As filed with the Securities and Exchange Commission on August 5, 2020

Registrations No. 333-               

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

SMARTMETRIC, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   3990   05-0543557
(State of Incorporation)   (Primary Standard Industrial Classification Number)   (IRS Employer Identification Number)

 

3960 Howard Hughes Parkway, Suite 500

Las Vegas, NV 89109

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

 

Please send copies of all communications to:

 

Lucosky Brookman LLP

101 Wood Avenue South, 5th Floor

Woodbridge, New Jersey 08830

Tel. No.: (732) 395-4400

Fax No.: (732) 395-4401

(Address, including zip code, and telephone, including area code)

 

Approximate date of proposed sale to the public: From time to time after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging Growth Company

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of securities to be registered   Number of shares of common stock to be registered
(1)
    Proposed Maximum Offering Price Per Share
(2)
    Proposed Maximum Aggregate Offering Price     Amount of Registration Fee
(3)
 
Common Stock     100,000,000     $ 0.0162     $ 1,620,000     $ 210.28  

  

(1)  In accordance with Rule 416(a), this registration statement shall also cover an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.

 

(2)  Based on the average of the high and low prices for our common stock on July 31, 2020. The shares offered, hereunder, may be sold by the selling stockholder from time to time in the open market, through privately negotiated transactions, or a combination of these methods at market prices prevailing at the time of sale or at negotiated prices.

 

(3)  The fee is calculated by multiplying the aggregate offering amount by .0001298, pursuant to Section 6(b) of the Securities Act of 1933

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED AUGUST 5, 2020

 

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SmartMetric, Inc.

100,000,000 Common Shares

 

The selling stockholder identified in this prospectus may offer an indeterminate number of shares of its common stock, which will consist of up to 100,000,000 shares of common stock to be sold by GHS Investments LLC (“GHS” and the “Selling Stockholder”) pursuant to an Equity Financing Agreement (the “Equity Financing Agreement”) dated March 6, 2020. If issued presently, the 100,000,000 shares of common stock registered for resale by GHS would represent approximately 26.40% of our issued and outstanding shares of common stock as of July 30, 2020. Additionally, as of the same date, the 100,000,000 shares of our common stock registered for resale herein would represent approximately 34.44% of the Company’s public float.

 

The Selling Stockholder may sell all or a portion of the shares being offered pursuant to this prospectus at fixed prices and prevailing market prices at the time of sale, at varying prices, or at negotiated prices.

 

We will not receive any proceeds from the sale of the shares of our common stock by GHS. However, we will receive proceeds from our initial sale of shares to GHS pursuant to the Financing Agreement. We will sell shares to GHS at a price equal to 80% of the lowest trading price of our common stock during the ten (10) consecutive trading day period immediately preceding the date on which the Company delivers a put notice to GHS (the “Market Price”). There will be a minimum of ten (10) trading days between purchases.

 

GHS is an underwriter within the meaning of the Securities Act of 1933, and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933 in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933.

 

Our common stock is traded on OTCQB under the symbol “SMME”. On July 31, 2020, the reported closing price for our common stock was $0.0178 per share.

 

Prior to this offering, there has been a limited market for our securities. While our common stock trades on the OTCQB, there has been limited and fluctuating trading volume. There is no guarantee that an active trading market will remain or develop in our securities.

 

This offering is highly speculative and these securities involve a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. See “Risk Factors” beginning on page 11. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

Table of Contents

 

The following table of contents has been designed to help you find information contained in this prospectus. We encourage you to read the entire prospectus.

 

Prospectus Summary   1
Summary Consolidated Financial Information   7
Risk Factors   11
Cautionary Note Regarding Forward-Looking Statements   20
Use of Proceeds   21
Determination of Offering Price   21
Dilution   21
Selling Security Holder   21
The Offering   23
Plan of Distribution   24
Interests of Named Experts and Counsel   28
Information with respect to the Registrant   28
Management’s Discussion and Analysis of Financial Condition and Results of Operations   36
Directors, Executive Officers and Key Employees   43
Executive Compensation   46
Security Ownership of Certain Beneficial Owners and Management and related stockholder matters   48
Transactions With Related Persons   50
Index to Consolidated Financial Statements   F-1

 

You may only rely on the information contained in this prospectus or that we have referred you to. We have not authorized any person to give you any supplemental information or to make any representations for us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the Common Stock offered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any Common Stock in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this prospectus nor any sale made in connection with this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus is correct as of any time after its date. You should not rely upon any information about our company that is not contained in this prospectus. Information contained in this prospectus may become stale. You should not assume the information contained in this prospectus or any prospectus supplement is accurate as of any date other than their respective dates, regardless of the time of delivery of this prospectus, any prospectus supplement or of any sale of the shares. Our business, financial condition, results of operations, and prospects may have changed since those dates. The Selling Stockholder is offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted.

 

In this prospectus, “SmartMetric” the “Company,” “we,” “us,” and “our” refer to SmartMetric, Inc., a Nevada corporation.

 

i

 

PROSPECTUS SUMMARY

 

You should carefully read all information in the prospectus, including the financial statements and their explanatory notes under the Financial Statements prior to making an investment decision.

 

This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be important information about us, you should carefully read this entire prospectus before investing in our Common Stock, especially the risks and other information we discuss under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and related notes beginning on page F-1. Our fiscal year end is June 30 and our fiscal years ended June 30, 2018 and 2019 are sometimes referred to herein as fiscal years 2018 and 2019, respectively. Some of the statements made in this prospectus discuss future events and developments, including our future strategy and our ability to generate revenue, income and cash flow. These forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those contemplated in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”. Unless otherwise indicated or the context requires otherwise, the words “we,” “us,” “our”, the “Company” or “our Company” or “SmartMetric” refer to SmartMetric, Inc., a Nevada corporation and its wholly-owned subsidiary, SmartMetric Australia Pty. Ltd.

 

Corporate History and Business 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’s main products are a fingerprint sensor debit card as well as a card with a finger sensor and fully functional fingerprint reader embedded inside the card. The SmartMetric biometric cards have a rechargeable battery allowing for portable biometric identification and card activation. This card is referred to as a biometric card or the SmartMetric Biometric Card.

 

The Market for Biometric Credit Cards

 

According to a to a press release issued by Goode Intelligence, an independent market research company, regarding their October 2018 report on the biometrics payment sector, nearly 579 million biometric credit/debit cards will be in use over the next five (5) years. Goode Intelligence believes* there is a significant market opportunity for biometric payment cards. and forecasts that by 2023 there will be almost 579 million biometric payment cards in use around the world.

 

“Contactless card payments are even outperforming mobile in many regions. Many consumers prefer to use a contactless payment card over a mobile payment equivalent and according to Goode Intelligence research, many users would like to use cards in contactless mode for higher value transactions. Biometric payment cards not only offer improved security by removing the PIN but also allow frictionless payments for higher value transactions,” stated Good Intelligence.

 

SmartMetric engaged an outside independent research company to survey a statistically relevant sample of Visa credit card holders in the United States. One of the questions asked showed that nearly 67% of these credit card holders would be willing to pay $69.95 for a biometric secured credit card.

 

The survey asked:

 

Would you pay for a safer biometric secured credit card that has a built-in fingerprint reader for your protection?

 

A1. Yes 64.5%
     
  No 35.5%

 

* Goode Intelligence is an independent analyst and consultancy company that provides quality advice to global decision makers in business and technology.

 

Goode Intelligence works in information security, mobile security, authentication and identity verification, biometrics, enterprise mobility and mobile commerce sectors.

 

Founded in 2007 by Alan Goode and headquartered in London, Goode. Intelligence helps both technology providers, investors and IT purchasers make strategic business decisions based on quality research, insight and consulting.

 

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The SmartMetric Biometric Technology and Products

 

SmartMetric’s founder, Chaya Hendrick is the originator and inventor of various miniature biometric activated cards, including the SmartMetric biometric fingerprint activated payments card with an embedded fully functional fingerprint reader inside. the card. The card is the size and thickness of a standard credit card. The SmartMetric biometric payments card provides for high level security for credit and debit cards by adding biometric authentication and activation to Europay, MasterCard and Visa (“EMV”) chip cards in use around the world. The SmartMetric biometric payments card has been manufactured to be totally interoperable with existing EMV chip card readers, ATMs as well as banking payments infrastructure. Using the advanced electronic miniaturization by SmartMetric to make its biometric credit/debit cards the Company has also created a multi-functional biometric building access control and logical network access card.

 

Since July 1, 2018, SmartMetric has commenced efforts towards creating a biometric health insurance card with memory for storing a person’s medical files, including medical images. This allows a person to securely take with them their private medical files inside the card when traveling away from home. For the first time, a person’s complete medical files can be stored in a credit card-sized card and the information is only able to be accessed by the card holder’s own fingerprint. The company is in discussion with significant health membership organizations concerning the offering of the SmartMetric Biometric Medical Records card to their respective members.

 

SmartMetric has developed its rechargeable battery powered fingerprint reader that is of a scale that fits “inside” a standard credit or debit card. The cardholder has stored inside the card his or her fingerprint. To activate the card the person swipes the fingerprint sensor, the sensor is connected to an internal microprocessor that manages the fingerprint sensor fingerprint image capture and comparison matching with the pre-stored fingerprint of the cardholder held in the internal electronic memory of the card. The card has a surface mounted EMV chip as found on EMV banking chip cards that is activated or turned on only after a card holder’s fingerprint has been scanned and verified using the SmartMetric miniature “in-card” biometric scanner.

 

There are over seven (7) billion EMV chip cards used by banks around the world for credit cards, ATM cards and debit cards according to EMVco. SmartMetric sees this existing user base as a natural market for its advanced biometric activated card technology for the credit and debit card market. SmartMetric has established a network of card manufacturers and technology distributors to market its in-card biometric products to card issuing banks and in the case of the SmartMetric biometric security card, to businesses.

 

SmartMetric has completed development of its biometric card and is now actively marketing its card to major card issuing banks throughout the world in partnership with established card distributors and dealers. 

 

SmartMetric has also developed a multi-function logical and physical access security card this size and thickness of a standard credit card. Utilizing the small size breakthroughs by the Company in its biometric payments card development, SmartMetric has successfully developed a biometric security card that is the size and thickness of a standard credit card that can easily fit inside a person’s wallet.

 

As with the biometric payments card, the SmartMetric security card has an internal rechargeable battery that is used to power the card’s internal processor used in the biometric fingerprint scan. All functions and operations of the card are subject to a valid fingerprint scan and match of the card user.

 

On February 1, 2019, SmartMetric entered into a manufacturing and license agreement with Servired, SA (“Servired”). Servired operates the major payments network in Spain for credit and debit card transactions. Subsequently, the Servired agreement has been transferred and assumed in total by RedSys, SA. (“RedSys”) as part of a corporate reorganization. RedSys is now the corporate entity that owns the ADVANTIS (discussed later) credit card and debit card chip and operating software system. Regarding integration of Advantis in Redsys, Redsys acquired from Servired, through company succession, the independent economic marketing unit of the Advantis System and the Pricenet, SIS and SAS family programs.

 

The ADVANTIS EMV Chip and operating system is currently being used by banks around the world on their debit and credit cards. 1.4 Billion cards with the ADVANTIS chip and software operating system have been issued by their member banks worldwide.

 

SmartMetric is now in the process of manufacturing its biometric credit/debit card with the ADVANTIS payments card chip and operating system. This will allow over 500 Banks worldwide, who are already using the ADVANTIS chip and chip card operating system, to seamlessly issue this new SmartMetric – ADVANTIS biometric credit and debit card.

 

Additional technological advances have now been made on both the Company’s biometric credit/debit card and its multifunction cyber security, building access to the biometric card.

 

In Card Fingerprint Matching and Verification

 

The SmartMetric Biometric card 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 the Company to SmartMetric’s specifications. This battery is embedded inside the card.

 

2

 

Other components needed for manufacture of the SmartMetric Biometric Card include, but are not limited to, sensors, microchips, memory chips and processor chips. The ultra-thin circuit board developed by SmartMetric has, in total, nearly 200 active and passive components. The sources and availability of these materials are numerous, readily available and should not affect the ability of SmartMetric to meet future demand. The supply of memory processors and passive components may be interrupted at any time based on global supply/demand issues. We have not experienced component supply issues to date and the Company, as a matter of policy, has alternative component sources to mitigate and protect against supply chain issues.

 

The biometric card has been designed to offer the option of a built-in radio frequency transmitter for contactless access and identity verification. The RFID contactless chip transmission is turned on using the card users fingerprint verification.

 

The thinness form factor of many of the components, has also resulted in the Company having to develop its own process for high volume electronic assembly. The Company has also successfully overcome the challenge of developing a process of encapsulating the electronics in plastic to create the credit card sized biometric fingerprint activated card that also has an internal rechargeable battery.

 

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 trade secret process that protects the silicon and internal battery that is mounted directly onto the card’s internal electronics circuit board.

 

The Security Technology Industry

 

SmartMetric Biometric Multi-Function Security Card

 

SmartMetric has developed a multi-function logical and physical access security card this size and thickness of a standard credit card. Utilizing the small size breakthroughs by the Company in its biometric payments card development, SmartMetric has successfully developed a biometric security card that can easily fit inside a person’s wallet.

 

As with the biometric payments card, the SmartMetric security card has an internal rechargeable battery that is used to power the card’s internal processor used in the biometric fingerprint scan. All functions and operations of the card are subject to a valid fingerprint scan and match of the card user.

 

The main features of the SmartMetric biometric security card are:

 

  1. Logical access smartcard card chip for insertion into a card reader attached to a computer or network
     
  2. RFID transceiver for physical access i.e. doorways, elevators, etc.
     
  3. Validation indicator light that glows green immediately following a fingerprint validation
     
  4. Rechargeable battery to power the card
     
  5. Size and thickness of a credit card
     
  6. Changeable security code on reverse of card for additional log on security

 

Cybersecurity and identity validation for network access control, physical building entry and secure on-the-spot identity security is now handled by the revolutionary biometric activated cyber and ID multi-function security card which has been developed by SmartMetric after over a decade of R&D.

 

From governments to the workplace, better, stronger security is desired across the enterprise. Our new biometric multifunction security card provides a revolutionary biometric based solution that is portable, easily integrated and backward compatible to existing backend security infrastructure.

 

The new multifunction biometric security card by SmartMetric is a revolutionary leap forward in the Cyber and Access Security world according to SmartMetric.

 

Access management market is estimated to grow from USD 8.09 billion in 2016 to USD 14.82 billion by 2021, at a CAGR of 12.9% between 2016 and 2021 according to a recent research report by KBV Research in a publication titled Identity & Access Management Market – Global Forecast by Marqual IT Solutions Pvt. Ltd (KBV Research) November 2016 KBV Research is a name owned by IT Solutions Pvt. Ltd.

 

3

 

Recent Developments

 

The COVID-19 has had an impact on SmartMetric's final card production. While the delays are due to supply line disruption, the Company is confident that these delays will be short-lived based on advice from our manufacturing partners, manufacturing alternatives and alternative supply lines that are being put into place by the Company..

 

Sales and Marketing

 

SmartMetric has engaged distributors and dealers in both North and South America. SmartMetric has entered into an agreement with Redsys the owner of the ADVANTIS credit and debit card chip that is used in over 1.4 Billion credit/debit cards globally. RedSys/Advantis is owned by card issuing Banks. Five hundred (500) card issuing banking organizations around the world are issuing credit and debit cards with the RedSys/ADVANTIS chip.

 

SmartMetric has added the ADVANTIS credit/debit card chip onto the SmartMetric biometric card thereby allowing the existing RedSys / ADVANTIS banks already issuing credit and debit cards with their chip on board to now issue seamlessly the SmartMetric biometric credit / debit card. RedSys / ADVANTIS have agreed to work closely with SmartMetric in promoting the SmartMetric card globally. RedSys / ADVANTIS is owned by some the largest Banks in Europe and Latin America.

 

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. A number of patents are in process (Patents Pending) that cover critical aspects of the engineering and function of the SmartMetric biometric card. The founder of SmartMetric, Chaya Hendrick, is the inventor of these patents, and has provided SmartMetric with an option over biometric card related pending patents invented by her.

 

Some of the most recent patents pending have not been disclosed on the publicly searchable USPTO database of filed for patents and remain trade secrets within the Company. Publishing of such patents pending will be done in due course.

 

Patents

 

SmartMetric biometric card is protected by five (5) USPTO issued patents. Other patents are pending. 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. The principal shareholder of SmartMetric and technology inventor, Chaya Hendrick, through various corporate investment vehicles and companies also owns other technologies, patents, and has financial interest in other technology companies. Chaya Hendrick, under an executed employment agreement is not subject to any restriction on using and owning any technology, methodology, process or invention created by Chaya Hendrick.

 

Government Regulation

 

There are currently no governmental regulations, which have any bearing on the raw materials or the manufacturing of our payments card products. United States federal departments such as the Department of Defense have rules and regulations concerning security features of smart cards used as identity or building and cyber access cards. These regulations stipulate a specific licensing and testing protocol for such cards.

 

Banking Industry Self-Regulation

 

The EMV chip used in chip cards are subject to licensing and testing by the banking-controlled body called EMVco. EMVco is an acronym standing for Europay, MasterCard and Visa. These international payments card networks were the founding parties of EMVco.

 

Individual payments networks such as Visa, Mastercard, Europay, American Express, Union Pay Dinners and JCB all have their own individual licensing and testing standards and processes.

 

4

 

Research and Development

 

Our research and development program is focused on ongoing development of new products built on our existing biometric card. We continue to refine our technology and develop further improvements to our biometric card products. We have finalized our first biometric EMV payments card product. We have also concluded the design and electronic engineering for our soon-to-be released multi-function security and access control biometric cards. Research and development will continue as the Company continues to innovate and develop new biometric card-based products. Future biometric card-based products the Company is now working on, include but are not limited to: (a) health insurance card with stored in-card medical records; (b) national identity card; and (c) drivers’ licenses.

 

The Company has developed and is continuing to develop its own embedded systems and application software that works with the SmartMetric Biometric Card. This development software and systems and ongoing electronic design and development requires the company to continue to expend time and financial resources on significant software development. Currently, the Company has electronic and software engineers working in Tel Aviv, Israel and Buenos Aires, Argentina.

 

Competition

 

Various potential competitors have announced products similar to that of SmartMetric’s. It is understood that “announced” is defined as a person to hold their finger on the cards fingerprint sensor while it is in a card reader. Unlike the SmartMetric biometric card that is powered from its own internal rechargeable battery, this other type of card does not allow the card to be used in most restaurants that need to take the card away from the table for processing at the checkout. It also does not allow their other type of card to be used at the vast majority of ATM’s.

 

Employees

 

As of the date of this prospectus, we have one full time employee, our Chief Executive Officer and President, Chaya Hendrick. We primarily use direct contract hires in administration and engineering, as is common in the information technology world. All work product developed by all of our engineers remains the intellectual property of SmartMetric. Engineers who work for SmartMetric under contract are primarily based in Tel Aviv, Israel. Some software engineering is conducted in Buenos Aires, Argentina.

 

GHS Equity Financing Agreement and Registration Rights Agreement

 

On March 6, 2020, the Company entered into an equity financing agreement, and a registration rights agreement (the “Registration Rights Agreement”) with GHS Investments LLC, a Nevada limited liability company. Under the terms of the Equity Financing Agreement, GHS agreed to provide the Company with up to $4,000,000 over the course of 36 months in return for shares of the Company’s common stock. The 36-month period will commence upon effectiveness of this registration statement on Form S-1 (the “Registration Statement”) filed with the U.S. Securities and Exchange Commission (the “Commission”).

 

5

 

Following effectiveness of the Registration Statement, the Company shall have the discretion to deliver puts to GHS and GHS will be obligated to purchase shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) based on the investment amount specified in each put notice. The maximum amount that the Company shall be entitled to put to GHS in each put notice shall not exceed two hundred percent (200%) of the average daily trading dollar volume of the Company’s Common Stock during the ten (10) trading days preceding the put, so long as such amount does not exceed $500,000. Pursuant to the Equity Financing Agreement, GHS and its affiliates will not be permitted to purchase, and the Company may not put shares of the Company’s Common Stock to GHS that would result in GHS’s beneficial ownership equaling more than 4.99% of the Company’s outstanding Common Stock. The price of each put share shall be equal to eighty percent (80%) of the Market Price (as defined in the Equity Financing Agreement). Puts may be delivered by the Company to GHS until the earlier of thirty-six (36) months after the effectiveness of the Registration Statement, the date on which GHS has purchased an aggregate of $4,000,000 worth of Common Stock under the terms of the Equity Financing Agreement, or at such time that the Registration Statement is no longer in effect. Additionally, in accordance with the Equity Financing Agreement, the Company issued GHS a convertible promissory note in the principal amount of $35,000 and a 9 month maturity date (the “Commitment Note”), with the first $20,000 of the Commitment Note deemed earned upon execution of the Equity Financing Agreement and the remaining $15,000 of the Commitment Note deemed earned upon payment by GHS of the Company’s legal fees.

 

The Registration Rights Agreement provides that the Company shall (i) use its best efforts to file with the Commission the Registration Statement within 60 days of the date of the Registration Rights Agreement; and (ii) have the Registration Statement declared effective by the Commission within 30 days after the date the Registration Statement is filed with the Commission, but in no event more than 90 days after the Registration Statement is filed.

 

Where to Find More Information

 

We make our public filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports. These materials are available on the Company’s website at www.smartmetric.com or on the SEC’s web site, http://www.sec.gov. 

 

Summary of the Offering

 

Shares currently outstanding:   379,523,000
     
Shares being offered:   100,000,000
     
Shares to be outstanding after the offering   479,523,000
     
Shares to Offering Price per share:   The Selling Stockholder may sell all or a portion of the shares being offered pursuant to this prospectus at fixed prices and prevailing market prices at the time of sale, at varying prices or at negotiated prices.
     
Use of Proceeds:   We will not receive any proceeds from the sale of the shares of our common stock by the Selling Stockholder.
     
Trading Symbol:   SMME
     
Risk Factors:   See “Risk Factors” beginning on page 11 herein and the other information in this prospectus for a discussion of the factors you should consider before deciding to invest in shares of our common stock.

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

 

The following summary consolidated statements of operations data for the fiscal years ended June 30, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Additionally, the six months ended December 31, 2019 and 2018 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of March 31, 2020 are derived from our consolidated financial statements that are included elsewhere in this prospectus. The historical financial data presented below is not necessarily indicative of our financial results in future periods, and the results for the quarter ended March 31, 2020 is not necessarily indicative of our operating results to be expected for the full fiscal year ending June 30, 2020 or any other period. You should read the summary consolidated financial data in conjunction with those financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our consolidated financial statements have been prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods.

 

7

 

SMARTMETRIC, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheet

 

    March 31,     June 30,  
    2020     2019  
    (Unaudited)        
Assets                
Current assets:                
Cash   $ -     $ 10,161  
Prepaid expenses and other current assets     10,017       6,450  
                 
Total current assets     10,017       16,611  
                 
Total assets   $ 10,017     $ 16,611  
                 
Liabilities and Stockholders’ Deficit                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 898,380     $ 884,140  
Liability for stock to be issued     69,183       147,484  
Deferred Officer’s salary     821,682       790,015  
Related party interest payable     135,240       93,488  
Dividends payable     2,489       3,123  
Due to shareholders     41,343       -  
Shareholder loan     6,571       3,759  
                 
Total current liabilities     1,974,888       1,922,009  
Total liabilities     1,974,888       1,922,009  
                 
Commitments and Contingencies (Note 4)                
                 
Series C mandatory redeemable convertible preferred stock, net of discount, authorized 1,000,000 shares 128,500 and 121,700 shares issued and outstanding, respectively     106,580       99,278  
Preferred Series C stock subscriptions receivable     (30,000 )     -  
                 
Stockholders’ deficit:                
Preferred B stock, $.001 par value; 5,000,000 shares authorized, 610,000 and 610,000 shares issued and outstanding     610       610  
Common stock, $.001 par value; 600,000,000 and 300,000,000 shares authorized, 316,875,686 and 264,648,821 shares issued and outstanding, respectively     316,876       264,649  
Additional paid-in capital     25,215,910       24,663,528  
Accumulated deficit     (27,574,847 )     (26,933,463 )
                 
Total stockholders’ deficit     (2,041,451 )     (2,004,676 )
                 
Total liabilities, redeemable convertible preferred stock and equity   $ 10,017     $ 16,611  

 

8

 

SMARTMETRIC, INC. AND SUBSIDIARY

Condensed Consolidated Statement of Operations

(Unaudited)

 

    Three
Months
    Three
Months
    Nine
Months
    Nine
Months
 
    Ended     Ended     Ended     Ended  
    March 31,     March 31,     March 31,     March 31,  
    2020     2019     2020     2019  
                                 
Revenues   $ -     $ -     $ -     $ -  
                                 
Expenses:                                
Officer’s salary     47,500       47,500       142,500       142,500  
Other general and administrative     93,200       121,200       375,779       369,361  
Research and development     14,090       38,949       60,796       90,084  
                                 
Total operating expenses     154,790       207,649       579,075       601,945  
                                 
Loss from operations before other expense     (154,790 )     (207,649 )     (579,075 )     (601,945 )
                                 
Other expense                                
Interest expense     (14,081 )     (13,647 )     (41,731 )     (39,468 )
Total Other expense     (14,081 )     (13,647 )     (41,731 )     (39,468 )
                                 
Loss before income taxes     (168,871 )     (221,296 )     (620,806 )     (641,413 )
                                 
Provision for income taxes     -       -       -       -  
                                 
Net loss     (168,871 )     (221,296 )     (620,806 )     (641,413 )
Preferred C stock dividends     (4,614 )     (4,273 )     (20,577 )     (4,273 )
Net loss available for common stockholders   $ (173,485 )   $ (225,569 )   $ (641,383 )   $ (645,686 )
                                 
Net loss per share, basic and diluted   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
                                 
Weighted average number of common shares outstanding, basic and diluted     307,327,958       256,676,745       285,940,273       253,891,612  

 

9

 

 SMARTMETRIC, INC. AND SUBSIDIARY

Consolidated Statements of Operations

  

    Year Ended     Year Ended  
    June 30,     June 30,  
    2019     2018  
                 
Revenues   $ -     $ -  
                 
Expenses:                
Officer’s salary     190,000       190,000  
Other general and administrative     577,756       683,329  
Research and development     107,962       129,375  
                 
Total operating expenses     875,718       1,002,704  
                 
Loss from operations before other expense     (875,718 )     (1,002,704 )
                 
Other expense:                
Interest expense     (53,432 )     (39,084 )
Loss on patent impairment     -       (600,000 )
Total other expense     (53,432 )     (639,084 )
                 
Loss before income taxes     (929,150 )     (1,641,788 )
                 
Provision for income taxes     -       -  
                 
Net loss     (929,150 )     (1,641,788 )
Preferred stock dividends     (7,401 )     -  
Net loss available for common stockholders   $ (936,551 )   $ (1,641,788 )
                 
Net loss per share, basic and diluted   $ (0.00 )   $ (0.01 )
                 
Weighted average number of common shares outstanding, basic and diluted     256,676,745       240,133,406  

 

10

 

RISK FACTORS

 

This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment. You should carefully consider the risks described below together with all of the other information included in our public filings before making an investment decision with regard to our securities. The statements contained in or incorporated into this document that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following events described in these risk factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Moreover, additional risks not presently known to us or that we currently deem less significant also may impact our business, financial condition or results of operations, perhaps materially. For additional information regarding risk factors, see “Forward-Looking Statements.”

 

Special Information Regarding Forward-Looking Statements

 

The information herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This filing contains a number of forward-looking statements that reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, clinical developments which management expects or anticipates will or may occur in the future, including statements related to our technology, market expectations, future revenues, financing alternatives, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the risks to be discussed in this Form S-1 Registration and in the press releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of the risks and factors which may affect our business. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For additional information regarding forward-looking statements, see “Forward-Looking Statements.

 

Risks Related to Our Financial Position and Need to Raise Additional Capital 

 

We have a limited operating history as a company and may not be able to effectively operate our business.

 

Our limited staff and operating history mean that there is a high degree of uncertainty regarding our ability to:

 

  develop our technologies and proposed products;

 

  identify, hire and retain the needed personnel to implement our business plan and sell our products;

 

  Manage our growth and / or successfully scale our business; or

 

  respond to competition.

 

No assurances can be given as to exactly when, if at all, we will be able to fully develop, and take the necessary steps to derive any revenues from our proposed products.

 

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.

 

11

 

Raising capital may be difficult as a result of our history of losses and limited operating history in our current stage of development.

 

When making investment decisions, investors typically look at a company’s management, earnings and historical performance in evaluating the risks and operations of the business and the business’s future prospects. Our history of losses and relatively limited operating history in our current stage of development makes such evaluation, as well as any estimation of our future performance, substantially more difficult. As a result, investors may be unwilling to invest in us or on terms or conditions which are acceptable. If we are unable to secure additional financing, we may need to materially scale back our business plan and/or operations or cease operations altogether.

 

We are an early-stage company, have no product revenues, are not profitable and may never be profitable.

 

From inception through March 31, 2020, we have raised approximately $26,000,000 through the sale of our securities. During this same period, we have recorded an accumulated deficit of approximately $27,574,847 million. Our net losses for the two most recent fiscal years ended June 30, 2019, and 2018 were $936,551 and $1,641,788, respectively. We have never made any sales and have never generated revenues and we anticipate none will be generated for the foreseeable future. We expect to incur significant operating losses for the foreseeable future as we continue the development of our products. Accordingly, we will need additional capital to fund our continuing operations and any expansion plans. Since we do not generate any revenue, the most likely source of such additional capital is the sale of our securities. To the extent that we raise additional capital by issuing equity securities, our stockholders are likely to experience dilution with regard to their percentage ownership of the company, which may be significant. If we raise additional capital by incurring debt, we could incur significant interest expense and become subject to covenants that could affect the manner in which we conduct our business, including securing such debt obligations with our assets.

 

To date, we have generated only losses, which are expected to continue for the foreseeable future.

 

For the nine months ended March 31, 2020 and 2019, we incurred a net loss of $620,806 and $641,413, 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 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. 

 

We may not be able to continue as a going concern if we do not obtain additional financing by December 31, 2020.

 

Since our inception, we have funded our operations primarily through the sale of our securities. Our cash balance at March 31, 2020 was $0. Based on our current expected level of operating expenditures, we expect to only be able to fund our operations through the first quarter (ending September 30, 2020) of fiscal year ending June 30, 2021, at which time we will need additional capital. Our ability to continue as a going concern is wholly dependent upon obtaining sufficient capital to fund our operations. We have no committed sources of additional capital and our access to capital funding is always uncertain. Accordingly, despite our ability to secure capital in the past, we cannot assure you that we will be able to secure additional capital through financing transactions, including issuance of debt, or through other means. In the event that we are not able to secure additional funding, we may be forced to curtail operations, cease operations altogether or file for bankruptcy.

 

The COVID-19 has had an impact on SmartMetric's final card production. While the delays are due to supply line disruption, the Company is confident that these delays will be short-lived based on advice from our manufacturing partners, manufacturing alternatives and alternative supply lines that are being put into place by the Company.

