Convention Center Drive, Las Vegas, NV

89109(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 registeredN/A

N/A





Securities registered pursuant to section 12(g) of the Act:  None





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).


x 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 oNon-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 Act).


o Yes   þ  No





The aggregate market value of the voting and non-voting common equity held by non-affiliates was $14,157,986 computed by reference to the closing price of the registrant’s common stock as quoted on the Over-the-Counter Bulletin Board on December 30, 2011 (which was $0.119 per share). For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.





As of June 30, 2012, there are presently118,974,672 shares of common stock, par value $0.001 issued and outstanding.








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TABLE OF CONTENTS





PagePART IItem 1.
DESCRIPTION OF BUSINESS

4Item 1A
RISK FACTORS

9Item 1B
UNRESOLVED STAFF COMMENTS

14Item 2.
DESCRIPTION OF PROPERTY

14Item 3.
LEGAL PROCEEDINGS

15Item 4.
MINE SAFETY DISCLOSURES

16PART IIItem 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES

16Item 6
SELECT FINANCIAL DATA

17Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

17Item 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

19Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

19Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

20Item 9A.
CONTROLS AND PROCEDURES

20Item 9B.
OTHER INFORMATION

21PART IIIItem 10.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(b) OF THE EXCHANGE ACT

21Item 11.
EXECUTIVE COMPENSATION

22Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

24Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

25Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

25Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES

26SIGNATURES

27





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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.








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PART I








Item 1.    Business





Corporate History and Overview


SmartMetric, Inc. (“SmartMetric” or the “Company”) 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 an issued patent to utilize technology that involves connection to networks using data cards. SmartMetric’s main product is a fingerprint sensor activated card with a finger sensor onboard the card and built inside the card a fingerprint reader with a rechargeable battery for portable biometric identification. This card may be referred to as a biometric card or the SmartMetric Biometric Datacard.
  On September 14, 2004, C. Hendrick received a United States patent, U.S. Patent No. 6,792,464 (the “’464 Patent”) with regard to the use of the biometric card. C Hendrick transferred the ‘464 Patent, to Applied Cryptography, Inc., a Nevada corporation, owned by C. Hendrick, in June 2004 (“ACI”). On December 11, 2009, the Company entered into an Assignment and Assumption Agreement (“Assignment Agreement”) with ACI pursuant to which ACI assigned all or its rights, title and interest to the ‘464 Patent to the Company in exchange for 200,000 shares of the Company’s series B preferred stock. In connection with the Assignment Agreement, on December 11, 2009, the Company and ACI entered into an option agreement pursuant to which the Company agreed to grant ACI an option to purchase the ‘464 Patent from the Company for 100,000 shares of the Company’s series B preferred stock, only in the event that Company fails to generate at least $1,000,000 in gross revenues attributable to the Patent at the conclusion of 24 months from the date of Assignment Agreement.
  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 Datacard
  SmartMetric has designed a biometric card. SmartMetric has completed development of its card along with pre mass manufacturing cards but has not yet begun to mass manufacture the biometric fingerprint activated cards. The manufacturing of the cards requires that the Company build not only a special factory, but also that the Company manufacture specialized mass production machines that will allow for the specialized manufacturing process required to mount sub micro thin silicon components; along with a credit card plastic manufacturing procedure that operates using low pressure and low heat so as not to harm the internal electronic components. We expect that mass production will commence in the last quarter of 2013, contingent upon and assuming that capital funding remains steady. The product, due to exposure in specialty trade publications and numerous press releases, is receiving much interest in the private sector. Also, the product has received interest from the governmental sector, including, but not limited to the Department of Defense.
  The SmartMetric biometric fingerprint activated card has several functions:
  ●
The fingerprint sensor facilitates instant authorization verification;
  ●
In card biometric measurement storage safeguards personal information;
  ●
In card biometric storage  permits access, identity and transaction control verification;
  ●
Instant identity verification will be more secure than central online or electronic wallet systems since such information on the SmartMetric Card is contained in the card and not in a centralized database or an always connected phone device. The SmartMetric Biometric fingerprint activated Datacard is a credit card size plastic card. On the card’s surface are two components. The first is a standard Smartcard chip that is a standard interface that connects to universal serial bus (USB) computer smartcard readers, teller machine (ATM) machines and smartcard (POS) point-of-sale machines in retail outlets. The second component is a sensor that protrudes through the card’s 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.  After a match between the users fingerprint and the prestored users fingerprint stored inside the card, the internal card processor unlocks and activates the surface mounted SmartCard Chip.  Forms of the SmartMetric fingerprint activated biometric card involve insertion within proximity to a wireless proximity physical reader or to a physical data card reader requiring physical insertion into the card reader.  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, Credit 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 having the to be attached to a computer that powered the scanning process thereby not allowing for portability. In order to achieve the goal of biometric authentication with 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 the size of electronics and develop specialized mass manufacturing techniques.







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The SmartMetric Biometric Datacard contains active and passive components mounted onto a paper-thin circuit board. Reducing a powerful 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 emerging technology.
 
 Today SmartMetric has created the worlds 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.
 
 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 is significantly increased 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 in the card, the SmartMetric Biometric Datacard will not operate.
 
 SmartMetric, Inc. sees a significant market for its biometric fingerprint activated credit cards to replace the use of PIN numbers used in current Bank issued EMV (Smartcards’) around the World. There are more than 1.5 Billion Bank issued SmartCard Credit and ATM Cards in the World that have a chip that stores credit card information but still rely on a user entered PIN at the ATM or Point Of Sale machine to verify the Card user. The reliance on a PIN for these new kinds of Credit & ATM Cards still leaves them vulnerable to hackers because of the use of PIN’s that are still proving to be vulnerable to hackers. Replacing the PIN for these cards with a persons fingerprint to activate the card provides the next level of security for the 1.5 Billion already issued around the World, Credit and ATM Cards.
 
 In 2011 both Visa and MasterCard announced that they will be introducing “Chip & Pin” Credit / ATM Cards based on the same smartcard technology already used in most advanced banking systems around the World, in the United States.
 
 The SmartMetric in-card fingerprint scanner will allow for a person to use their fingerprint to activate their Credit Card or ATM Card. For the banking and card industry it will allow for a much more secure verification process then the PIN system currently used.
 
 SmartMetric plans to roll out its fingerprint activated cards in the United States. Latin America, Asia/Pacific and Europe over the next 12 months.  In addition to the Financial Services Sector, the Company believes its SmartMetric Biometric Datacard may be used for a variety of security applications such as employee identity, building access and security control, computer network access, driver’s licenses, passports, welfare payments, health insurance, portable electronic medical records and check cashing identity verification, etc. Additionally, the Biometric Datacard contains a powerful on-card processor and varying degrees of encrypted memory, enabling the Biometric Datacard 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 Datacard 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 card is designed to be inserted into the USB port of a computer using a USB port adapter and any purchasing information can only be released from the card when the owner’s finger print 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 parties 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 on a central database, we believe that confirmation of identify with the SmartMetric system may not be intercepted during the verification process 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 smartcard will not operate.


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The SmartMetric access control and identity 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 on the surface of the card. 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 card reading devices, the activation signal is sent only when there has been a positive match of the persons fingerprint by the cards fingerprint sensor. The card reader devices are standard smartcard readers available from a variety of third parties.


The memory and computational capacities of the biometric card are used to store a user's fingerprint(s). The computational capacity is 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.
 
 FINGERPRINT ENROLEMENT ON THE SMARTMETRIC CARD
 
 
 
 IN CARD FINGERPRINT MATCHING AND VERIFICATION
 
 
 
 The fingerprint sensor used in the SmartMetric biometric card is known as the "Metric 2.0" fingerprint sensor. The Metric 2.0 allows for fingerprints, which are either wet or dry to be recognized or authenticated. It is also pressure sensitive. SmartMetric purchases its fingerprint sensors from various third party 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 miniaturization of the complex electronic components to fit inside the thickness of an ISO standard credit card is what has been the biggest challenge for the company resulting in the extended amount of time necessary to complete the card and bring it to the point of being able to be mass produced.
 
 The SmartMetric Biometric Datacard incorporates a rechargeable, lithium polymer battery. This battery is rechargeable, very thin and has been designed by SmartMetric to fit inside the SmartMetric fingerprint Credit Card sized card.  This battery is manufactured by a third party unaffiliated with SmartMetric. This battery is integrated into the card.
 
 Other components needed for manufacture of the SmartMetric Biometric Datacard 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.  However, SmartMetric does re-engineer a number of important components at silicon level to achieve the component size required to fit inside a Credit Card.  Both the supply of memory and processors in silicon wafers may be interrupted at anytime based on global silicon supply/demand issues and the re-engineering of Silicon by SmartMetric may also cause end component supply problems from time to time which may affect production and sale of the Cards.
 
 The biometric card has been designed to offer the option of a built-in radio frequency transmitter for contactless long range access and  identity verification.  Another version of the card incorporates a short range RFID contactless chip that is also turned off and on using the card users fingerprint verification on the Card.
 
 The thinness form factor of many of the components including the processor itself being an unpackaged wafer of silicon has also resulted in the Company having to develop its own process for mass electronic assembly. The Company was also challenged in the process of encapsulating the electronics in plastic creating the credit card sized biometric fingerprint activated card.
 
 Standard credit card manufacturing utilizes machines that require high pressure and high temperature in fusing top and bottom sheets of plastic together thereby encasing any electronics inside the card. Given the complexity of the card’s electronics and vulnerability to an assembly process involving high heat and high pressure, damage to the electronic circuitry was a major challenge for the Company to overcome. Research and development activities of the Company allowed the Company to achieve this ability through a combination of adjusting the pressure and heat required using special polymers together with a trade secret process that protects the silicon that is mounted directly onto the electronics circuit board.
 
 New mass manufacturing machinery has had to be developed for our manufacturing process along with other advanced processing techniques. Including pick and place electronics manufacturing for mounting non standard thickness, super thin silicon onto our electronic boards.
 
 The challenges described above have delayed the expected release time of our product overcoming these technological issues has given the Company a product that it will be able to efficiently produce in large quantities.
 
 The Company is currently concentrating on building out its manufacturing facility that will be incorporating SmartMetric’s advanced manufacturing processes.
 
 Much of the machinery to be used in the manufacturing processes has to be specially made and will be shipped from various locations around the world to the Company’s manufacturing facility in Buenos Aires, Argentina.We will need approximately $1,500,000 in order to complete the production of the machinery to be used in our manufacturing processes.


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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, website 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 fingerprint 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 mass production card. 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.
  The physical structure of a card is specified by the International Standards Organization ("ISO"). 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 in the card.
  The SmartMetric card has been designed so that it conforms to ISO standards. The printed circuit is a part of, and not distinct from, the biometric card. The printed circuit is intended to protect the circuit chips from mechanical stress and static electricity. Communication with the chip is accomplished through contacts that overlay the printed circuit. The integrated circuit chip defines the capability of a smart chip. Typically, an integrated SmartCard circuit chip consists of a microprocessor, read only memory (ROM), non-static random access memory and electrically erasable programmable read only memory which 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.  SmartCard circuit chips are all low power and low memory chips that can only do very basic functions.  It is these chips that are used in the EMV Cards used in the Banking and Credit Card industry.  They normally only have 8,000bytes of memory.   SmartMetric attaches this standard SmartMetric chip to the internal circuit board and connects it electronically to a further powerful processor chip and memory chip.   Thereby advancing many fold both the memory and processing capacity.   The processor inside the SmartMetric fingerprint scanning card is an ARM 9 or ARM 7 processor attached to up to 123 Gigabytes of memory.


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It is our intent that the physical interface which allows data exchange between the integrated circuit chip and the card acceptor device is limited to 9600 bits per second. The communication line is intended to be a bi-directional serial transmission line, which conforms to ISO standards. All the data exchanges are under the control of the central processing unit in the integrated processor chip. Card commands and input data are sent to the chip that responds with status words and output data upon the receipt of these commands and data. Information is 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.  Other data protection systems are utilized inside 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.
 
 Sales and Marketing





We plan to market and sell our product to commercial and 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.  However, the company is receiving enquiries from financial institutions and Government sales organizations from around the World.
 
 Manufacturing
 
 The Company contracts outside silicon and component fabrication plants to manufacture specific components to its specifications. Creation of the sub-micro circuit boards are outsourced, assembly of components on the board are also outsourced while the finished end card will be manufactured in the SmartMetric manufacturing facility in Buenos Aires, Argentina.  The company may also establish other card manufacturing centers at different locations as and when required.
 
 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.
 
 Patents
 
 On September 14, 2004, C. Hendrick received a United States patent, U.S. Patent No. 6,792,464 (the “’464 Patent”) with regard to the use of the biometric card. C Hendrick transferred the ‘464 Patent, to Applied Cryptography, Inc., a Nevada corporation, owned by C. Hendrick, in June 2004 (“ACI”). On December 11, 2009, the Company entered into an Assignment and Assumption Agreement (“Assignment Agreement”) with ACI pursuant to which ACI assigned all or its rights, title and interest to the ‘464 Patent to the Company in exchange for 200,000 shares of the Company’s series B preferred stock. In connection with the Assignment Agreement, on December 11, 2009, the Company and ACI entered into an option agreement pursuant to which the Company agreed to grant ACI an option to purchase the ‘464 Patent from the Company for 100,000 shares of the Company’s series B preferred stock, only in the event that Company fails to generate at least $1,000,000 in gross revenues attributable to the Patent at the conclusion of 24 months from the date of Assignment Agreement.
 
 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.
 
 Research and Development
 
 Our research and development program is focused on completing development of our biometric card and manufacturing facilities. We continue to refine existing technology and develop further improvements to our product. We are finalizing the product and our product design and manufacturing facilities. We expect research and development costs to trend higher in the fiscal year ending June 30, 2013, due to the product being expected to be ready for market in the last quarter of fiscal 2013. Research and development will continue as the Company will continue to innovate and develop new products.
 
 The company has developed and is continuing to develop its own systems and application software that works with the SmartMetric Biometric Card.  This development requires the company to continue to expend time and financial resources on significant software development.   Contractors engaged by and working for SmartMetric in Buenos Aires, Argentina and Tel Aviv, Israel are undertaking this development.
 
 Competition
 
 SmartMetric is a company involved in portable smart card built-in-card biometric identity verification. The company knows of no other company that has created the same kind or similar biometric card with an inbuilt fingerprint scanner with an inbuilt reader for fingerprint matching and identity verification.
 
 The biggest companies in the SmartCard industry who are also the largest suppliers of EMV Smartcard’s or what are commonly called, “chip and pin” cards are:
 
 Gemalto
 
 Gemalto, the result of a merger of equals between Axalto and Gemplus, aims to build a major player in digital security and to develop secure technologies for the digital world.
 
 http://www.gemalto.com
 
 Giesecke & Devrient
 
 Giesecke & Devrient is one of the founders of the smart card industry. G&D is a worldwide group, providing smart cards, modules and solutions in the fields of telecommunications, electronic payments, transportation, health, ID and Internet security. G&D is also a leading provider of banknotes and securities as well as currency processing equipment.
 
 http://www.gi-de.com
 
 Oberthur Card Systems
 
 Oberthur Card Systems is one of the founders of the smartcard industry and one of the world's leading providers of card-based solutions, software and applications including SIM and multi-application smart cards and services ranging from consulting to personalization.
 
 http://www.oberthurcs.com
 
 While these companies are the leading suppliers of the estimated more than 1.5 Billion EMV SmartCard’s issued by Banks around the World, they all issue cards that rely upon PIN user verification.  None supply cards that have inbuilt fingerprint scanners.  The SmartMetric technology replaces the PIN number as a verification method with its unique inbuilt fingerprint scanner that scans a persons fingerprint rather than have the card holder input a PIN.   This is a level of magnitude increase in EMV Card Security and is unique to SmartMetric, Inc.


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Employees





As of the date of this annual report, SmartMetric has one full time employee in the United States, Ms. Chaya Coleena Hendrick.  All other functions in the company are undertaken by contractors including but not limited to engineers working under contract in Israel, Argentina and the United States.  Administrative functions are also undertaken under contract staffing offshore primarily in Argentina.





Government Regulation





There are currently no governmental regulations, which have any bearing on the raw materials or the manufacturing of our product.  In some jurisdictions Smartcard’s for security purposes are subject to Government control.


EMV Standards
  SmartMetric’s biometric Smartcards conform to International EMV standards, ensuring market acceptance and growth worldwide.  EMV format cards are becoming the de facto standard for worldwide financial transactions, with more than 1.5 billion cards already in circulation.  As a more secure weapon in the multi-billion dollar war against credit card fraud, EMV Smartcards are significantly more secure than cards that rely only on magnetic stripe data, which is easily spoofed or counterfeited.  A transaction-unique digital seal or signature in the EMV card’s chip proves its authenticity, even in an offline environment, and prevents criminals from assigning fraudulent payment cards purchases to unsuspecting legitimate cardholders.  These cards can be used to secure online payment transactions and protect cardholders, merchants and issuers against fraud through a transaction-unique online cryptogram that:
  ·
Supports enhanced cardholder verification methods
  ·
Stores considerably more information than magnetic stripe cards
  ·
EMV Standard and EMVCo
 
 The EMV standards are a series of specifications and testing procedures for EMV chip payment cards and card accepting devices, such as point of sale (POS) terminals and ATMs.  A primary goal of the EMV standards, and EMVCo as an organization, is to help facilitate the global interoperability and compatibility of chip-based payment cards and payment terminals.
  Thanks to the EMV standards, SmartMetric and other chip card issuers have a uniform standard to help them ensure that the payment cards they give their cardholders will work in EMV compliant acceptance infrastructures anywhere in the world.  Merchants and banks can invest in chip card acceptance infrastructures knowing EMV compliant cards have been developed based on uniform standards.  Cardholders can feel more confident knowing the security advantages of EMV will help protect them against the risk of fraud anywhere EMV is implemented.  The EMV standard encompasses specifications, test procedures and compliance processes managed by EMVCo, LLC, an organization jointly owned and operated by American Express, JCB, MasterCard and Visa.
 
 Item 1A. Risk Factors.





You should carefully consider the following risk factors and the other information included in this annual report on Form 10-K, as well as the information included in other reports and filings made with the SEC, before investing in our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.




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.
 
 In their report on the annual financial statements for the years ended June 30, 2012 and 2011, 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, 2012 and 2011, we incurred a net loss of $2,709,913 and $1,885,040, 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 contracted 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 Chairman and CEO, C. Hendrick.




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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.





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.





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. 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.




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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 customers’ expectations could result in damage to our reputation or even claims for substantial monetary damages.





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. 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 will establish warranty reserves based on our best estimates of 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 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.




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





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 and interruptions, 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, whether because 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.





Risks Related to our Common Stock





There has not been an active public market for our common stock so the price of our common stock could be volatile and could decline at a time when you want to sell your holdings.





Our common stock is traded on the Over-the-Counter Bulletin Board under the symbol SMME.OB. Our common stock is not actively traded and the price of our common stock may be volatile.  Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:





•

our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;





•

changes in financial estimates by us or by any securities analysts who might cover our stock;





•

speculation about our business in the press or the investment community;





•

significant developments relating to our relationships with our customers or suppliers;





•

stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industry;





•

customer demand for our products;





•

investor perceptions of the industry in general and our company in particular;





•

the operating and stock performance of comparable companies;





•

general economic conditions and trends;





•

major catastrophic events;





•

announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;





•

changes in accounting standards, policies, guidance, interpretation or principles;





•

sales of our common stock, including sales by our directors, officers or significant stockholders; and





•

additions or departures of key personnel.




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Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.





Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us.





If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.





Companies trading on the Over-The-Counter Bulletin Board, such as us we are seeking to become, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.





If our common stock becomes subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.





If at any time our securities are not listed on a national securities exchange or we have net tangible assets of $5,000,000 or less and our common stock has a market price per share of less than $5.00, transactions in our common stock will be subject to the SEC’s “penny stock” rules. If our common stock becomes subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.





Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:





•

make a special written suitability determination for the purchaser;





•

receive the purchaser’s written agreement to the transaction prior to sale;





•

provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and





•

obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.





As a result, if our common stock becomes subject to the penny stock rules, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.





Because certain of our stockholders control a significant number of shares of our common stock, they may have effective control over actions requiring stockholder approval.





Our directors, executive officers and principal stockholders, and their respective affiliates, will beneficially own approximately 49% of our outstanding shares of common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:





•

delaying, deferring or preventing a change in corporate control;





•

impeding a merger, consolidation, takeover or other business combination involving us; or





•

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.







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Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and stockholders could lose confidence in our financial reporting.





Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. Failure to achieve and maintain an effective internal control environment, regardless of whether we are required to maintain such controls, could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. The Company’s management assessed the design and operating effectiveness of internal control over financial reporting as of June 30, 2012 based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In connection with the assessment described above, management identified the  control deficiencies that represent material weaknesses at June 30, 2012. See "Item 9. Controls and Procedures" for more detailed discussion.





We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock.





No cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates.





The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.





The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. For example, Section 404 of the Sarbanes-Oxley Act of 2002 requires that our management report on, and our independent auditors attest to, the effectiveness of our internal controls structure and procedures for financial reporting. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we fail to do so, or if in the future our chief executive officer, chief financial officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our common stock. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company, which will increase costs. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and to meeting the obligations that are associated with being a public company, which may divert attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. In addition, because our management team has limited experience managing a public company, we may not successfully or efficiently manage our transition into a public company.





If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.





The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.





Item 1B. Unresolved Staff Comments.





Not Applicable.





Item 2.  Properties.





UNITED STATES
 
 Our principal office is located at 101 Convention Center Drive, Las Vegas, Nevada 89109. Our accounting 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.
  ARGENTINA
 
 We also have offices and factory space for worldwide administration and manufacturing in Argentina in two locations.
 