 

12

 

We entered into a royalty and licensing agreement with Chaya Hendrick, our CEO, which requires substantial payments by us on an annual basis and additionally in the event gross revenues are derived, which could harm our financial position.

 

Pursuant to a licensing and royalty agreement, entered into on September 11, 2017 by the Company and Chaya Hendrick, our founder and CEO, we received a license to certain patents related to our technologies until the expiration of such patents in exchange for the following : (i) Issuance of 200,000 Series B Convertible Preferred Shares, (ii) 5% of gross revenues derived from the sale of products derived from the patents, and (iii) annual payments beginning at $50,000 per annum, increased by 100% of each previous year (offset against 5% gross revenue royalty payments). We believe these patents are instrumental our business plan and if we are unable to make such required payments under the plan, Chaya Hendrick may terminate the agreement, which may materially impact our business plan. Furthermore, there can be no assurances that we will be able to continue to meet our financial obligations under the terms of the agreement unless we are able to raise additional capital through the sale of our securities or derive revenue from some other source.

 

As of March 31, 2020, we owe Chaya Hendrick, our CEO, $790,015 in deferred salary, of which the failure to pay could result in Chaya Hendrick’s termination of employment, the result of which would materially harm our business.

 

We currently have not paid $790,015 in salary owed to Chaya Hendrick pursuant to Chaya Hendrick’s employment agreement outstanding with us as of March 31, 2020. While Chaya Hendrick continues to support the Company and continues to operate as its CEO, President and chairman of the Board, there can be no assurances that this will continue if we fail to back salaries and future salary owed. Additionally, as of July 1, 2017, all prior and future deferred salary owed will bear interest at a rate of 7% per annum. In the event Chaya Hendrick terminates employment for lack of payment, the Company believes such loss would cause irreparable harm to our product development and would materially harm our business prospects. Additionally, there can be no assurances that Chaya would not attempt to foreclose on our assets in order to satisfy such debt obligations.

 

Risks Relating to our Stage of Development and Business

 

Our potential competitors have significantly greater resources than we have, which may make competing difficult.

 

We compete against numerous companies, many of which have substantially greater resources than we have. Several such competitors have large teams of engineers and scientists that attempt to develop products and technologies similar to ours. Companies such as Gemalto, Giesecke & Devrient, IDEMIA, as well as others, have substantially greater financial, research, manufacturing and marketing resources than we do. As a result, such competitors may find it easier to compete in our industry and bring competing products to market.

 

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 our President and CEO, Chaya Henrick and technical contracted personnel. If any of these 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 our President and CEO, Chaya Hendrick.

 

Our continued success will depend, to a significant extent, upon the performance and contributions of Chaya Henrick and upon our ability to attract motivate and retain highly qualified management personnel and employees. We depend on Chaya Henrick to effectively 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.

 

We currently employ a part-time Chief Financial Officer, Mr. Jay Needelman, who is also a member of the Board. The loss of services of any of our key management personnel, whether through resignation or other causes, the reduced services of our part-time Chief Financial Officer, or the inability to attract qualified personnel as needed, could prevent us from adequately executing our business strategy. 

 

13

 

Rapid technological changes could make our services or products 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. 

 

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, all of which may be financially burdensome or unsuccessful.

 

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 through simpler means (by their name, social security number, etc.) Additionally, we have a strategy of expanding sales of existing products into new geographic markets. Our target market initially will be South America and Australia. In the event that we are unable to adequately develop our applications or gain traction in these emerging markets, or that the cost of the foregoing is too great, our business may be harmed.

 

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.

 

Risks Related to Our Intellectual Property

 

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.

 

14

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use of, our technology.

 

Some or all of our patent applications may not issue as patents, or the claims of any issued patents may not afford meaningful protection for our technologies or products. In addition, patents issued to us or our licensors, if any, may be challenged and subsequently narrowed, invalidated or circumvented. Patent litigation is widespread in our industry and could harm our business. Litigation might be necessary to protect our patent position or to determine the scope and validity of third-party proprietary rights. If we choose to go to court to stop someone else from using the inventions claimed in our patents, that individual or company would have the right to ask the court to rule that such patents are invalid and/or should not be enforced against that third party. These lawsuits are costly and we may not have the required resources to pursue such litigation or to protect our patent rights. In addition, there is a risk that the court might decide that these patents are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court could refuse to stop the other party on the grounds that such other party’s activities do not infringe on our rights contained in these patents. 

 

Furthermore, a third party may claim that we are using inventions covered by their patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could materially increase our operating expenses and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents. In addition, there is a risk that a court would order us to pay the other party damages for having violated the other party’s patents. It is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform.

 

Because some patent applications in the United States may be maintained in secrecy until the patents are issued, patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our issued patents or that we were the first to invent the technology. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications and could further require us to obtain rights to issued patents covering such technologies. 

 

If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference or other proceeding in the U.S. Patent and Trademark Office, or the PTO, or a court to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions.

 

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the capital necessary to continue our operations.

 

Risks Relating to Market Approval and Government Regulations

 

Compliance with regulation of corporate governance and public disclosure diverts time and attention away from revenue generating activities.

 

Our management team invests significant time and financial resources to comply with existing standards for public companies, which has lead to management’s time and attention away from developing our business to compliance activities which could have an adverse effect on our business.

 

Our technology relies on our ability to gain the acceptance and approval of large banking / credit card institutions, the failure to do so may materially harm our business.

 

In the event that our SmartMetric Biometric Card does not gain acceptance/approval amongst the large card issuing institutions in the United States and abroad, our cards will not be provided for use to customers. We currently have no plans to open our own bank/credit card issuing institution and accordingly, we plan to rely on our ability to have our products accepted within the banking/credit card industries. Our failure to do so will have a material impact on our ability to generate revenues and continue to operate our business.

 

15

 

Risks Relating to the Development and Manufacturing of Our Products

 

We currently rely on third party manufacturers and suppliers for certain components of our product; with such parties being, to some extent, outside of our control.

 

We currently have limited internal manufacturing capability and intend to rely on third party contract manufacturers or suppliers for the foreseeable future. Accordingly, factors outside of our control may result in material manufacturing delays and product shortages, which could delay or otherwise negatively impact our manufacturing and product development plans. Should we be forced to manufacture our proposed products, we cannot give any assurance that we would be able to develop internal manufacturing capabilities. In the event that we seek third party suppliers or alternative manufacturers, they may require us to purchase a minimum amount of materials or could require other unfavorable terms. Any such event could materially impact our business prospects and could delay the development and manufacturing of our products. Moreover, we cannot give any assurance that the contract manufacturers or suppliers that we select will be able to supply our products in a timely or cost-effective manner or in accordance with our specifications.

 

We have a limited number of suppliers of key components and may experience difficulties in obtaining components for which there is significant demand, which would materially impact our business prospects.

 

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. The following delays/factors from our third-party suppliers 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; and
     
  Late delivery of our products.

 

We utilize third party manufacturing plants for silicon for the manufacturing our products, which, in the event of growth would need to use large quantities of silicon, for which raw material shortages may occur.

 

While we currently use silicon in our products, and no shortage currently exists of these materials, there can be no assurances that there will not be a shortage in the future, which may materially impact our manufacturing capabilities, growth prospects, and ability to generate revenue in the future.

 

16

 

Risks Related to our Securities

 

Our board of directors has broad discretion to issue additional securities.

 

We are authorized under our certificate of incorporation to issue up to 605,000,000 shares consisting of 600,000,000 shares of common stock and 5,000,000 “blank check” shares of preferred stock. Shares of our blank check preferred stock provide the Board with broad authority to determine voting, dividend, conversion, and other rights. As of July 30, 2020, we have issued and outstanding 379,523,000 shares of common stock; 610,000 shares of Series B Convertible Preferred Stock that are convertible into 30,500,000 shares of common stock at the election of the holder; and 121,700 shares of shares of Series C Convertible Preferred Stock that are convertible into 16,901,408 shares of common stock. Additionally, we have 28,153,406 shares of common stock reserved upon the exercise of outstanding purchase warrants. Accordingly, as of July 30, 2020, we are entitled to issue up to 220,477,000 additional shares of common stock, and 4,390,000 additional shares of “blank check” preferred stock. Our board may generally issue those common and preferred shares, or convertible securities to purchase those shares, without further approval by our shareholders. Any additional preferred shares we may issue could have such rights, preferences, privileges, and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions.

 

It is likely that we will issue additional securities to raise capital in order to further our business plans. It is also likely that we will issue additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services. Any issuances could be made at a price that reflects a discount to, or a premium from, the then-current market price of our common stock. These issuances would dilute the percentage ownership interest of our current shareholders, which would have the effect of reducing your influence on matters on which our stockholders vote and might dilute the net tangible book value per share of our common stock.

 

If securities or industry analysts do not publish research or reports or if they publish unfavorable research or reports, an active market for our common stock may not develop and the price of our common stock could decline.

 

We are a small company which is relatively unknown to stock analysts, stockbrokers, institutional investors and others in the investment community that generate or influence sales volume. Even if we come to the attention of such persons, they may be reluctant to follow or recommend an unproven company such as ours until such time as we became more seasoned and viable. Generally, the trading market for a company’s securities depends in part on the research and reports that securities or industry analysts publish. We currently have limited research coverage by securities and industry analysts. As a consequence, there may be periods of time when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer with significant research coverage. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or if developed, will be sustained, or that current trading levels could be sustained or not diminish. In addition, in the event any analyst downgrades our securities, the price of our shares would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and its trading volume, if any, to decline.

 

Our common stock may be considered a “penny stock,” and may be subject to additional sale and trading regulations that may make it more difficult to sell.

 

Our common stock may be considered a “penny stock.” The principal result or effect of being designated a penny stock is that securities broker-dealers participating in sales of our common stock may be subject to the penny stock regulations set forth in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

 

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Our CEO and Chairman, as the sole holder of our Series B Convertible Preferred Stock, controls our company.

 

Chaya Hendrick, our CEO and Chairman, holds (via shares in her name or shares in the name of an entity she controls - Applied Cryptography, Inc. (“ACI”)) all 610,000 shares of Series B Convertible Preferred Stock outstanding. The outstanding shares of Series B Convertible Preferred Stock are entitled to vote on any matter with the holders of Common Stock voting together as one (1) class and shall have that number of votes (identical in every other respect to the voting rights of the holder of common stock entitled to vote at any regular or special meeting of Stockholders) equal to that number of common shares which is not less than 51% of the vote required to approve any action, which Nevada law provides may or must be approved by vote or consent of the common shares or the holders of other securities entitled to vote, if any. Each share of Series B Convertible Preferred Stock is convertible, at the option of the holder, into fifty (50) shares of Common Stock upon the satisfaction of certain conditions and for purposes of determining a quorum of a shareholder meeting, the outstanding shares of Series B Convertible Preferred Stock shall be deemed the equivalent of 51% of all shares of the Company’s Common Stock entitled to vote at such meetings. Accordingly, Ms. Hendrick can (without the approval of our other shareholders) elect our entire Board and determine the outcome of various matters submitted to shareholders for approval, including fundamental corporate transactions. Voting control by Ms. Hendrick may discourage certain types of transactions involving an actual or potential change in control of us, including transactions in which the holders of our common stock might receive a premium for their shares over prevailing market prices.

 

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, 2019 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 control deficiencies that represented a material weakness at June 30, 2019.

 

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 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.

 

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Risks Related to the Offering

 

Our existing stockholders may experience significant dilution from the sale of our common stock pursuant to the GHS financing agreement.

 

The sale of our common stock to GHS Investments LLC in accordance with the Financing Agreement may have a dilutive impact on our shareholders. As a result, the market price of our common stock could decline. In addition, the lower our stock price is at the time we exercise our put options, the more shares of our common stock we will have to issue to GHS in order to exercise a put under the Financing Agreement. If our stock price decreases, then our existing shareholders would experience greater dilution for any given dollar amount raised through the offering.

 

The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.

  

GHS Investments LLC will pay less than the then-prevailing market price of our common stock which could cause the price of our common stock to decline.

 

Our common stock to be issued under the GHS Financing Agreement will be purchased at a twenty percent (20%) discount, or eighty percent (80%) of the lowest trading price for the Company’s common stock during the ten (10) consecutive trading days immediately preceding the date on which the Company delivers a put notice to GHS.

 

GHS has a financial incentive to sell our shares immediately upon receiving them to realize the profit between the discounted price and the market price. If GHS sells our shares, the price of our common stock may decrease. If our stock price decreases, GHS may have further incentive to sell such shares. Accordingly, the discounted sales price in the Financing Agreement may cause the price of our common stock to decline.

 

We may not have access to the full amount under the financing agreement.

 

The lowest closing price of the Company’s common stock during the ten (10) consecutive trading day period immediately preceding the filing of this Registration Statement was approximately $0.014. At that price we would be able to sell shares to GHS under the Financing Agreement at the discounted price of $0.0112. At that discounted price, the 100,000,000 shares would only represent $1,120,000, which is below the full amount of the Financing Agreement.

 

We Needed Additional Capital, and the Sale of Additional Shares, Equity and Debt Securities Resulted in Additional Dilution to Our Stockholders.

 

We recently required additional cash resources due to changed business conditions or other future developments. These resources were insufficient to satisfy our cash requirements, so we sold additional equity or debt securities or obtained one or more credit facilities. The sale of these securities resulted in additional dilution to our shareholders. The future sale of additional equity securities could result in additional dilution to our stockholders and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a Common Stockholder. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.

 

If we raise additional funds through government grants, collaborations, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue stream or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products that we would otherwise prefer to develop and market ourselves.

 

In order for the Company to continue its business operations and provide growth to its shareholders, the Company requires financing in the form of debt, equity, credit and other forms of financing. The Company’s issuance of additional convertible promissory notes, common stock purchase warrants, or common stock will continue to increase the amount of shares of common stock issued and outstanding and thereby dilute our shareholders.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties and include statements regarding, among other things, our projected revenue growth and profitability, our growth strategies and opportunity, anticipated trends in our market and our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this prospectus generally. In particular, these include statements relating to future actions, prospective products, market acceptance, future performance or results of current and anticipated products, sales efforts, expenses, and the outcome of contingencies such as legal proceedings and financial results.

 

Examples of forward-looking statements in this prospectus include, but are not limited to, our expectations regarding our business strategy, business prospects, operating results, operating expenses, working capital, liquidity and capital expenditure requirements. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the cost, terms and availability of components, pricing levels, the timing and cost of capital expenditures, competitive conditions and general economic conditions. These statements are based on our management’s expectations, beliefs and assumptions concerning future events affecting us, which in turn are based on currently available information. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.

 

Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:

 

increased levels of competition;
     
changes in the market acceptance of our products;
     
changes in political, economic or regulatory conditions generally and in the markets in which we operate;
     
our relationships with our key customers;
     
our ability to retain and attract senior management and other key employees;
     
our ability to quickly and effectively respond to new technological developments;
     
our ability to protect our trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on the proprietary rights of the Company; and
     
other risks, including those described in the “Risk Factors” discussion of this prospectus.

 

We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this prospectus are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.

 

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USE OF PROCEEDS

 

We will not receive any proceeds from the sale of the shares of our common stock by the Selling Stockholder.

 

DETERMINATION OF OFFERING PRICE

 

We have not set an offering price for the shares registered hereunder, as the only shares being registered are those sold pursuant to the GHS Financing Agreement. GHS may sell all or a portion of the shares being offered pursuant to this prospectus at fixed prices and prevailing market prices at the time of sale, at varying prices or at negotiated prices.

 

DILUTION

 

Not applicable. The shares registered under this registration statement are not being offered for purchase. The shares are being registered on behalf of our selling shareholder pursuant to the GHS Financing Agreement.

 

SELLING SECURITY HOLDER

 

The Selling Stockholder identified in this prospectus may offer and sell up to 100,000,000 shares of our common stock, which consists of shares of common stock to be sold by GHS pursuant to the Financing Agreement. If issued presently, the shares of common stock registered for resale by GHS would represent approximately 26.40% of our issued and outstanding shares of common stock as of July 30, 2020. Additionally, as of the date hereof, the 100,000,000 shares of our common stock registered for resale herein would represent approximately 34.44% of the Company’s public float.

 

We may require the Selling Stockholder to suspend the sales of the shares of our common stock being offered pursuant to this prospectus upon the occurrence of any event that makes any statement in this prospectus or the related registration statement untrue in any material respect or that requires the changing of statements in those documents in order to make statements in those documents not misleading.

 

The Selling Stockholder identified in the table below may from time to time offer and sell under this prospectus any or all of the shares of common stock described under the column “Shares of Common Stock Being Offered” in the table below.

 

GHS will be deemed to be an underwriter within the meaning of the Securities Act. Any profits realized by the Selling Stockholder may be deemed to be underwriting commissions.

 

Information concerning the Selling Stockholder may change from time to time and, if necessary, we will amend or supplement this prospectus accordingly. We cannot give an estimate as to the number of shares of common stock that will actually be held by the Selling Stockholder upon termination of this offering, because the Selling Stockholder may offer some or all of the common stock under the offering contemplated by this prospectus or acquire additional shares of common stock. The total number of shares that may be sold, hereunder, will not exceed the number of shares offered, hereby. Please read the section entitled “Plan of Distribution” in this prospectus.

 

The manner in which the Selling Stockholder acquired or will acquire shares of our common stock is discussed below under “The Offering.”

 

21

 

The following table sets forth the name of the Selling Stockholder, the number of shares of our common stock beneficially owned by the Selling Stockholder before this offering, the number of shares to be offered for the Selling Stockholder’s account and the number and (if one percent or more) the percentage of the class to be beneficially owned by such stockholder after completion of the offering. The number of shares owned are those beneficially owned, as determined under the rules of the SEC, and such information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares of our common stock as to which a person has sole or shared voting power or investment power and any shares of common stock which the person has the right to acquire within 60 days, through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement, and such shares are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the person holding such options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other person. Beneficial ownership percentages are calculated based on 379,523,000 shares of our common stock outstanding as of July 30, 2020.

 

Unless otherwise set forth below, (a) the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the Selling Stockholder’s name, subject to community property laws, where applicable, and (b) no Selling Stockholder had any position, office or other material relationship within the past three years, with us or with any of our predecessors or affiliates. The number of shares of common stock shown as beneficially owned before the offering is based on information furnished to us or otherwise based on information available to us at the timing of the filing of the registration statement of which this prospectus forms a part.

  

                Number of Shares to be Owned by Selling Stockholder After the Offering and Percent of Total Issued and Outstanding Shares  
Name of Selling Stockholder   Shares Owned by the Selling Stockholder before the Offering
(1)
    Shares of Common Stock Being Offered     # of Shares
(2)
    % of Class
(2)
 
GHS Investments LLC (3)     0       (4 )     0       0 %

 

Notes:

 

(1)  Beneficial ownership is determined in accordance with Securities and Exchange Commission rules and generally includes voting or investment power with respect to shares of common stock. Shares of common stock subject to options, warrants and convertible debentures currently exercisable or convertible, or exercisable or convertible within 60 days, are counted as outstanding. The actual number of shares of common stock issuable upon the conversion of the convertible debentures is subject to adjustment depending on, among other factors, the future market price of our common stock, and could be materially less or more than the number estimated in the table.

 

(2)  Because the Selling Stockholder may offer and sell all or only some portion of the 100,000,000 shares of our common stock being offered pursuant to this prospectus and may acquire additional shares of our common stock in the future, we can only estimate the number and percentage of shares of our common stock that any of the Selling Stockholder will hold upon termination of the offering.

 

(3)  Mark Grober exercises voting and dispositive power with respect to the shares of our common stock that are beneficially owned by GHS Investments LLC.

 

(4)  Consists of up to 100,000,000 shares of common stock to be sold by GHS pursuant to the Financing Agreement.

 

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THE OFFERING

 

On March 6, 2020, we entered into an Equity Financing Agreement with GHS Investments LLC GHS. Although we are not mandated to sell shares under the Financing Agreement, the Equity Financing Agreement gives us the option to sell to GHS, up to $4,000,000 worth of our common stock until thirty six (36) months after an effective Registration Statement registering such shares of common stock. The $4,000,000 was stated as the total amount of available funding in the Financing Agreement because this was the maximum amount that GHS agreed to offer us in funding. There is no assurance the market price of our common stock will increase in the future. The number of common shares that remain issuable may not be sufficient, dependent upon the share price, to allow us to access the full amount contemplated under the Financing Agreement. Based on the lowest closing price of our common stock during the ten (10) consecutive trading day period preceding the filing date of this registration statement was approximately $0.009, the registration statement covers the offer and possible sale of $720,000 worth of our shares.

 

The purchase price of the common stock will be set at eighty percent (80%) of the lowest trading price of the common stock during the ten (10) consecutive trading day period immediately preceding the date on which the Company delivers a put notice to GHS. In addition, there is an ownership limit for GHS of 4.99%.

 

GHS is not permitted to engage in short sales involving our common stock during the term of the commitment period. In accordance with Regulation SHO, however, sales of our common stock by GHS after delivery of a put notice of such number of shares reasonably expected to be purchased by GHS under a put will not be deemed a short sale.

 

In addition, we must deliver the other required documents, instruments and writings required. GHS is not required to purchase the put shares unless:

 

Our registration statement with respect to the resale of the shares of common stock delivered in connection with the applicable put shall have been declared effective;
     
We shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the registrable securities; and
     
We shall have filed all requisite reports, notices, and other documents with the SEC in a timely manner.

 

As we draw down on the equity line of credit, shares of our common stock will be sold into the market by GHS. The sale of these shares could cause our stock price to decline. In turn, if our stock price declines and we issue more puts, more shares will come into the market, which could cause a further drop in our stock price. You should be aware that there is an inverse relationship between the market price of our common stock and the number of shares to be issued under the equity line of credit. If our stock price declines, we will be required to issue a greater number of shares under the equity line of credit. We have no obligation to utilize the full amount available under the equity line of credit.

 

Neither the Equity Financing Agreement nor any of our rights or GHS’s rights thereunder may be assigned to any other person.

 

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PLAN OF DISTRIBUTION

 

The Selling Stockholder named above and any of its pledgees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the OTCQB or any other stock exchange, market or trading facility on which the shares of our common stock are traded or in private transactions. These sales may be at fixed prices and prevailing market prices at the time of sale, at varying prices or at negotiated prices. The Selling Stockholder may use any one or more of the following methods when selling shares:

 

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
privately negotiated transactions;
     
broker-dealers may agree with the Selling Stockholder to sell a specified number of such shares at a stipulated price per share; or
     
a combination of any such methods of sale.

 

Broker-dealers engaged by the Selling Stockholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

 

GHS is an underwriter within the meaning of the Securities Act of 1933 and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933 in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933. GHS has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the common stock of our company. Pursuant to a requirement by FINRA, the maximum commission or discount to be received by any FINRA member or independent broker-dealer may not be greater than 8% of the gross proceeds received by us for the sale of any securities being registered pursuant to Rule 415 promulgated under the Securities Act of 1933.

 

Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the Selling Stockholder. The selling stockholder may agree to indemnify any agent, dealer, or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act of 1933.

 

We are required to pay certain fees and expenses incurred by us incident to the registration of the shares covered by this prospectus. We have agreed to indemnify the Selling Stockholder against certain losses, claims, damages and liabilities, including liabilities under the Securities Act of 1933. We will not receive any proceeds from the resale of any of the shares of our common stock by the Selling Stockholder. We may, however, receive proceeds from the sale of our common stock under the Financing Agreement with GHS. Neither the Financing Agreement with GHS nor any rights of the parties under the Financing Agreement with GHS may be assigned or delegated to any other person.

 

We have entered into an agreement with GHS to keep this prospectus effective until GHS has sold all of the common shares purchased by it under the Financing Agreement and has no right to acquire any additional shares of common stock under the Financing Agreement.

 

The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Securities Exchange Act of 1934, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholder will be subject to applicable provisions of the Securities Exchange Act of 1934 and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Stockholder or any other person. We will make copies of this prospectus available to the Selling Stockholder.

 

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DESCRIPTION OF SECURITIES TO BE REGISTERED

 

General

 

We are authorized to issue an aggregate of six hundred million (600,000,000) shares of common stock, $0.001 par value per share and five million (5,000,000) shares of preferred stock, $0.001 par value per share, in one or more series and to fix the voting powers, preferences and other rights and limitations of the preferred stock. As July 30, 2020, we had 379,523,000 shares of common stock outstanding and 5,000,000 shares of Preferred Stock outstanding.

 

Each share of common stock shall have one (1) vote per share. Our common stock does not provide a preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights. Our common stockholders are not entitled to cumulative voting for election of Board of Directors.

 

Dividends

 

We have not paid any dividends on our common stock since our inception and do not intend to pay any dividends in the foreseeable future.

 

The declaration of any future cash dividends is at the discretion of our Board and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

Warrants

 

As of March 31, 2020, there were 30,079,406 warrants outstanding to purchase shares of our common stock at a price per share ranging between $0.05 to $1.00.

 

Options

 

The Company has not granted any options since inception.

 

Transfer Agent

 

Our transfer agent is Worldwide Stock Transfer, LLC, 1 University Plaza Dr #505, Hackensack, NJ 07601. Their phone number is 201-820-2008.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

2017 Equity Compensation Plan

 

On October 12, 2017, the Board approved the SmartMetric, Inc. 2017 Equity Compensation Plan (the “2017 Plan”) whereby 23,500,000 shares of common stock were authorized for issuance under the plan to employees, directors and consultants. The plan permits the grant of incentive stock options, nonstatutory stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock based awards.

 

As of July 30, 2020, no shares of our common stock were issued to our employees, directors and consultants, pursuant to the 2017 Plan.

 

2018 Professional/Consultant Compensation Plan

 

On May 2, 2018, the Board approved the plan to, among other things, make available 20,000,000 shares of the Company’s common stock, par value $0.001 per share, for stock-based awards thereunder (the “2018 Plan”).

 

As of July 30, 2020, no shares of our common stock were issued as stock-based awards pursuant to the 2018 Plan.

 

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Preferred Stock

 

Series B Convertible Preferred Stock

 

On December 11, 2009, the Company filed a Certificate of Designation with the State of Nevada, to designate 500,000 shares of preferred stock as Series B Convertible Preferred Stock (the “Series B Convertible Preferred Stock”). Effective November 5, 2014, the number of shares designated as Series B Convertible Preferred Stock was increased to 5,000,000 shares. Each share of Series B Convertible Preferred Stock has a par value of $0.001, and a stated value equal to $5.00 (“Stated Value”). Holders of the Series B Convertible Preferred Stock are entitled to receive dividends or other distributions with the holders of the common stock of the Company on an as converted basis when, as, and if declared by the directors of the Company. Holders of the Series B Convertible Preferred Stock are entitled to convert each share of the Series B Convertible Preferred Stock into fifty (50) shares of common stock. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, holders of the Series B Convertible Preferred Stock are entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to the Stated Value, pro rata with the holders of the common stock.

 

As of July 30, 2020, the Company had 5,000,000 shares of Series B Convertible Preferred Stock, par value $0.001, authorized, and 610,000 shares of Class B preferred stock issued and outstanding.

 

Series C Preferred Stock

 

On January 14, 2019, the Company filed a Certificate of Designation with the Secretary of State of the State of Nevada, which established 1,000,000 shares of Series C Convertible Preferred Stock (the “Series C Preferred Stock”), par value $0.001 per share, having such designations, rights and preferences as set forth in the Certificate of Designation, as determined by the Board in its sole discretion, in accordance with the Company’s Certificate of Incorporation and Bylaws. The Certificate of Designation became effective with the State of Nevada upon filing.

 

The shares of Series C Preferred Stock have a stated value of $1.00 per share, are convertible into Common Stock at a price per share equal to 71% of the average of the lowest two (2) closing prices of the Common Stock during the fifteen (15) Trading Day (as defined in the Certificate of Designation) period ending on the last complete Trading Day prior to the Conversion Date (as defined in the Certificate of Designation) (the “Conversion Price”), and earn dividends at the rate of 10% per annum. Upon an Event of Default (as defined in the Certificate of Designation), the Series C Preferred Stock earn dividends at the rate of 22% per annum.

 

The shares of Series C Preferred Stock do not have voting rights, and rank: (a) senior with respect to dividend rights and rights of liquidation with the Common Stock; (b) junior with respect to dividends and right of liquidation with respect to the Company’s Series B Preferred Stock; and (c) junior with respect to dividends and right of liquidation to all existing indebtedness of the Company.

 

The Company may redeem the Series C Preferred Stock in accordance with the terms of the Certificate of Designation prior to the one hundred eightieth (180th) day following the date of issuance of the Series C Preferred Stock.

 

The Company sold 70,000 shares of Series C Preferred Stock on January 15, 2019 for gross proceeds of $63,000 and sold 51,700 shares of Series C Preferred Stock on June 14, 2019 for gross proceeds of $47,000. For the nine month period ended March 31, 2020, there were 164,500 Preferred C shares issued for net proceeds of $135,000 and 157,700 Preferred C shares converted to 11,980,203 shares of common stock.

 

Anti-Takeover Effects of Various Provisions of Nevada Law

 

Provisions of the Nevada Revised Statutes, our articles of incorporation, as amended, and bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, would be expected to discourage certain types of takeover practices and takeover bids our Board may consider inadequate and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us will outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.

   

Amendments to our Articles of Incorporation and Bylaws

 

Under the Nevada Revised Statutes, our articles of incorporation may not be amended by stockholder action alone.

 

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Nevada Anti-Takeover Statute

 

We may be subject to Nevada’s Combination with Interested Stockholders Statute (Nevada Corporation Law Sections 78.411-78.444) which prohibits an “interested stockholder” from entering into a “combination” with the corporation, unless certain conditions are met. An “interested stockholder” is a person who, together with affiliates and associates, beneficially owns (or within the prior two years, did beneficially own) 10% or more of the corporation’s capital stock entitled to vote.

 

Limitations on Liability and Indemnification of Officers and Directors

 

The Nevada Revised Statutes limits or eliminates the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors.

 

The limitation of liability and indemnification provisions under the Nevada Revised Statues and in our articles of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. However, these provisions do not limit or eliminate our rights, or those of any stockholder, to seek non-monetary relief such as injunction or rescission in the event of a breach of a director’s fiduciary duties. Moreover, the provisions do not alter the liability of directors under the federal securities laws. In addition, your investment may be adversely affected to the extent that, in a class action or direct suit, we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

 

Authorized but Unissued Shares

 

Our authorized but unissued shares of Common Stock and preferred stock will be available for future issuance without stockholder approval, except as may be required under the listing rules of any stock exchange on which our Common Stock is then listed. We may use additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of Common Stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

 

Penny Stock Considerations

 

Our shares will be “penny stocks” as that term is generally defined in the Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00 per share. Thus, our shares will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock. Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt.

 

In addition, under the penny stock regulations, the broker-dealer is required to:

 

Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt;

 

Disclose commissions payable to the broker-dealer and our registered representatives and current bid and offer quotations for the securities;

 

Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer’s account, the account’s value, and information regarding the limited market in penny stocks; and

 

Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction, prior to conducting any penny stock transaction in the customer’s account.

 

Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if our securities become publicly traded. In addition, the liquidity for our securities may be decreased, with a corresponding decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rules and our shareholders will, in all likelihood, find it difficult to sell their securities.

 

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INTERESTS OF NAMED EXPERTS AND COUNSEL

 

The consolidated financial statements for the Company for the year ended June 30, 2019 included in this prospectus have been audited by Prager Metis CPAs, LLC, an independent registered public accounting firm. The consolidated financial statements for the Company for the year ended June 30, 2018 included in this prospectus have been audited by AMC Auditing, an independent registered public accounting firm. The consolidated financial statements included in this prospectus are incorporated herein in reliance upon such reports given upon the authority of said firms as experts in auditing and accounting.

 

The legality of the shares offered under this registration statement will be passed upon by Lucosky Brookman LLP.

 

INFORMATION WITH RESPECT TO THE REGISTRANT

 

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’s main products are a fingerprint sensor debit card as well as a card with a finger sensor and fully functional fingerprint reader embedded inside the card. The SmartMetric biometric cards have a rechargeable battery allowing for portable biometric identification and card activation. This card is referred to as a biometric card or the SmartMetric Biometric Card.

 

The Market for Biometric Credit Cards

 

According to a to a press release issued by Goode Intelligence, an independent market research company, regarding their October 2018 report on the biometrics payment sector, nearly 579 million biometric credit/debit cards will be in use over the next five (5) years. Goode Intelligence believes* there is a significant market opportunity for biometric payment cards. and forecasts that by 2023 there will be almost 579 million biometric payment cards in use around the world.

 

“Contactless card payments are even outperforming mobile in many regions. Many consumers prefer to use a contactless payment card over a mobile payment equivalent and according to Goode Intelligence research, many users would like to use cards in contactless mode for higher value transactions. Biometric payment cards not only offer improved security by removing the PIN but also allow frictionless payments for higher value transactions,” stated Good Intelligence.

 

SmartMetric engaged an outside independent research company to survey a statistically relevant sample of Visa credit card holders in the United States. One of the questions asked showed that nearly 67% of these credit card holders would be willing to pay $69.95 for a biometric secured credit card.

 

The survey asked:

 

Would you pay for a safer biometric secured credit card that has a built-in fingerprint reader for your protection?

 

A1. Yes 64.5%
     
  No 35.5%

 

* Goode Intelligence is an independent analyst and consultancy company that provides quality advice to global decision makers in business and technology.

 

Goode Intelligence works in information security, mobile security, authentication and identity verification, biometrics, enterprise mobility and mobile commerce sectors.

 

Founded in 2007 by Alan Goode and headquartered in London, Goode. Intelligence helps both technology providers, investors and IT purchasers make strategic business decisions based on quality research, insight and consulting.

 

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The SmartMetric Biometric Technology and Products

 

SmartMetric’s founder, Chaya Hendrick is the originator and inventor of various miniature biometric activated cards, including the SmartMetric biometric fingerprint activated payments card with an embedded fully functional fingerprint reader inside. the card. The card is the size and thickness of a standard credit card. The SmartMetric biometric payments card provides for high level security for credit and debit cards by adding biometric authentication and activation to Europay, MasterCard and Visa (“EMV”) chip cards in use around the world. The SmartMetric biometric payments card has been manufactured to be totally interoperable with existing EMV chip card readers, ATMs as well as banking payments infrastructure. Using the advanced electronic miniaturization by SmartMetric to make its biometric credit/debit cards the Company has also created a multi-functional biometric building access control and logical network access card.

 

Since July 1, 2018, SmartMetric has commenced efforts towards creating a biometric health insurance card with memory for storing a person’s medical files, including medical images. This allows a person to securely take with them their private medical files inside the card when traveling away from home. For the first time, a person’s complete medical files can be stored in a credit card-sized card and the information is only able to be accessed by the card holder’s own fingerprint. The company is in discussion with significant health membership organizations concerning the offering of the SmartMetric Biometric Medical Records card to their respective members.

 

SmartMetric has developed its rechargeable battery powered fingerprint reader that is of a scale that fits “inside” a standard credit or debit card. The cardholder has stored inside the card his or her fingerprint. To activate the card the person swipes the fingerprint sensor, the sensor is connected to an internal microprocessor that manages the fingerprint sensor fingerprint image capture and comparison matching with the pre-stored fingerprint of the cardholder held in the internal electronic memory of the card. The card has a surface mounted EMV chip as found on EMV banking chip cards that is activated or turned on only after a card holder’s fingerprint has been scanned and verified using the SmartMetric miniature “in-card” biometric scanner.

 

There are over seven (7) billion EMV chip cards used by banks around the world for credit cards, ATM cards and debit cards according to EMVco. SmartMetric sees this existing user base as a natural market for its advanced biometric activated card technology for the credit and debit card market. SmartMetric has established a network of card manufacturers and technology distributors to market its in-card biometric products to card issuing banks and in the case of the SmartMetric biometric security card, to businesses.

 

SmartMetric has completed development of its biometric card and is now actively marketing its card to major card issuing banks throughout the world in partnership with established card distributors and dealers. 

 

SmartMetric has also developed a multi-function logical and physical access security card this size and thickness of a standard credit card. Utilizing the small size breakthroughs by the Company in its biometric payments card development, SmartMetric has successfully developed a biometric security card that is the size and thickness of a standard credit card that can easily fit inside a person’s wallet.

 

As with the biometric payments card, the SmartMetric security card has an internal rechargeable battery that is used to power the card’s internal processor used in the biometric fingerprint scan. All functions and operations of the card are subject to a valid fingerprint scan and match of the card user.

 

On February 1, 2019, SmartMetric entered into a manufacturing and license agreement with Servired, SA (“Servired”). Servired operates the major payments network in Spain for credit and debit card transactions. Subsequently, the Servired agreement has been transferred and assumed in total by RedSys, SA. (“RedSys”) as part of a corporate reorganization. RedSys is now the corporate entity that owns the ADVANTIS (discussed later) credit card and debit card chip and operating software system. Regarding integration of Advantis in Redsys, Redsys acquired from Servired, through company succession, the independent economic marketing unit of the Advantis System and the Pricenet, SIS and SAS family programs.

 

The ADVANTIS EMV Chip and operating system is currently being used by banks around the world on their debit and credit cards. 1.4 Billion cards with the ADVANTIS chip and software operating system have been issued by their member banks worldwide.

 

SmartMetric is now in the process of manufacturing its biometric credit/debit card with the ADVANTIS payments card chip and operating system. This will allow over 500 Banks worldwide, who are already using the ADVANTIS chip and chip card operating system, to seamlessly issue this new SmartMetric – ADVANTIS biometric credit and debit card.

 

Additional technological advances have now been made on both the Company’s biometric credit/debit card and its multifunction cyber security, building access to the biometric card.

 

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In Card Fingerprint Matching and Verification

 

The SmartMetric Biometric card 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 the Company to SmartMetric’s specifications. This battery is embedded inside the card.

 

Other components needed for manufacture of the SmartMetric Biometric Card include, but are not limited to, sensors, microchips, memory chips and processor chips. The ultra-thin circuit board developed by SmartMetric has, in total, nearly 200 active and passive components. The sources and availability of these materials are numerous, readily available and should not affect the ability of SmartMetric to meet future demand. The supply of memory processors and passive components may be interrupted at any time based on global supply/demand issues. We have not experienced component supply issues to date and the Company, as a matter of policy, has alternative component sources to mitigate and protect against supply chain issues.

 

The biometric card has been designed to offer the option of a built-in radio frequency transmitter for contactless access and identity verification. The RFID contactless chip transmission is turned on using the card users fingerprint verification.

 

The thinness form factor of many of the components, has also resulted in the Company having to develop its own process for high volume electronic assembly. The Company has also successfully overcome the challenge of developing a process of encapsulating the electronics in plastic to create the credit card sized biometric fingerprint activated card that also has an internal rechargeable battery.

 

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 trade secret process that protects the silicon and internal battery that is mounted directly onto the card’s internal electronics circuit board.

 

The Security Technology Industry

 

SmartMetric Biometric Multi-Function Security Card

 

SmartMetric has developed a multi-function logical and physical access security card this size and thickness of a standard credit card. Utilizing the small size breakthroughs by the Company in its biometric payments card development, SmartMetric has successfully developed a biometric security card that can easily fit inside a person’s wallet.

 

As with the biometric payments card, the SmartMetric security card has an internal rechargeable battery that is used to power the card’s internal processor used in the biometric fingerprint scan. All functions and operations of the card are subject to a valid fingerprint scan and match of the card user.

 

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The main features of the SmartMetric biometric security card are:

 

  1. Logical access smartcard card chip for insertion into a card reader attached to a computer or network

 

  2. RFID transceiver for physical access i.e. doorways, elevators, etc.

 

  3. Validation indicator light that glows green immediately following a fingerprint validation

 

  4. Rechargeable battery to power the card

 

  5. Size and thickness of a credit card

 

  6. Changeable security code on reverse of card for additional log on security

  

Cybersecurity and identity validation for network access control, physical building entry and secure on-the-spot identity security is now handled by the revolutionary biometric activated cyber and ID multi-function security card which has been developed by SmartMetric after over a decade of R&D.

 

From governments to the workplace, better, stronger security is desired across the enterprise. Our new biometric multifunction security card provides a revolutionary biometric based solution that is portable, easily integrated and backward compatible to existing backend security infrastructure.

 

The new multifunction biometric security card by SmartMetric is a revolutionary leap forward in the Cyber and Access Security world according to SmartMetric.

 

Access management market is estimated to grow from USD 8.09 billion in 2016 to USD 14.82 billion by 2021, at a CAGR of 12.9% between 2016 and 2021 according to a recent research report by KBV Research in a publication titled Identity & Access Management Market – Global Forecast by Marqual IT Solutions Pvt. Ltd (KBV Research) November 2016 KBV Research is a name owned by IT Solutions Pvt. Ltd.

 

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 with 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.

 

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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 two reasons: (i) the person to be identified is required to be physically present at the point of identification to be identification; and (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. The SmartMetric fingerprint activated credit card that has the fingerprint encased inside the credit card has been developed to replace the less secure PIN’s for credit and debit cards.

 

PINs and passwords may be forgotten, may be hacked 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 facial recognition and fingerprint matching. Other biometric systems utilize iris and retinal scanning, speech, facial thermograms and hand geometry. Of the biometric options available to work with a credit or debit card, fingerprint scanning is the only biometric methodology that has been successfully reduced in size to fit inside such cards.

 

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?).

 

As stated above, the SmartMetric fingerprint biometric card has been designed as a credit-card sized card embedded with an integrated circuit, contact chip and biometric fingerprint sensor. 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 makes it substantially resistant to attack, as it will not need to depend upon 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, this structure is made up of three elements: (i) the plastic card, which is the most basic one and has the dimensions of 85.60mm x 53.98 x 0.80mm; (ii) an electronic circuit board inlay; and (iii) a contact chip that are embedded in the card.

 

The SmartMetric card has been designed to conform to ISO standards. The electronic circuit inlay is a part of, and not distinct from, the biometric card.

 

The communication line between the card and ATMs and other standard Smart Card reading devices is bi-directional serial transmission, which conforms to ISO standards. 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 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 data attack on the card. Other data protection systems are utilized inside the card including advanced encryption.

 

In general, the size, the thickness and bend requirements for the biometric card were designed to protect the card from being spoiled physically.

 

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Recent Developments

 

On January 14, 2019, the Company filed a Certificate of Designation with the Secretary of State of the State of Nevada (the “Certificate of Designation”), which established 1,000,000 shares of Series C Convertible Preferred Stock (the “Series C Preferred Stock”), par value $0.001 per share, having such designations, rights and preferences as set forth in the Certificate of Designation, as determined by the Board in its sole discretion, in accordance with the Company’s Certificate of Incorporation and Bylaws. The Certificate of Designation became effective with the State of Nevada upon filing.

 

The shares of Series C Preferred Stock have a stated value of $1.00 per share, are convertible into Common Stock at a price per share equal to 71% of the average of the lowest two (2) closing prices of the Common Stock during the fifteen (15) Trading Day (as defined in the Certificate of Designation) period ending on the last complete Trading Day prior to the Conversion Date (as defined in the Certificate of Designation) (the “Conversion Price”), and earn dividends at the rate of 10% per annum. Upon an Event of Default (as defined in the Certificate of Designation), the Series C Preferred Stock earn dividends at the rate of 22% per annum.

 

The shares of Series C Preferred Stock do not have voting rights, and rank: (a) senior with respect to dividend rights and rights of liquidation with the Common Stock; (b) junior with respect to dividends and right of liquidation with respect to the Company’s Series B Preferred Stock; and (c) junior with respect to dividends and right of liquidation to all existing indebtedness of the Company.

 

The Company may redeem the Series C Preferred Stock in accordance with the terms of the Certificate of Designation prior to the one hundred eightieth (180th) day following the date of issuance of the Series C Preferred Stock.

 

The Company sold: (i) 70,000 shares of Series C Preferred Stock on January 15, 2019 for gross proceeds of $63,000; (ii) 51,700 shares of Series C Preferred Stock on June 14, 2019 for gross proceeds of $47,000; and (iii) 52,800 shares of Series C Preferred Stock on August 27, 2019 for gross proceeds of $48,000. 

  

Sales and Marketing

 

SmartMetric has engaged distributors and dealers in both North and South America. SmartMetric has entered into an agreement with Redsys the owner of the ADVANTIS credit and debit card chip that is used in over 1.4 Billion credit/debit cards globally. RedSys/Advantis is owned by card issuing Banks. Five hundred (500) card issuing banking organizations around the world are issuing credit and debit cards with the RedSys/ADVANTIS chip.

 

SmartMetric has added the ADVANTIS credit/debit card chip onto the SmartMetric biometric card thereby allowing the existing RedSys / ADVANTIS banks already issuing credit and debit cards with their chip on board to now issue seamlessly the SmartMetric biometric credit / debit card. RedSys / ADVANTIS have agreed to work closely with SmartMetric in promoting the SmartMetric card globally. RedSys / ADVANTIS is owned by some the largest Banks in Europe and Latin America.

 

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Manufacturing

 

The Company designs and develops its biometric technology. Current production capacity is approximately 250,000 cards per week that can be substantially increased over a relatively short period of time.

 

 

 

SmartMetric’s President & CEO in the card lamination factory.

 

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. A number of patents are in process (Patents Pending) that cover critical aspects of the engineering and function of the SmartMetric biometric card. The founder of SmartMetric, Chaya Hendrick, is the inventor of these patents, and has provided SmartMetric with an option over biometric card related pending patents invented by her.

 

Some of the most recent patents pending have not been disclosed on the publicly searchable USPTO database of filed for patents and remain trade secrets within the Company. Publishing of such patents pending will be done in due course.

 

Patents

 

SmartMetric biometric card is protected by five (5) USPTO issued patents. Other patents are pending. 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. The principal shareholder of SmartMetric and technology inventor, Chaya Hendrick, through various corporate investment vehicles and companies also owns other technologies, patents, and has financial interest in other technology companies. Chaya Hendrick, under an executed employment agreement is not subject to any restriction on using and owning any technology, methodology, process or invention created by Chaya Hendrick.

 

Government Regulation

 

There are currently no governmental regulations, which have any bearing on the raw materials or the manufacturing of our payments card products. United States federal departments such as the Department of Defense have rules and regulations concerning security features of smart cards used as identity or building and cyber access cards. These regulations stipulate a specific licensing and testing protocol for such cards.

 

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Banking Industry Self-Regulation

 

The EMV chip used in chip cards are subject to licensing and testing by the banking-controlled body called EMVco. EMVco is an acronym standing for Europay, MasterCard and Visa. These international payments card networks were the founding parties of EMVco.

 

Individual payments networks such as Visa, Mastercard, Europay, American Express, Union Pay Dinners and JCB all have their own individual licensing and testing standards and processes.

 

Research and Development

 

Our research and development program is focused on ongoing development of new products built on our existing biometric card. We continue to refine our technology and develop further improvements to our biometric card products. We have finalized our first biometric EMV payments card product. We have also concluded the design and electronic engineering for our soon-to-be released multi-function security and access control biometric cards. Research and development will continue as the Company continues to innovate and develop new biometric card-based products. Future biometric card-based products the Company is now working on, include but are not limited to: (a) health insurance card with stored in-card medical records; (b) national identity card; and (c) drivers’ licenses.

 

The Company has developed and is continuing to develop its own embedded systems and application software that works with the SmartMetric Biometric Card. This development software and systems and ongoing electronic design and development requires the company to continue to expend time and financial resources on significant software development. Currently, the Company has electronic and software engineers working in Tel Aviv, Israel and Buenos Aires, Argentina.

 

Competition

 

Various potential competitors have announced products similar to that of SmartMetric’s. It is understood that “announced” is defined as a person to hold their finger on the cards fingerprint sensor while it is in a card reader. Unlike the SmartMetric biometric card that is powered from its own internal rechargeable battery, this other type of card does not allow the card to be used in most restaurants that need to take the card away from the table for processing at the checkout. It also does not allow their other type of card to be used at the vast majority of ATM’s.

 

Employees

 

As of the date of this annual report, we have one full time employee, our Chief Executive Officer and President, Chaya Hendrick. We primarily use direct contract hires in administration and engineering, as is common in the information technology world. All work product developed by all of our engineers remains the intellectual property of SmartMetric. Engineers who work for SmartMetric under contract are primarily based in Tel Aviv, Israel. Some software engineering is conducted in Buenos Aires, Argentina.

 

Corporate History

 

We were incorporated in the State of Nevada on December 18, 2002 and our principal office is located in Las Vegas, Nevada. Since our inception, we have invested a substantial portion of our efforts and financial resources in the development of our products. We have generated no revenues from the sale of our products and have experienced substantial net operating losses.  

 

Where to Find More Information

 

We make our public filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports. These materials are available on the Company’s website at www.smartmetric.com or on the SEC’s web site, http://www.sec.gov.  

 

MARKET PRICE OF THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

(a) Common Stock

 

Our common stock is quoted on the OTCQB under the symbol “SMME.”

 

(b) Holders of Common Equity

 

As of the date hereof, there were approximately 82 stockholders of record. An additional number of stockholders are beneficial holders of our common stock in “street name” through banks, brokers and other financial institutions that are the record holders.

 

(c) Dividend Information

 

We have not paid any cash dividends to our holders of common stock. The declaration of any future cash dividends is at the discretion of our Board and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

You should read the following discussion of our financial condition and results of operations in conjunction with financial statements and notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section labeled “Risk Factors.”

 

We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This filing contains a number of forward-looking statements that reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, clinical developments which management expects or anticipates will or may occur in the future, including statements related to our technology, market expectations, future revenues, financing alternatives, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, the risks to be discussed in this Prospectus and in the press releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of the risks and factors which may affect our business. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For additional information regarding forward-looking statements, see “Forward-Looking Statements.”

 

These risks and factors include, by way of example and without limitation:

 

our ability to successfully commercialize our products to produce a market-ready product in a timely manner and in enough quantity;

 

absence of contracts with customers or suppliers;

 

our ability to maintain and develop relationships with customers and suppliers;

 

our ability to successfully integrate acquired businesses or new brands;

 

the impact of competitive products and pricing;

 

supply constraints or difficulties;

 

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the retention and availability of key personnel;

 

general economic and business conditions;

 

substantial doubt about our ability to continue as a going concern;

 

our need to raise additional funds in the future;

 

our ability to successfully recruit and retain qualified personnel in order to continue our operations;

 

our ability to successfully implement our business plan;

 

our ability to successfully acquire, develop or commercialize new products and equipment;

 

the commercial success of our products;

 

intellectual property claims brought by third parties; and

 

the impact of any industry regulation.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in the future operating results over time, except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.

 

As used in this registration statement on Form S-1 and unless otherwise indicated, the terms “Company,” “we,” “us,” and “our” refer to SmartMetric, Inc. and its wholly-owned subsidiary, SmartMetric Australia Pty. Ltd.

 

Going Concern

 

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

 

As shown in the accompanying consolidated financial statements the Company has incurred recurring losses of $641,383 and $645,686 for the period ending March 31, 2020 and 2019, respectively, and has incurred a cumulative loss of $27,574,847 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. To mitigate this concern, management plans on continuing its relationship with Geneva Roth Remark and the agreement to issue Preferred C shares.

 

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.

 

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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. 

 

In December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China (“COVID-19”) and has since spread worldwide, including to the Unites States, posing public health risks that have reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a threat to the health and economic wellbeing of our employees, customers and vendors. Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially; however, management cannot presently predict the scope and severity with which COVID-19 will impact our business, financial condition, results of operations and cash flows. 

 

Critical Accounting Policies

 

We have prepared our financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make significant judgments and estimates 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 expenses during the reporting period. We base these significant judgments and estimates on historical experience and other applicable assumptions we believe to be reasonable based upon information presently available. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Actual results could materially differ from our estimates under different assumptions, judgments or conditions.

 

All of the Company’s significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, to our financial statements, included elsewhere in this Quarterly Report. We have identified the following as our significant accounting policies and estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions.

 

We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:

 

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Actual results may differ from those estimates.

 

Research and Development Costs - Research and development costs are charged to expense as incurred. Our research and development expenses consist primarily of expenditures for electronics design and engineering, software design and engineering, component sourcing, component engineering, manufacturing, product trials, compensation and consulting costs.

 

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Results of Operations

 

Comparison of the Three Months Ended March 31, 2020 and 2019

 

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future. We did not have revenue for the three months ending March 31, 2020 and 2019. Net loss for the three months ended March 31, 2020 and 2019 were $173,485 and $225,569, respectively, resulting from the operational activities described below.

 

Operating Expenses

 

Operating expense totaled $154,790 and $207,649 during the three months ended March 31, 2020 and 2019, respectively. The decrease in operating expenses is the result of the following factors.

 

    Quarter Ended
March 31,
    Change in 2020
Versus 2019
 
    2020     2019     $     %  
Operating expense                        
Officer salary   $ 47,500     $ 47,500     $       (0 )%
Research and development     14,090       38,949       (24,589 )     (63.8 )%
General and administrative     93,200       121,200       (28,000 )     (23.1 )%
Total operating expense   $ 154,790     $ 207,649     $ (52,859 )     (25.5 )%

 

Research and Development

 

Research and development expenses totaled $14,090 and $38,949 for the three months ended March 31, 2020 and 2019, respectively. The decrease of $24,589, or 63.8%, in 2020 compared to 2019 was primarily attributable to decreased engineering expenses. Our research and development expenses consist primarily of expenditures related to engineering.

 

General and Administrative

 

General and administrative expenses totaled $93,200 and $121,200 for the three months ended March 31, 2020 and 2019, respectively. The decrease of $28,000 or 23.1%, in 2020 compared to 2019 was primarily the result of a decrease in consulting expenses. Our general and administrative expenses consist primarily of expenditures related to employee compensation, legal, accounting and tax, other professional services, and general operating expenses.

 

Other Expense

 

Other income (expense) totaled $14,081 and $13,647 for the three months ended March 31, 2020 and 2019, respectively.

 

    Quarter Ended
March 31,
    Change in 2020
Versus 2019
 
    2020     2019     $     %  
                         
Interest Expense     14,081       13,647       434       3.2 %
Total other expense   $ 14,081     $ 13,647     $ 434       3.2 %

  

Interest income (expense)

 

We had net interest expense of $14,081 in the three months ended March 31, 2020 compared to $13,647 net interest expense for the three months ended March 31, 2019. The increase of $434 was attributable to interest expenses related to accrued but unpaid salary of our CEO pursuant to an amended and restated employment agreement entered into on July 1, 2017.

 

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Comparison of the Nine Months Ended March 31, 2020 and 2019

 

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future. We did not have revenue for the nine months ending March 31, 2020 and 2019. Net loss for the nine months ended March 31, 2020 and 2019 were $620,806 and $641,413, respectively, resulting from the operational activities described below.

 

Operating Expenses

 

Operating expense totaled $579,075 and $601,945 during the nine months ended March 31, 2020 and 2019, respectively. The decrease in operating expenses is the result of the lower research & development expenses.

 

    Nine Months Ended
March 31,
    Change in 2020
Versus 2019
 
    2020     2019     $     %  
Operating expense                        
Officer salary   $ 142,500     $ 142,500     $       (0 )%
Research and development     60,796       90,084       (29,288 )     (32.5 )%
General and administrative     375,779       369,361       6,418       1.7 %
Total operating expense   $ 579,075     $ 601,945     $ (22,870 )     (3.8 )%

 

Research and Development

 

Research and development expenses totaled $60,796 and $90,084 for the nine months ended March 31, 2020 and 2019, respectively. The decrease of $29,288, or 35.2%, in 2020 compared to 2019 was primarily attributable to decreased engineering expenses. Our research and development expenses consist primarily of expenditures related to engineering.

 

General and Administrative

 

General and administrative expenses totaled $375,779 and $369,361 for the nine months ended March 31, 2020 and 2019, respectively. The increase of $6,418 or 1.7%, in 2020 compared to 2019 was primarily the result of an increase in consulting expenses. Our general and administrative expenses consist primarily of expenditures related to employee compensation, legal, accounting and tax, other professional services, and general operating expenses.

 

Other Expense

 

Other income (expense) totaled $41,731 and $39,468 for the nine months ended March 31, 2020 and 2019, respectively.

 

    Quarter Ended
March 31,
    Change in 2020
Versus 2019
 
    2020     2019     $     %  
                         
Interest Expense     41,731       39,468       2,263       5.7 %
Total other expense   $ 41,731     $ 39,468     $ 2,263       5.7 %

 

Interest income (expense)

 

We had net interest expense of $41,731 in the nine months ended March 31, 2020 compared to $39,468 net interest expense for the nine months ended March 31, 2019. The increase of $2,263 was attributable to interest expenses related to accrued but unpaid salary of our CEO pursuant to an amended and restated employment agreement entered into on July 1, 2017.

 

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Liquidity and Capital Resources as of March 31, 2020

 

We have incurred losses since our inception in 2002 as a result of significant expenditures for operations and research and development and the lack of any revenue. We have an accumulated deficit of $27,574,847 as of March 31, 2020 and anticipate that we will continue to incur additional losses for the foreseeable future. Through March 31, 2020, we have funded our operations through the private sale of our equity securities and exercises of options and warrants, resulting in gross proceeds of approximately $27.6 million from inception through March 31, 2020.

 

   

Nine months ended

March 31,

    Change in 2020
versus 2019
 
    2020     2019     $     %  
                   
Cash at beginning of period   $ 10,161     $ 4,427     $ 5,734       129.5 %
Net cash used in operating activities     495,371       403,816       91,555       22.7 %
Net cash used in investing activities                        
Net cash provided by financing activities     485,210       460,318       24,892       5.4 %
Cash at end of period   $ -0-     $ 60,929     $ (60,929 )     (100.0 )%

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $495,371 and $403,816 for the nine months ended March 31, 2020 and 2019, respectively. The increase of $91,555 in cash used during 2020 compared to 2019 was primarily attributable to an increase in consultant costs.

 

Net Cash Used in Investing Activities

 

Cash used in investing activities was $0 and $0 for the nine months ended March 31, 2020 and 2019, respectively.

 

Net Cash Provided by Financing Activities

 

During the nine months ended March 31, 2020, net cash provided by financing activities was 485,210, compared to $460,318 for the nine months ended March 31, 2019. The increase of $24,892 was due to higher sales of the Company’s securities in private placements. We continue to seek funding through private placement sales of equity to fund our continued operations, sales and marketing and ongoing research and development programs.

 

Equity Financing Agreement

 

On March 5, 2020, the Company entered into an equity financing agreement with GHS Investments, LLC, a Nevada limited liability company (“Investor”). Pursuant to the agreement, the Company agrees the sell to the investor an indeterminate amount of shares of the Company’s common stock, par value $0.001 per share, up to an aggregate price of four million dollars ($4,000,000).

 

Pursuant to the agreement, the Company is required, to within sixty (60) calendar days upon the date of execution of this Agreement, use its best efforts to file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form S-1, covering the resale of all of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon stock splits, stock dividends or similar transactions.

 

Per terms of the convertible note agreement, the Company agrees to pay the investor the sum of $35,000, together with interest, on December 5, 2020. As of the date of this filing, the Company has not yet received this money.

 

Year Ended June 30, 2019 Compared to the Year Ended June 30, 2018

 

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future. We did not have revenue during the years ending June 30, 2019 and 2018. We do not anticipate generating any revenues during the year ending June 30, 2020. Net loss for the years ended June 30, 2019 and 2018 were $936,551 and $1,641,788, respectively, resulting from the operational activities described below.

 

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Operating Expenses

 

Operating expense totaled $875,718 and $1,002,704 during the years ended June 30, 2019 and 2018, respectively.  The decrease in operating expenses is the result of the following factors.

 

    Year Ended
June 30,
    Change in 2019
Versus 2018
 
    2019     2018     $     %  
Operating Expenses                        
Research and development   $ 107,962     $ 129,375     $ (21,413 )     (16.6 )%
General and administrative     577,756       683,329       (105,573 )     (15.4 )%
Officer salary     190,000       190,000             (0 )%
Total operating expense   $ 875,718     $ 1,002,704     $ (126,986 )     (12.7 )%

 

Research and Development

 

Research and development expenses totaled $107,962 and $129,375 for the years ended June 30, 2019 and 2018, respectively. The decrease of $21,143, or 16.6%, in 2019 compared to 2018 was primarily attributable to a decrease in engineering costs.

 

Our research and development expenses consist primarily of expenditures related to engineering.

 

General and Administrative

 

General and administrative expenses totaled $577,756 and $683,329 for the years ended June 30, 2019 and 2018, respectively. The decrease of $105,573 or 15.4%, in 2019 compared to 2018 was primarily the result of a decrease in consulting expenses.

 

Our general and administrative expenses consist primarily of expenditures related to employee compensation, legal, accounting and tax, other professional services, and general operating expenses.

 

Officer salary totaled $190,000 for the years ended June 30, 2019 and 2018, respectively.

 

Liquidity and Capital Resources as of June 30, 2019

 

We have incurred losses since our inception in 2002 as a result of significant expenditures for operations and research and development and the lack of any revenue. We have an accumulated deficit of approximately $26.9 million as of June 30, 2019 and anticipate that we will continue to incur additional losses for the foreseeable future. Through June 30, 2019, we have funded our operations through the private sale of our equity securities and exercise of options and warrants, resulting in gross proceeds of approximately $26 million. Cash and cash equivalents at June 30, 2019 were $10,161.

  

We are actively seeking sources of financing to fund our continued operations and research and development programs. To raise additional capital, we may sell shares of equity or debt securities. There can be no assurance that we will be able to complete any financing transaction in a timely manner or on acceptable terms or otherwise. If we are not able to raise additional cash, we may be forced to further delay, curtail, or cease development of our product candidates, or cease operations altogether.

 

    Year Ended
June 30,
 
    2019     2018  
       
Cash at beginning of period   $ 4,427     $ 51,695  
Net cash used in operating activities     (588,930 )     (637,997 )
Net cash used in investing activities            
Net cash provided by financing activities     594,664       590,729  
Cash at end of period   $ 10,161     $ 4,427  

 

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Net Cash Used in Operating Activities

 

Net cash used in operating activities was $587,265 and $637,997 for the years ended June 30, 2019 and 2018, respectively. The decrease of $50,737 in cash used during 2019 compared to 2018 was primarily attributable to lower consulting and legal expenses.