 Corrientes 222, Floor 14, Centro, Buenos Aires, Argentina. We lease this space on a “month to month” basis.
 
 Blanco Encalada 1635, Belgrano, Buenos Aires, Argentina. We lease this space on a three year contract expiring in January 2015.   This property is used for both Manufacturing and Administration.
 
 ISRAEL
 
 Our primary Research and Development is undertaken in Tel Aviv Israel.  We rent office space at Ackerstein Touners, Building B, 5th floor, 11, Hamenofim Street, Itertzelia Pituach Israel, with administrative support on a “month to month” basis.


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AUSTRALIA
  We lease a support office at Riato South Tower, Level 27,525 Collins Street, Melbourne Australia, on a month to month basis.
 
 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.
  Item 3. Legal Proceedings.





From time to time we may be a defendant or plaintiff in various legal proceedings arising in the normal course of our business.   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 “Visa and Mastercard Complaint”) in the United States District Court, Central District of California (the “Court”), Case No. 2:10-cv-01864, against MasterCard, Inc. and Visa, Inc. alleging patent infringement on the Company’s patent, U.S. Patent 6,792,464 (the “‘464 Patent”) (the “Visa and Mastercard Case”).




On December 7, 2010, the Company filed a complaint (the “AMEX Complaint”) in the Court, Case No. CV10-9371 JHN (MANx), against American Express Company (“AMEX”) alleging patent infringement on the ‘464 Patent (the “AMEX Case”).




On June 20, 2011, the Court entered a judgment of non-infringement as to systems that use contactless cards in both the Visa and Mastercard Case and the AMEX Case based on the Court’s construction of certain of the disputed phrases of the asserted claims of the ’464 Patent (the “Judgment”).


On June 30, 2011, the Company filed a Notice of Appeal to the Judgment in the AMEX Case against what the Company believes to be erroneous definition and limitations placed on the ‘464 Patent as a result of wrongful interpretation. On July 1, 2011, the Company filed a Notice of Appeal to the Judgment in the Visa and Mastercard Case against what the Company believes to be erroneous interpretation of definitions and limitations placed on the ‘464 Patent by the Court.




On August 29, 2011, the Company filed a complaint in the United States District Court, Central District of California, against Master Card, Inc. (“MasterCard”) and Visa, Inc. (“Visa”) alleging patent infringement on the ‘464 Patent (the “August 2011 Case”).  The Company is seeking the following relief from MasterCard and Visa:




1.
For an order pursuant to 35 U.S.C. section 271 declaring that both MasterCard and Visa have infringed one or more claims of the ‘464 Patent;2.
A preliminary and permanent injunction against both MasterCard and Visa prohibiting each of them from further infringement of the ‘464 Patent;3.
An award of actual damages the Company has suffered by reason of the infringement charged in the complaint in an amount not less than a reasonable royalty on both MasterCard’s and Visa’s infringement of the ‘464 Patent:4.
An award to the Company of its costs; and5.
Such other relief as the Court may deem just and proper.





In the earlier actions against VISA, MasterCard, and AMEX (“collectively the “Defendants”), the Court mandated the Company to narrow its complaint exclusively to patent infringement from Defendants’ revenues from “contactless” credit card/pay systems.  The Court stated:




MasterCard and Visa are infringing ... the ‘464 Patent in this judicial district by selling, offering to sell and using contactless card systems, namely, VI’s Paywave and MC’s PayPass, that use data cards that, when passed near to a reader, establish connection to a network (the “Systems”), that infringe ... the ‘464 Patent.




The prior Visa and Mastercard Case and AMEX case excluded physical insertion of a credit card into a recess of a data card reader.  In the August 2011 Case, the Company charged that  Defendants’ “contact” and “contact/contactless” credit card systems infringe the ‘464 Patent.  These systems do allow for physical insertion of an EMV/credit card into a recess of a data card reader, therefore presenting  a distinguishing  infringement issue.  This distinction allows the Company the opportunity to pursue its infringement claims against all systems that require or permit the physical insertion of a chip-bearing card into a recess of a data card reader.




On April 11, 2012, the United States Court of Appeals for the Federal Circuit (the “Appeals Court”) affirmed the Judgment of the Court in the Visa and Mastercard Case and the AMEX case.  While the Appeals Court affirmed the Judgment, it stated that the Court erroneously limited the definition of network service providers even though its construction of “insertion of said data card into said data card reader” was correct.  Moreover, the Court stated that it saw no reason why a data card that communicates with a card reader using an embedded antenna cannot also be inserted into a data card reader to immediately trigger an application program.




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Item 4.    Mine Safety Disclosures.





Not Applicable


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, 2012 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 BidQuarter Ended September 30, 2010

$
0.05


$
0.15Quarter Ended December 31, 2010


0.11



0.88Quarter Ended March 31, 2011


0.22



0.53Quarter Ended June 30, 2011


0.18



0.45Quarter Ended September 30, 2011


0.09



0.25Quarter Ended December 31, 2011


0.10



0.18Quarter Ended March 31, 2012


0.14



0.45Quarter Ended June 30, 2012


0.20



0.32





As of September 28, 2012, we had approximately 860 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.







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Recent Sales of Unregistered Securities





The following summarizes the securities that we sold during the fiscal year ended June 30, 2012 without registering the securities under the Securities Act:





In the three months ended September 30, 2011, the Company sold 66.894 Units (representing 3,344,721 shares and 3,344,721 warrants) during the three month period ended September 30, 2011, at a price of $10,000 per Unit, or net proceeds of $668,113.   Units consisted of 50,000 shares of common stock and 50,000 warrants exercisable for twelve months from date of issue into one share of common stock at $0.80 per share.





During the three months ended December 31, 2011 the Company sold 11.5 units representing 575,000 shares and twelve month warrants to purchase an additional 575,000 shares at $0.80 per share for net proceeds of $114,800.  Each unit was offered at $10,000 and consisted of 50,000 shares and one twelve month warrant to buy an additional 50,000 shares at $0.80 per share.





During the three months ended March 31, 2012, the Company sold 149.96 units representing 7,498,099 shares and twelve month warrants to purchase an additional 7,498,099 shares at $0.80 per share for net proceeds of $999,059.  Units were offered at $5,000 and $10,000 and consisted of 50,000 shares and one twelve month warrant to purchase an additional 50,000 shares at $0.80 per share.





In the three months ended March 31, 2012, the Company issued 765,713 shares for legal and consulting services rendered.





During the three months ended June 30, 2012, the Company sold 42.70 units representing 2,135,000 shares and twelve month warrants to purchase an additional 2,135,000 shares at $0.80 per share for net proceeds of $426,487.  Units were offered at $10,000 and consisted of 50,000 shares and one twelve month warrant to purchase an additional 50,000 shares at $0.80 per share.





During the three months ended June 30, 2012, the Company authorized to be issued 3,881,978 shares, ranging in value from $0.05 to $0.26 per share, for services valued at $895,827.





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





This discussion should be read in conjunction with our consolidated financial statements included in this Annual Report on Form 10-K and the notes thereto, as well as the other sections of this Annual Report on Form 10-K, including “Risk Factors” and “Business” sections thereof. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Annual Report. Our actual results may materially differ.





Overview





Incorporated in 2002, SmartMetric and its founder and CEO, C. Hendrick, have been engaged in research and development of a biometric security solution which would authenticate the identity of a person in a self-contained credit card-sized device.  SmartMetric’s Biometric Datacard has been designed to use an on-board finger print sensor which is embedded in the card along with an integrated circuit chip which will provide varying degrees of encrypted memory SmartMetric has completed development of its card along with pre mass manufacturing cards but has not yet begun to mass manufacture the biometric fingerprint activated cards.  To date, SmartMetric has had no sales revenues.





The manufacturing of the cards requires that the Company build not only a special factory that meets security conditions but also that the Company manufacture specialized mass production machines that will allow for the specialized manufacturing process required to mount sub micro thin silicon components; along with accredit card plastic manufacturing procedure that operates using low pressure and low heat so as not to harm the internal electronic components.






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The Company is currently concentrating on building out its manufacturing facility that will be incorporating SmartMetric’s advanced manufacturing processes.  The manufacturing facility is now projected to be ready for production.  The company may at its discretion for logistical reasons operate its initial manufacturing of plastic fingerprint activated cards in another location other than Buenos Aires, Argentina.





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





The Company’s research and development is being undertaken by contractors working in Israel and Argentina.





SmartMetric does not believe its business is seasonal.





Results of Operations





Comparison of the Year Ended June 30, 2012 and 2011





Revenue and Net Loss





For the fiscal year ended June 30, 2012, there was no revenue and a net loss of $2,709,913.  For the year ended June 30, 2011, there was no revenue and a net loss of $1,885,040.  This increased loss of $824,873 or 43.8%, resulted primarily from general and administrative costs.





General and Administrative Expenses





General and administrative expenses for the year ended June 30, 2012 were $2,237,532, an increase of $845,997 or 60.8% compared to $1,391,535 for the comparable period in 2011.  This increase was primarily attributed to higher legal and professional fees, marketing, contract labor costs and rent partially offset by lower consulting costs.





Research and Development Expenses





Research and development expenses for the year ended June 30, 2012 were $302,381, a decrease of $15,279 or 4.8% compared to $317,660 for the comparable period in 2011.  This decrease was primarily attributable to lower engineering costs.





Interest expense





Interest expense for the year ended June 30, 2012 was $0, a decrease of $5,845 from the comparable period in 2011.  This decrease was attributable to the Company having satisfied its past due payroll tax liability.





Liquidity and Capital Resources





Cash and Cash Equivalents





Our cash and cash equivalents were $889,589 at June 30, 2012 compared with $272,599 at June 30, 2011.  The increase was primarily attributable to the Company raising capital in amounts greater than its operating costs for the period in capital funding.





Net cash used in operating activities





Net cash used in operating activities was $1,342,217 for the year ended June 30, 2012, compared to $2,707,540 for the year ended June 30, 2011, a decrease of $1,365,323 or 50.4% from the comparable period in 2011.  The Company is largely dependent on the capital it raises to fund operations.  When capital is raised the development process is accelerated, and when cash flows are decreased the Company conserves its cash by delaying development and other operating costs.




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Net cash used in investing activities





Net cash used in investing activities was $0 for the year ended June 30, 2012, unchanged from June 30, 2011.





Net cash provided by financing activities





Net cash provided by financing activities was $1,959,207 for the year ended June 30, 2012, as compared to $2.980.139 for the year ended June 30, 2011.  The decrease of $1,020,932 or 34.3% was based on the Company successfully raising new capital.





We expect to begin mass production of our product in the last quarter of fiscal 2013 however this is dependent on a number of factors including the supply of specific silicon based components that may require a modest longer lead time then original planned.


Our consolidated financial statements have been prepared assuming we will continue as a going concern. Assurances cannot be given that adequate financing can be obtained to meet our capital needs. If we are unable to generate profits and are unable to continue to obtain financing to meet our working capital requirements, we will have to sharply curtail our business or cease operations altogether. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to obtain additional financing and, ultimately, to attain profitability. Presently, the Company is considering various alternatives, including pursuing private placement financings as well as various sales strategies to improve cash from operations, in order to provide for the future working capital needs of the Company. Should the Company not be able to fund its working capital needs through financings or increases in sales, we will be adversely affected and we will have to cease operations.