 

Net Cash Used in Investing Activities

 

Cash used in investing activities was $0 and $0 for years ended June 30, 2019 and 2018, respectively.

 

Net Cash Provided by Financing Activities

 

During the year ended June 30, 2019, we received net proceeds of $592,999 from the sales of our securities, compared to $590,729 for the year ended June 30, 2018. The increase was due to slightly increased private placement sales. We are actively seeking sources of financing to fund our continued operations and research and development programs.

 

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

 

Set forth below are the present directors and executive officers of the Company. Except as set forth below, there are no other persons who have been nominated or chosen to become directors, nor are there any other persons who have been chosen to become executive officers. Other than as set forth below, there are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer.

 

Name    Age   Position with the Company
Chaya Hendrick   63   President, Chief Executive Officer and Chairman of the Board
Jay M. Needelman, CPA   52   Chief Financial Officer, Director
Elizabeth Ryba   68   Director

 

The Board is comprised of only one class. All of the directors serve for a term of one year and until their successors are elected at the Company’s annual shareholders meeting via teleconference and are qualified, subject to removal by the Company’s shareholders.

 

Our Board believes that all members of the Board and all executive officers encompass a range of talent, skill, and experience sufficient to provide sound and prudent guidance with respect to our operations and interests. The information below with respect to our directors and executive officers includes each individual’s experience, qualifications, attributes, and skills that led our Board to the conclusion that he or she should serve as a director and/or executive officer.

 

Biographies

 

Set forth below are brief accounts of the business experience during the past five years of each director, executive officer and significant employee of the Company.

 

CHAYA HENDRICK has been President, Chief Executive Officer and Chairman of the Board 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 FastEcom, 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. Ms. Hendrick founded Asset Developments a property development company that created and sold regional residential land subdivisions. The last being a 1,000-acre subdivision named Claire Valley Estates in the Canberra region of Australia. All of the property development projects were funded by C. Hendrick and were financially profitable. C. Hendrick attended Dandenong College in Australia. 

 

We believe Ms. Hendrick is qualified to serve on our Board due to her extensive experience in technology development and as an executive at technology companies.

 

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JAY M.  NEEDELMAN, CPA, has been the Chief Financial Officer and a director of SmartMetric since 2007. Mr. Needelman has over 20 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.

 

We believe Mr. Needelman is qualified to serve on our Board due to his financial expertise.

 

ELIZABETH RYBA has been a director of SmartMetric since April 5, 2006. From 2015 to the present, Ms. Ryba has been Vice President of Marketing at the Design and Decoration Building in New York, one of the premier destinations for luxury interior design showrooms in the country. From 2006 to 2015, Ms. Ryba had marketing positions at two luxury home decor brands. Ms. Ryba 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. From 1991 through 1999, Ms. Ryba worked at Master Card where she launched a Smart Card 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.

 

We believe Ms. Ryba is qualified to serve on our Board due to her extensive experience in the credit card industry as well as her extensive experience in marketing in the luxury sector which we believe is a sector to which we may be able to sell our products. 

 

Family Relationships

 

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

 

Committees of the Board

 

Our business, property and affairs are managed by or under the direction of the Board. 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. We have not previously had an audit committee, compensation committee or nominations and governance committee. 

 

Audit Committee

 

We currently do not have an acting audit committee, and our Board currently acts as our audit committee.

 

Audit Committee Financial Expert

 

We do not have an audit committee and thus do not have an audit committee financial expert.

 

Compensation Committee

 

We do not presently have a compensation committee. Our Board currently acts as our compensation committee.

 

Director Independence

 

For purposes of determining independence, we have adopted the definition of “independence” contained in the NASDAQ Market Place Rules.  Pursuant to the definition, the company has determined that Elizabeth Ryba qualifies as independent.

 

Code of Ethics

 

The Company has adopted a Code of Ethics that applies to its Chief Executive Officer and Chief Financial Officer. A copy of the Company’s code of ethics is available to any person without charge upon written request to the Company at SmartMetric, Inc., 3960 Howard Hughes Parkway, Suite 500, Las Vegas, NV, 89109. Attn: Secretary.

 

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

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our company with copies of all Section 16(a) reports they file.

 

Based solely on our review of the copies of such reports received by us, and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended June 30, 2019, there were no failures to file such forms in a timely fashion. 

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

 

  been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

  had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;

 

  been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;

 

  been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity 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 of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

  been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Except as set forth in our discussion below in “Certain Relationships and Related Transactions, and Director Independence” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

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EXECUTIVE COMPENSATION

 

General Philosophy

 

Our Board is responsible for establishing and administering the Company’s executive and director compensation.

 

The following summary compensation table indicates the cash and non-cash compensation earned from the Company during the fiscal years ended June 30, 2020 and 2019, by the current and former executive officers of the Company and each of the other two highest paid executives or directors, if any, whose total compensation exceeded $100,000 during those periods.

 

Summary Compensation Table

 

Name and Principal Position   Fiscal
Year Ended
    Salary 
($)
    Bonus
($)
    Stock 
Awards
($)
    Option 
Awards
($)
    Non-equity 
Incentive Plan
Compensation
($)
    Nonqualified 
Deferred 
Compensation
Earnings 
($)
    All Other Compensation
($)
    Total 
($)
 
Chaya Hendrick 
(President, Chief Executive Officer, Chairman of the Board (1)
    2020     $ 110,833 (2)     -0-       -0-       -0-       -0-       -0-     $ 15,833     $ 110,833  
      2019     $ 63,333 (3)     -0-       -0-       -0-       -0-       -0-     $ 126,667 (4)   $ 190,000  
                                                                         
Jay Needelman
(Chief and Principal Financial Officer, Director) (7)
    2020     $ -0-       -0-       -0-       -0-       -0-       -0-     $ 11,250     $ 11,250  
      2019     $ 15,000       -0-       -0-       -0-       -0-       -0-       -0-     $ 15,000  

  

(1) Chaya Hendrick has been President, Chief Executive Officer and director of the Company since inception. This Summary Compensation Table does not include the issuance of 200,000 shares of Series B Convertible Preferred Stock issued to Ms. Hendrick pursuant to an addendum to the employment agreement entered into on 9/30/2015. Each share of Series B Convertible Preferred Stock is convertible into 50 shares of Common Stock. Chaya Hendrick also has a car allowance in her employment agreement which she has forgone for the years ended June 30, 2019 and 2018.
   
(2) The Company paid Chaya Hendrick $110,833 during the fiscal year 2020, out of her total aggregate salary of $142,500, with the remainder being accrued but unpaid. As of March 31, 2020, the Company has accrued $821,682 of unpaid salary, which includes previously accrued but unpaid salary for periods not covered under this Summary Compensation Table.

 

(3) The Company paid Chaya Hendrick $63,333 for the year ended June 30, 2019 out of her total aggregate salary of $190,000, with the remainder being accrued but unpaid. As of June 30, 2019, the Company has accrued $790,015 of unpaid salary, which includes previously accrued but unpaid salary for periods not covered under this Summary Compensation Table.

 

(4) Includes $126,667 in accrued but unpaid salary for the year end June 30, 2019. As of June 30, 2019, the Company has accrued $790,015 of unpaid salary, which includes previously accrued but unpaid salary for periods not covered under this Summary Compensation Table.

 

Outstanding Equity Awards at Fiscal Year End

 

None.

 

Chaya Hendrick Employment

 

Previous Employment Agreement

 

On July 1, 2012, the Company entered into an employment agreement (the “Prior Agreement”) with Chaya Hendrick, the Company’s Chief Executive Officer that expired on July 1, 2017. Pursuant to the Prior Agreement, Ms. Hendrick received an annual base salary of $190,000 per year. Ms. Hendrick was also entitled to receive a management fee equal to $50,000 per year beginning with the Company’s fiscal year ended June 30, 2012 and each fiscal year thereafter during the term of the Agreement provided that the Company has manufactured its first product. This fee was to increase by 25% per annum at the conclusion of each calendar year and was based on the continued manufacturing and sales of products by the Company. As of the end of the term of the Prior Agreement, no compensation was paid pursuant to this management fee. 

 

46

 

Ms. Hendrick was also 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. The Company also provided Ms. Hendrick with the use of an automobile of Ms. Hendrick’s choice at a purchase price not to exceed $60,000. Executive’s employment with the Company was subject to termination at any time, with cause, as such terms are defined in the Prior Agreement.

  

The Prior Agreement may be terminated on 30 days’ notice by Ms. Hendrick but may only be terminated by the Company for “cause.” In the event that Ms. Hendrick’s employment was terminated by the Company, the Company was obligated to pay to Ms. Hendrick an amount equal to $350,000 plus salary remaining on the term of the Prior Agreement.

 

Addendum to Prior Agreement

 

On September 30, 2015, the Company and Ms. Hendrick entered into an Addendum to the Agreement (the “Addendum”) pursuant to which in consideration for the issuance of 200,000 shares of the Company’s Series B Convertible Preferred Stock, Ms. Hendrick granted the Company the first right to purchase or license any patents (the “Patent Option”) relating to “Smartcards” which Ms. Hendrick (i) shall apply for with the relevant patent authorities during the term of the Agreement, and (ii) are currently applied for with the relevant patent authorities or pending as of the date of the Prior Agreement (the “Patent Rights”). In exchange for the Patent Option the Company agrees, during the term of the Prior Agreement, to pay for any fees and/or expenses related to the application for the Ms. Hendrick’s Patent Rights with the relevant patent authorities, including, but not limited to, legal or filing fees. If, upon the Company’s receipt of notice of any Patent Rights of Ms. Hendrick’s in writing (“Patent Notification”) the parties fail to successfully negotiate and execute a purchase or license agreement as it relates to the Patent Right that is the subject of such Patent Notification within 60 calendar days of the receipt of such Patent Notification, the Ms. Hendrick shall be permitted to retain or transfer the Patent Rights to a third party without any subsequent notice to the Company.

 

Amended and Restated Employment Agreement

 

On July 1, 2017, the Company and Ms. Hendrick entered into an amended and restated employment agreement (“Agreement”) with a duration of sixty (60) months. Pursuant to the Agreement, Ms. Hendrick shall receive (i) an annual base salary of $190,000, subject to adjustment at the end of each fiscal year at the discretion of the Board, with a minimum increase of 10% per annum for the duration of the term, (ii) an incentive management fee equal to $50,000 upon the Company manufacturing its first product, which shall increase by 25% per annum and based on the continued manufacturing and sales of products by our Company.

 

Additionally, Ms. Hendrick shall maintain certain rights to initiate, write, invent and / or create inventions separate from SmartMetric, Inc. and to retain the intellectual property rights of such patents, inventions or new products.

 

The Agreement may be terminated on 30 days’ notice by Ms. Hendrick but may only be terminated by the Company for “cause.” In the event that Ms. Hendrick’s employment is terminated by the Company for such “cause,” the Company is obligated to pay to Ms. Hendrick an amount equal to $350,000 plus the remaining salary on the term of the Agreement.

 

Jay Needelman Contract

 

We currently have an oral agreement with Jay Needelman, our part-time Chief Financial Officer, whereby we pay Mr. Needelman an annual fee of $15,000 for his services, payable in quarterly installments of $3,750.

 

Potential Payments Upon Termination or Change-in-Control

 

SEC regulations state that we must disclose information regarding agreements, plans or arrangements that provide for payments or benefits to our executive officers in connection with any termination of employment or change in control of the Company. Such payments are set forth above in the section entitled “Employment Agreements.”

 

None of our executive officers or directors received, nor do we have any arrangements to pay out, any bonus, stock awards, option awards, non-equity incentive plan compensation, or non-qualified deferred compensation.

 

47

 

Compensation of Directors

 

We have no standard arrangement to compensate directors for their services in their capacity as directors. Directors are not paid for meetings attended. However, we intend to review and consider future proposals regarding board compensation. All travel and lodging expenses associated with corporate matters are reimbursed by us, if and when incurred.

 

Stock Option Plans - Outstanding Equity Awards at Fiscal Year End

 

None.

 

Pension Table

 

None.

 

Retirement Plans

 

We do not offer any annuity, pension, or retirement benefits to be paid to any of our officers, directors, or employees in the event of retirement. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement, or any other termination of employment with our company, or from a change in the control of our Company.

 

Compensation Committee

 

The Company does not have a separate Compensation Committee. Instead, the Board reviews and approves executive compensation policies and practices, reviews salaries and bonuses for other officers, administers the Company’s stock option plans and other benefit plans, if any, and considers other matters.

 

Risk Management Considerations

 

We believe that our compensation policies and practices for our employees, including our executive officers, do not create risks that are reasonably likely to have a material adverse effect on our Company.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

As of July 30, 2020, we had outstanding 379,523,000 shares of common stock. Each share of common stock is currently entitled to one vote on all matters put to a vote of our stockholders. The following table sets forth the number of common shares, and percentage of outstanding common shares, beneficially owned as of the date hereof by:

 

each person known by us to be the beneficial owner of more than five percent of our outstanding common stock;

 

each of our current directors;

 

each our current executive officers and any other persons identified as a “named executive” in the Summary Compensation Table above; and

 

all our current executive officers and directors as a group.

 

48

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes general voting power and/or investment power with respect to securities. Shares of common stock issuable upon exercise of options or warrants that are currently exercisable or exercisable within 60 days of the record date, and shares of common stock issuable upon conversion of other securities currently convertible or convertible within 60 days, are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Under the applicable SEC rules, each person’s beneficial ownership is calculated by dividing the total number of shares with respect to which they possess beneficial ownership by the total number of outstanding shares. In any case where an individual has beneficial ownership over securities that are not outstanding but are issuable upon the exercise of options or warrants or similar rights within the next 60 days, that same number of shares is added to the denominator in the calculation described above. Because the calculation of each person’s beneficial ownership set forth in the “Percentage Beneficially Owned” column of the table may include shares that are not presently outstanding, the sum total of the percentages set forth in such column may exceed 100%. Unless otherwise indicated, the address of each of the following persons is 3960 Howard Hughes Parkway, Suite 500, Las Vegas, NV 89169, and, based upon information available or furnished to us, each such person has sole voting and investment power with respect to the shares set forth opposite his, her or its name.

 

    Name and Address of  Beneficial Owner   Director/Officer   Number of 
Shares 
of Common 
Stock (1)
    Percentage 
of Class (1)
 
    Directors and Executive Officers                
                     
Common Stock   Chaya Hendrick (2) 
145 East Harmon Avenue, Unit 19620 
Las Vegas, NV 89109
  Chief Executive Officer, 
Chairman of the Board of Directors
    89,127,778 (2)     23.5 %
                         
Common Stock  

Jay Needelman, CPA 

520 West 47th Street 

Miami Beach, FL 33140 

  Director; Chief Financial Officer     -0-       0  
                         
Common Stock   Elizabeth Ryba 
73 Brown Road 
Scarsdale, New York 10583
  Director     40,000      

 

*

 
                         
    All Executive Officers and Directors as a Group (3 persons)         89,167,778       23.5 %
                         
    5% Shareholders                    

 

* Less than one percent (1%)

  

(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 July 30, 2020, (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) 379,523,000, the total shares of common stock outstanding on July 30, 2020, 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) The 89,127,778 shares of common stock include (i) 58,627,778 of Common Stock and; (ii) 610,000 shares of Series B Convertible Preferred Stock convertible into 30,500,000 shares of common stock held by Applied Cryptography, Inc. (“ACI”) and / or Chaya Hendrick. The outstanding shares of Series B Convertible Preferred Stock are entitled to vote on any matter with the holders of Common Stock voting together as one (1) class and shall have that number of votes (identical in every other respect to the voting rights of the holder of common stock entitled to vote at any regular or special meeting of Stockholders) equal to that number of common shares which is not less than 51% of the vote required to approve any action, which Nevada law provides may or must be approved by vote or consent of the common shares or the holders of other securities entitled to vote, if any. Each share of Series B Convertible Preferred Stock is convertible, at the option of the holder, into fifty (50) shares of Common Stock upon the satisfaction of certain conditions and for purposes of determining a quorum of a shareholder meeting, the outstanding shares of Series B Convertible Preferred Stock shall be deemed the equivalent of 51% of all shares of the Company’s Common Stock entitled to vote at such meetings. Our Chairman and Chief Executive Officer, has sole voting and dispositive power over all of the shares beneficially owned by ACI.

 

49

 

TRANSACTIONS WITH RELATED PERSONS

  

Except as set out below, as of July 30, 2020, there have been no transactions, or currently proposed transactions, in which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any of the following persons had or will have a direct or indirect material interest:

 

any director or executive officer of our company;

 

any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our outstanding shares of common stock;

 

any promoters and control persons; and

 

any member of the immediate family (including spouse, parents, children, siblings and in laws) of any of the foregoing persons.

 

Chaya Hendrick, our CEO has made cash advances to the Company periodically in exchange for promissory notes of such face values. As of the years ended June 30, 2019 and 2018, we owed $3,759 and $15,000, respectively. These notes bear interest at 7.00% per annum. We have paid down $11,241 of these cash advances during the year ended June 30, 2019.

 

During the years ended June 30, 2019 and 2018, Chaya Hendrick, our CEO deferred $126,667 and $142,500 in annual salary, respectively. As of June 30, 2019 and 2018, respectively, the Company has accrued the amounts of $790,015 and $663,348 as deferred salary for the difference between Chaya Hendrick’s contractual annual salary and the amounts actually paid. These amounts include previously deferred salary prior to the years ended June 30, 2019 and 2018.

 

Director Independence

 

Our Board consists of Chaya Hendrick Jay Needelman and Elizabeth Ryba. Our securities are quoted on the OTCQB, which does not have any director independence requirements. We evaluate independence by the standards for director independence established by applicable laws, rules, and listing standards including, without limitation, the standards for independent directors established by The New York Stock Exchange, Inc., the NASDAQ National Market, and the Securities and Exchange Commission.

  

Subject to some exceptions, these standards generally provide that a director will not be independent if (a) the director is, or in the past three years has been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of ours; (c) the director or a member of the director’s immediate family has received more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director’s immediate family is, or in the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of a company where one of our executive officers serves on the compensation committee; or (f) the director or a member of the director’s immediate family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $1,000,000 or two percent of that other company’s consolidated gross revenues. Based on these standards, we have determined that Elizabeth Ryba is our only independent director.

 

50

  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Audited Consolidated Financial Statements

 

Reports of Independent Registered Public Accounting Firms F-2 - F-3
   
Consolidated Balance Sheets for the years ended June 30, 2019 and 2018 F-4
   
Consolidated Statements of Operations for the years ended June 30, 2019 and 2018 F-5
   
Consolidated Statements of Cash Flows for the years ended June 30, 2019 and 2018 F-6
   
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended June 30, 2019 and 2018 F-7
   
Notes to Consolidated Financial Statements F-8 - F-16

 

Unaudited Consolidated Financial Statements

 

Condensed consolidated balance sheets as of March 31, 2020 (unaudited) and June 30, 2019 F-17
   
Condensed consolidated statements of operations for the three months and nine months ended March 31, 2020 and 2019 (unaudited) F-18
   
Condensed consolidated statements of stockholders’ deficit for the nine months ended March 31, 2020 and 2019 (unaudited) F-19
   
Condensed consolidated statements of cash flows for the nine months ended March 31, 2020 and 2019 (unaudited) F-20
   
Notes to condensed consolidated financial statements (unaudited) F-21 - F-27

 

F-1

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders of

Smartmetric, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheet of Smartmetric, Inc. (the “Company”) as of June 30, 2019 and the related statements of operations, stockholders’ (deficit), and cash flows for the year ended June 30, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019, and the result of its operations and its cash flow for the year ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Prager Metis CPAs, LLC  
   
We have served as the Company’s auditor since 2019  
Basking Ridge, New Jersey  
September 30, 2019  

 

F-2

   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders of

Smartmetric, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Smartmetric, Inc. (the “Company”) as of June 30, 2018 and June 30, 2017 and the related statements of operations, stockholders’ (deficit), and cash flows for each of the years in the two-year period ended June 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and June 30, 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2018 in conformity with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has no revenues, has negative working capital at June 30, 2018, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ AMC Auditing  
   
AMC Auditing  
We have served as the Company’s auditor since 2017  
Las Vegas, Nevada  
October 5, 2018  

 

F-3

 

SMARTMETRIC, INC. AND SUBSIDIARY

Consolidated Balance Sheets

  

    June 30,     June 30,  
    2019     2018  
             
Assets            
Current assets:                
Cash   $ 10,161     $ 4,427  
Receivables     -       10,400  
Prepaid expenses and other current assets     6,450       8,767  
                 
Total current assets     16,611       23,594  
                 
Total assets   $ 16,611     $ 23,594  
                 
Liabilities and Stockholders’ Deficit                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 880,390     $ 730,794  
Liability for stock to be issued     147,484       103,718  
Deferred Officer’s salary     790,015       663,348  
Related party interest payable     93,488       40,055  
Dividends payable     3,123       -  
Credit card payable     3,750       -  
Shareholder loan     3,759       15,000  
                 
Total current liabilities     1,922,009       1,552,915  
                 
Commitments and Contingencies (Note 4 and 8)                
                 
Series C mandatory redeemable convertible preferred stock, net of discount, authorized 1,000,000 shares 121,700 and 0 shares issued and outstanding, respectively     99,278       0  
                 
Stockholders’ deficit:                
Preferred stock, $.001 par value; 5,000,000 shares authorized, 610,000 and 610,000 shares issued and outstanding     610       610  
Common stock, $.001 par value; 300,000,000 shares authorized, 264,648,821 and 249,147,547 shares issued and outstanding , respectively     264,649       249,148  
Additional paid-in capital     24,663,528       24,217,831  
Accumulated deficit     (26,933,463 )     (25,996,910 )
                 
Total stockholders’ deficit     (2,004,676 )     (1,529,321 )
                 
Total liabilities and stockholders’ deficit   $ 16,611     $ 23,594  

 

See notes to consolidated financial statements.

 

F-4

 

SMARTMETRIC, INC. AND SUBSIDIARY

Consolidated Statements Of Operations

  

    Year Ended     Year Ended  
    June 30,     June 30,  
    2019     2018  
             
Revenues   $ -     $ -  
                 
Expenses:                
Officer’s salary     190,000       190,000  
Other general and administrative     577,756       683,329  
Research and development     107,962       129,375  
                 
Total operating expenses     875,718       1,002,704  
                 
Loss from operations before other expense     (875,718 )     (1,002,704 )
                 
Other expense:                
Interest expense     (53,432 )     (39,084 )
Loss on patent impairment     -       (600,000 )
Total other expense     (53,432 )     (639,084 )
                 
Loss before income taxes     (929,150 )     (1,641,788 )
                 
Provision for income taxes     -       -  
                 
Net loss     (929,150 )     (1,641,788 )
Preferred stock dividends     (7,401 )     -  
Net loss available for common stockholders   $ (936,551 )   $ (1,641,788 )
                 
Net loss per share, basic and diluted   $ (0.00 )   $ (0.01 )
                 
Weighted average number of common shares outstanding, basic and diluted     256,676,745       240,133,406  

 

See notes to consolidated financial statements.

 

F-5

 

SMARTMETRIC, INC. AND SUBSIDIARY

Consolidated Statements Of Cash Flows 

 

    Year Ended     Year Ended  
    June 30,     June 30,  
CASH FLOWS FROM OPERATING ACTIVITIES   2019     2018  
Net loss   $ (936,551 )   $ (1,641,788 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Asset impairment     -       600,000  
Common stock issued and issuable for services     -       66,824  
                 
Changes in assets and liabilities                
Decrease in prepaid expenses and other current assets     2,317       50,560  
(Decrease) increase in accounts payable and accrued expenses     149,596       104,822  
Increase in deferred officer salary     126,667       142,500  
Increase (decrease) in credit card debt     3,750       -  
Increase (decrease) in allowance for bad debt     10,400       -  
Increase (decrease) in dividends payable     1,458       -  
Increase in accrued interest payable     53,433       39,084  
                 
Net cash used in operating activities     (588,930 )     (637,998 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Loans from related parties     (11,241 )     10,200  
Proceeds from sale of common stock     507,782       580,530  
Proceeds from sale of Series C Preferred stock     95,000       -  
Dividends payable     3,123       -  
Net cash provided by financing activities     594,664       590,730  
                 
NET INCREASE (DECREASE) IN CASH     5,734       (47,268 )
                 
CASH AT BEGINNING OF YEAR     4,427       51,695  
                 
CASH AT END OF YEAR   $ 10,161     $ 4,427  
                 
CASH PAID DURING THE YEAR FOR:                
Income taxes   $ -     $ -  
Interest   $ -     $ -  

 

See notes to consolidated financial statements.

 

F-6

 

SMARTMETRIC, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

 

                Class A                 Additional              
    Preferred Stock     Common Stock     Common Stock     Paid-In     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Total  
Balance June 30, 2017     410,000     $ 410       -     $ -       226,172,799     $ 226,173     $ 22,778,252     $ (24,346,047 )   $ (1,341,212 )
                                                                         
Series B Preferred     200,000       200       -       -       -       -       599,800       200       600,000  
                                                                         
Shares issued of common stock and warrants for services rendered     -       -       -       -       1,083,948       1,083       65,742       -       66,825  
                                                                         
Shares issued of common stock and warrants for cash     -       -       -       -       21,891,800       21,892       774,037       -       795,929  
                                                                         
To adjust for prior period expense     -       -       -       -       -       -       -       (9,075 )     (9,075 )
                                                                         
Net loss for period     -       -       -       -       -       -       -       (1,641,788 )     (1,641,788 )
                                                                         
Balance June 30, 2018     610,000       610       -       -       249,147,547       249,148       24,217,831       (25,996,910 )     (1,529,321 )
                                                                         
Shares issued of common stock and warrants for cash     -       -       -       -       15,501,274       15,501       445,697       -       461,198  
                                                                         
Dividends                                                             (7,401 )     (7,401 )
                                                                         
Net loss for the period     -       -       -       -       -       -       -       (929,150 )     (929,150 )
                                                                         
Balance June 30, 2019     610,000     $ 610       -     $ -       264,648,821     $ 264,649     $ 24,663,528     $ (26,933,461 )   $ (2,004,674 )

 

F-7

 

SMARTMETRIC INC. AND SUBSIDIARY 

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. This card may be referred to as a biometric card or the SmartMetric Biometric Datacard.   SmartMetric has completed development of its card along with pre-mass manufacturing cards but has not yet begun to mass manufacture the biometric fingerprint activated cards.

 

Basis of Presentation

 

The financial statements present the balance sheets, statements of operations, stockholder’s equity (deficit) and cash flows of the Company. The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America.

 

The Company has adopted June 30 as its fiscal year end.

 

Going Concern

 

As shown in the accompanying consolidated financial statements the Company has incurred recurring losses of $936,551 and $1,641,788 for the years ended June 30, 2019 and 2018, respectively, and has incurred a cumulative loss of $26,933,463 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 are no assurances that the Company will be able to achieve the level of revenues adequate to generate a sufficient cash flow from operations to support the Company’s working capital requirements. To the extent that funds generated are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may not continue its operations.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Management believes that the Company’s capital requirements will depend on many factors. These factors include product marketing and distribution. The management plans include equity sales and borrowing in order to fund the operations.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   

Recent Accounting Pronouncements

 

From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our consolidated financial statements upon adoption.

 

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-8

 

SMARTMETRIC INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value of Financial Instruments

 

The carrying amounts reflected in the balance sheets for cash, accounts payable and related party payables approximate the respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.

 

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The three levels of the fair value hierarchy are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The Company at present does not have any Level 2 or Level 3 fair value instruments.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to income taxes and contingencies.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates.

 

Cash

 

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 which exceed FDIC insured limits exposes the Company to cash concentration risk. The Company had no cash equivalents at June 30, 2019 and 2018.

 

 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.  Therefore, the Company has not yet adopted a revenue recognition policy.

 

F-9

 

SMARTMETRIC INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Accounts Receivable

 

The Company will extend credit based on its evaluation of the customers’ financial condition, generally without requiring collateral.  Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer.  The Company will monitor exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.  The Company has not recorded any receivables, and therefore no allowance for doubtful accounts.  

 

Uncertainty in Income Taxes

 

GAAP requires the recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach.   Management evaluates Company tax positions on an annual basis and has determined that as of June 30, 2019 and 2018, no accrual for uncertain income tax positions is necessary.

 

Loss Per Share of Common Stock 

 

In accordance with FASB ASC 260, “Earnings Per Share,” the basic loss per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net loss per share excludes the dilutive effect of stock options or warrants and convertible notes. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. As of June 30, 2019, and 2018, respectively, 26,526,234 and 14,842,583 dilutive shares were excluded from the calculation of diluted loss per common share.  

 

 Patent Impairment

 

When the carrying balance of the Company’s patent is more than what it could be sold for on the open market and/or is not recoverable through future use, the Company decreases its value. In determining whether the carrying value is not recoverable, the Company estimates the sum of the expected cash flows from the use of the patent or its possible sale. If the results in an amount less that the patent’s value on the financial statements, the Company will deem the patent’s carrying value on the balance sheet to be impaired by the amount that the carrying value exceeds the fair market value of the asset. The decrease in the patent’s value will then be included as a loss in the Company’s profit and loss statement. The Company recorded no loss from patent impairment during the year ended June 30, 2019. During the year ended June 30, 2018, the Company recorded a loss of $600,000 related to the patent impairment.

 

NOTE 3 - PREPAID EXPENSES

 

Prepaid expenses represent the unexpired terms of any consulting agreements, as well as advance rental payments.  All consulting agreements are entered into for the issuance of common stock and warrants and are valued based on the stock price or computed warrant value at the time of the respective agreement.

 

F-10

 

SMARTMETRIC INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 - COMMITMENTS

 

Lease Agreement

 

The Company utilizes office in Las Vegas, NV on a short-term lease basis. The Company’s main office is located in Las Vegas, NV. Rent expense for the years ended June 30, 2019 and 2018 was $12,522 and $30,947, respectively.

 

The Company adopted ASC 842 on January 1, 2019 and evaluated to conclude that it has no impact on the financial statements, as under the practical expedient, the lease consists of terms less than one year, and therefore is not required to be capitalized.

 

Related Party Transactions

 

The Company’s Chief Executive Officer has made cash advances to the Company with an aggregate amount due of $3,759 and $15,000 as of June 30, 2019 and 2018, respectively. These advances bear interest at 7.00% per annum.

 

As of June 30, 2019 and June 30, 2018, the Company has accrued the amounts of $790,015 and $663,348, respectively, as deferred Officer’s salary for the difference between the president’s annual salary and the amounts paid.  

 

NOTE 5 - STOCKHOLDERS’ DEFICIT

 

Preferred Stock

 

As of June 30, 2019, the Company has 5,000,000 shares of preferred stock, par value $0.001, authorized and 610,000 shares issued and outstanding.

 

On December 11, 2009, the Company filed a Certificate of Designation with the State of Nevada, to designate 500,000 shares of the preferred stock to be designated as Series B Convertible Preferred Stock (“Series B Convertible Preferred Stock”).

 

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 September 11, 2017, the Company issued 200,000 shares of Series B preferred shares to its CEO, Chaya Hendrick, in consideration for grant of exclusive rights to the licensed patent.