We may need to raise additional funds through either the licensing or sale of our technologies, products and services or the additional public or private offerings of our securities. There can be no assurance that we will be able to obtain further financing, do so on reasonable terms, or do so on terms that would not substantially dilute our current stockholders’ equity interests in us. If we are unable to raise additional funds on a timely basis, or at all, we may not be able to continue our operations.





Contractual Obligations and Off-Balance Sheet Arrangements.





There were no off-balance sheet arrangements as of June 30, 2012 and June 30, 2011.





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





In consideration for the assignment of the Patent, the Company issued 200,000 shares of Series B Convertible Preferred Stock. ACI may only convert these shares into common shares (in accordance with the conversion terms noted herein) upon delivering to the Company, a third party valuation of the assigned Patent conducted by a nationally qualified accounting firm or IP law firm mutually agreed upon between the Company and ACI, indicating that such Patent is valued at a minimum of $1,000,000.





In connection with the Assignment and Assumption Agreement, the Company and ACI entered into an option agreement pursuant to which the Company agreed to grant ACI an option to purchase the Patent from the Company for 100,000 shares of Series B Convertible Preferred Stock, only in the event that the Company fails to generate at least $1,000,000 in gross revenues attributable to the Patent at the conclusion of 24 months from the date of the Assignment and Assumption Agreement, December 11, 2011.





The Company did not generate the minimum revenue amount by December 11, 2011. As a result, ACI has the right to exercise its option to purchase the Patent from the Company. If this occurs, the Company may be unable to continue to develop and manufacture the SmartMetric Biometric Datacard without first entering into an arrangement with ACI for the right to use the Patent, the terms of which may be unfavorable to the Company. ACI has given no indication that it intends to exercise its option to purchase the Patent.





Critical accounting policies and estimates





See note 2 in the notes to the financial statements included as part of this Annual Report on Form 10-K.





Intangible assets





SmartMetric did not purchase any intangible assets for the years ended June 30, 2012 or June 30, 2011.





Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.





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 June 30, 2012, we had approximately $889,589 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, 2012 and 2011, together with the reports of the independent certified public accounting firms thereon and the notes thereto, are presented beginning at page F-1.





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Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.





Not Applicable.





Item 9A.  Controls and Procedures





Evaluation of Disclosure Controls and Procedures





We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.





As of June 30, 2012, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.





Management’s Report on Internal Control over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act.    Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with section 404 of the Sarbanes-Oxley of 2002 (“section 404”).  Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2012.  In making this assessment we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. During our assessment of the effectiveness of internal control over financial reporting as of June 30, 2012, management identified significant deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and (iii) a lack of segregation of duties within accounting functions. Management believes that these deficiencies amount to a material weakness.  Therefore our internal controls over financial reporting were ineffective as of June 30, 2012.





Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff.  The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.  To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.





In order to correct the foregoing deficiencies, we plan to take the following remediation measures:





1)
We have committed to the establishment of effective internal audit functions, however, due to the limited resources of the Company and the limited operations, we plan to defer the establishment of an effective internal audit function until our product is ready for production and sale.





2)
Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, we will implement procedures to ensure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by capable individuals.





We believe that the foregoing steps will remediate the deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.  However, as of June 30, 2012, these steps have not been completed.




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A material weakness (within the meaning of PCAOB auditing standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.





Our management is aware of the material weaknesses in our internal control over financial reporting, and has acknowledged the increased possibility of errors existing in our financial statements as of June 30, 2012.  The reportable conditions and other areas of internal control over financial reporting identified by us as needing improvement have cause an increased possibility of a material misstatement of our financial statements, however we are not aware of any instance where such reportable conditions or other identified areas of weakness have resulted in a material misstatement or omission in any report we have filed with or submitted to the Commission.  Accordingly, while we believe that our financial controls were ineffective, we do not believe there to be any material misstatements in our financial statements at June 30, 2012.





This Annual Report on Form 10-K does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this Annual Report on Form 10-K.





Limitations on Controls





Management does not expect that the Company's disclosure controls and procedures or the Company's internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.  The Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective at that reasonable assurance level.





Changes in Internal Controls





During the fiscal quarter ended June 30, 2012, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting





Item 9B. Other Information.





There have been no material events that have occurred during the fiscal year ending June 30, 2012 that were not previously disclosed.





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PART III





Item 10.  Directors, Executive Officers and Corporate Governance





The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each.  Each member of the Board of Directors serves for a term of one year, or until his or her successor has been duly elected and has been qualified. Each of our officers serve until they are replaced by the Board of Directors.





Name

Age

Position with the CompanyC. Hendrick

56

President, Chief Executive Officer and Chairman of the BoardJay M. Needelman, CPA

44

Chief Financial Officer, DirectorElizabeth Ryba

61

Director





C. HENDRICK has been President, Chief Executive Officer and Chairman of the Board of Directors of SmartMetric since the Company’s inception in 2002.  C. Hendrick has served as President and CEO of Smart Micro Chip, Inc., an Australian corporation from 2000 to 2002. From 1999 to 2001, C. Hendrick was President and Chief Executive Officer of Smarticom Inc. and Fast Econ, Inc., Australian corporations. From 1994 to 1998, C. Hendrick served as executive officer of Applied Computing Science (Australia), an Australian company involved in e-commerce systems, research and development. C. Hendrick attended Dandenong College in Australia.





JAY M.  NEEDELMAN, CPA, has been the Chief Financial Officer for SmartMetric since July 2004.  Mr. Needelman has over 17 years of experience in public accounting.  A 1991 graduate of Florida State University in Tallahassee, Fl, Mr. Needelman began his career in public accounting in Miami, Fl, in 1991.  After working for two different firms, Mr. Needelman founded his own firm in late 1992.





ELIZABETH RYBA, has been a director of SmartMetric since April 5, 2006. Ms. Ryba has over 16 years of experience in the credit card industry. She was a promotion director at Hearst Publishing from 2002 through 2005. Between 2001 and 2004, Ms. Ryba was a consultant at Stratus Rewards Credit Cards where she launched a Visa Luxury credit card where points were redeemable on private jets. Between 2000 and 2001, Ms. Ryba worked as a Marketing Consultant for SpaFinder. In 1991 through 1999 Ms. Ryba worked at Master Card where she launched a SmartCard in Australia Ms. Ryba received her M.S. in Marketing from the University of Illinois, and her B.A. in English from the State University of New York at Stony Brook.





The Board believes that each of the Company’s directors is highly qualified to serve as a member of the Board. Each of the directors has contributed to the mix of skills, core competencies and qualifications of the Board. When evaluating candidates for election to the Board, the Nominating Committee seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.





Family Relationships





There are no family relationships among officers or directors of the Company.





Director Experience





Our Board believes that each of the Company’s directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the Company’s shareholders. When evaluating candidates for election to the Board, the Board seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, and leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.





Legal Proceedings





To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:





·
Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.




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·
Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.





·
Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.





·
Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.





·
Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.





Audit Committee Financial Expert





SmartMetric’s board of directors has determined that the company does not have an audit committee financial expert serving on its audit committee.  At the present time, we believe that the members of Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting.  We do, however, recognize the importance of good corporate governance and intend to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.





Committees of the Board





Our business, property and affairs are managed by or under the direction of the board of directors. Members of the board are kept informed of our business through discussion with the chief executive and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board and its committees.  We have not previously had an audit committee, compensation committee or nominations and governance committee. We anticipate that the board of directors will authorize the creation of such committees, in compliance with established corporate governance requirements in the future.





Audit Committee





SmartMetric does not currently have a separately - designated standing committee established in accordance with Section 3(a) (58)(A) of the Exchange Act. The entire board of directors is acting as SmartMetric’s audit committee.





Compensation Committee





SmartMetric does not presently have a compensation committee. Our board of directors currently acts as our compensation committee.





Nominating Committee





SmartMetric does not presently have a nominating committee. Our board of directors currently acts as our nominating committee.





Code of Ethics





The Company has adopted a Code of Ethics that applies to its Chief Executive Officer and Chief Financial Officer.





Compliance with Section 16(a) of the Securities Act of 1934





Not Applicable.





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Item 11.  Executive Compensation.





Summary Compensation Table





The table below sets forth, for the fiscal years ended June 30, 2012 and 2011, the compensation earned by each person acting as our Chief Executive Officer and our next two most highly compensated executive officers whose total annual compensation exceeded $100,000 in 2012 (together, the “Named Executive Officers”).




Name and

Principal

Position

Fiscal

Year

Salary

($)


Bonus

($)


Stock

Awards

($)


Option

Awards

($)


Non-equity

Incentive Plan

Compensation

($)


Change in

Pension

Value  and

Nonqualified

Deferred

Compensation

Earnings

($)


All Other

Compensation

($)


Total

($)C. Hendrick  (President, Chief Executive

2012

$
170,000


-0-



-0-



-0-



-0-



-0-



-0-



170,000Officer, Chairman of the Board) (1)

2011

$
170,000



-0-



-0-



-0-



-0-



-0-



-0-



170,000





(1)
C. Hendrick has been President, Chief Executive Officer and director of the Company since inception.  C. Hendrick receives an annual salary of $170,000


Employment Agreements





On December 9, 2009, the Company entered into an employment agreement (the “Agreement”) with C. Hendrick, the Company’s Chief Executive Officer (“Executive”).  Pursuant to the terms of the Agreement, the Company will employ Executive for a period of three (3) years from the date of the Agreement provided that such term may be renewed by the mutual written agreement of Company and Executive for additional consecutive one (1) year terms.  Executive is to receive an annual base salary of $170,000 a year.  Executive is entitled to receive certain bonuses to be determined based on performance criteria set forth by a committee of the Board of Directors.  Executive is entitled to participate in any and all benefit plans, from time to time, in effect for senior management, along with vacation, sick and holiday pay in accordance with the Company’s policies established and in effect from time to time.  Executive’s employment with the Company may be terminated at any time, with cause or good reason, as such terms are defined in the Agreement.  In the event that Executive’s employment is terminated by the Company, Company shall pay the first twelve (12) months of COBRA premiums for Executive’s coverage under the Company’s group medical insurance plan.




Compensation Discussion and Analysis





We strive to provide our Named Executive Officers with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.





We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including, without limitation, short and long term compensation, cash and non-cash, and other equity-based compensation such as stock options. We expect that this compensation program will be comparable to the programs of our peer companies and aimed to retain and attract talented individuals.





We will also consider forming a compensation committee to oversee the compensation of our Named Executive Officers. The majority of the members of the compensation committee would be independent directors.








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Compensation of Directors





As of the date of this annual report, our directors have received no compensation for their service on the board of directors.   A compensation program for our independent directors, as and when they are appointed, which we anticipate will include such elements as an annual retainer, meeting attendance fees and stock options. The details of that compensation program will be negotiated with each independent director





Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.