 

F-11

 

SMARTMETRIC INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 - STOCKHOLDERS’ DEFICIT (CONTINUED)

 

Class A Common Stock

 

As of June 30, 2019, the Company has 50,000,000 shares of Class A common stock, par value $0.001, authorized and no shares issued and outstanding.

 

Common Stock and Warrants

  

During the three months ended to September 30, 2017, the Company sold for cash 2,500,000 shares of common stock and warrants to purchase (i) 1,437,500 shares at $0.70 and $0.20 per share and (ii) 724,500 shares at $1.00 and $0.50 per share, for net proceeds of $114,625.

 

During the three months ended September 30, 2017, the Company issued 362,864 shares of common stock for consulting services valued at $21,825, based on the stock price at the time of the respective agreements underlying the services provided.

  

During the three months ended December 31, 2017, the Company sold for cash 8,319,000 shares of common stock and warrants to purchase: (i) 3,250,000 shares at $0.20 per share and (ii) 1,638,000 shares at $0.50 per share, for net proceeds of $259,362.

 

The warrants expire at various times through December 29, 2019.

 

During the three months ended December 31, 2017, the Company issued 212,164 shares of common stock for consulting services valued at $15,000 based on the stock price at the time of the respective agreements underlying the services provided.

  

During the three months ended March 31, 2018, the Company sold for cash 2,850,000 shares of common stock and warrants to purchase: (i) 2,051,250 shares at $0.70 per share and (ii) 929,250 shares at $1.00 per share, for net proceeds of $142,305. The warrants expire at various times through February 21, 2020. None of the 2,850,000 shares were issued as of March 31, 2018.

  

During the three months ended March 31, 2018, the Company issued 508,620 shares of common stock for consulting services valued at $30,000, based on the stock price at the time of the respective agreements underlying the services provided. These shares were issued on February 26, 2018.

 

During the three months ended June 30, 2018, the Company sold for cash 2,646,100 shares of common stock and warrants to purchase: (i) 1,536,625 shares at $0.70 per share and (ii) 774,459 shares at $1.00 per share, for net proceeds of $119,738. The warrants expire at various times through June 15, 2020.

 

During the three months ended June 30, 2018, the Company issued zero shares of common stock for consulting services.

 

During the three months ended September 30, 2018, the Company sold for cash 4,624,153 shares of common stock for net proceeds of $145,770 and warrants to purchase (i) 3,699,988 shares at $0.25, (ii) 60,000 shares at $0.30, (iii) 30,000 shares at $0.50, (iv) 301,875 shares at $0.70 and (v) 152,210 shares at $1.00.

 

F-12

 

SMARTMETRIC INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 - STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

 

During the three months ended December 31, 2018, the Company sold for cash 5,212,499 shares of common stock and warrants to purchase: (i) 3,712,499 shares at $0.25 per share and (ii) 1,500,000 shares at $0.50 per share, for net proceeds of $106,060. The warrants expire at various times through December 4, 2020.

 

During the three months ended March 31, 2019, the Company sold for cash 7,541,663 shares of common stock and warrants to purchase: (i) 7,541,663 shares at prices ranging from $0.05 per share to $0.50 per share for net proceeds of $165,749. The warrants expire at various times through March 21, 2021.

 

During the three months ended June 30, 2019, the Company sold for cash 1,740,000 shares of common stock and warrants to purchase: (i) 1,740,000 shares at a price of $0.05 per share for net proceeds of $86,934. The warrants expire at various times through June 10, 2021.

 

During the year ended June 30, 2018, the Company issued a total of 21,891,800 shares of common stock for cash totaling $759,929. In addition, the Company sold common shares, which have not yet been issued as June 30, 2018 and are considered stock payable in the amount of $103,718. 

 

During the year ended June 30, 2019, the Company issued a total of 15,501,274 shares of common stock for cash totaling $461,198. In addition, the Company sold common shares, which have not yet been issued as June 30, 2019 and are considered stock payable in the amount of $147,484.

 

The common shares issued for services was 0, and 1,083,948, as of June 30, 2019 and 2018, respectively.

 

The following information summarizes the warrants outstanding and exercisable.

 

Warrants Outstanding and Exercisable at June 30, 2019:

 

Range of Exercise Prices   Number of Warrants Outstanding     Weighted-Average Contractual Life Remining in Years     Weighted-Average Exercise Price     Number Exercisable     Weighted-Average Exercise Price  
                               
$0.05 - $1.00     26,526,234       1.120     $ 0.33       26,526,234     $ 0.33  
                                         
Warrants Outstanding and Exercisable at September 30, 2018:                                        
                                         
$0.20 - $1.00     14,842,583       0.527     $ 0.53       14,842,583     $ 0.53  

  

F-13

 

SMARTMETRIC INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 - STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

 

Warrant Activity:

 

As of June 30, 2019 and 2018, the following is a breakdown of the activity:

 

June 30, 2019:

 

Outstanding - beginning of year     14,842,583  
Issued     18,738,235  
Exercised      
Expired     (7,054,584 )
         
Outstanding - end of year     26,526,234  

 

June 30, 2018:

 

Outstanding - beginning of year     20,276,399  
Issued     12,341,584  
Exercised      
Expired     (17,775,400 )
         
Outstanding - end of year     14,842,583  

 

At June 30, 2019, all of the 26,526,234 warrants are vested, 23,226,234 warrants expire at various times through July 2020, 3,000,000 warrants expire in September 2019, and 300,000 warrants expire in July 2020. 

 

F-14

 

SMARTMETRIC INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6 - MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK

 

Issuances of Series C Mandatory Redeemable Convertible Preferred Stock

 

On January 10, 2019, the Board of Directors of the Company adopted a resolution pursuant to the Company’s Certificate of Incorporation, as amended, providing for the designations, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions, of the Series C Convertible Preferred Stock.

 

On January 14, 2019, the Company filed a Certificate of Designations for a Series C Convertible Preferred Stock. The authorized number of Series C Convertible Preferred Stock is 1,000,000 shares, par value 0.001. The Series C Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding-up or dissolution, rank: (a) senior with respect to dividends and right of liquidation with the Company’s common stock, , (b) junior with respect to dividends and right of liquidation with respect to the Company’s Series B Preferred Stock; and (c) junior with respect to dividends and right of liquidation to all existing indebtedness of the Company. Series C Preferred Stock will carry an annual ten percent (10%) cumulative dividend, compounded daily, payable solely upon redemption, liquidation or conversion. The Company will have a right, at any time in the period of 180 days from the date of the issuance, at the Company’s option, to redeem all or any portion of the Series C Preferred Stock at prices ranging from 105% to 130%, based on the passage of time.

 

The Holder shall have the right at any time during the period beginning on the date which is six (6) months following the Issuance Date, to convert all or any part of the outstanding Series C Preferred Stock into fully paid and non-assessable shares of Common Stock at the Variable Conversion Price. The “Variable Conversion Price” shall mean 71% multiplied by the Market Price (representing a discount rate of 29%). “Market Price” means the average of the two (2) lowest Trading Prices (as defined here) for the Common Stock during the fifteen (15) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.

 

On the date which is eighteen (18) months following the Issuance Date or upon the occurrence of an Event of Default (the “Mandatory Redemption Date”), the Company shall redeem all of the shares of Series C Preferred Stock of the Holder (which have not been previously redeemed or converted). With five (5) days of the Mandatory Redemption Date, the Company shall make payment to each Holder of an amount in cash equal to the total number of shares of Series C Preferred Stock held by such Holder multiplied by the then current Stated Value.

 

All shares of mandatorily redeemable convertible preferred stock have been presented outside of permanent equity in accordance with ASC 480, Classification and Measurement of Redeemable Securities. The Company accretes the carrying value of its Series C mandatory redeemable convertible preferred stock to its estimate of fair value (i.e. redemption value) at period end.

 

The estimated fair value of the Series C, mandatory redeemable convertible preferred stock at June 30, 2019 and 2018 was $110,000 and $0, respectively.

 

The Company recorded preferred stock dividends of $7,401 during fiscal year 2019, and accrued dividends payable of $3,123.

 

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, 2019 and 2018, deferred tax assets consist of the following:

 

    2019     2018  
Net operating loss carryforward   $ 7,972,161     $ 6,958,336  
Warrant issuances            
Deferred officer compensation     790,015       225,538  
Other     371       644  
Valuation allowance     (8,762,547 )     (7,184,518 )
    $     $  

 

F-15

 

SMARTMETRIC INC. AND SUBSIDIARY 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 - INCOME TAXES (CONTINUED)

 

At June 30, 2019, the Company had a net operating loss carry-forwards in the amount of approximately $21.0 million available to offset future taxable income through 2036, which will begin to expire in 2021. 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, 2019 and 2018 is summarized as follows:

 

    2019     2018  
Tax on income before income tax     21.00 %     34.00 %
Effect of non-temporary differences     (0.01 )%     (0.07 )%
Effect of prior year items     %     %
Effect of temporary differences     %     %
Change in valuation allowance     (20.99 )%     (33.90 )%
      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 2015.  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.

 

NOTE 8 - LITIGATION

 

From time to time we may be a defendant or plaintiff in various legal proceedings arising in the normal course of our business.   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. 

 

NOTE 9 - SUBSEQUENT EVENTS 

 

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2019 to the date these financial statements were issued.

 

Subsequent to June 30, 2019, the Company sold 52,800 shares of Series C Preferred Stock on August 26, 2019 for gross proceeds of $48,000.

 

Subsequent to June 30, 2019, the Company issued 11,216,305 common shares, all of which were for stock payable existing as of year end. These shares had a cash value of $226,000.

 

F-16

 

SMARTMETRIC, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheet

 

    March 31,     June 30,  
    2020     2019  
    (Unaudited)        
Assets            
Current assets:            
Cash   $ -     $ 10,161  
Prepaid expenses and other current assets     10,017       6,450  
                 
Total current assets     10,017       16,611  
                 
Total assets   $ 10,017     $ 16,611  
                 
Liabilities and Stockholders’ Deficit                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 898,380     $ 884,140  
Liability for stock to be issued     69,183       147,484  
Deferred Officer’s salary     821,682       790,015  
Related party interest payable     135,240       93,488  
Dividends payable     2,489       3,123  
Due to shareholders     41,343       -  
Shareholder loan     6,571       3,759  
                 
Total current liabilities     1,974,888       1,922,009  
Total liabilities     1,974,888       1,922,009  
                 
Commitments and Contingencies (Note 4)                
                 
Series C mandatory redeemable convertible preferred stock, net of discount, authorized 1,000,000 shares 128,500 and 121,700 shares issued and outstanding, respectively     106,580       99,278  
Preferred Series C stock subscriptions receivable     (30,000 )     -  
                 
Stockholders’ deficit:                
Preferred B stock, $.001 par value; 5,000,000 shares authorized, 610,000 and 610,000 shares issued and outstanding     610       610  
Common stock, $.001 par value; 600,000,000 and 300,000,000 shares authorized, 316,875,686 and 264,648,821 shares issued and outstanding , respectively     316,876       264,649  
Additional paid-in capital     25,215,910       24,663,528  
Accumulated deficit     (27,574,847 )     (26,933,463 )
                 
Total stockholders’ deficit     (2,041,451 )     (2,004,676 )
                 
Total liabilities, redeemable convertible preferred stock and equity   $ 10,017     $ 16,611  

 

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements

 

F-17

 

SMARTMETRIC, INC. AND SUBSIDIARY

Condensed Consolidated Statement of Operations

(Unaudited)

 

    Three
Months
    Three
Months
    Nine
Months
    Nine
Months
 
    Ended     Ended     Ended     Ended  
    March 31,     March 31,     March 31,     March 31,  
    2020     2019     2020     2019  
                         
Revenues   $ -     $ -     $ -     $ -  
                                 
Expenses:                                
Officer’s salary     47,500       47,500       142,500       142,500  
Other general and administrative     93,200       121,200       375,779       369,361  
Research and development     14,090       38,949       60,796       90,084  
                                 
Total operating expenses     154,790       207,649       579,075       601,945  
                                 
Loss from operations before other expense     (154,790 )     (207,649 )     (579,075 )     (601,945 )
                                 
Other expense                                
Interest expense     (14,081 )     (13,647 )     (41,731 )     (39,468 )
Total Other expense     (14,081 )     (13,647 )     (41,731 )     (39,468 )
                                 
Loss before income taxes     (168,871 )     (221,296 )     (620,806 )     (641,413 )
                                 
Provision for income taxes     -       -       -       -  
                                 
Net loss     (168,871 )     (221,296 )     (620,806 )     (641,413 )
Preferred C stock dividends     (4,614 )     (4,273 )     (20,577 )     (4,273 )
Net loss available for common stockholders   $ (173,485 )   $ (225,569 )   $ (641,383 )   $ (645,686 )
                                 
Net loss per share, basic and diluted   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
                                 
Weighted average number of common shares outstanding, basic and diluted     307,327,958       256,676,745       285,940,273       253,891,612  

 

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements

 

F-18

 

SMARTMETRIC, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ (Deficit)

(Unaudited)

 

    Preferred Series B           Additional Paid In     Accumulated        
    Stock     Common Stock     Capital     Deficit     Total  
                               
Balance June 30, 2019     610,000     $ 610       264,648,821       264,649     $ 24,663,528     $ (26,933,461 )   $ (2,004,674 )
                                                         
Shares issued of common stock and warrants for cash     -       -       7,991,662       7,992       218,008       -       226,000  
                                                         
Shares converted from Preferred Series C shares     -       -       3,224,643       3,224       63,289       -       66,513  
                                                         
Preferred Series C dividends                                             (11,725 )     (11,725 )
                                                         
Net loss available for common shareholders     -       -       -       -       -       (215,296 )     (215,296 )
                                                         
Balance September 30, 2019     610,000     $ 610       275,865,126     $ 275,865     $ 24,944,825     $ (27,160,482 )   $ (1,939,182 )
                                                         
Shares issued of common stock and warrants for cash     -       -       3,730,000       3,730       77,720       -       81,450  
                                                         
Shares converted from Preferred Series C shares     -       -       2,370,696       2,371       28,538       -       30,909  
                                                         
Preferred Series C dividends                                             (4,238 )     (4,238 )
                                                         
Net loss available for common shareholders     -       -       -       -       -       (236,638 )     (236,638 )
                                                         
Balance December 31, 2019     610,000     $ 610       281,965,822     $ 281,966     $ 25,051,083     $ (27,401,358 )   $ (2,067,699 )
                                                         
Shares issued of common stock for services                     50,000       50       1,450               1,500  
                                                         
Shares issued of common stock and warrants for cash     -       -       28,475,000       28,475       118,275       -       146,750  
                                                         
Shares converted from Preferred Series C shares     -       -       6,384,864       6,385       45,102       -       51,487  
                                                         
Preferred Series C dividends                                             (4,614 )     (4,614 )
                                                         
Net loss available for common shareholders     -       -       -       -       -       (168,871 )     (168,871 )
                                                         
Balance March 31, 2020     610,000     $ 610       316,875,686     $ 316,876     $ 25,215,910     $ (27,574,847 )   $ (2,041,451 )
                                                         
Balance June 30, 2018     610,000     $ 610       249,147,547     $ 249,148     $ 24,217,831     $ (25,996,910 )   $ (1,529,321 )
                                                         
Shares issued of common stock and warrants for cash     -       -       5,502,538       5,503       201,196       -       206,699  
                                                         
Net loss for the period     -       -       -       -       -       (213,827 )     (213,827 )
                                                         
Balance September 30, 2018     610,000     $ 610       254,650,085     $ 254,651     $ 24,419,027     $ (26,210,237 )   $ (1,526,479 )
                                                         
Shares issued of common stock and warrants for cash     -       -       2,026,660       2,027       59,973       -       62,000  
                                                         
Net loss for the period     -       -       -       -       -       (206,790 )     (206,790 )
                                                         
Balance December 31, 2018     610,000     $ 610       256,676,745     $ 256,678     $ 24,479,000     $ (26,417,027 )   $ (1,671,269 )
                                                         
Preferred Series C dividends     -       -       -       -       -       (4,273 )     (4,273 )
                                                         
Net loss for the period     -       -       -       -       -       (221,296 )     (221,296 )
                                                         
Balance March 31, 2019     610,000     $ 610       256,676,745     $ 256,678     $ 24,479,000     $ (26,642,596 )   $ (1,896,838 )

  

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements

 

F-19

 

SMARTMETRIC, INC. AND SUBSIDIARY

Condensed Consolidated Statements Of Cash Flows

(Unaudited)

 

    Nine Months     Nine Months  
    Ended     Ended  
    March 31,     March 31,  
    2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss   $ (620,806 )   $ (641,413 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
                 
Changes in assets and liabilities                
Prepaid expenses and other current assets     (3,567 )     (2,250 )
Accounts payable and accrued expenses     14,240       58,414  
Deferred officer salary     31,667       142,500  
Credit card debt             (536 )
Due to shareholder     41,343          
Accrued interest payable     41,752       39,469  
                 
Net cash used in operating activities     (495,371 )     (403,816 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES     -       -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Loans from related parties     2,812       (7,261 )
Proceeds from sale of common stock     377,398       417,579  
Proceeds from sale of Series C Preferred stock     105,000       50,000  
                 
Net cash provided by financing activities     485,210       460,318  
                 
NET DECREASE IN CASH     (10,161 )     56,502  
                 
CASH, BEGINNING OF PERIOD     10,161       4,427  
CASH, END OF PERIOD   $ -     $ 60,929  
                 
CASH PAID DURING THE PERIOD FOR:                
Income taxes   $ -     $ -  
Interest   $ -     $ -  
                 
Non-cash investing and financing activity:                
Conversion of 157,700 Preferred C shares into 11,980,203 shares of Common stock   $ 142,722     $ -  
    $ -     $ -  

 

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements

 

F-20

 

SMARTMETRIC INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION

 

SmartMetric, Inc. (“SmartMetric” or the “Company”) was incorporated pursuant to the laws of Nevada on December 18, 2002. SmartMetric is a company engaged in the technology industry. SmartMetric’s main products are a fingerprint sensor activated payments card and a security card with a finger sensor and fully functional fingerprint reader embedded inside the card. The SmartMetric biometric cards have a rechargeable battery allowing for portable biometric identification and card activation. This card is referred to as a biometric card or the SmartMetric Biometric Card.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management of the Company, the accompanying unaudited financial statements contain all the adjustments (which are of a normal recurring nature) necessary for a fair presentation. Operating results for the nine months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending June 30, 2020. For further information, refer to the financial statements and the footnotes thereto contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, as filed with the Securities and Exchange Commission on September 30, 2019. The condensed consolidated balance sheet as of June 30, 2019, has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by US GAAP for complete financial statements.

 

Going Concern

 

As shown in the accompanying condensed consolidated financial statements the Company has sustained recurring losses of $641,383 and $645,686 for the nine months ended March 31, 2020 and 2019, respectively, and has an accumulated deficit of $27,574,847 at March 31, 2020.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date of this filing. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Management believes that the Company’s capital requirements will depend on many factors. These factors include product marketing and distribution. The management plans include equity sales and borrowing in order to fund the operations.

 

There are no assurances that the Company will be able to achieve the level of revenues adequate to generate sufficient cash flow from operations to support the Company’s working capital requirements. To the extent that funds generated are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may not continue its operations.

 

In December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China (“COVID-19”) and has since spread worldwide, including to the Unites States, posing public health risks that have reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a threat to the health and economic wellbeing of our employees, customers and vendors. Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially; however, management cannot presently predict the scope and severity with which COVID-19 will impact our business, financial condition, results of operations and cash flows.

 

Principles of Consolidation

 

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

 

F-21

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Actual results may differ from those estimates.

 

Research and Development

 

Research and development costs are charged to expense as incurred. Our research and development expenses consist primarily of expenditures for electronics design and engineering, software design and engineering, component sourcing, component engineering, manufacturing, product trials, compensation and consulting costs.

 

Recent Accounting Pronouncements

 

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow except as noted below.

 

In February 2016, the FASB issued authoritative guidance, which is included in ASC 842, “Leases.” This guidance requires lessees to recognize most leases on the balance sheet by recording a right-of-use asset and a lease liability. The Company has made the decision to adopt this guidance early, and it was adopted by the Company as of March 1, 2019. Based on the completed analysis, the Company has determined that the adjustment did not have a material impact on the financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This guidance was adopted by the Company as of March 1, 2019. Based on the completed analysis, the Company has determined the adjustment did not have a material impact on the financial statements.

 

Loss Per Share of Common Stock

 

In accordance with FASB ASC 260, “Earnings Per Share,” the basic loss per share is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net loss per share excludes the dilutive effect of stock options or warrants and convertible notes. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. As of March 31, 2020 and 2019, 30,079,406 and 26,392,318 dilutive shares were excluded from the calculation of diluted loss per common share, with all dilutive shares being Common stock warrants at March 31, 2020 and 2019.

 

Stock-Based Compensation

 

The Company measures expense for issuances of stock-based compensation to employees and others at fair value of the stock and warrants issued, as this is more reliable than the fair value of the services received complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.

 

Reclassifications

 

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

 

F-22

 

NOTE 3 PREPAID EXPENSES

 

Prepaid expenses represent the unexpired terms of various consulting agreements as well as advance rental payments. The Company does not currently have any prepaid items related to shares issued for services.

 

NOTE 4 - COMMITMENTS AND CONTINGENCIES

 

Lease Agreement

 

The Company’s main office is in Las Vegas, Nevada. Rent expense under all leases for the nine months ended March 31, 2020 and 2019 was $3,600 and $10,545 respectively. The Company maintains only one office. This office is in Las Vegas, NV and is a month-to-month lease.

 

Related Party Transactions

 

The Company’s Chief Executive Officer has made cash advances to the Company with an aggregate amount due of $6,571 and $3,759 at March 31, 2020 and June 30, 2019, respectively. These advances bear interest at the rate of five percent (5%) per annum.

 

The Company has accrued the amounts of $821,682 and $790,015 at March 31, 2020 and June 30, 2019, respectively, as deferred officer’s salary, for the difference between the Chief Executive Officer’s annual salary and the amounts paid.

 

On September 11, 2017, we received a license to certain patents from Chaya Hendrick, our founder and CEO, related to our technologies until the expiration of the patents. As consideration, we issued Chaya Hendrick, or her assigns, (i) 200,000 shares of Series B Convertible Preferred Stock, (ii) a royalty equal to 5% of gross revenues derived from products sold related to the patents, and (iii) certain minimum required payments beginning at $50,000 and doubling each year thereafter. The Series B Preferred Shares may be converted at the election of holder on a basis for 50 common shares for each preferred share at any time or an aggregate of 10,000,000 common shares in exchange for all 200,000 preferred shares.

 

Litigation

 

From time to time we may be a defendant or plaintiff in various legal proceedings arising in the normal course of our business. As of the date of this Quarterly Report, there are no material pending legal or governmental proceedings relating to us or properties to which we are a party, and, to our knowledge, there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

 

NOTE 5 STOCKHOLDERS’ DEFICIT

 

Preferred Stock

 

As of March 31, 2020, the Company has 5,000,000 shares of Class B preferred stock, par value $0.001, authorized and 610,000 shares issued and outstanding.

 

On December 11, 2009, the Company filed a Certificate of Designation with the State of Nevada, to designate 500,000 shares of preferred stock as Series B Convertible Preferred Stock (“Series B Convertible Preferred Stock”). Effective November 5, 2014, the number of shares designated as Series B Convertible Preferred Stock was increased to 5,000,000 shares.

 

Each share of Series B Convertible Preferred Stock has a par value of $0.001, and a stated value equal to $5.00 (“Stated Value”). Holders of the Series B Convertible Preferred Stock are entitled to receive dividends or other distributions with the holders of the common stock of the Company on an as converted basis when, as, and if declared by the directors of the Company. Holders of the Series B Convertible Preferred Stock are entitled to convert each share of the Series B Convertible Preferred Stock into fifty (50) shares of common stock.

 

Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, holders of the Series B Convertible Preferred Stock are entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to the Stated Value, pro rata with the holders of the common stock.

 

F-23

 

NOTE 5 STOCKHOLDERS’ DEFICIT (CONTINUED)

 

Class A Common Stock

 

As of March 31, 2020, the Company has 50,000,000 shares of Class A common stock, par value $0.001, authorized and no shares issued and outstanding.

 

Common Stock

 

  During the three months ended September 30, 2019, the Company sold for cash 6,337,500 shares of common stock and warrants to purchase: (i) 6,337,500 shares at prices ranging from $0.10 per share to $0.25 per share for net proceeds of $133,495. The warrants expire at various times through September 17, 2021. None of these shares were issued during the quarter ended September 30, 2019, with all 6,337,500 shares being recorded as stock payable. There were 52,800 Preferred C shares issued for net proceeds of $45,000 and 70,000 Preferred C shares converted to 3,224,643 Common shares for the three month period ending September 30, 2019, see Note 6.

 

  During the three month period ending December 31, 2019, the Company increased its total number of shares of authorized capital stock to 600,000,000 shares, par value $0.001 per share.

 

  During the three months ended December 31, 2019, the Company sold for cash 40,675,000 shares of common stock and warrants to purchase: (i) 825,000 shares at prices ranging from $0.20 per share to $0.25 per share for net proceeds of $214,510. The warrants expire at various times through November 1, 2021. None of these shares were issued during the quarter ended December 31, 2019, with all 40,675,000 shares being recorded as stock payable. There were 36,300 Preferred C shares converted to 2,370,696 Common shares for the three month period ending December 31, 2019, see Note 6.
     
  During the three months ended March 31, 2020, the Company sold for cash 9,550,000 shares of common stock and warrants to purchase: (i) 3,500,000 shares at prices ranging from $0.05 per share to $1.00 per share for net proceeds of $66,500. The warrants expire at various times through March 12, 2022. None of these shares were issued during the quarter ended March 31, 2020, with all 9,550,000 shares being recorded as stock payable.  There were 53,700 Preferred C shares converted to 6,384,864 Common shares for the three month period ending March 31, 2020. The Company issued 41,800 preferred shares for net proceeds of $35,000 and another 33,600 preferred shares for which the net proceeds of $30,000 had not been received as of March  31, 2020.

 

  As of March 31, 2020, the Company had 316,875,686 shares of common stock issued and outstanding. 

 

  During the three months ended September 30, 2018, the Company sold for cash 4,624,153 shares of common stock for net proceeds of $145,770 and warrants to purchase (i) 3,699,988 shares at $0.25, (ii) 60,000 shares at $0.30, (iii) 30,000 shares at $0.50, (iv) 301,875 shares at $0.70 and (v) 151,970 shares at $1.00.  During the quarter ended September 30, 2018, the Company issued a total of 5,502,538 shares of common stock.  Of the total number of shares issued, 3,061,659 shares were for proceeds received during the quarter and 2,440,879 shares to reduce the liability for stock to be issued.

 

  During the three months ended December 31, 2018, the Company sold for cash 5,212,499 shares of common stock and warrants to purchase: (i) 3,712,499 shares at $0.25 per share and (ii) 1,500,000 shares at $0.50 per share, for net proceeds of $106,060. The warrants expire at various times through December 4, 2020. During the quarter ended December 31, 2018, the Company issued a total of 2,026,660 shares of common stock. Of the total number of shares issued, 250,000 shares were for proceeds received during the quarter and 4,962,499 shares to reduce the liability for stock to be issued.

 

  As of March 31, 2019, the Company had 256,676,745 shares of common stock issued and outstanding

 

  During the three months ended March 31, 2019, the Company sold for cash 7,541,663 shares of common stock and warrants to purchase: (i) 7,541,663 shares at prices ranging from $0.05 per share to $0.50 per share for net proceeds of $165,749. The warrants expire at various times through March 21, 2021. None of these shares were issued during the quarter ended March 31, 2019.

 

Equity Financing Agreement

 

On March 5, 2020, the Company entered into an equity financing agreement with GHS Investments, LLC, a Nevada limited liability company (“Investor”). Pursuant to the agreement, the Company agrees the sell to the investor an indeterminate amount of shares of the Company’s common stock, par value $0.001 per share, up to an aggregate price of four million dollars ($4,000,000).

 

Pursuant to the agreement, the Company is required, to within sixty (60) calendar days upon the date of execution of this agreement, use its best efforts to file with the SEC a registration statement or registration statements (as is necessary) on Form S-1, covering the resale of all of the registrable securities, which registration statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such registration statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon stock splits, stock dividends or similar transactions. The Company failed to file the Registration S-1 within 60 days of the execution of the Equity Financing Agreement, and has not been able to comply with that requirement as of the date of this filing.

 

Concurrently with the execution of the equity financing agreement, the company entered into a convertible promissory note, for the principal balance of $35,000. Per the terms of the convertible note agreement, the Company agrees to pay the investor interest at the rate of ten percent (10%) until it is due on December 5, 2020. The holder shall have the right at any time to convert all or any part of the outstanding and unpaid principal and interest at a fixed conversion price of $0.0175. As of the date of this filing, the Company has not yet received this money.

 

F-24

 

NOTE 5 STOCKHOLDERS’ DEFICIT (CONTINUED)

 

Warrants

 

From time to time the Company granted warrants in connection with private placements of securities, as described herein.

 

As of March 31, 2020, and June 30, 2019, the following is a breakdown of the warrant activity:

 

Range of Exercise Prices   Number of
Warrants
Outstanding
    Weighted-Average
Contractual Life
Remaining in Years
    Weighted-
Average
Exercise Price
    Number
Exercisable
    Weighted-
Average
Exercise Price
 
Warrants Outstanding and Exercisable at March 31, 2020:                                        
$0.05 - $1.00     30,079,406       1.27     $ 0.28       30,079,406     $ 0.28  
                                         
Warrants Outstanding and Exercisable at June 30, 2019:                                        
                                         
$0.20 - $1.00     26,526,234       1.12     $ 0.34       26,526,234     $ 0.34  

 

Warrant Activity:

 

March 31, 2020:

 

Outstanding - June 30, 2019     26,526,234  
Issued     10,662,500  
Exercised      
Expired     (7,109,328 )
Outstanding - March 31, 2020     30,079,406  

 

June 30, 2019:

 

Outstanding - June 30, 2018     14,842,583  
Issued     18,738,235  
Exercised      
Expired     (7,054,584 )
Outstanding - June 30, 2019     26,526,234  

 

At March 31, 2020, all 30,079,406 warrants are vested and (i) 29,779,406 warrants expire at various times prior to March 12, 2022, (ii) 300,000 warrants expire in July 2020,

 

NOTE 6 MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK

 

Issuances of Series C Mandatory Redeemable Convertible Preferred Stock

 

On January 10, 2019, the Board of Directors of the Company adopted a resolution pursuant to the Company’s Certificate of Incorporation, as amended, providing for the designations, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions, of the Series C Convertible Preferred Stock.

 

On January 14, 2019, the Company filed a Certificate of Designations for a Series C Convertible Preferred Stock. The authorized number of Series C Convertible Preferred Stock is 1,000,000 shares, par value 0.001. The Series C Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding-up or dissolution, rank: (a) senior with respect to dividends and right of liquidation with the Company’s common stock, (b) junior with respect to dividends and right of liquidation with respect to the Company’s Series B Preferred Stock; and (c) junior with respect to dividends and right of liquidation to all existing indebtedness of the Company. Series C Preferred Stock will carry an annual ten percent (10%) cumulative dividend, compounded daily, payable solely upon redemption, liquidation or conversion. The Company will have a right, at any time in the period of 180 days from the date of the issuance, at the Company’s option, to redeem all or any portion of the Series C Preferred Stock at prices ranging from 105% to 130%, based on the passage of time.

 

F-25

 

NOTE 6 MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)

 

The number of Series C, mandatory redeemable convertible preferred stock shares issued and outstanding were 128,500 and 121,700, respectively, for March 31, 2020 and June 30, 2019.

 

The Holder shall have the right at any time during the period beginning on the date which is six (6) months following the Issuance Date, to convert all or any part of the outstanding Series C Preferred Stock into fully paid and non-assessable shares of Common Stock at the Variable Conversion Price. The “Variable Conversion Price” shall mean 71% multiplied by the Market Price (representing a discount rate of 29%). “Market Price” means the average of the two (2) lowest Trading Prices (as defined here) for the Common Stock during the fifteen (15) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.

 

On the date which is eighteen (18) months following the Issuance Date or upon the occurrence of an Event of Default (the “Mandatory Redemption Date”), the Company shall redeem all of the shares of Series C Preferred Stock of the Holder (which have not been previously redeemed or converted). With five (5) days of the Mandatory Redemption Date, the Company shall make payment to each Holder of an amount in cash equal to the total number of shares of Series C Preferred Stock held by such Holder multiplied by the then current Stated Value.

 

All shares of mandatorily redeemable convertible preferred stock have been presented outside of permanent equity in accordance with ASC 480, Classification and Measurement of Redeemable Securities. The Company accretes the carrying value of its Series C mandatory redeemable convertible preferred stock to its estimate of fair value (i.e. redemption value) at period end.

 

The carrying value of the Series C mandatory redeemable convertible preferred stock at March 31, 2020 and 2019 was $106,580 and $52,815, respectively. There were 75,400 Preferred C shares issued for net proceeds of $65,000 and 75,400 Preferred C shares converted to 6,384,864 Common shares for the three month period ended March 31, 2020. For the nine month period ended March 31, 2020, there were 164,500 Preferred C shares issued for net proceeds of $135,000 and 157,700 Preferred C shares converted to 11,980,203 Common shares.

 

    Preferred C Stock  
    Shares     Amount  
             
Balance, June 30, 2019   $ 121,700     $ 99,278  
Shares issued for cash - Preferred Stock C     52,800       45,000  
Preferred C accretion     -0-       9,473  
Preferred shares converted into common stock     (70,000 )     (63,000 )
Balance, September 30, 2019   $ 104,500     $ 90,751  
Shares issued for cash - Preferred Stock C     36,300       25,000  
Preferred C accretion     -0-       1,722  
Preferred shares converted into common stock     (34,000 )     (30,909 )
Balance, December 31, 2019   $ 106,800     $ 86,564  
Shares issued for cash - Preferred Stock C     75,400       65,000  
Preferred C accretion     -0-       3,825  
Preferred shares converted into common stock     (53,700 )     (48,813 )
Balance, March 31, 2020   $ 128,500     $ 106,580  

 

F-26

 

NOTE 6 MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)

 

    Preferred C Stock  
    Shares     Amount  
Balance, June 30, 2018   $ 0     $ 0  
Shares issued for cash - Preferred Stock C     -0-       -0-  
Preferred C accretion     -0-       -0-  
Preferred shares converted into common stock     -0-       -0-  
Balance, September 30, 2018   $ 0     $ 0  
Shares issued for cash - Preferred Stock C     -0-       -0-  
Preferred C accretion     -0-       -0-  
Preferred shares converted into common stock     -0-       -0-  
Balance, December 31, 2018   $ 0     $ 0  
Shares issued for cash - Preferred Stock C     70,000       50,000  
Preferred C accretion     -0-       2,815  
Preferred shares converted into common stock     -0-       -0-  
Balance, March 31, 2019   $ 70,000     $ 52,815  

 

NOTE 7 INCOME TAXES

 

The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the Company’s estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.

 

The Company has estimated its effective tax rate to be 0%, based primarily on losses incurred and the uncertainty of realization of the tax benefit of such losses.

 

NOTE 8 SUBSEQUENT EVENTS

 

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to March 31, 2020 to the date these financial statements were issued. On April 2, 2020, the Company converted 12,000 preferred C shares into 1,909,091 common shares and on April 24, 2020 the Company converted 4,800 preferred shares into 775,385 common shares. On April 8, 2020 9,287,500 common shares were issued and on April 22, 2020, 12,000,000 common shares were issued. On May 1, 2020, 41,800 preferred shares were issued for net proceeds of $35,000.

 

F-27

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Other Expenses of Issuance and Distribution

 

The following table sets forth the costs and expenses to be paid by the Registrant in connection with the issuance and distribution of the securities being registered. All amounts other than the SEC registration fee are estimates. 

 

Securities and Exchange Commission registration fee   $ 181.72  
Accounting fees and expenses   $ *
Legal fees and expenses   $ 15,000  
Miscellaneous   $   *
Total   $ 15,181.72 *

 

* To be provided by amendment.

 

Indemnification of Officers and Directors

 

Nevada Law

 

The Nevada Revised Statutes limits or eliminates the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors. Our bylaws include provisions that require the company to indemnify our directors or officers against monetary damages for actions taken as a director or officer of our Company. We are also expressly authorized to carry directors’ and officers’ insurance to protect our directors, officers, employees and agents for certain liabilities. Our articles of incorporation do not contain any limiting language regarding director immunity from liability.

 

The limitation of liability and indemnification provisions under the Nevada Revise Statutes and our bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. However, these provisions do not limit or eliminate our rights, or those of any stockholder, to seek non-monetary relief such as injunction or rescission in the event of a breach of a director’s fiduciary duties. Moreover, the provisions do not alter the liability of directors under the federal securities laws. In addition, your investment may be adversely affected to the extent that, in a class action or direct suit, we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

 

II-1

 

RECENT SALES OF UNREGISTERED SECURITIES

 

The following sets forth information regarding all unregistered securities sold by us in transactions that were exempt from the requirements of the Securities Act in the last three years. Except where noted, all of the securities discussed in this Item 15 were all issued in reliance on the exemption under Section 4(a)(2) of the Securities Act. Unless otherwise indicated, all of the share issuances described below were made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

Except where noted, all of the securities discussed in this section were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.

 

  On September 11, 2017, we received a license to certain patents from Chaya Hendrick, our founder and CEO, related to our technologies until the expiration of the patents. As consideration, we issued Chaya Hendrick, or her assigns, (i) 200,000 shares of Series B Convertible Preferred Stock, (ii) a royalty equal to 5% of gross revenues derived from products sold related to the patents, and (iii) certain minimum required payments beginning at $50,000 and doubling each year thereafter. The Series B Convertible Preferred Shares may be converted at the election of holder on a basis for 50 common shares for each preferred share at any time or an aggregate of 10,000,000 common shares in exchange for all 200,000 preferred shares.
     
  During the three months ended June 30, 2017, the Company sold, for net proceeds of $242,157, units consisting of an aggregate of (i) 7,450,000 shares, (ii) warrants to purchase 3,031,250 shares at $0.70 per share, and (iii) warrants to purchase 1,527,750 shares at $1.00 per share. The warrants expire at various times through October 20, 2018.
     
  During the three months ended March 31, 2017, the Company issued an aggregate of 2,423,000 shares of common stock for consulting services valued at $283,955, based on the stock price at the time of the respective agreements underlying the services provided.
     
  During the three months ended March 31, 2017, the Company sold, for net proceeds of $127,247.50, units consisting of an aggregate of (i) 2,550,000 shares, (ii) warrants to purchase 1,593,750 shares at $0.70 per share, and (iii) warrants to purchase 803,250 shares at $1.00 per share. The warrants have all expired and no warrants were exercised.
     
  During the three months ended September 30, 2017, the Company sold for cash 2,500,000 shares of common stock and warrants to purchase: (i) 1,437,500 shares at $0.70 and $0.20 per share and (ii) 724,500 shares at $1.00 and $0.50 per share, for net proceeds of $114,625. The warrants expire at various times through September 28, 2019. During the three months ended September 30, 2017, 300,000 shares were issued and 2,200,000 shares were accrued as stock payable.

 

  During the three months ended September 30, 2017, the Company issued 362,864 shares of common stock for consulting services valued at $21,825, based on the stock price at the time of the respective agreements underlying the services provided. All 362,864 shares were accrued to stock payable.

 

  During the three months ended December 31, 2017, the Company sold for cash 8,319,000 shares of common stock and warrants to purchase: (i) 3,250,000 shares at $0.20 per share and (ii) 1,638,000 shares at $0.50 per share, for net proceeds of $259,362. The warrants expire at various times through December 29, 2019. During the three months ended December 31, 2017, 5,120,000 were issued and 3,199,000 shares were accrued to stock payable.

 

  During the three months ended December 31, 2017, the Company issued 212,164 shares of common stock for consulting services valued at $15,000, based on the stock price at the time of the respective agreements underlying the services provided. These shares were issued on November 8, 2017.

 

  During the three months ended March 31, 2018, the Company sold for cash 2,850,000 shares of common stock and warrants to purchase: (i) 2,051,250 shares at $0.70 per share and (ii) 929,250 shares at $1.00 per share, for net proceeds of $142,305. The warrants expire at various times through February 21, 2020. None of the 2,850,000 shares were issued as of March 31, 2018.

 

  During the three months ended March 31, 2018, the Company issued 508,620 shares of common stock for consulting services valued at $30,000, based on the stock price at the time of the respective agreements underlying the services provided. These shares were issued on February 26, 2018.

 

  During the three months ended June 30, 2018, the Company sold for cash 2,646,100 shares of common stock and warrants to purchase: (i) 1,536,625 shares at $0.70 per share and (ii) 774,459 shares at $1.00 per share, for net proceeds of $119,738. The warrants expire at various times through June 15, 2020. During the three months ended June 30, 2018, 1,937,500 of these shares were issued and 708,600 shares were accrued to stock payable.

 

II-2

 

  During the three months ended September 30, 2018, the Company sold for cash 4,624,153 shares of common stock for net proceeds of $145,770 and warrants to purchase (i) 3,699,988 shares at $0.25, (ii) 60,000 shares at $0.30, (iii) 30,000 shares at $0.50, (iv) 301,875 shares at $0.70 and (v) 151,970 shares at $1.00.  During the quarter ended September 30, 2018, the Company issued a total of 5,502,538 shares of common stock.  Of the total number of shares issued, 3,061,659 shares were for proceeds received during the quarter and 2,440,879 shares to reduce the liability for stock to be issued. During the three months ended September 30, 2018, 3,061,659 of these shares were issued and 1,562,494 shares were accrued to stock payable.
     
  During the three months ended December 31, 2018, the Company sold for cash 5,212,499 shares of common stock and warrants to purchase: (i) 3,712,499 shares at $0.25 per share and (ii) 1,500,000 shares at $0.50 per share, for net proceeds of $106,060. The warrants expire at various times through December 4, 2020. During the quarter ended December 31, 2018, the Company issued a total of 2,026,660 shares of common stock. Of the total number of shares issued, 250,000 shares were for proceeds received during the quarter and 4,962,499 shares to reduce the liability for stock to be issued. During the three months ended December 31, 2018, 250,000 shares were issued and 4,962,499 shares were accrued to stock payable.

 

  During the three months ended March 31, 2019, the Company sold for cash 7,541,663 shares of common stock and warrants to purchase: (i) 7,541,663 shares at prices ranging from $0.05 per share to $0.50 per share for net proceeds of $165,749. The warrants expire at various times through March 21, 2021. None of these shares were issued during the quarter ended March 31, 2019. During the three months ended March 31, 2019, none of the 7,541,663 were issued and all 7,541,663 shares were accrued to stock payable.

 

During the three months ended June 30, 2019, the Company sold for cash 1,740,000 shares of common stock and warrants to purchase: (i) 1,740,000 shares at a price of $0.25 per share for net proceeds of $86,934. The warrants expire at various times through June 10, 2021. None of these shares were issued during the quarter ended June 30, 2019. During the three months ended June 30, 2019, none of the 1,740,000 shares were issued and all 1,740,000 shares were accrued to stock payable.

 

During the three months ended September 30, 2019, the Company sold for cash 6,337,500 shares of common stock and warrants to purchase: (i) 6,337,500 shares at prices ranging from $0.10 per share to $0.25 per share for net proceeds of $133,495. The warrants expire at various times through September 17, 2021. None of these shares were issued during the quarter ended September 30, 2019, with all 6,337,500 shares being recorded as stock payable. There were 52,800 Preferred C shares issued for net proceeds of $45,000 and 70,000 Preferred C shares converted to 3,224,643 Common shares for the three month period ending September 30, 2019, see Note 6.

 

During the three months ended December 31, 2019, the Company sold for cash 40,675,000 shares of common stock and warrants to purchase: (i) 825,000 shares at prices ranging from $0.20 per share to $0.25 per share for net proceeds of $214,510. The warrants expire at various times through November 1, 2021. None of these shares were issued during the quarter ended December 31, 2019, with all 40,675,000 shares being recorded as stock payable. There were 36,300 Preferred C shares converted to 2,370,696 Common shares for the three month period ending December 31, 2019, see Note 6.

 

During the three months ended March 31, 2020, the Company sold for cash 9,550,000 shares of common stock and warrants to purchase: (i) 3,500,000 shares at prices ranging from $0.05 per share to $1.00 per share for net proceeds of $66,500. The warrants expire at various times through March 12, 2022. None of these shares were issued during the quarter ended March 31, 2020, with all 9,550,000 shares being recorded as stock payable. There were 53,700 Preferred C shares converted to 6,384,864 Common shares for the three month period ending March 31, 2020. The Company issued 41,800 preferred shares for net proceeds of $35,000 and another 33,600 preferred shares for which the net proceeds of $30,000 had not been received as of March 31, 2020.

 

The preceding securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, and manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, the Investor had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, the securities bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.

 

II-3

 

EXHIBIT INDEX

  

      Incorporated by
Reference
 

Filed or

Furnished

Exhibit
Number
  Exhibit Description   Form   Exhibit   Filing
Date
  Herewith
3.1   Articles of Incorporation of SmartMetric, Inc. filed 12/18/02   SB-2   3.1   9/3/04    
                     
3.2   Amendment to Articles of Incorporation dated 12/11/09   8-K   3.1   12/18/09    
                     
3.3   Amendment to Articles of Incorporation dated June 8, 2016   10-K   3.5   9/28/16    
                     
3.4   Certificate of Designation of Series B Preferred Stock   8-K   3.2   12/18/09    
                     
3.5   Amendment to Certificate of Designation of Series B Preferred Stock dated 11/5/14   10-Q   3.1   11/14/14    
                     
3.6   Amendment to Certificate of Designation of Series B Preferred Stock dated 6/8/16   10-K   3.4   9/28/16    
                     
3.7   Amended and Restated Bylaws of SmartMetric   8-K   3.1   4/26/16    
                     
3.8   Series C Preferred Stock Certificate of Designations dated 1/14/19   8-K   3.1   1/18/19    
                     
4.1   Common Stock Certificate Specimen   SB-2   4.1   9/3/04    
                     
4.2   Form of Warrant issued to May 2013 Investor   8-K   4.1   5/28/13    
                     
4.3   Form of Warrant issued to investors between 2015 – 2017   10-K   4.03   10/13/17    
                     
4.4*   SmartMetric, Inc. 2017 Equity Compensation Plan   10-Q   4.04   11/14/17    
                     
4.5*   Form of Option Grant under 2017 Equity Compensation Plan   10-Q   4.05   11/14/17    
                     
4.6*   Form of Restricted Stock Grant under 2017 Equity Compensation Plan   10-Q   4.06   11/14/17    
                     
4.7*   Form of Restricted Stock Unit Grant under 2017 Equity Compensation Plan   10-Q   4.07   11/14/17    
                     
4.8   Convertible Promissory Note dated March 5, 2020 issued by SmartMetric, Inc. in favor of GHS Investments LLC               X
                     
5.1**   Legal Opinion of Lucosky Brookman LLP                
                     
10.1*   Assignment and Assumption Agreement dated 11/12/12 with Applied Cryptography   8-K   10.1   11/16/12    
                     
10.2   Subscription Agreement with May 2013 Investor   8-K   10.1   5/28/13    
                     
10.3*   Employment Agreement dated July 1, 2012 with Chaya Hendrick and Addendum dated 9/30/15   10-K   10.8   10/5/15    
                     
10.4*   Assignment and Assumption dated 9/3/13 with Applied Cryptography    10-K   10.04   10/13/17     
                     
10.5   Form of Securities Purchase Agreement with investors used between 2015 - 2017   10-K   10.05   10/13/17    

 

II-4

 

10.6*   Employment Agreement with Chaya Hendrick dated July 1, 2017   10-K   10.06   10/13/17    
                     
10.7*   Issued Patent License and Royalty Agreement dated 9/11/17 with Chaya Hendrick   10-K   10.07   10/13/17    
                     
10.8*   Jay Needelman Services Agreement   10-K/A   10.01   10/27/17    
                     
10.9   Manufacturer’s Representative Agreement   8-K   10.01   12/26/17    
                     
10.10   Agreement by and between the Company and Hogier Gartner CIA S.A. dated February 16, 2018   8-K   10.1   2/23/18    
                     
10.11*   2018 Professional/Consultant Stock Compensation Plan   S-8   10.1   7/18/18    
                     
10.12   Securities Purchase Agreement by and between the Company and Geneva Roth Remark Holdings, Inc., dated January 9, 2019   8-K   10.1   1/18/19    
                     
10.13   Equity Financing Agreement dated March 5, 2020 by and between SmartMetric, Inc. and GHS Investments LLC               X
                     
10.14   Registration Rights Agreement by and between the Company and GHS Investments LLC, dated March 5, 2020               X
                     
14.1   SmartMetric Code of Ethics   SB-2   16.1   9/3/04    
                     
21.1   Subsidiaries of the Registrant   S-B/A   21.1   2/3/05    
                     
23.1   Consent of AMC Auditing, LLC               X
                     
23.2   Consent of Prager Metis CPAs LLC               X
                     
23.3**   Consent of Lucosky Brookman LLP (included in Exhibit 5.1)                

 

* Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.

** To be filed by amendment

 

II-5

 

UNDERTAKINGS

 

The undersigned registrant hereby undertakes

 

1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

i. To include any Prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

ii. To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

 

iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

4. That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

i. Any Preliminary Prospectus or Prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

ii. Any free writing Prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

iii. The portion of any other free writing Prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

5. That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: Each Prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than Prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or Prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or Prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or Prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of the corporation in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such case.

 

II-6

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized on August 5, 2020.

 

SIGNATURE   TITLE
     
/s/ Chaya Hendrick  

President, Chief Executive Officer,

and Chairman of the Board

Chaya Hendrick    

  

In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated:

 

DATE   SIGNATURE   TITLE
         
August 5, 2020   /s/ Chaya Hendrick  

President, Chief Executive Officer,

and Chairman of the Board

    Chaya Hendrick   (Principal Executive Officer)
         
August 5, 2020   /s/ Jay Needelman   Chief Financial Officer and Director
    Jay Needelman   (Principal Financial and Accounting Officer)
         
August 5, 2020   /s/ Elizabeth Ryba   Director
    Elizabeth Ryba    

  

 

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Exhibit 4.8

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

  

Principal Amount: $35,000 Issue Date: March 5, 2020

 

CONVERTIBLE PROMISSORY NOTE

 

FOR VALUE RECEIVED, SmartMetric, Inc., a Nevada corporation (hereinafter called the “Borrower” or “Company”), hereby promises to pay to the order of GHS Investments LLC, a Nevada limited liability company, or its registered assigns (the “Holder”), the sum of $35,000, together with any interest as set forth herein, on December 5, 2020(the “Maturity Date”), and to pay interest on the unpaid principal balance hereof at the rate of ten percent (10%) (the “Interest Rate”) per annum from the funding date hereof (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. This Note may be prepaid in whole or in part as explicitly set forth herein. Interest shall commence accruing on the date that the Note is fully paid and shall be computed on the basis of a 360-day year and the actual number of days elapsed. All payments due hereunder (to the extent not converted into common stock, $0.001 par value per share (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in this Note, the term “business day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Equity Financing Agreement dated the date hereof, pursuant to which this Note was originally issued (as amended and/or restated from time to time, the “Purchase Agreement”).

 

 

 

 

This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Borrower and will not impose personal liability upon the holder thereof.

 

The undersigned hereby affirm all of their obligations to the Holder under all of the Transaction Documents and agree and affirm as follows: (i) that as of the date hereof, the undersigned have performed, satisfied and complied in all material respects with all the covenants, agreements and conditions under each of the Transaction Documents to be performed, satisfied or complied with by the undersigned; (ii) that the undersigned shall continue to perform each and every covenant, agreement and condition set forth in each of the Transaction Documents and this Note, and continue to be bound by each and all of the terms and provisions thereof and hereof; (iii) that as of the date hereof, no default or Event of Default has occurred or is continuing under the Purchase Agreement, any Note or any other Transaction Documents, and no event has occurred that, with the passage of time, the giving of notice, or both, would constitute a default or an Event of Default under the Purchase Agreement, the Notes or any other Transaction Documents; and (iv) that as of the date hereof, no event, fact, or other set of circumstances has occurred which could reasonably be expected to have, cause, or result in a Material Adverse Effect.

The undersigned hereby acknowledge, represent, warrant and confirm to Holder that: (i) each of the Transaction Documents executed by the Company are valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms; and (ii) no oral representations, statements, or inducements have been made by Holder, or any agent or representative of Holder, with respect to this Note, any other Note, the Purchase Agreement, and all other Transaction Documents.

 

The following terms shall apply to this Note:

 

Article I. CONVERSION RIGHTS

 

1.1 Conversion Right. The Holder shall have the right at any time to convert all or any part of the outstanding and unpaid principal, interest, fees, or any other obligation owed pursuant to this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the Conversion Price (as defined below) determined as provided herein (a “Conversion”); provided, however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended(the “Exchange Act”), and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso, provided, further, however, that the limitations on conversion may be waived by the Holder upon, at the election of the Holder, not less than 61 days’ prior notice to the Borrower, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) (the numerator) by the applicable Conversion Price then in effect on the date specified in the notice of conversion (the denominator), in the form attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the Borrower by the Holder in accordance with Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New York time on such conversion date (the “Conversion Date”). The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion plus (2) at the Holder’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Note to the Conversion Date, provided however, that the Borrower shall have the right to pay any or all interest in cash plus (3) at the Holder’s option, on the amounts referred to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof.

 

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1.2 Conversion Price.

 

1.2 Conversion Price. Subject to the adjustments described herein, and provided that no Event of Default (as defined in Article III) has occurred, the Conversion Price shall equal $0.0175 (the “Fixed Conversion Price”), subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events. Notwithstanding anything herein to the contrary, upon delivery by the Holder to the Borrower of a Default Notice (as defined herein) setting forth the Event of Default under the Note, the Fixed Conversion Price shall be extinguished and of no further force or effect and the Variable Conversion Price (as defined below) shall immediately and irrevocably be effective. The “Variable Conversion Price” shall mean 70% multiplied by the Market Price (as defined herein) (representing a discount rate of 30%) (the Variable Conversion Price or the Fixed Conversion Price, as applicable the “Conversion Price”). “Market Price” means the lowest Trading Price (as defined below) for the Common Stock during the twenty (20) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the lesser of: (a) the lowest trade price on the Over-the-Counter Bulletin Board (the “OTCBB”), OTCQB or applicable trading market as reported by a reliable reporting service (“Reporting Service”) designated by the Holder or, if the OTCBB is not the principal trading market for such security, the trading price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no trading price of such security is available in any of the foregoing manners, the average of the trading prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc., or (b) the closing bid price on the OTCBB, OTCQB or applicable trading market as reported by a Reporting Service designated by the Holder or, if the OTCBB is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no closing bid price of such security is available in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc. To the extent the Conversion Price of the Borrower’s Common Stock closes below the par value per share, the Borrower will take all steps necessary to solicit the consent of the stockholders to reduce the par value to the lowest value possible under law. The Borrower agrees to honor all conversions submitted pending this adjustment. If the shares of the Borrower’s Common Stock have not been delivered within three (3) business days to the Holder, the Notice of Conversion may be rescinded. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the holders of a majority in interest of the Notes being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Notes. “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the OTCBB, OTCQB or on the principal securities exchange or other securities market on which the Common Stock is then being traded. If at any time the Conversion Price as determined hereunder for any conversion would be less than the par value of the Common Stock, then at the sole discretion of the Holder, the Conversion Price hereunder may equal such par value for such conversion and the Conversion Amount for such conversion may be increased to include Additional Principal, where “Additional Principal” means such additional amount to be added to the Conversion Amount to the extent necessary to cause the number of conversion shares issuable upon such conversion to equal the same number of conversion shares as would have been issued had the Conversion Price not been adjusted by the Holder to the par value price.

 

(a) Pro Rata Conversion; Disputes. In the event of a dispute as to the number of shares of Common Stock issuable to the Holder in connection with a conversion of this Note, the Borrower shall issue to the Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 4.13.

 

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1.3 Authorized Shares. The Borrower covenants that during the period the conversion right exists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares , free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note issued pursuant to the Purchase Agreement. The Borrower is required at all times to have authorized and reserved three times the number of shares that is actually issuable upon full conversion of the Note (based on the Conversion Price of the Notes in effect from time to time) (the “Reserved Amount”). The Reserved Amount shall be increased from time to time in accordance with the Borrower’s obligations pursuant to Section 5.5 of the Purchase Agreement. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes. The Borrower (i) acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Note. Notwithstanding the foregoing, in no event shall the Reserved Amount be lower than the initial Reserved Amount, regardless of any prior conversions.

 

Borrower’s failure to maintain or to replenish the Reserved Amount within three (3) business days of a request of the Holder, shall be an Event of Default under the Note.

 

1.4 Method of Conversion.

 

(a) Mechanics of Conversion. Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time from time to time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable means of communication dispatched on the Conversion Date prior to 5:00 p.m., New York, New York time) and (B) subject to Section 1.4(b), surrendering this Note at the principal office of the Borrower.

 

(b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaid principal amount of this Note is so converted. The Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such records of the Holder shall, prima facie, be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than the amount stated on the face hereof.

 

(c) Payment of Taxes. The Borrower shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that of the Holder (or in street name), and the Borrower shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder’s account) requesting the issuance thereof shall have paid to the Borrower the amount of any such tax or shall have established to the satisfaction of the Borrower that such tax has been paid.

 

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(d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates (or electronic shares via DWAC transfer, at the option of Holder) for the Common Stock issuable upon such conversion within three (3) business days after such receipt (the “Deadline”) (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement.

 

(e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 5:00 p.m., New York, New York time, on such date.

 

(f) Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal At Custodian (“DWAC”) system.

 

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(g) Failure to Deliver Common Stock Prior to Delivery Deadline. Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered by the Deadline (other than a failure due to the circumstances described in Section 1.3 above, which failure shall be governed by such Section) the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Borrower fails to deliver such Common Stock until the Borrower issues and delivers a certificate to the Holder or credit the Holder’s balance account with OTC for the number of shares of Common Stock to which the Holder is entitled upon such Holder’s conversion of any Conversion Amount (under Holder’s and Borrower’s expectation that any damages will tack back to the Issue Date). Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice to the Borrower by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. The Borrower agrees that the right to convert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate, interference with such conversion right are difficult if not impossible to qualify. Accordingly, the parties acknowledge that the liquidated damages provision contained in this Section 1.4(g) are justified.

 

(h) Rescindment of a Notice of Conversion. If (i) the Borrower fails to respond to Holder within one (1) business day from the Conversion Date confirming the details of Notice of Conversion, (ii) the Borrower fails to provide any of the shares of the Borrower’s Common Stock requested in the Notice of Conversion within three (3) business days from the date of receipt of the Note of Conversion, (iii) the Holder is unable to procure a legal opinion required to have the shares of the Borrower’s Common Stock issued unrestricted and/or deposited to sell for any reason related to the Borrower’s standing, (iv) the Holder is unable to deposit the shares of the Borrower’s Common Stock requested in the Notice of Conversion for any reason related to the Borrower’s standing, (v) at any time after a missed Deadline, at the Holder’s sole discretion, or (vi) if OTC Markets changes the Borrower’s designation to ‘Limited Information’ (Yield), ‘No Information’ (Stop Sign), ‘Caveat Emptor’ (Skull & Crossbones), ‘OTC’, ‘Other OTC’ or ‘Grey Market’ (Exclamation Mark Sign) or other trading restriction on the day of or any day after the Conversion Date, the Holder maintains the option and sole discretion to rescind the Notice of Conversion (“Rescindment”) with a “Notice of Rescindment.”

 

1.5 Concerning the Shares. The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) (“Rule 144”) or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor (as defined in the Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:

 

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

 

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The legend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefore free of any transfer legend if (i) the Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act, which opinion shall be reasonably accepted by the Borrower so that the sale or transfer is effected or (ii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold.In the event that the Borrower does not accept the opinion of counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.2 of the Note.

 

1.6 Effect of Certain Events.

 

(a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which more than 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shalleither: (i) be deemed to be an Event of Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. “Person” shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.

 

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(b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Note is issued and outstanding and prior to conversion of all of the Notes, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not affect any transaction described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiring entity (if not the Borrower) assumes by written instrument the obligations of this Section 1.6(b). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.

 

(c) Adjustment Due to Distribution. If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Borrower’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.

 

(d) Adjustment Due to Dilutive Issuance. If, at any time when any Notes are issued and outstanding, the Borrower issues or sells, or in accordance with this Section 1.6(d) hereof is deemed to have issued or sold, except for shares of Common Stock issued directly to vendors or suppliers of the Borrower in satisfaction of amounts owed to such vendors or suppliers (provided, however, that such vendors or suppliers shall not have an arrangement to transfer, sell or assign such shares of Common Stock prior to the issuance of such shares), any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive Issuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the consideration per share received by the Borrower in such Dilutive Issuance.

 

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The Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights or options (not including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “Options”) and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.

 

Additionally, the Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options), and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon such conversion or exchange” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.

 

(e) Purchase Rights. If, at any time when any Notes are issued and outstanding, the Borrower issues any convertible securities or rights to purchase stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders of any class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

 

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(f) Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 1.6, the Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of the Note.

 

1.7 Trading Market Limitations. Unless permitted by the applicable rules and regulations of the principal securities market on which the Common Stock is then listed or traded, in no event shall the Borrower issue upon conversion of or otherwise pursuant to this Note and the other Notes issued pursuant to the Purchase Agreement more than the maximum number of shares of Common Stock that the Borrower can issue pursuant to any rule of the principal United States securities market on which the Common Stock is then traded (the “Maximum Share Amount”), which shall be 4.99% of the total shares outstanding on the Closing Date (as defined in the Purchase Agreement), subject to equitable adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the date hereof. Once the Maximum Share Amount has been issued, if the Borrower fails to eliminate any prohibitions under applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Borrower or any of its securities on the Borrower’s ability to issue shares of Common Stock in excess of the Maximum Share Amount, in lieu of any further right to convert this Note, this will be considered an Event of Default under Section 3.2 of the Note.