The following table sets forth certain information, as of September 28, 2012, with respect to the beneficial  ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of  the Company's executive officers and directors; and (iii) the Company's directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.


Amount and Nature of Beneficial Ownership





Name and Address of

Beneficial Owner

Director/Officer

Number of Shares

of Common Stock (1)


Percentage

of Class (1)Directors and Executive OfficersC. Hendrick

1150 Kane Concourse, Suite 400,

Bay Harbor Islands, FL

Chief Executive Officer,

Chairman of the Board of Directors


49,127,778



41.3
%Jay Needelman, CPA

1150 Kane Concourse, Suite 400,

Bay Harbor Islands, FL

Chief Financial Officer, Director


-0 -



-0-Elizabeth Ryba

73 Brown Road

Scarsdale, New York 10583

Director


40,000



0
%All Executive Officers and Directors as a Group (3 persons)5% ShareholdersApplied Cryptography, Inc.  (2)

9195 Collins Avenue

Surfside, Fl, 33154

Not applicable


49,127,778



41.3
%





(1)           In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of that date. In determining the percent of common stock owned by a person or entity on September 20, 2012, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) 118,974,672, the total shares of common stock outstanding on September 28, 2012, and (ii) the total number of shares that the beneficial owner may acquire upon conversion of any preferred stock and on exercise of the warrants and options. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.





(2)            Applied Cryptography, Inc., a Nevada corporation, is owned and controlled by C. Hendrick, our Chairman and Chief Executive Officer.





Item 13.  Certain Relationships and Related Transactions, and Director Independence.





There have been no significant related party transactions meeting the requirements for disclosure for the fiscal year ended June 30, 2012.


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Procedures for Approval of Related Party Transactions





Our Board of Directors is charged with reviewing and approving all potential related party transactions.  All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.





Director Independence





The Company currently does not have a director that qualifies as an “independent” director as that term is defined under the National Association of Securities Dealers Automated Quotation system.  Our company, however, recognizes the importance of good corporate governance and intends to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.





Item 14.   Principal Accounting Fees and Services





Audit Fee





The Company incurred, in the aggregate, approximately $43,000 and $48,000 for professional services rendered by its registered independent public accounting firms for the audit of the Company’s annual financial statements for the years ended June 30, 2012 and 2011, respectively, and for the reviews of the financial statements included in its Quarterly Reports on Form 10-Q during those fiscal years.





Audit-Related Fees





The Company incurred approximately $0 and $0 in fees from its registered independent public accounting firms for audit-related services during the years ended June 30, 2012 and 2011, respectively.





Tax Fees





The Company incurred approximately $0 and $0 in fees from its registered independent public accounting firms for tax compliance or tax consulting services during the years ended June 30, 2012 and 2011, respectively.





All Other Fees





The Company incurred $0 and $0 for fees from its registered independent public accounting firms for services rendered to the Company, other than the services covered in "Audit Fees", “Audit-Related Fees” and “Tax Fees” for the fiscal years ended June 30, 2012 and 2011, respectively.




26
 Table Of Contents




Item 15.  Exhibits, Financial Statements Schedules





3.1

Articles of Incorporation of SmartMetric, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on September 3, 2004)3.2

Amendment to the Articles of Incorporation of Smartmetric Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2009)3.3

Certificate of Designation for the Company’s Series B Preferred Stock (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2009)3.4

By-laws of SmartMetric, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on September 3, 2004)4.1

Specimen Certificate of Common Stock. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on September 3, 2004)10.1

License Agreement between SmartMetric and Applied Cryptography, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 23, 2005)10.2

Employment Agreement, dated December 9, 2009 by and between Colin Hendrick and Smartmetric, Inc    (incorporated by reference to Exhibit 99.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2009)10.3

Agreement between SmartMetric and ISI (incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 23, 2005)10.4

Assignment and Assumption Agreement, dated December 11, 2009 by and between Smartmetric, Inc. and Applied Cryptology Inc. (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2009)10.5

Option Agreement, dated December 11, 2009 ((incorporated by reference to Exhibit 99.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2009)14.1

Code of Ethics (incorporated by reference to Exhibit 16.1 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on September 3, 2004)31.1

Certification of SmartMetric’s Chief Executive Office pursuant to Rule13a- 14(a) of the Securities Exchange Act of 1934*31.2

Certification of SmartMetric’s Chief Financial Officer pursuant to Rule13a- 14(a) of the Securities Exchange Act of 1934*32.1

Certification of SmartMetric’s Chief Executive Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.1350)*32.2

Certification of SmartMetric’s Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.1350)*


EX-101.INS

XBRL INSTANCE DOCUMENT**EX-101.SCH

XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT**EX-101.CAL

XBRL TAXONOMY EXTENSION CALCULATION LINKBASE**EX-101.DEF

XBRL TAXONOMY EXTENSION DEFINITION LINKBASE**EX-101.LAB

XBRL TAXONOMY EXTENSION LABELS LINKBASE**EX-101.PRE

XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE**
 
 *           Filed herewith
 **         Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-K within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-K.


27
 Table Of Contents





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





SMARTMETRIC, INC.Date: September 28, 2012
By:
/s/ C HendrickC. HendrickPresident, Chief Executive Officer and Chairman (Principal Executive Officer)





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Name

Title

Date/s/ C Hendrick

Chief Executive Officer and Director (principal executive officer)

September 28, 2012C. Hendrick/s/ Jay Needelman

Chief Financial Officer  (principal financial and accounting officer) and Director

September 28, 2012Jay Needelman/s/ Elizabeth Ryba

Director

September 28, 2012Elizabeth Ryba











28
 Table Of Contents





SMARTMETRIC INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 CONSOLIDATED FINANCIAL STATEMENTS
 YEARS ENDED JUNE 30, 2012 AND 2011
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-2CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2012 AND 2011
F-3CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2012 AND 2011 WITH CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
F-4CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2012 AND 2011 WITH CUMULATIVE TOTALS SINCE DECEMBER 18, 2002 (INCEPTION)
F-5CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE PERIOD DECEMBER 18, 2002 (INCEPTION) TO JUNE 30, 2012
F-6 – F-8NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2012 AND 2011
F-9 to F-17


F-1
 Table Of Contents
 
 
 Report of Independent Registered Public Accounting Firm
 
 
 To the Board of Directors and Stockholders
 Smartmetric, Inc. and Subsidiary
 Bay Harbor Island, Florida
 
 
 We have audited the accompanying consolidated balance sheets of Smartmetric, Inc. and Subsidiary (a development stage company) (the “Company”) as of June 30, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended June 30, 2012.  The consolidated financial statements for the period from December 18, 2002 (inception) 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 December 18, 2002 (inception) to June 30, 2009 include total revenues and net loss of $0 and $5,069,772, respectively.  Our opinion on the consolidated statements of operations, stockholders' deficit and cash flows for the period from December 18, 2002 (inception) 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 consolidated financial statements.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits 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 audits provide 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, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2012 in conformity with accounting principles generally accepted in the United States of America.
 
 The accompanying consolidated 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 has sustained recurring losses, has negative cash flows from operations, and has not generated any revenues to this point.  These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 Daszkal Bolton LLP Boca Raton, Florida
 September 28, 2012








F-2
 Table Of Contents




SMARTMETRIC, INC. AND SUBSIDIARY


(A Development Stage Company)


Consolidated Balance Sheets




June 30,2012


2011AssetsCurrent assets:Cash

$
889,589


$
272,599Prepaid expenses and other current assets


749,162



948,750Total current assets


1,638,751



1,221,349Other assets:Patent costs, less accumulated amortizationof $11,625 and $10,125, respectively


3,375



4,875Total assets

$
1,642,126


$
1,226,224Liabilities and Stockholders' Equity (Deficit)Current liabilities:Accounts payable and accrued expenses

$
132,925


$
80,882Liability for stock to be issued


924,392



1,162,663Deferred Officer salary


67,026



65,294Shareholder loan


1,422



12,422Payroll taxes and related fees


16,551



179,964Total current liabilities


1,142,316



1,501,225Commitments and contingenciesStockholders' equity (deficit):Preferred stock, $.001 par value; 5,000,000 sharesauthorized, 200,000 shares issued and outstanding


200



200Common stock, $.001 par value; 100,000,000 sharesauthorized, 118,974,672 and 101,702,335shares issued and outstanding , respectively


118,975



101,702Additional paid-in capital


11,657,012



8,189,561Deficit accumulated during the development stage


(11,276,377
)


(8,566,464
)Total Stockholders' equity (deficit)


499,810



(275,001
)Total liabilities and stockholders' equity (deficit)

$
1,642,126


$
1,226,224
 
 See notes to consolidated financial statements.
 
 F-3
 Table Of Contents
 
 SMARTMETRIC, INC. AND SUBSIDIARY
 (A Development Stage Company)
 Consolidated Statements of Operations
 
 During theDevelopmentYears


StageEnded


DecemberJune 30,


18, 2002 toJune 30,2012


2011


2012Revenues

$
-


$
-


$
-Expenses:Officer's salary


170,000



170,000



1,275,000Other general and administrative


2,237,532



1,391,535



8,418,563Research and development


302,381



317,660



1,520,988Total operating expenses


2,709,913



1,879,195



11,214,551Loss from operations


(2,709,913
)


(1,879,195
)


(11,214,551
)Interest income


-



-



657Interest expense


-



(5,845
)


(62,483
)Loss before income taxes


(2,709,913
)


(1,885,040
)


(11,276,377
)Income taxes


-



-



-Net loss

$
(2,709,913
)

$
(1,885,040
)

$
(11,276,377
)Net loss per share, basic and diluted

$
(0.03
)

$
(0.02
)Weighted average number of commonshares outstanding, basic and diluted


106,240,891



95,285,612
 
 See notes to consolidated financial statements.
  F-4
 Table Of Contents
 
 SMARTMETRIC, INC. AND SUBSIDIARY
 (A Development Stage Company)
 Consolidated Statements of Cash Flows
  During theDevelopmentStageYEARS ENDED


(December18, 2002) toJUNE 30,


June 30,CASH FLOWS FROM OPERATING ACTIVITIES

2012


2011


2012Net loss

$
(2,709,913
)

$
(1,885,040
)

$
(11,276,377
)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation


-



-



15,984Amortization


1,500



1,500



11,625Common stock and warrants issued and issuable for services


1,276,246



473,850



3,087,599Interest accrued on convertible notes payable


-



-



2,400Changes in assets and liabilities(Increase) decrease in prepaid expenses and other current assets


199,588



(944,681
)


(749,162
)Increase (decrease) in accounts payable and accrued expenses


52,043



(79,732
)


132,925Increase (decrease) in deferred officer's salary


1,732



(17,130
)


67,026Increase (decrease) in payroll taxes and related fees


(163,413
)


(256,307
)


16,551Net cash used in operating activities


(1,342,217
)


(2,707,540
)


(8,691,429
)CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of equipment


-



-



(15,984
)Patent costs


-



-



(15,000
)Net cash (used in) investing activities


-



-



(30,984
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from notes payable


-



-



60,000(Decrease) in cash overdraft


-



(15,141
)


-Loans from related parties


-



-



74,343Repayments of loans from related parties


(11,000
)


(7,494
)


(72,921
)Proceeds from sale of common stock


2,208,478



1,994,115



8,626,188Liability for stock to be issued


(238,271
)


1,008,659



924,392Net cash provided by financing activities


1,959,207



2,980,139



9,612,002NET INCREASE INCASH


616,990



272,599



889,589CASHBEGINNING OF PERIOD


272,599



-



-END OF PERIOD

$
889,589


$
272,599


$
889,589CASH PAID DURING THE YEAR FOR:Income taxes

$
-


$
-


$
-Interest expense

$
-


$
5,845


$
62,483SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIESConversion of notes payable and accrued interest to common stock

$
-


$
-


$
62,400Issuance of preferred stock and reduction of additional paid in capital for patent

$
-


$
-


$
200


See notes to consolidated financial statements.





F-5
 Table Of Contents


SMARTMETRIC, INC. AND SUBSIDIARY


(A Development Stage Company)


Consolidated Statement of Changes In Stockholders' Equity (Deficit)


For The Years Ended June 30, 2012 and 2011 with Cumulative Totals Since December 18, 2002 (Inception)




DeficitAccumulatedClass A


Common


Additional


DuringPreferred Stock


Common Stock


Stock





Paid-in


DevelopmentShares


Amount


Shares


Amount


Shares


Amount


Capital


Stage


TotalBalance,December 18,2002



-


$
-



-



-



-


$
-


$
-


$
-


$
-Net loss for theperiod December18, 2002(inception)through June30, 2003



-



-



-



-



-



-



-



(60
)


(60
)BalanceJune 30, 2003



-



-



-



-



-



-



-



(60
)


(60
)Shares issued ofClass A Commonstock



-



-



50,000,000



50,000



-



-



-



-



50,000Shares issued ofcommon stockfor cash



-



-



-



-



8,560,257



8,560



77,042



-



85,602Net loss for theyear



-



-



-



-



-



-



-



(35,978
)


(35,978
)Balance, June 30,2004



-



-



50,000,000



50,000



8,560,257



8,560



77,042



(36,038
)


99,564Costs associatedwith sale ofcommon stocksubject topossiblerescission



-



-



-



-



-



-



(95,877
)


-



(95,877
)Total Stockholders' deficitNet loss for theyear



-



-



-



-



-



-



-



(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 ofcommon stockfor cash, net ofofferingcosts of $138,509



-



-



-



-



936,112



936



1,197,361



-



1,198,297Shares issued ofcommon stockfor servicesrendered



-



-



-



-



20,000



20



19,980



-



20,000Conversion ofloan payableand accruedinterest tocommon shares



-



-



-



-



40,000



40



62,360



-



62,400Conversion ofClass A commonshares tocommon shares



-



-



(50,000,000
)


(50,000
)


50,000,000



50,000



-



-



-Net loss for theyear



-



-



-



-



-



-



-



(1,225,045
)


(1,225,045
)Balance June 30,2006



-



-



-



-



59,556,369



59,556



1,260,866



(1,519,438
)


(199,016
)  F-6
 Table Of Contents
  Shares issued ofcommon stockfor cash



-



-



-



-



1,208,887



1,209



759,140



-



760,349Shares issued ofcommon stockfor servicesrendered



-



-



-



-



191,505



192



(192
)


-



-Net loss for theyear



-



-



-



-



-



-



-



(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 ofcommon stockfor cash



-



-



-



-



6,629,634



6,629



1,293,595



-



1,300,224Shares issued ofcommon stockfor servicesrendered



-



-



-



-



2,327,000



2,327



471,073



-



473,400Net loss for theyear



-



-



-



-



-



-



-



(1,397,056
)


(1,397,056
)Balance June 30,2008



-



-



-



-



69,913,395



69,913



3,784,482



(3,966,683
)


(112,288
)Transfer ofshares fromtemporary equityto common stock



-



-



-



-



160,837



161



241,095



-



241,256Shares issued ofcommon stockfor cash



-



-



-



-



4,412,596



4,413



438,931



-



443,344Shares issued ofcommon stockfor servicesrendered



-



-



-



-



1,059,394



1,059



104,880



-



105,939Net loss for theyear



-



-



-



-



-



-



-



(1,103,089
)


(1,103,089
)Balance June 30,2009



-



-



-



-



75,546,222



75,546



4,569,388



(5,069,772
)


(424,838
)Shares issuedfor patent



200,000



200



-



-



-



-



(200
)


-



-Net cash (used in) investing activitiescommon stockfor cash



-



-



-



-



8,808,000



8,808



431,592







440,400Shares issued ofcommon stockfor servicesrendered



-



-



-



-



4,858,333



4,858



395,556



-



400,414Warrants issuedfor services























337,750







337,750Net loss for theyear



-



-



-



-



-



-



-



(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
)  F-7
 Table Of Contents
  Shares issued ofcommon stock andwarrants for cash



-



-



-



-



10,264,030



10,264



1,851,014



-



1,861,278Shares issued ofcommon stockfor servicesrendered



-



-



-



-



2,225,750



2,226



604,461



-



606,687Net loss for theyear



-



-



-



-



-



-



-



(1,885,040
)


(1,885,040
)Balance June30, 2011



200,000



200



-



-



101,702,335



101,702



8,189,561



(8,566,464
)


(275,001
)Shares issued ofcommon stock andwarrants for cash



-



-



-



-



13,149,250



13,149



2,240,635



-



2,253,784Shares issued ofcommon stock andwarrants for servicesrendered



-



-



-



-



4,123,087



4,124



1,226,816



-



1,230,940Net loss for theperiod



-



-



-



-



-



-



-



(2,709,913
)


(2,709,913
)Balance June30, 2012



200,000


$
200



-


$
-



118,974,672


$
118,975


$
11,657,012


$
(11,276,377
)

$
499,810
  See notes to consolidated financial statements.


F-8
 Table Of Contents




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. SmartMetric’s main product is a fingerprint sensor activated card with a finger sensor onboard the card and a built-in rechargeable battery for portable biometric identification. SmartMetric has completed development of its card along with pre mass manufacturing cards but has not yet begun to mass manufacture the biometric fingerprint activated cards.
 
 Going Concern
 
 As shown in the accompanying consolidated financial statements the Company has incurred recurring losses of $2,709,913 and $1,885,040 for the years ended June 30, 2012 and 2011 respectively, and has incurred a cumulative loss of $11,276,377 since inception (December 18, 2002).   The Company is currently in the development stage and has spent a substantial portion of its time in the development of its technology.
 
 There is no guarantee that the Company will be able to raise enough capital or generate revenues to sustain its operations.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
 
 Management believes that the Company’s capital requirements will depend on many factors.  These factors include the final phase of development and mass production being successful as well as product implementation and distribution.
 
 The 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. The Company has devoted substantially all of its efforts to the development of its technology.  Additionally, the Company has allocated a substantial portion of its time and investment in bringing its services to the market, and the raising of capital.
 
 Principles of Consolidation
 
 The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, SmartMetric Australia Pty. Ltd.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
 F-9
 Table Of Contents
  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 (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to income taxes and contingencies.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates.
 
 Cash and Cash Equivalents
 
 The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents.  Any amounts of cash in financial institutions over FDIC insured limits exposes the Company to cash concentration risk. The Company has no cash equivalents.
 
 Fair Value of Financial Instruments
 
 The carrying amounts reported in the consolidated balance sheet for cash, accounts payable, and accrued expenses including payroll withholdings, interest and penalties approximate fair value because of the immediate or short-term maturity of these financial instruments.
 
 GAAP provides for a framework of valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. GAAP classifies these inputs into the following hierarchy:
 
 Level 1 inputs: Quoted prices for identical instruments in active markets.
 
 Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
 Level 3 inputs: Instruments with primarily unobservable value drivers.
 
 Research and Development
 
 The Company annually incurs costs on activities that relate to research and development of new technology and products.  Research and development costs are expensed as incurred.
 
 Revenue Recognition
 
 The Company has not recognized revenues to date.  The Company anticipates recognizing revenue in accordance with the contracts it enters into for the sale and distribution of its products.
 
 Accounts Receivable
 
 The Company will extend credit based on its evaluation of the customers’ financial condition, generally without requiring collateral.  Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer.  The Company will monitor exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.  The Company has not recorded any receivables, and therefore no allowance for doubtful accounts.
  F-10
 Table Of Contents
 
 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
 
 GAAP requires the recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach.   Management evaluates Company tax positions on an annual basis and has determined that as of June 30, 2012 no accrual for uncertain income tax positions is necessary.
 
 Advertising Costs
 
 The Company will expense the cost associated with advertising as incurred.
 
 Equipment
 
 Equipment is stated at cost.  Depreciation is computed using the straight-line method over the estimated economic useful lives of the assets ranging from 3 - 5 years.
 
 Impairment of Long-Lived Assets
 
 Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable.  The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators.  Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.  For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value.
 
 Loss Per Share of Common Stock
 
 Basic net loss per common share is computed using the weighted average number of common shares outstanding.  The calculation of diluted earnings per share ("EPS") includes consideration of dilution arising from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants.  Common stock equivalents were not included in the computation of diluted earnings per share on the consolidated statement of operations due to the fact that the Company reported a net loss and to do so would be anti-dilutive for the periods presented.
 
 Stock-Based Compensation
 
 The Company measures expense for issuances of stock-based compensation to employees and others at fair value of the stock and warrants issued, as this is more reliable than the fair value of the services received.  The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete.  The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.
 
 Reclassifications
  Certain amounts in the 2011 financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements.  These reclassifications had no effect on previously reported results.
 
 F-11
 Table Of Contents
 
 SMARTMETRIC INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 3 -       PREPAID EXPENSES
 
 Prepaid expenses represent the unexpired terms of various consulting agreements and expire through May 2013, as well as advance rental payments.  These consulting agreements were entered into for the issuance of common stock and warrants and were valued based on the stock price or computed warrant value at the time of the respective agreement.
 
 NOTE 4 -       PATENT COSTS
 
 Patent costs as of June 30, 2012 and June 30, 2011 are summarized as follows:
 
 Estimated

Useful Lives

( Years)


June 30,

2012


June 30,

2011Legal fees paid in connection with patent

Applications

10


$
15,000


$
15,000Less: accumulated amortization



(11,625
)


(10,125
)Patent costs, net


$
3,375


$
4,875
 
 Amortization expense was $1,500 for each of the years ended June 30, 2012 and 2011.
 