 

1.8 Status as Shareholder. Upon submission of a Notice of Conversion by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a Holder of such converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Borrower to comply with the terms of this Note. Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Deadline with respect to a conversion of any portion of this Note for any reason, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Borrower) the Holder shall regain the rights of a Holder of this Note with respect to such unconverted portions of this Note and the Borrower shall, as soon as practicable, return such unconverted Note to the Holder or, if the Note has not been surrendered, adjust its records to reflect that such portion of this Note has not been converted. In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Section 1.3) for the Borrower’s failure to convert this Note.

 

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1.9 Prepayment. Notwithstanding anything to the contrary contained in this Note, the Borrower may prepay the amounts outstanding hereunder with the consent of the Holder pursuant to the following terms and conditions:

 

(a) At any time during the period beginning on the Issue Date and ending on the date which is sixty (60) calendar days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 120%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note.

 

(b) At any time during the period beginning the day which is sixty-one (61) calendar days following the Issue Date and ending on the date which is one hundred twenty (120) calendar days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 125%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note.

 

(c) At any time during the period beginning the day which is one hundred twenty one (121) calendar days following the Issue Date and ending on the date which is one hundred eighty (180) calendar days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 130%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note.

 

(d) After the expiration of one hundred eighty (180) calendar days following the Issue Date, the Borrower shall have no right of cash prepayment. For the avoidance of doubt, on the Maturity Date, the Borrower is expressly permitted to pay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 100% multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note. Such cash payment on the Maturity Date shall not be considered prepayment.

 

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Any notice of prepayment hereunder (an “Optional Prepayment Notice”) shall be delivered to the Holder of the Note at its registered addresses and shall state: (1) that the Borrower is exercising its right to prepay the Note, and (2) the date of prepayment which shall be not more than three (3) Trading Days from the date of the Optional Prepayment Notice. On the date fixed for prepayment (the “Optional Prepayment Date”), the Borrower shall make payment of the applicable prepayment amount to or upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date. If the Borrower delivers an Optional Prepayment Notice and fails to pay the applicable prepayment amount due to the Holder of the Note within two (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section 1.9.

 

Article II. CERTAIN COVENANTS

 

2.1 Distributions on Capital Stock. So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder’s written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock except for distributions pursuant to any shareholders’ rights plan which is approved by a majority of the Borrower’s disinterested directors.

 

2.2 Restriction on Stock Repurchases. So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder’s written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Borrower or any warrants, rights or options to purchase or acquire any such shares.

 

2.3 Borrowings. So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, create, incur, assume guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection, or suffer to exist any liability for borrowed money, except (a) borrowings in existence or committed on the date hereof and of which the Borrower has informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors financial institutions or other lenders incurred in the ordinary course of business or (c) borrowings, the proceeds of which shall be used to repay this Note.

 

2.4 Sale of Assets. So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.

 

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2.5 Advances and Loans. So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of the Borrower, except loans, credits or advances (a) in existence or committed on the date hereof and which the Borrower has informed Holder in writing prior to the date hereof, (b) made in the ordinary course of business or (c) not in excess of $100,000.

 

2.6 Section 3(a)(9) or 3(a)(10) Transaction. So long as this Note is outstanding, the Borrower shall not enter into any transaction or arrangement structured in accordance with, based upon, or related or pursuant to, in whole or in part, either Section 3(a)(9) of the Securities Act (a “3(a)(9) Transaction”) or Section 3(a)(l0) of the Securities Act (a “3(a)(l0) Transaction”). In the event that the Borrower does enter into, or makes any issuance of Common Stock related to a 3(a)(9) Transaction or a 3(a)(l0) Transaction while this Note is outstanding, a liquidated damages charge of 25% of the outstanding principal balance of this Note, but not less than Fifteen Thousand Dollars ($15,000), will be assessed and will become immediately due and payable to the Holder at its election in the form of cash payment or addition to the balance of this Note.

 

2.7 Preservation of Existence, etc. The Borrower shall maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, its existence, rights and privileges, and become or remain, and cause each of its Subsidiaries (other than dormant Subsidiaries that have no or minimum assets) to become or remain, duly qualified and in good standing in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary.

 

2.8 Non-circumvention. The Borrower hereby covenants and agrees that the Borrower will not, by amendment of its Certificate or Articles of Incorporation or Bylaws, or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all the provisions of this Note and take all action as may be required to protect the rights of the Holder.

 

2.9 Repayment from Proceeds. While any portion of this Note is outstanding, if the Borrower receives cash proceeds from any source or series of related or unrelated sources, including but not limited to, from payments from customers, the issuance of equity or debt, the conversion of outstanding warrants of the Borrower, the issuance of securities pursuant to an equity line of credit of the Borrower or the sale of assets, the Borrower shall, within one (1) business day of Borrower’s receipt of such proceeds, inform the Holder of such receipt, following which the Holder shall have the right in its sole discretion to require the Borrower to immediately apply all or any portion of such proceeds to repay all or any portion of the outstanding amounts owed under this Note. Failure of the Borrower to comply with this provision shall constitute an Event of Default. In the event that such proceeds are received by the Holder prior to the Maturity Date, the required prepayment shall be subject to the terms of Section 1.9 herein.

 

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Article III. EVENTS OF DEFAULT

 

If any of the following events of default (each, an “Event of Default”) shall occur:

 

3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the principal hereof or interest thereon when due on this Note, whether at maturity, upon acceleration or otherwise.

 

3.2 Conversion and the Shares. The Borrower fails to issue shares of Common Stock to the Holder (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, the Borrower directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for shares of Common Stock to be issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer agent not to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for three (3) business days after the Holder shall have delivered a Notice of Conversion. It is an obligation of the Borrower to remain current in its obligations to its transfer agent. It shall be an event of default of this Note, if a conversion of this Note is delayed, hindered or frustrated due to a balance owed by the Borrower to its transfer agent. If at the option of the Holder, the Holder advances any funds to the Borrower’s transfer agent in order to process a conversion, such advanced funds shall be paid by the Borrower to the Holder within forty-eight (48) hours of a demand from the Holder.

  

3.3 Breach of Covenants. The Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents including but not limited to the Purchase Agreement.

 

3.4 Breach of Representations and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.

 

3.5 Receiver or Trustee. The Company or any subsidiary of the Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.

 

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3.6 Judgments. Any money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary of the Borrower or any of its property or other assets for more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.

 

3.7 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company or the Borrower admits in writing its inability to pay its debts generally as they mature, or have filed against it an involuntary petition for bankruptcy.

 

3.8 Delisting of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCBB, OTCQB, OTC Pink or an equivalent replacement exchange, the Nasdaq Capital Market, the New York Stock Exchange, or the NYSE American.

 

3.9 Failure to Comply with the Exchange Act. The Borrower shall fail to timely comply with the reporting requirements of the Exchange Act (including but not limited to becoming delinquent in its filings); and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act.

 

3.10 Liquidation. Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.

 

3.11 Cessation of Operations. Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern” shall not be an admission that the Borrower cannot pay its debts as they become due.

 

3.12 Maintenance of Assets. The failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets which are necessary to conduct its business (whether now or in the future)or any disposition or conveyance of any material asset of the Borrower.

 

3.13 Financial Statement Restatement. The restatement of any financial statements filed by the Borrower with the SEC for any date or period from two years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison to the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.

 

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3.14 Reverse Splits. The Borrower effectuates a reverse split of its Common Stock without twenty (20) days prior written notice to the Holder.

 

3.16 Replacement of Transfer Agent. In the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower.

3.17 Cessation of Trading. Any cessation of trading of the Common Stock on at least one of the OTCBB, OTCQB, OTC Pink or an equivalent replacement exchange, the Nasdaq Capital Market, the New York Stock Exchange, or the NYSE American, and such cessation of trading shall continue for a period of five consecutive (5) Trading Days.

 

3.18 Cross-Default. Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default by the Borrower of any material covenant or other term or condition contained in any of the Other Agreements, other than any such breach or default which is cured by agreement of the parties, after the passage of all applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. “Other Agreements” means, collectively, all agreements and instruments between, among or by: (1) the Borrower, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory notes; provided, however, the term “Other Agreements” shall not include the agreements and instruments defined as the Documents. Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to the Holder.

 

3.19 Bid Price. The Borrower shall lose the “bid” price for its Common Stock ($0.0001 on the “Ask” with zero market makers on the “Bid” per Level 2)and/or a market (including the OTCBB, OTCQB or an equivalent replacement exchange).

 

3.20 OTC Markets Designation Markets changes the Borrower’s designation to ‘No Information’ (Stop Sign), ‘Caveat Emptor’ (Skull and Crossbones), or ‘OTC’, ‘Other OTC’ or ‘Grey Market’ (Exclamation Mark Sign).

 

3.21 Inside Information. Any attempt by the Borrower or its officers, directors, and/or affiliates to transmit, convey, disclose, or any actual transmittal, conveyance, or disclosure by the Borrower or its officers, directors, and/or affiliates of, material non-public information concerning the Borrower, to the Holder or its successors and assigns, which is not immediately cured by Borrower’s filing of a Form 8-K pursuant to Regulation FD on that same date.

 

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3.22 Unavailability of Rule 144. If, at any time on or after the date which is six (6) months after the Issue Date, the Holder is unable to (i) obtain a standard “144 legal opinion letter” from an attorney reasonably acceptable to the Holder, the Holder’s brokerage firm (and respective clearing firm), and the Borrower’s transfer agent in order to facilitate the Holder’s conversion of any portion of the Note into free trading shares of the Borrower’s Common Stock pursuant to Rule 144, and (ii) thereupon deposit such shares into the Holder’s brokerage account.

 

Upon the occurrence of any Event of Default specified in Sections 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9, 3.10,3.11, 3.12, 3.13, 3.14, 3.15, 3.16. 3.17, 3.18, 3.19, 3.20, 3.21, and/or 3.22 exercisable through the delivery of written notice to the Borrower by such Holders (the “Default Notice”), the Note shall become immediately due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to (i) 150%times the sum of (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the date of payment (the “Mandatory Prepayment Date”), on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment plus the amounts referred to in clauses (x), (y) and (z) shall collectively be known as the “Default Sum”) or (ii) at the option of the Holder, the “parity value” of the Default Sum to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuable upon conversion of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately preceding the Mandatory Prepayment Date as the “Conversion Date” for purposes of determining the lowest applicable Conversion Price, unless the Default Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion Date shall be the Conversion Date), multiplied by (b) the highest Trading Price for the Common Stock during the period beginning on the date of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the “Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.

 

The Holder shall have the right at any time, to require the Borrower to immediately issue, in lieu of the Default Amount, the number of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then in effect, subject to the terms of this Note. This requirement by the Borrower shall automatically apply upon the occurrence of an Event of Default without the need for any party to give any notice or take any other action.

 

If the Holder shall commence an action or proceeding to enforce any provisions of this Note, including, without limitation, engaging an attorney, then if the Holder prevails in such action, the Holder shall be reimbursed by the Borrower for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.

 

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Article IV. MISCELLANEOUS

 

4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.

 

4.2 Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:

 

If to the Borrower, to:

 

SmartMetric, Inc.

3960 Howard Hughes Parkway, Suite 500

Las Vegas, NV 89169

Attn: Chaya Hendrick, President and CEO

 

If to the Holder:

 

GHS Investments LLC

420 Jericho Turnpike, Suite 102

Jericho, New York 11753

  

4.3 Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder. The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.

 

4.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns. Neither the Borrower nor the Holder shall assign this Note or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, the Holder may assign its rights hereunder to any “accredited investor” (as defined in Rule 501(a) of the 1933 Act) in a private transaction from the Holder or to any of its “affiliates”, as that term is defined under the 1934 Act, without the consent of the Borrower. Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bonafide margin account or other lending arrangement. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than the amount stated on the face hereof.

 

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4.5 Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay the Holder hereof reasonable costs of collection, including reasonable attorneys’ fees.

 

4.6 Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in the state courts of New York, in the federal courts located in the District of the State of New York, or in such other jurisdiction and venue as the Holder may determine in its sole discretion.. The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. THE BORROWER HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

 

4.7 Certain Amounts. Whenever pursuant to this Note the Borrower is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest, the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Note may be difficult to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant to this Note. The Borrower and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Note into shares of Common Stock.

 

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4.8 Purchase Agreement. By its acceptance of this Note, each party agrees to be bound by the applicable terms of the Purchase Agreement.

 

4.9 Notice of Corporate Events. Except as otherwise provided below, the Holder of this Note shall have no rights as a Holder of Common Stock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide the Holder with prior notification of any meeting of the Borrower’s shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Borrower of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. The Borrower shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section 4.9 including, but not limited to, name changes, recapitalizations, etc. as soon as possible under law.

 

4.10 Usury. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable provision shall automatically be revised to equal the maximum rate of interest or other amount deemed interest permitted under applicable law. The Borrower covenants (to the extent that it may lawfully do so) that it will not seek to claim or take advantage of any usury law that would prohibit or forgive the Borrower from paying all or a portion of the principal or interest on this Note.

 

4.11 Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required. No provision of this Note shall alter or impair the obligation of the Borrower, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place, and rate, and in the form, herein prescribed.

 

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4.12 Severability. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.

 

4.13 Dispute Resolution. In the case of a dispute as to the determination of the Conversion Price, Conversion Amount, any prepayment amount or Default Amount, Default Sum, Closing or Maturity Date, the closing bid price, or fair market value (as the case may be) or the arithmetic calculation of the Conversion Price or the applicable prepayment amount(s) (as the case may be), the Borrower or the Holder shall submit the disputed determinations or arithmetic calculations via facsimile (i) within two (2) Business Days after receipt of the applicable notice giving rise to such dispute to the Borrower or the Holder or (ii) if no notice gave rise to such dispute, at any time after the Holder learned of the circumstances giving rise to such dispute. If the Holder and the Borrower are unable to agree upon such determination or calculation within two (2) Business Days of such disputed determination or arithmetic calculation (as the case may be) being submitted to the Borrower or the Holder, then the Borrower shall, within two (2) Business Days, submit via facsimile (a) the disputed determination of the Conversion Price, the closing bid price, the or fair market value (as the case may be) to an independent, reputable investment bank selected by the Borrower and approved by the Holder or (b) the disputed arithmetic calculation of the Conversion Price, Conversion Amount, any prepayment amount or Default Amount, Default Sum to an independent, outside accountant selected by the Holder that is reasonably acceptable to the Borrower. The Borrower shall cause at its expense the investment bank or the accountant to perform the determinations or calculations and notify the Borrower and the Holder of the results no later than ten (10) Business Days from the time it receives such disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation shall be binding upon all parties absent demonstrable error.

 

4.14 Terms of Future Financings. So long as this Note is outstanding, upon any issuance by the Borrower or any of its subsidiaries of any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note (other than a future financing with the Holder), then the Borrower shall notify the Holder of such additional or more favorable term and such term, at Holder’s option, shall become a part of the transaction documents with the Holder. The types of terms contained in another security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, prepayment rate, conversion lookback periods, interest rates, original issue discounts, stock sale price, private placement price per share, and warrant coverage.

 

[signature page follows]

 

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IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer as of the date first above written.

 

  SMARTMETRIC, INC.
     
  By:                    
  Name:  
  Title:  

 

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EXHIBIT A

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert $_________________ principal amount of the Note (defined below)together with $________________ of accrued and unpaid interest thereto, totaling $_____________into that number of shares of Common Stock to be issued pursuant to the conversion of the Note (“Common Stock”) as set forth below, of SmartMetric, Inc., a Nevada corporation (the “Borrower”), according to the conditions of the convertible note of the Borrower dated as of March 5, 2020(the “Note”), as of the date written below. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any.

 

Box Checked as to applicable instructions:

 

  The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal At Custodian system (“DWAC Transfer”).

 

Name of DTC Prime Broker:

Account Number:

 

  The undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:

 

Name: [NAME]

Address: [ADDRESS]

 

  Date of Conversion:   _____________
  Applicable Conversion Price:   $____________
  Number of Shares of Common Stock to be Issued    
  Pursuant to Conversion of the Notes:   ______________
  Amount of Principal Balance Due remaining    
  Under the Note after this conversion:   ______________
  Accrued and unpaid interest remaining:   ______________

 

[HOLDER]

 

  By:    
  Name: [NAME]  
  Title: [TITLE]  
  Date: [DATE]  

 

 

 

 

 

Exhibit 10.13

 

EQUITY FINANCING AGREEMENT

 

This EQUITY FINANCING AGREEMENT (the “Agreement”), dated as of March 5, 2020 (the “Execution Date”), is entered into by and between SmartMetric., a Nevada corporation with its principal executive office at 3960 Howard Hughes Parkway, Suite 500, Las Vegas, NV (the “Company”), and GHS Investments LLC, a Nevada limited liability company, with offices at 420 Jericho Turnpike, Suite 102, Jericho, NY 11753 (the “Investor”).

 

RECITALS:

 

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Investor shall invest up to Four Million Dollars ($4,000,000) (the "Commitment Amount"), over the course of thirty six (36) months immediately following the Effective Date (the “Contract Period”) to purchase the Company’s common stock, par value $0.001 per share (the “Common Stock”);

 

WHEREAS, such investments will be made in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”), Rule 506 of Regulation D promulgated by the SEC under the 1933 Act, and/or upon such other exemption from the registration requirements of the 1933 Act as may be available with respect to any or all of the investments in Common Stock to be made hereunder; and

 

WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as Exhibit A (the “Registration Rights Agreement”) pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act, and the rules and regulations promulgated thereunder, and applicable state securities laws.

 

NOW THEREFORE, in consideration of the foregoing recitals, which shall be considered an integral part of this Agreement, the covenants and agreements set forth hereafter, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Investor hereby agree as follows:

 

SECTION I.

DEFINITIONS

 

For all purposes of and under this Agreement, the following terms shall have the respective meanings below, and such meanings shall be equally applicable to the singular and plural forms of such defined terms.

 

1933 Act” shall have the meaning set forth in the recitals.

 

1934 Act” shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the SEC thereunder, all as the same will then be in effect.

 

Affiliate” shall have the meaning set forth in Section 5.7.

 

Agreement” shall have the meaning set forth in the preamble.

 

Articles of Incorporation” shall have the meaning set forth in Section 4.3.

 

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By-laws” shall have the meaning set forth in Section 4.3.

 

Closing” shall have the meaning set forth in Section 2.4.


Closing Date” shall have the meaning set forth in Section 2.4.

 

Commitment Note” shall have the meaning set forth in Section 2.7

 

Common Stock” shall have the meaning set forth in the recitals.

 

Control” or “Controls” shall have the meaning set forth in Section 5.7.

 

Effective Date” shall mean the date the SEC declares effective under the 1933 Act the Registration Statement covering the Securities.

 

Environmental Laws” shall have the meaning set forth in Section 4.13.

 

Execution Date” shall have the meaning set forth in the preamble.

 

Indemnified Liabilities” shall have the meaning set forth in Section 10.

 

Indemnitees” shall have the meaning set forth in Section 10.

 

Indemnitor” shall have the meaning set forth in Section 10.

 

Ineffective Period” shall mean any period of time that the Registration Statement or any supplemental registration statement becomes ineffective or unavailable for use for the sale or resale, as applicable, of any or all of the Registrable Securities (as defined in the Registration Rights Agreement) for any reason (or in the event the prospectus under either of the above is not current and deliverable) during any time period required under the Registration Rights Agreement.

 

Investor” shall have the meaning set forth in the preamble.

 

“Market Price” shall mean the lowest traded price of the Common Stock during the Pricing Period.

 

Material Adverse Effect” shall have the meaning set forth in Section 4.1.

 

Maximum Common Stock Issuance” shall have the meaning set forth in Section 2.5.

 

Open Period” shall mean the period beginning on and including the Trading Day immediately following the Effective Date and ending on the termination of the Agreement in accordance with Section 8.

 

Pricing Period” shall mean ten (10) consecutive Trading Days preceding the receipt of the applicable Put Notice.

 

Principal Market” shall mean the New York Stock Exchange, the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the OTC Markets, whichever is the principal market on which the Common Stock is listed.

 

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Prospectus” shall mean the prospectus, preliminary prospectus and supplemental prospectus used in connection with the Registration Statement.

 

Purchase Amount” shall mean the total amount being paid by the Investor on a particular Closing Date to purchase the Securities.

 

Purchase Price” shall mean eighty percent (80%) of the Market Price.

 

Put” shall mean the Company is entitled to request equity investments (the “Put” or “Puts”) by the Investor, pursuant to which the Company will issue Common Stock to the Investor with an aggregate Purchase Price equal to the value of the Put, subject to a price per share calculation based on the Market Price.

 

Put Amount” shall mean the total dollar amount requested by the Company pursuant to an applicable Put. The timing and amounts of each Put shall be at the discretion of the Company. The maximum dollar amount of each Put will not exceed two hundred percent (200%) of the average daily trading dollar volume for the Common Stock during the ten (10) consecutive Trading Days preceding the Put Notice Date. No Put will be made in an amount greater than five hundred thousand dollars ($500,000). Puts are further limited to the Investor owning no more than 4.99% of the outstanding stock of the Company at any given time.

 

Put Notice” shall mean a written notice sent to the Investor by the Company stating the Put Amount in U.S. dollars that the Company intends to sell to the Investor pursuant to the terms of the Agreement and stating the current number of Shares issued and outstanding on such date.

 

Put Notice Date” shall mean the Trading Day on which the Investor receives a Put Notice.

 

Put Restriction” shall mean a minimum of ten (10) Trading Days following a Put Notice Date. During this time, the Company shall not be entitled to deliver another Put Notice.

 

Put Shares” shall have the meaning set forth in Section 2.4.

 

Registered Offering Transaction Documents” shall mean this Agreement, the Registration Rights Agreement and the Commitment Note between the Company and the Investor as of the date herewith.

 

Registration Rights Agreement” shall have the meaning set forth in the recitals.

 

Registration Statement” means the registration statement of the Company filed under the 1933 Act covering the Securities issuable hereunder.

 

Related Party” shall have the meaning set forth in Section 5.7.

 

Resolution” shall have the meaning set forth in Section 7.5.

 

SEC” shall mean the U.S. Securities and Exchange Commission.

 

SEC Documents” shall have the meaning set forth in Section 4.6.

 

Securities” shall mean the shares of Common Stock issued pursuant to the terms of this Agreement.

 

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“Settlement Date” shall have the meaning set forth in Section 6.2.

 

Shares” shall mean the shares of the Common Stock.

 

Subsidiaries” shall have the meaning set forth in Section 4.1.

 

Trading Day” shall mean any day on which the Principal Market for the Common Stock is open for trading, from the hours of 9:30 am until 4:00 pm.

 

Transaction Costs” the Company shall bear the costs of the Registration Statement.

 

Waiting Period” shall have the meaning set forth in Section 2.2.

 

SECTION II

PURCHASE AND SALE OF COMMON STOCK

 

2.1 PURCHASE AND SALE OF COMMON STOCK. Subject to the terms and conditions set forth herein, the Company shall issue and sell to the Investor, and the Investor shall purchase from the Company, up to that number of Shares having an aggregate Purchase Price of Four Million Dollars ($4,000,000).

 

2.2 DELIVERY OF PUT NOTICES. Subject to the terms and conditions herein, and from time to time during the Open Period, the Company may, in its sole discretion, deliver a Put Notice to the Investor which states the dollar amount (designated in U.S. Dollars), which the Company intends to sell to the Investor on a Closing Date (the “Put”). The Put Notice shall be in the form attached hereto as Exhibit C and incorporated herein by reference. The Purchase Price of the Put shall be eighty percent (80%) percent of the Market Price. During the Open Period, the Company shall not be entitled to submit a Put Notice until after the previous Closing has been completed. There will be a minimum of ten (10) trading days between Put Notices. No Put will be made in an amount greater than five hundred thousand dollars ($500,000).

 

2.3 CONDITIONS TO INVESTOR’S OBLIGATION TO PURCHASE SHARES. Notwithstanding anything to the contrary in this Agreement, the Company shall not be entitled to deliver a Put Notice and the Investor shall not be obligated to purchase any Shares at a Closing unless each of the following conditions are satisfied:

 

i. a Registration Statement shall have been declared effective and shall remain effective and available for the resale of all the Registrable Securities (as defined in the Registration Rights Agreement) at all times until the Closing with respect to the subject Put Notice;

 

ii. at all times during the period beginning on the related Put Notice Date and ending on and including the related Closing Date, the Common Stock shall have been listed or quoted for trading on the Principal Market and shall not have been suspended from trading thereon for a period of two (2) consecutive Trading Days during the Open Period and the Company shall not have been notified of any pending or threatened proceeding or other action to suspend the trading of the Common Stock;

 

iii. the Company has complied with its obligations and is otherwise not in breach of or in default under, this Agreement, the Registration Rights Agreement or any other agreement executed between the parties, which has not been cured prior to delivery of the Put Notice;

 

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iv. no injunction shall have been issued and remain in force, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Securities; and

 

v. the issuance of the Securities will not violate any requirements of the Principal Market.

 

If any of the events described in clauses (i) through (v) above occurs during a Pricing Period, then the Investor shall have no obligation to purchase the Put Amount of Common Stock set forth in the applicable Put Notice.

 

2.4 MECHANICS OF PURCHASE OF SHARES BY INVESTOR. Subject to the satisfaction of the conditions set forth in Sections 2.5, 7 and 8 of this Agreement, at the end of the Pricing Period, the Purchase Price shall be established and an amount of Shares equaling one hundred percent (100%) of the Put Amount (the “Put Shares”) shall be delivered to the Investor’s broker for a particular Put. The Investor shall cause the Put Amount to be placed into escrow within one Trading Day of the Put Notice Date.

The Closing of a Put shall occur upon the first Trading Day following the confirmation of receipt and approval for trading by Investor's broker of the Put Shares, whereby the Company shall have caused the Transfer Agent to electronically transmit, prior to the applicable Closing Date, the applicable Put Shares by crediting the account of the Investor's broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. The Investor shall deliver (by informing the designated escrow agent) the Purchase Amount specified in the Put Notice, less deposit and clearing fees, by wire transfer of immediately available funds to an account designated by the Company if the aforementioned receipt and approval are confirmed before 9:30 AM ET or on the following Trading Day if receipt and approval by the Investor's broker is made after 9:30 AM ET("Closing Date" or "Closing"). In addition, on or prior to such Closing Date, each of the Company and Investor shall deliver to each other all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein.

 

2.5 OVERALL LIMIT ON COMMON STOCK ISSUABLE. Notwithstanding anything contained herein to the contrary, if during the Open Period the Company becomes listed on an exchange which limits the number of shares of Common Stock that may be issued without shareholder approval, then the number of Shares issuable by the Company and purchasable by the Investor, shall not exceed that number of the shares of Common Stock that may be issuable without shareholder approval (the “Maximum Common Stock Issuance”). If such issuance of shares of Common Stock could cause a delisting on the Principal Market then the Maximum Common Stock Issuance shall first be approved by the Company’s shareholders in accordance with applicable law and the By-laws and the Articles of Incorporation of the Company. The parties understand and agree that the Company’s failure to seek or obtain such shareholder approval shall in no way adversely affect the validity and due authorization of the issuance and sale of Securities or the Investor’s obligation in accordance with the terms and conditions hereof to purchase a number of Shares in the aggregate up to the Maximum Common Stock Issuance, and that such approval pertains only to the applicability of the Maximum Common Stock Issuance limitation provided in this Section 2.5.

 

2.6 LIMITATION ON AMOUNT OF OWNERSHIP. Notwithstanding anything to the contrary in this Agreement, in no event shall the Investor be entitled to purchase that number of Shares, which when added to the sum of the number of shares of Common Stock beneficially owned (as such term is defined under Section 13(d) and Rule 13d-3 of the 1934 Act), by the Investor, would exceed 4.99% of the number of shares of Common Stock outstanding on the Closing Date, as determined in accordance with Rule 13d-1(j) of the 1934 Act.

 

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2.7 COMMITMENT NOTE. The Company shall issue to the Investor a thirty-five thousand dollar ($35,000) convertible promissory note to offset transaction costs (“Commitment Note”). The first $20,000 of the Commitment Note shall be deemed earned upon the execution of this Agreement and the remaining $15,000 of the Commitment Note shall be deemed earned upon payment by the Investor of the Company’s legal fees in the amount of $15,000.

 

SECTION III

 

INVESTOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS

 

The Investor represents and warrants to the Company, and covenants, that to the best of the Investor's knowledge:

 

3.1 SOPHISTICATED INVESTOR. The Investor has, by reason of its business and financial experience, such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that it is capable of (I) evaluating the merits and risks of an investment in the Securities and making an informed investment decision; (II) protecting its own interest; and (III) bearing the economic risk of such investment for an indefinite period of time.

 

3.2 AUTHORIZATION; ENFORCEMENT. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Investor and is a valid and binding agreement of the Investor enforceable against the Investor in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

 

3.3 SECTION 9 OF THE 1934 ACT. During the term of this Agreement, the Investor will comply with the provisions of Section 9 of the 1934 Act, and the rules promulgated thereunder, with respect to transactions involving the Common Stock.

 

3.4 ACCREDITED INVESTOR. Investor is an “Accredited Investor” as that term is defined in Rule 501(a) of Regulation D of the 1933 Act.

 

3.5 NO CONFLICTS. The execution, delivery and performance of the Documents by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby will not result in a violation of Partnership Agreement or other organizational documents of the Investor.

 

3.6 OPPORTUNITY TO DISCUSS. The Investor has received all materials relating to the Company’s business, finance and operations which it has requested. The Investor has had an opportunity to discuss the business, management and financial affairs of the Company with the Company’s management.

 

3.7 INVESTMENT PURPOSES. The Investor is purchasing the Securities for its own account for investment purposes and not with a view towards distribution and agrees to resell or otherwise dispose of the Securities solely in accordance with the registration provisions of the 1933 Act (or pursuant to an exemption from such registration provisions).

 

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3.8 NO REGISTRATION AS A DEALER. The Investor is not required to be registered as a “dealer” under the 1934 Act, either as a result of its execution and performance of its obligations under this Agreement or otherwise.

 

3.9 GOOD STANDING. The Investor is a limited liability company, duly organized, validly existing and in good standing in the State of Nevada.

 

3.10 TAX LIABILITIES. The Investor understands that it is liable for its own tax liabilities.

 

3.11 REGULATION M. The Investor will comply with Regulation M under the 1934 Act, if applicable.

 

3.12 PROHIBITED TRADING. No short sales shall be permitted by the Investor or its affiliates during the period commencing on the Execution Date and continuing through the termination of this Agreement.

 

SECTION IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

Except as set forth in the Schedules attached hereto, or as disclosed on the Company’s SEC Documents, the Company represents and warrants to the Investor that:

 

4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Nevada, and has the requisite corporate power and authorization to own its properties and to carry on its business as now being conducted. Both the Company and the companies it owns or controls (“Subsidiaries”) are duly qualified to do business and are in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means a change, event, circumstance, effect or state of facts that has had or is reasonably likely to have, a material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith, or on the authority or ability of the Company to perform its obligations under the Registered offering Transaction Documents.