 NOTE 5 -       COMMITMENTS
 
 Patent License Agreement
 
 Effective August 1, 2004, the Company executed a license agreement with Applied Cryptography, Inc. (“ACI”), a corporation controlled by the Company’s president and the owner of certain technology. Pursuant to the license agreement, the Company has the right to make use of this technology for the purpose of developing software and systems to be used by the Company to provide any or all of the following: 1) secure transactions over the Internet from home and office computers; 2) an automatic method for connecting to remote computers; 3) a method of developing targeted advertising to home and/or office computers; and 4) identity verification and access control as provided for in the patent. Pursuant to this license agreement, ACI is to receive 2% of all revenues generated by the Company on products which utilize this patented technology. The license fee is to be paid within 45 days of the end of each quarter. In the event no revenues are generated through the use of any of the licensed patents during a given quarter, no money shall be owed ACI for such quarter. ACI has the right to rescind the license agreement and reclaim all rights and interest in the patents if certain events, such as the Company’s filing for bankruptcy protection or reorganization, occur. The license agreement remains in effect for the lives of the patents. The Company may utilize the technological applications anywhere in the world without limitation.  Upon execution of the Assignment and Assumption Agreement on December 11, 2009 (see Note 6), the Patent License Agreement was terminated.
 
 Lease Agreement
 
 The Company leases office space in Bay Harbor Islands, Florida under a month to month agreement. In February 2012, the company entered into a facilities lease in Buenos Aires, Argentina for its manufacturing activities.  The lease term is from March 1, 2012 through January 31, 2015.   Rent expense under all leases for the years ended June 30, 2012 and 2011 was $46,918 and $15,600 respectively.  Total minimum future rental payments under all leases with terms in excess of one year are as follows:
 
 Year ending June 30,

Amount2013

$
77,0772014


80,9312015


48,558Total

$
206,566
 
 Related Party Transactions
 
 The Company’s president has made cash advances to the Company with an aggregate amount due of $1,422 and $12,422 as of June 30, 2012 and June 30, 2011, respectively.  These advances bear interest at 5.00% per annum.
 
 At June 30, 2012 and 2011, the Company has accrued the amounts of $67,026 and $65,294, respectively, as deferred Officer salary for the difference between the president’s annual salary and the amounts paid.
 
 Payroll Taxes
 
 The Company had accrued $16,551 and $179,964 as of June 30, 2012 and 2011, respectively, for payroll tax liabilities, inclusive of principal, interest and penalties.  This liability resulted from the Company’s inability to pay the federal withholding tax, social security withholding tax and related Company portion and the Medicare withholding tax and related Company portion.  All past due payroll taxes, interest and penalties were satisfied during the year ended June 30, 2012.
 
 F-12
 Table Of Contents
  SMARTMETRIC INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 6 -       STOCKHOLDERS’ EQUITY (DEFICIT)
 
 Preferred Stock
 
 On December 11, 2009, the Company filed a Certificate of Designation with the State of Nevada, to designate 500,000 shares of the preferred stock to be designated as Series B Convertible Preferred Stock (“Series B Convertible Preferred Stock”).
 
 Each share of Series B Convertible Preferred Stock has a par value of $0.001, and a stated value equal to $5.00 (“Stated Value”). Holders of the Series B Convertible Preferred Stock are entitled to receive dividends or other distributions with the holders of the common stock of the Company on an as converted basis when, as, and if declared by the directors of the Company. Holders of the Series B Convertible Preferred Stock are entitled to convert all or any one (1) share of the Series B Convertible Preferred Stock into fifty (50) shares of common stock.
 
 Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (“liquidation”), holders of the Series B Convertible Preferred Stock are entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to the Stated Value, pro rata with the holders of the common stock.
 
 On December 11, 2009, the Company entered into an Assignment and Assumption Agreement with ACI (the “assignment and Assumption Agreement”). In accordance with the Assignment and Assumption Agreement, ACI conveyed, assigned and transferred to the Company all of ACI’s rights, title and interest in and to the Patent (see Note 5) and delegated to the Company all of its duties and obligations to be performed under the Patent; and the Company hereby accepts the assignment of all of ACI’s rights, title and interest to the Patent and the rights and delegation of duties and obligations and agrees to be bound by and to assume such duties and obligations.
 
 In consideration for the assignment of the Patent, the Company issued 200,000 shares of Series B Convertible Preferred Stock to ACI. ACI may only convert these shares into common shares (in accordance with the conversion terms noted herein) upon delivering to the Company, a third party valuation of the assigned Patent conducted by a nationally qualified accounting firm or IP law firm mutually agreed upon between the Company and ACI, indicating that such Patent is valued at a minimum of $1,000,000.
 
 In connection with the Assignment and Assumption Agreement, the Company and ACI entered into an option agreement pursuant to which the Company agreed to grant ACI an option to repurchase the assigned Patent from the Company for 100,000 shares of Series B Convertible Preferred Stock, only in the event that the Company fails to generate at least $1,000,000 in gross revenues attributable to the Patent at the conclusion of 24 months from the date of the Assignment and Assumption Agreement, December 11, 2011.
 
 As of December 11, 2011, the Company has not generated the minimum revenue amount under the Assignment and Assumption Agreement.  As a result, ACI has the right to exercise its option to repurchase the Patent from the Company.  If ACI exercises its option to repurchase the Patent, the Company may be unable to continue to develop and manufacture the SmartMetric Biometric Datacard without first entering into an arrangement with ACI for the right to use the Patent, the terms of which may be unfavorable to the Company.  As of June 30, 2012, ACI has given no intention that it intends to exercise its option to purchase the patent.
 
 In accordance with Staff Accounting Bulletin (“SAB”) topic 5G “Transfers of Non-monetary Assets by Promoters and Shareholders” the Company recorded the transaction at ACI’s carrying basis of the Patent.
 
 Class A Common Stock
 
 As of March 31, 2012, the Company has 50,000,000 shares of Class A common stock, par value $0.001, authorized and no shares issued and outstanding. The Company in October 2003 issued 50,000,000 shares of Class A common stock at par value ($50,000). These shares were converted into 50,000,000 shares of common stock during fiscal year 2006.
 
 Common Stock
 
 The Company was incorporated on December 18, 2002, with 45,000,000 shares, par value $0.001. In 2006, the Company amended their articles of incorporation to increase the 45,000,000 shares to 100,000,000 shares. In 2009, the Company further increased the authorized shares to 200,000,000.
 
 As of June 30, 2012, the Company has 118,974,672 shares of common stock issued and outstanding.
 
 From October 2003 to June 2004, the Company issued 8,560,257 shares to investors at $0.01 for $85,602.
 
 From August 2005 to February 2006, the Company sold a total of 743,648 shares of common stock at $1.50 per share in its public offering resulting in gross proceeds of $1,115,472. The net proceeds to the Company after deducting $138,471 in offering costs, was $977,001.
 
 From May 2006 to June 2006, the Company sold a total of 192,464 units at $1.15 per Unit in private placements resulting in gross proceeds of $221,334 and net proceeds of $221,296. Each unit consisted of one share of common stock and one warrant exercisable for 12 months from the date of issue into one share of common stock at $1.50 per share.
 
 In July 2006, the Company sold a total of 56,522 units at $1.15 per Unit in private placements resulting in net proceeds of $65,000.  In August and September 2006, the Company sold a total of 128,377 units at prices ranging between $0.60 to $0.79 per unit in private placements resulting in net proceeds of $83,558. In the three months ended December 31, 2006, the Company sold a total of 344,115 units at prices ranging from $0.48 to $1.00 per unit in private placements resulting in net proceeds of $229,284. In the six months ended March 31, 2007, the Company sold a total of 297,228 Units at prices ranging from $0.55 to $1.00 per unit in private placements resulting in net proceeds of $200,641. In the three months ended June 30, 2007, the Company sold a total of 382,645 units at prices ranging from $0.36 to $0.56 per unit in private placements resulting in net proceeds of $181,866. Each unit consisted of one share of common stock and one warrant exercisable for 12 months from the date of issue into one share of common stock at $1.50 per share.
 
 F-13
 Table Of Contents
  SMARTMETRIC INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 6 -       STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
 
 Common Stock (Continued)
 
 In the year ended June 30, 2007, the Company also authorized the issuance of a total of 82,893 Units to various parties for services rendered relating to the public offering and the private placements and a total of 108,612 shares of common stock to various parties relating to the financings.
 
 In the three months ended September 30, 2007, the Company sold a total of 903,813 units at prices ranging from $0.30 to $0.34 per unit in private placements resulting in net proceeds of $297,633. In the three months ended December 31, 2007, the Company sold a total of 332,500 units at prices ranging from $0.20 to $0.25 per unit in private placements resulting in net proceeds of $64,284. In the three months ended March 31, 2008, the Company sold a total of 1,042,300 units at a price of $0.20 per unit in private placements resulting in net proceeds of $207,967.  In the three months ended June 30, 2008, the Company sold a total of 2,961,203 units at prices ranging from $0.20 to $0.25 per unit in private placements resulting in net proceeds of $597,542. Each unit consisted of one share of common stock and one warrant exercisable for 12 months from the date of issue into one share of common stock at $1.00 per share.
 
 On March 25, 2008, the Company sold 200,000 shares of its common stock at a price of $0.10 per share resulting in net proceeds of $20,000. In the year ended June 30,2008, the Company sold 1,189,818 shares of its common stock at prices ranging from $0.07 to $0.13 per share resulting in net proceeds of $112,798.
 
 In the three months ended September 30, 2007, the Company authorized the issuance of a total of 80,000 shares, valued at $24,000 to non-officer directors of the Company for services rendered.
 
 On January 14, 2008, the Company issued a total of 2,107,000 shares of its common stock, valued at $421,400 to its attorney and two consultants for services rendered. On February 26, 2008, the Company issued 140,000 shares of common stock, valued at $28,000 to its attorney for services rendered.
 
 In the year ended June 30, 2009, the Company issued 1,059,394 shares of stock for services rendered valued at $105,939; 662,027 shares of common stock in private placements at prices ranging from $0.08 to $0.10 resulting in net proceeds of $49,587; and 3,750,569 units at a price of $0.10 resulting in net proceeds of $393,757. Each unit consisted of one share of common stock and one warrant exercisable for 12 months from the date of issue into one share of common stock at $1.00 per share.
 
 In the year ended June 30, 2010, the Company has received $154,004 of stock subscriptions for 1,540,040 shares which has been recorded as a liability for stock to be issued. In addition, the Company issued 3,000,000 shares of common stock for investor relations services on November 9, 2009 at a value of $300,000 ($0.10 per share), and 525,000 shares for consulting services on December 15, 2009 at a value of $34,125 ($0.065 per share).  The Company issued 1,333,333 shares of common stock for legal services on April 28, 2010 at a value of $66,289 ($0.05 per share).  The related expense is included in other general and administrative expenses in the consolidated statement of operations.  The company issued 44,795 units in private placements at a price of $0.05 per share and $10.00 per unit, representing 8,959,000 shares and net proceeds of $446,750.
 
 In the three months ended September 30, 2010, the Company sold 8,737 units (representing 1,747,513 shares and 436,850 warrants) during the three month period ending September 30, 2010, at prices ranging from $10.00 to $20.00 per Unit.  Each unit consisted 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 addition, the Company sold 625,000 shares of common stock in a private placement at a price of $0.04 per share.
 
 In the three months ended December 31, 2010, the Company sold 18,855 units (representing 3,770,953 shares and 942,772 warrants) during the three month period ending December 31, 2010, at prices ranging from $26.00 to $245.00 per unit for net proceeds of $1,205,769.  Each unit consisted of 200 shares of common stock and 50 warrants exercisable for twelve months from date of issue into one share of common stock at $0.50 per share.  The Company sold 587,110 shares of common stock in private placement resulting in net proceeds of $41,000.  In addition, the Company issued 1,225,750 shares of common stock for legal and consulting services, at a value of $177,299 (0.145 per share).
 
 From January 1, 2011 to February 28, 2011, the Company sold 3,908 units (representing 781,617 shares and warrants to purchase 195,406 shares), at prices ranging from $53.66 to $96.00 per unit for net proceeds of $336,622.  Each unit consisted 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.  Effective March 1, 2011, the Company changed its units to consist of 25,000 shares and one six-month warrant to purchase an additional 25,000 shares at $0.80 per share.   The Company sold 4.96 of these units during March, 2011 at a price of $10,000 per Unit for net proceeds of $49,437.
 
 During the three month period ending June 30, 2011, the Company sold 25 units (representing 580,000 shares and warrants to purchase 585,000 shares) , at prices ranging from $6,000  to $10,000  per unit for net proceeds of  $213,850.  Certain units consisted of 25,000 shares and one six month warrant to purchase an additional 25,000 shares at $0.80 per share.  Other units consisted of 6,000 shares and a twelve month warrant to purchase 6,000 shares at $0.80 per share. In addition, the Company has incurred a liability to issue shares for legal and other services of $874,624 ($0.0541 to $0.42636 per share).
 
 In the three months ended June 30, 2011, the Company issued 1,000,000 shares of common stock for services rendered at a value of $282,730 ($0.28273 per share).
  F-14
 Table Of Contents
 
 SMARTMETRIC INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 6 -       STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
 
 Common Stock (Continued)
  In the three months ended September 30, 2011, the Company issued 2,512,500 shares for legal and consulting services valued at $869,125.  These issued shares represent legal services of $27,767 in the current period and satisfaction of the liability to issue 1,000,000 shares with an aggregate value of $841,358.
 
 During the three months ended September 30, 2011, the Company sold 66.894 units representing 3,344,721 shares and twelve month warrants to purchase an additional 3,344,721 shares at $0.80 per share for net proceeds of $668,113.   Each unit was offered at $10,000 and consisted of 50,000 shares and  one twelve month warrant to buy an additional  50,000 shares at $0.80 per share.
 
 During the three months ended December 31, 2011 the Company sold 11.5 units representing 575,000 shares and twelve month warrants to purchase an additional 575,000 shares at $0.80 per share for net proceeds of $114,800.  Each unit was offered at $10,000 and consisted of 50,000 shares and one twelve month warrant to buy an additional 50,000 shares at $0.80 per share.
 
 In the three months ended March 31, 2012, the Company issued 765,713 shares for legal and consulting services valued at $102,881.
  During the three months ended March 31, 2012, the Company sold 149.96 units representing 7,498,099 shares and twelve month warrants to purchase an additional 7,498,099 shares at $0.80 per share for net proceeds of $999,059.  Units were offered at $5,000 and $10,000 and consisted of 50,000 shares and one twelve month warrant to purchase an additional 50,000 shares at $0.80 per share.
 
 During the three months ended June 30, 2012, the Company sold 42.70 units representing 2,135,000 shares and twelve month warrants to purchase an additional 2,135,000 shares at $0.80 per share for net proceeds of $426,487.  Units were offered at $10,000 and consisted of 50,000 shares and one twelve month warrant to purchase an additional 50,000 shares at $0.80 per share.
 
 During the three months ended June 30, 2012, the Company authorized to be issued 3,881,978 shares, ranging in value from $0.05 to $0.26 per share, for services valued at $895,827.
 
 Warrants
 
 The Company granted from time to time warrants with terms of one-year and of six months in connection with private placements at various prices as noted herein.
 
 In October 2009, the Company executed a warrant agreement with an investor relations company for 5,000,000 warrants to be issued in two tranches. The first tranche of 2,500,000 warrants (the “October warrants”) has been issued in October 2009, and the second tranche of 2,500,000 warrants has been issued on March 31, 2010 (the “March warrants”). The October warrants expire October 25, 2012, and have strike prices as follows: 1,000,000 at $0.10 per share; 1,000,000 at $0.15 per share; and 500,000 at $0.20 per share. The March warrants expire March 29, 2013, and have strike prices as follows: 500,000 at $0.20 per share; 1,000,000 at $0.25 per share; and 1,000,000 at $0.30 per share.
 
 In June 2011, the Company issued warrants to purchase 1,000,000 shares of its common stock at an exercise price of $0.50 per share, as partial consideration for a consulting agreement.  These warrants expired unexercised on June 3, 2012.
 
 In May 2012, the Company issued warrants to purchase 250,000 shares of its common stock at an exercise price of $0.50 per share, as partial consideration for a consulting agreement for public relations services.  The warrants expire on May 8, 2014.
 
 As of June 30, 2012 and 2011, the following is a breakdown of the activity:
 
 F-15
 Table Of Contents
 
 SMARTMETRIC INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 6 -       STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
 
 June 30, 2012:
 
 Outstanding - beginning of period


8,279,028Issued


13,802,820Exercised


-Expired


(3,279,028
)Outstanding - end of period


18,802,820
 
 June 30, 2011:
 
 Outstanding - beginning of period


7,239,750Issued


3,279,028Exercised


-Expired


(2,239,750
)Outstanding - end of period


8,279,028
 
 At June 30, 2012, all of the 18,802,820 warrants are vested and all but 250,000 of the warrants expire at various times through June 30, 2013.   The Company valued the June 2011 warrants using the Black-Scholes method with the following criteria: stock price $0.28; strike price $0.50; volatility 178.82% and interest rate 0.18%.  The criteria yielded an option value of $0.15 resulting in a value of $146,658 for the 1,000,000 warrants.   The Company valued the May 2012 warrants using the Black-Scholes method with the following criteria:   stock price $0.26; strike price $0.50; volatility 148% and interest rate 0.27%.  The criteria yielded an option value of $0.16 resulting in a value of $39,266 for the 250,000 warrants.  The expense has been included in other general and administrative expenses in the consolidated statement of operations.
 
 NOTE 7 -       INCOME TAXES
 
 Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.  The Company recognizes interest and penalties related to income tax matters as a component of income tax expense.
 
 At June 30, 2012 and 2011, deferred tax assets consist of the following:
 
 2012


2011Net operating loss carryforward

$
3,610,256


$
2,747,456Warrant issuances


171,374



164,699Other


23,775



-Valuation allowance


(3,805,405
)


(2,912,155
)$
-


$
-
  A reconciliation of the activity related to the liability for gross unrecognized tax benefits during fiscal 2012 and 2011 is as follows:
 
 Year ended June 30,2012


2011Balance as of beginning of fiscal year

$
114,835


$
-Increases related to prior year positions


50,034



114,835Balance as of June 30,

$
164,869


$
114,835
 
  
 At June 30, 2012, the Company had a net operating loss carryforwards in the amount of $10,618,400 available to offset future taxable income through 2031, which will begin to expire in 2022. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods. A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the period ended June 30, 2012 and 2011 is summarized as follows:
 
 2012


2011Tax on income before income tax


34.00
%


34.00
%Effect of nontemporary differences


(1.04
%)


(0.02
%)Effect of NOL true-up adjustment


0.00
%


(12.87
%)Change in valuation allowance


(32.96
%)


(21.11
%)0.00
%


0.00
%
 
 The total amount of unrecognized tax benefits can change due to tax examination activities, lapse of applicable statutes of limitations and the recognition and measurement criteria under the guidance related to accounting for uncertainty in income taxes.  The Company does not believe any significant increases or decreases will occur within the next twelve months.
 
 The Company files income tax returns in the United States ("U.S.") federal jurisdiction.  Generally, the Company is no longer subject to U.S. federal examinations by tax authorities for fiscal years prior to 2009.  The Company does not file in any other jurisdiction and remains open for audit for all tax years as the statute of limitations does not begin until the returns are filed.
 
 F-16
 Table Of Contents
  SMARTMETRIC INC. AND SUBSIDIARY
 (A DEVELOPMENT STAGE COMPANY)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 8 -       LITIGATION
 
 On July 27, 2010, the Company filed a second amended complaint (the “Visa and Mastercard Complaint”) in the United States District Court, Central District of California (the “Court”), Case No. 2:10-cv-01864, against MasterCard, Inc. and Visa, Inc. alleging patent infringement on the Company’s patent, U.S. Patent 6,792,464 (the “’464 Patent”) (the “Visa and Mastercard Case”).
 
 On December 7, 2010, the Company filed a complaint (the “AMEX Complaint”) in the Court, Case No. CV10-9371 JHN (MANx), against American Express Company (“AMEX”) alleging patent infringement on the 464 Patent (the “AMEX Case”).
 
 On June 20, 2011, the Court entered a judgment of non-infringement in both the Visa and Mastercard Case and the AMEX Case based on the Court’s construction of certain of the disputed phrases of the asserted claims of the ’464 Patent (the “Judgment”).
 
 On June 30, 2011, the Company filed a Notice of Appeal to the Judgment in the AMEX Case against what the Company believes to be erroneous definition and limitations placed on the ’464 patent as a result of wrongful interpretation. On July 1, 2011, the Company filed a Notice of Appeal to the Judgment in the Visa and Mastercard Case against what the Company believes to be erroneous interpretation of definitions and limitations placed on the ’464 Patent by the Court.
 
 On August 29, 2011, the Company filed a complaint in the United States District Court, Central District of California, against Master Card, Inc. (“MasterCard”) and Visa, Inc. (“Visa”) alleging patent infringement on the ’464 Patent.  The Company is seeking the following relief from MasterCard and Visa:
 
 1.
For an order pursuant to 35 U.S.C. section 271 declaring that both MasterCard and Visa have infringed one or more claims of the ‘464 Patent;2.
A preliminary and permanent injunction against both MasterCard and Visa prohibiting each of them from further infringement of the ‘464 Patent;3.
An award of actual damages the Company has suffered by reason of the infringement charged in the complaint in an amount not less than a reasonable royalty on both MasterCard’s and Visa’s infringement of the ‘464 Patent:4.
An award to the Company of its costs; and5.
Such other relief as the Court may deem just and proper.
 
 On April 11, 2012, the United States Court of Appeals for the Federal Circuit (the "Appeals Court") affirmed the Judgment of the Court in the Visa and Mastercard case and the AMEX case. While the Appeals Court affirmed the Judgment, it stated that the Court erroneously limited the definition of network service providers even though its construction of "insertion of said data card into said data card reader"  was correct. Moreover, the Court stated that it saw no reason why a data card that communicates with a card reader using an embedded antenna cannot also be inserted into a data card reader to immediately trigger an application program.
 
 The Company intends to continue to vigorously pursue its infringement claim in the Visa and MasterCard case.