 

4.2 AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS.

 

i. The Company has the requisite corporate power and authority to enter into and perform this Agreement and the Registration Rights Agreement (collectively, the “Registered Offering Transaction Documents”), and to issue the Securities in accordance with the terms hereof and thereof.

 

ii. The execution and delivery of the Registered Offering Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the issuance of the Securities pursuant to this Agreement, have been duly and validly authorized by the Company’s Board of Directors and no further consent or authorization is required by the Company, its Board of Directors, or its shareholders.

 

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iii. The Registered Offering Transaction Documents have been duly and validly executed and delivered by the Company.

 

iv. The Registered Offering Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors’ rights and remedies.

 

4.3 CAPITALIZATION. As of the date hereof, the authorized capital stock of the Company consists of: (i)600,000,000 shares of the Common Stock, par value $0.001 per share, of which as of the date hereof 312,936,217 shares are issued and outstanding; and, (ii) 5,000,000 shares of Preferred Stock, par value $0.001, of which as of the date hereof 716,800 Preferred Stock are issued and outstanding. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable.

Except as disclosed in the Company’s publicly available filings with the SEC and as will be disclosed in the Registration Statement, and based on the best information available and efforts of the Company’s management, or as otherwise set forth on Schedule 4.3:

 

i. no shares of the Company’s capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company;

 

ii. there are no outstanding debt securities;

 

iii. there are no outstanding shares of capital stock, options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries;

 

iv. there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except the Registration Rights Agreement);

 

v. there are no outstanding securities of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries;

 

vi. there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in this Agreement;

 

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vii. the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and

 

viii. there is no dispute as to the classification of any shares of the Company’s capital stock.

 

The Company has furnished to the Investor, or the Investor has had access through EDGAR to, true and correct copies of the Company’s Articles of Incorporation and all amendments thereto, as in effect on the date hereof (the “Articles of Incorporation”), and the Company’s By-laws and all amendments thereto, as in effect on the date hereof (the “By-laws”), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto.

 

4.4 ISSUANCE OF SHARES. As of the filing of the Registration Statement the Company will have reserved the amount of Shares included in the Registration Statement for issuance pursuant to the Registered Offering Transaction Documents, which have been duly authorized and reserved (subject to adjustment pursuant to the Company’s covenant set forth in Section 5.5 below) pursuant to this Agreement. Upon issuance in accordance with this Agreement, the Securities will be validly issued, fully paid for and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. In the event the Company cannot register a sufficient number of Shares for issuance pursuant to this Agreement, the Company will use its best efforts to authorize and reserve for issuance the number of Shares required for the Company to perform its obligations hereunder as soon as reasonably practicable.

 

4.5 NO CONFLICTS. The execution, delivery and performance of the Registered Offering Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby will not (i) result in a violation of the Articles of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws; or (ii) conflict with, or constitute a material default (or an event which with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, contract, indenture mortgage, indebtedness or instrument to which the Company or any of its Subsidiaries is a party, or to the Company’s knowledge result in a violation of any law, rule, regulation, order, judgment or decree (including United States federal and state securities laws and regulations and the rules and regulations of the Principal Market or principal securities exchange or trading market on which the Common Stock is traded or listed) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected. Neither the Company nor its Subsidiaries is in violation of any term of, or in default under, the Articles of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws or their organizational charter or by-laws, respectively, or any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, except for possible conflicts, defaults, terminations, amendments, accelerations, cancellations and violations that would not individually or in the aggregate have or constitute a Material Adverse Effect. The business of the Company and its Subsidiaries is not being conducted, and shall not be conducted, in violation of any law, statute, ordinance, rule, order or regulation of any governmental authority or agency, regulatory or self-regulatory agency, or court, except for possible violations the sanctions for which either individually or in the aggregate would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act or any securities laws of any states, to the Company’s knowledge, the Company is not required to obtain any consent, authorization, permit or order of, or make any filing or registration (except the filing of a registration statement as outlined in the Registration Rights Agreement between the parties) with, any court, governmental authority or agency, regulatory or self-regulatory agency or other third party in order for it to execute, deliver or perform any of its obligations under, or contemplated by, the Registered Offering Transaction Documents in accordance with the terms hereof or thereof. All consents, authorizations, permits, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof and are in full force and effect as of the date hereof. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company is not, and will not be, in violation of the listing requirements of the Principal Market as in effect on the date hereof and on each of the Closing Dates and is not aware of any facts which would reasonably lead to delisting of the Common Stock by the Principal Market in the foreseeable future.

 

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4.6 SEC DOCUMENTS; FINANCIAL STATEMENTS. As of the date hereof, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, and amendments thereto, being hereinafter referred to as the “SEC Documents”). The Company has delivered to the Investor or its representatives, or they have had access through EDGAR to, true and complete copies of the SEC Documents. As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC or the time they were amended, if amended, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, by a firm that is a member of the Public Companies Accounting Oversight Board (“PCAOB”) consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other written information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents, including, without limitation, information referred to in Section 4.3 of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. Neither the Company nor any of its Subsidiaries or any of their officers, directors, employees or agents have provided the Investor with any material, nonpublic information which was not publicly disclosed prior to the date hereof and any material, nonpublic information provided to the Investor by the Company or its Subsidiaries or any of their officers, directors, employees or agents prior to any Closing Date shall be publicly disclosed by the Company prior to such Closing Date.

 

4.7 ABSENCE OF CERTAIN CHANGES. Except as otherwise set forth in the SEC Documents, the Company does not intend to change the business operations of the Company in any material way. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings.

 

4.8 ABSENCE OF LITIGATION AND/OR REGULATORY PROCEEDINGS. Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of Company or any of its Subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company’s Subsidiaries or any of the Company’s or the Company’s Subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a Material Adverse Effect.

 

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4.9 ACKNOWLEDGMENT REGARDING INVESTOR’S PURCHASE OF SHARES. The Company acknowledges and agrees that the Investor is acting solely in the capacity of an arm’s length investor with respect to the Registered Offering Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Registered Offering Transaction Documents and the transactions contemplated hereby and thereby and any advice given by the Investor or any of its respective representatives or agents in connection with the Registered Offering Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investor’s purchase of the Securities, and is not being relied on by the Company. The Company further represents to the Investor that the Company’s decision to enter into the Registered Offering Transaction Documents has been based solely on the independent evaluation by the Company and its representatives.

 

4.10 NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR CIRCUMSTANCES. Except as set forth in the SEC Documents, as of the date hereof, no event, liability, development or circumstance has occurred or exists, or to the Company’s knowledge is contemplated to occur, with respect to the Company or its Subsidiaries or their respective business, properties, assets, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced.

 

4.11 EMPLOYEE RELATIONS. Neither the Company nor any of its Subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute threatened. Neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that relations with their employees are good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has notified the Company that such officer intends to leave the Company’s employ or otherwise terminate such officer’s employment with the Company.

 

4.12 INTELLECTUAL PROPERTY RIGHTS. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. Except as set forth in the SEC Documents, none of the Company’s trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights necessary to conduct its business as now or as proposed to be conducted have expired or terminated, or are expected to expire or terminate within two (2) years from the date of this Agreement. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, except as set forth in the SEC Documents, there is no claim, action or proceeding being made or brought against, or to the Company’s knowledge, being threatened against, the Company or its Subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and its Subsidiaries have taken commercially reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties.

 

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4.13 ENVIRONMENTAL LAWS. The Company and its Subsidiaries (i) are, to the knowledge of the management and directors of the Company and its Subsidiaries, in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”); (ii) have, to the knowledge of the management and directors of the Company, received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (iii) are in compliance, to the knowledge of the management and directors of the Company, with all terms and conditions of any such permit, license or approval where, in each of the three (3) foregoing cases, the failure to so comply would have, individually or in the aggregate, a Material Adverse Effect.

 

4.14 TITLE. The Company and its Subsidiaries have good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the SEC Documents or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its Subsidiaries. Any real property and facilities held under lease by the Company or any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries.

 

4.15 INSURANCE. Each of the Company’s Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company reasonably believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any of its Subsidiaries has been refused any insurance coverage sought or applied for and neither the Company nor its Subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.

 

4.16 REGULATORY PERMITS. The Company and its Subsidiaries have in full force and effect all certificates, approvals, authorizations and permits from the appropriate federal, state, local or foreign regulatory authorities and comparable foreign regulatory agencies, necessary to own, lease or operate their respective properties and assets and conduct their respective businesses, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, approval, authorization or permit, except for such certificates, approvals, authorizations or permits which if not obtained, or such revocations or modifications which, would not have a Material Adverse Effect.

 

4.17 INTERNAL ACCOUNTING CONTROLS. Except as otherwise set forth in the SEC Documents, the Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles by a firm with membership to the PCAOB and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company’s management has determined that the Company’s internal accounting controls were not effective as of the date of this Agreement as further described in the SEC Documents.

 

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4.18 NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company’s officers has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company’s officers has or is expected to have a Material Adverse Effect.

 

4.19 TAX STATUS. The Company and each of its Subsidiaries has made or filed all United States federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

 

4.20 CERTAIN TRANSACTIONS. Except as set forth in the SEC Documents filed at least ten (10) days prior to the date hereof and except for arm’s length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from disinterested third parties, none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, such that disclosure would be required in the SEC Documents..

 

4.21 DILUTIVE EFFECT. The Company understands and acknowledges that the number of shares of Common Stock issuable upon purchases pursuant to this Agreement will increase in certain circumstances including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines during the period between the Effective Date and the end of the Open Period. The Company’s executive officers and directors have studied and fully understand the nature of the transactions contemplated by this Agreement and recognize that they have a potential dilutive effect on the shareholders of the Company. The Board of Directors of the Company has concluded, in its good faith business judgment, and with full understanding of the implications, that such issuance is in the best interests of the Company. The Company specifically acknowledges that, subject to such limitations as are expressly set forth in the Registered Offering Transaction Documents, its obligation to issue shares of Common Stock upon purchases pursuant to this Agreement is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company.

 

4.22 NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, nor any person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Common Stock to be offered as set forth in this Agreement.

 

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4.23 NO BROKERS, FINDERS OR FINANCIAL ADVISORY FEES OR COMMISSIONS. No brokers, finders or financial advisory fees or commissions will be payable by the Company, its agents or Subsidiaries, with respect to the transactions contemplated by this Agreement.

 

4.24 EXCLUSIVITY. The Company shall not pursue a similar equity financing transaction as envisioned hereunder (the “Equity Financing”) with any other party unless and until good faith negotiations have terminated between the Investor and the Company or until such time as the Registration Statement has been declared effective by the SEC.

 

SECTION V

COVENANTS OF THE COMPANY

 

5.1 BEST EFFORTS. The Company shall use all commercially reasonable efforts to timely satisfy each of the conditions set forth in Section 7 of this Agreement.

 

5.2 REPORTING STATUS. Until one of the following occurs, the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status, or take an action or fail to take any action, which would terminate its status as a reporting company under the 1934 Act: (i) this Agreement terminates pursuant to Section 8 and the Investor has the right to sell all of the Securities without restrictions pursuant to Rule 144 promulgated under the 1933 Act, or such other exemption, or (ii) the date on which the Investor has sold all the Securities and this Agreement has been terminated pursuant to Section 8.

 

5.3 USE OF PROCEEDS. The Company will use the proceeds from the sale of the Put Shares (excluding amounts paid by the Company for fees as set forth in the Registered Offering Transaction Documents) for general corporate and working capital purposes and acquisitions or assets, businesses or operations or for other purposes that the Board of Directors, in good faith, deem to be in the best interest of the Company.

 

5.4 FINANCIAL INFORMATION. During the Open Period, the Company agrees to make available to the Investor via EDGAR or other electronic means the following documents and information on the forms set forth: (i) within five (5) Trading Days after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any Registration Statements or amendments filed pursuant to the 1933 Act; (ii) copies of any notices and other information made available or given to the shareholders of the Company generally, contemporaneously with the making available or giving thereof to the shareholders; and (iii) within two (2) calendar days of filing or delivery thereof, copies of all documents filed with, and all correspondence sent to, the Principal Market, any securities exchange or market, or the Financial Industry Regulatory Association, unless such information is material nonpublic information.

 

5.5 RESERVATION OF SHARES. The Company shall take all action necessary to at all times have authorized, and reserved the amount of Shares included in the Company’s registration statement for issuance pursuant to the Registered Offering Transaction Documents. In the event that the Company determines that it does not have a sufficient number of authorized shares of Common Stock to reserve and keep available for issuance as described in this Section 5.5, the Company shall use all commercially reasonable efforts to increase the number of authorized shares of Common Stock by seeking shareholder approval for the authorization of such additional shares.

 

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5.6 LISTING. The Company shall promptly secure and maintain the listing of all of the Registrable Securities (as defined in the Registration Rights Agreement) on the Principal Market and each other national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, such listing of all Registrable Securities from time to time issuable under the terms of the Registered Offering Transaction Documents. Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market (excluding suspensions of not more than one (1) Trading Day resulting from business announcements by the Company). The Company shall promptly provide to the Investor copies of any notices it receives from the Principal Market regarding the continued eligibility of the Common Stock for listing on such automated quotation system or securities exchange. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 5.6.

 

5.7 TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall cause each of its Subsidiaries not to, enter into, amend, modify or supplement, or permit any Subsidiary to enter into, amend, modify or supplement, any agreement, transaction, commitment or arrangement with any of its or any Subsidiary’s officers, directors, persons who were officers or directors at any time during the previous two (2) years, shareholders who beneficially own 5% or more of the Common Stock, or Affiliates or with any individual related by blood, marriage or adoption to any such individual or with any entity in which any such entity or individual owns a 5% or more beneficial interest (each a “Related Party”), except for (i) customary employment arrangements and benefit programs on reasonable terms, (ii) any agreement, transaction, commitment or arrangement on an arms-length basis on terms no less favorable than terms which would have been obtainable from a disinterested third party other than such Related Party, or (iii) any agreement, transaction, commitment or arrangement which is approved by a majority of the disinterested directors of the Company. For purposes hereof, any director who is also an officer of the Company or any Subsidiary of the Company shall not be a disinterested director with respect to any such agreement, transaction, commitment or arrangement. “Affiliate” for purposes hereof means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a 5% or more equity interest in that person or entity, (ii) has 5% or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) is under common control with that person or entity. “Control” or “Controls” for purposes hereof means that a person or entity has the power, directly or indirectly, to conduct or govern the policies of another person or entity.

 

5.8 FILING OF FORM 8-K. On or before the date which is four (4) Trading Days after the Execution Date, the Company shall file a Current Report on Form 8-K with the SEC describing the terms of the transaction contemplated by the Registered Offering Transaction Documents in the form required by the 1934 Act, if such filing is required.

 

5.9 CORPORATE EXISTENCE. The Company shall use all commercially reasonable efforts to preserve and continue the corporate existence of the Company.

 

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5.10 NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION; SUSPENSION OF RIGHT TO MAKE A PUT. The Company shall promptly notify the Investor upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of the Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Securities for sale in any jurisdiction or the initiation or notice of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of a Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company’s reasonable determination that a post-effective amendment or supplement to the Registration Statement would be appropriate, and the Company shall promptly make available to Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to Investor any Put Notice during the continuation of any of the foregoing events in this Section 5.10.

 

5.11 TRANSFER AGENT. The Company shall deliver instructions to its transfer agent to issue Shares to the Investor that are issued to the Investor pursuant to the Equity Financing and transactions contemplated herein.

 

5.12 ACKNOWLEDGEMENT OF TERMS. The Company hereby represents and warrants to the Investor that: (i) it is voluntarily entering into this Agreement of its own free will, (ii) it is not entering this Agreement under economic duress, (iii) the terms of this Agreement are reasonable and fair to the Company, and (iv) the Company has had independent legal counsel of its own choosing review this Agreement, advise the Company with respect to this Agreement, and represent the Company in connection with this Agreement.

 

SECTION VI

CONDITIONS OF THE COMPANY’S OBLIGATION TO SELL

 

The obligation hereunder of the Company to issue and sell the Securities to the Investor is further subject to the satisfaction, at or before each Closing Date, of each of the following conditions set forth below. These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion.

 

6.1 The Investor shall have executed this Agreement and the Registration Rights Agreement and delivered the same to the Company.

 

6.2 The Investor shall have delivered to the Company the Purchase Price for the Securities being purchased by the Investor.

 

6.3 No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

SECTION VII

FURTHER CONDITIONS OF THE INVESTOR’S OBLIGATION TO PURCHASE

 

The obligation of the Investor hereunder to purchase Securities is subject to the satisfaction, on or before each Closing Date, of each of the following conditions set forth below.

 

7.1 The Company shall have executed the Registered Offering Transaction Documents and delivered the same to the Investor.

 

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7.2 The representations and warranties of the Company shall be true and correct as of the date when made and as of the applicable Closing Date as though made at that time and the Company shall have performed, satisfied and complied with the covenants, agreements and conditions required by the Registered Offering Transaction Documents to be performed, satisfied or complied with by the Company on or before such Closing Date. The Investor may request an update as of such Closing Date regarding the representation contained in Section 4.3.

 

7.3 The Company shall have executed and delivered to the Investor via DWAC the Securities (in such denominations as the Investor shall request) being purchased by the Investor at such Closing.

 

7.4 The Board of Directors of the Company shall have adopted resolutions consistent with Section 4.2(ii) (the “Resolutions”) and such Resolutions shall not have been amended or rescinded prior to such Closing Date.

 

7.5 No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

7.6 Within sixty (60) days after the Agreement is executed, the Company agrees to use its best efforts to file with the SEC the Registration Statement covering the shares of stock underlying the Equity Financing contemplated herein. Such Registration Statement shall conform to the requirements of the rules and regulations of the SEC, and be subject to the reasonable approval of the Investor. The Company will take any and all steps necessary to have its Registration Statement declared effective by the SEC within 30 days but no more than 90 days after the Company has filed its Registration Statement. The Registration Statement shall be effective on each Closing Date and no stop order suspending the effectiveness of the Registration statement shall be in effect or to the Company’s knowledge shall be pending or threatened. Furthermore, on each Closing Date (I) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to such Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of such Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC’s concerns have been addressed), and (II) no other suspension of the use or withdrawal of the effectiveness of such Registration Statement or related prospectus shall exist.

 

7.7 At the time of each Closing, the Registration Statement (including information or documents incorporated by reference therein) and any amendments or supplements thereto shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or which would require public disclosure or an update supplement to the prospectus.

 

7.8 If applicable, the shareholders of the Company shall have approved the issuance of any Shares in excess of the Maximum Common Stock Issuance in accordance with Section 2.5 or the Company shall have obtained appropriate approval pursuant to the requirements of applicable state and federal laws and the Company’s Articles of Incorporation and By-laws.

 

7.9 The conditions to such Closing set forth in Section 2.3 shall have been satisfied on or before such Closing Date.

 

7.10 The Company shall have certified to the Investor the number of Shares of Common Stock outstanding when a Put Notice is given to the Investor. The Company’s delivery of a Put Notice to the Investor constitutes the Company’s certification of the existence of the necessary number of shares of Common Stock reserved for issuance.

 

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SECTION VIII

TERMINATION

 

This Agreement shall terminate upon any of the following events:

 

8.1 when the Investor has purchased an aggregate of Four Million Dollars ($4,000,000) in the Common Stock of the Company pursuant to this Agreement;

 

8.2 thirty-six (36) months from the date of this Agreement's execution have elapsed; or

 

8.3 at such time that the Registration Statement is no longer in effect.

 

Any and all shares, or penalties, if any, due under this Agreement shall be immediately payable and due upon termination of this Agreement.

 

SECTION IX

SUSPENSION

 

This Agreement shall be suspended upon any of the following events, and shall remain suspended until such event is rectified:

 

i. The trading of the Common Stock is suspended by the SEC, the Principal Market or FINRA for a period of two (2) consecutive Trading Days during the Open Period; or

 

ii. The Common Stock ceases to be quoted, listed or traded on the Principal Market or the Registration Statement is no longer effective (except as permitted hereunder). Immediately upon the occurrence of one of the above-described events, the Company shall send written notice of such event to the Investor.

 

SECTION X

INDEMNIFICATION

 

In consideration of the parties mutual obligations set forth in the Transaction Documents, the Company ( the “Indemnitor”) shall defend, protect, indemnify and hold harmless the Investor and all of the investor’s shareholders, officers, directors, employees, counsel, and direct or indirect investors and any of the foregoing person’s agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and reasonable expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or relating to (I) any misrepresentation or breach of any representation or warranty made by the Indemnitor or any other certificate, instrument or document contemplated hereby or thereby; (II) any breach of any covenant, agreement or obligation of the Indemnitor contained in the Registered Offering Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby; or (III) any cause of action, suit or claim brought or made against such Indemnitee by a third party and arising out of or resulting from the execution, delivery, performance or enforcement of the Registered Offering Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, except insofar as any such misrepresentation, breach or any untrue statement, alleged untrue statement, omission or alleged omission is made in reliance upon and in conformity with information furnished to Indemnitor which is specifically intended for use in the preparation of any such Registration Statement, preliminary prospectus, prospectus or amendments to the prospectus. To the extent that the foregoing undertaking by the Indemnitor may be unenforceable for any reason, the Indemnitor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The indemnity provisions contained herein shall be in addition to any cause of action or similar rights Indemnitor may have, and any liabilities the Indemnitor or the Indemnitees may be subject to.

 

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SECTION XI

GOVERNING LAW; DISPUTES SUBMITTED TO ARBITRATION.

 

11.1 Law Governing this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state or federal courts located in New York City, New York State. The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The parties executing this Agreement and other agreements referred to herein or delivered in connection herewith on behalf of the Company agree to submit to the in personam jurisdiction of such courts and hereby irrevocably waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Documents by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

 

11.2 LEGAL FEES; AND MISCELLANEOUS FEES. Except as otherwise set forth in the Registered Offering Transaction Documents (including but not limited to Section V of the Registration Rights Agreement), each party shall pay the fees and expenses of its advisers, counsel, the accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. Any attorneys’ fees and expenses incurred by either the Company or the Investor in connection with the preparation, negotiation, execution and delivery of any amendments to this Agreement or relating to the enforcement of the rights of any party, after the occurrence of any breach of the terms of this Agreement by another party or any default by another party in respect of the transactions contemplated hereunder, shall be paid on demand by the party which breached the Agreement and/or defaulted, as the case may be. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of any Securities.

 

11.3 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile transmission, PDF, electronic signature or other similar electronic means with the same force and effect as if such signature page were an original thereof.

 

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11.4 HEADINGS; SINGULAR/PLURAL. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine.

 

11.5 SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

 

11.6 ENTIRE AGREEMENT; AMENDMENTS. This Agreement is the FINAL AGREEMENT between the Company and the Investor with respect to the terms and conditions set forth herein, and, the terms of this Agreement may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the Parties. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Investor, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. The execution and delivery of the Registered Offering Transaction Documents shall not alter the force and effect of any other agreements between the Parties, and the obligations under those agreements.

 

11.7 NOTICES. Any notices or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (I) upon receipt, when delivered personally; (II) upon receipt, when sent by email; or (III) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses for such communications shall be:

 

If to the Company:

 

 

 

 

 

 

With a copy to

(which copy shall not constitute notice):

 

 

SmartMetric, Inc.

3960 Howard Hughes Parkway

Suite 500

Las Vegas, NV 89169
Attn: Chaya Hendrick, President and CEO

 

 

Lucosky Brookman LLP

101 Wood Avenue South, Fifth Floor

Woodbridge, New Jersey 08830

Attn: Joseph M. Lucosky, Esq.

     

If to the Investor:

 

 

 

GHS Investments, LLC

420 Jericho Turnpike,
Suite 102
Jericho, NY 11753

 

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Each party shall provide five (5) days prior written notice to the other party of any change in address.

 

11.8 NO ASSIGNMENT. This Agreement may not be assigned.

 

11.9 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any other person, except that the Company acknowledges that the rights of the Investor may be enforced by its general partner.

 

11.10 SURVIVAL. The representations and warranties of the Company and the Investor contained in Sections 3 and 4, the agreements and covenants set forth in Sections 5 and 6, and the indemnification provisions set forth in Section 10, shall survive each of the Closings and the termination of this Agreement.

 

11.11 PUBLICITY. The Investor acknowledges that this Agreement and all or part of the Registered Offering Transaction Documents may be deemed to be “material contracts” as that term is defined by Item 601(b)(10) of Regulation S-K, and that the Company may therefore be required to file such documents as exhibits to reports or registration statements filed under the 1933 Act or the 1934 Act. The Investor further agrees that the status of such documents and materials as material contracts shall be determined solely by the Company, in consultation with its counsel.

 

11.12 FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

11.13 PLACEMENT AGENT. If so required, the Company agrees to pay a registered broker dealer, to act as placement agent. The Investor shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other persons or entities for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Registered Offering Transaction Documents. The Company shall indemnify and hold harmless the Investor, their employees, officers, directors, agents, and partners, and their respective affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney’s fees) and expenses incurred in respect of any such claimed or existing fees, as such fees and expenses are incurred.

 

11.14 NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party, as the parties mutually agree that each has had a full and fair opportunity to review this Agreement and seek the advice of counsel on it.

 

11.15 REMEDIES. The Investor shall have all rights and remedies set forth in this Agreement and the Registration Rights Agreement and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which the Investor has by law. Any person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any default or breach of any provision of this Agreement, including the recovery of reasonable attorneys fees and costs, and to exercise all other rights granted by law.

 

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11.16 PAYMENT SET ASIDE. To the extent that the Company makes a payment or payments to the Investor hereunder or under the Registration Rights Agreement or the Investor enforces or exercises its rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

 

11.17 PRICING OF COMMON STOCK. For purposes of this Agreement, the price of the Common Stock shall be as reported by Quotestream Media.

 

SECTION XII

NON-DISCLOSURE OF NON-PUBLIC INFORMATION

 

The Company shall not disclose non-public information to the Investor, its advisors, or its representatives.

 

Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 12 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading.

 

SECTION XIII

ACKNOWLEDGEMENTS OF THE PARTIES

 

Notwithstanding anything in this Agreement to the contrary, the parties hereto hereby acknowledge and agree to the following: (i) the Investor makes no representations or covenants that it will not engage in trading in the securities of the Company, other than as provided in Section 3.12 of this Agreement; (ii) the Company shall, by 8:30 a.m. EST on the fourth Trading Day following the date hereof, file a current report on Form 8-K disclosing the material terms of the transactions contemplated hereby and in the other Registered Offering Transaction Documents; (iii) the Company has not and shall not provide material non-public information to the Investor unless prior thereto the Investor shall have executed a written agreement regarding the confidentiality and use of such information; and (iv) the Company understands and confirms that the Investor will be relying on the acknowledgements set forth in clauses (i) through (iii) above if the Investor effects any transactions in the securities of the Company.

 

[Signature page follows]

 

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Your signature on this Signature Page evidences your agreement to be bound by the terms and conditions of the Investment Agreement as of the date first written above. The undersigned signatory hereby certifies that he has read and understands the Investment Agreement, and the representations made by the undersigned in this Investment Agreement are true and accurate, and agrees to be bound by its terms.

 

  GHS INVESTMENTS, LLC
   
  By:  
  Name:  
  Title: Member
   
  SMARTMETRIC, INC.
   
  By:  
  Name:  
  Title:  

 
[SIGNATURE PAGE OF EQUITY FINANCING AGREEMENT]

 

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LIST OF EXHIBITS

 

EXHIBIT A       Registration Rights Agreement

 

EXHIBIT B       Notice of Effectiveness

 

EXHIBIT C       Put Notice

 

EXHIBIT D       Put Settlement Sheet

 

24

 

 

EXHIBIT A

 

REGISTRATION RIGHTS AGREEMENT

 

See attached.

 

25

 

 

EXHIBIT B

 

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

 

Date: __________

 

[TRANSFER AGENT]

 

Re: SmartMetric, Inc.

 

Ladies and Gentlemen:

 

We are counsel to SmartMetric Inc., a _______corporation (the “Company”), and have represented the Company in connection with that certain Equity Financing Agreement (the “Investment Agreement”) entered into by and among the Company and GHS Investments, LLC(the “Investor”) pursuant to which the Company has agreed to issue to the Investor shares of the Company’s common stock, $_____ par value per share (the “Common Stock”) on the terms and conditions set forth in the Investment Agreement. Pursuant to the Investment Agreement, the Company also has entered into a Registration Rights Agreement with the Investor (the “Registration Rights Agreement”) pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issued or issuable under the Investment Agreement under the Securities Act of 1933, as amended (the “1933 Act”). In connection with the Company’s obligations under the Registration Rights Agreement, on ____________ ___, 20__, the Company filed a Registration Statement on Form S-1 (File No. __-________) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the Registrable Securities which names the Investor as a selling shareholder thereunder.

 

In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at ______ on __________, 20__ and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for sale under the 1933 Act pursuant to the Registration Statement

 

Very truly yours,

 

[Company Counsel]

 

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EXHIBIT C

 

FORM OF PUT NOTICE

 

Date:

 

RE: Put Notice Number __

 

Dear Mr./Ms.__________,

 

This is to inform you that as of today, SmartMetric, Inc., a _________ corporation (the “Company”), hereby elects to exercise its right pursuant to the Equity Financing Agreement to require GHS Investments LLC to purchase shares of its common stock. The Company hereby certifies that:

 

The amount of this put is $__________.

 

The Pricing Period runs from _______________ until _______________.

 

The Purchase Price is: $_______________

 

The number of Put Shares due:___________________.

 

The current number of shares of common stock issued and outstanding is: _________________.

 

The number of shares currently available for issuance on the S-1 is: ________________________.

 

Regards,

 

SmartMetric, Inc.  
   
By:        
Name:  
Title:  
   

 

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EXHIBIT D

 

PUT SETTLEMENT SHEET

 

Date: ________________

 

Dear Mr. ________,

 

Pursuant to the Put given by SmartMetric, Inc., to GHS Investments LLC (“GHS”) on _________________ 202_, we are now submitting the amount of common shares for you to issue to GHS.

 

Please have a certificate bearing no restrictive legend totaling __________ shares issued to GHS immediately and send via DWAC to the following account:

 

[INSERT]

 

If not DWAC eligible, please send FedEx Priority Overnight to:

 

[INSERT ADDRESS]

 

Once these shares are received by us, we will have the funds wired to the Company.

 

Regards,

 

GHS INVESTMENTS LLC  
   
By:    
Name:  
Title  

 

 

28

 

Exhibit 10.14

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights AGREEMENT (the “Agreement”), dated as of March 5, 2020 (the “Execution Date”), is entered into by and between SmartMetric, Inc., aNevadacorporation with its principal executive office at 3960 Howard Hughes Parkway, Suite 500, Las Vegas, NV (the “Company”), and GHS Investments LLC, a Nevada limited liability company, with offices at 420 Jericho Turnpike, Suite 102 Jericho, NY 11753 (the “Investor”).

 

RECITALS:

 

Whereas, pursuant to the Equity Financing Agreemententered into by and between the Company and the Investor of even date (the “Equity Financing Agreement”), the Company has agreed to issue and sell to the Investor an indeterminate number of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), up to an aggregate purchase price of FourMillionDollars($4,000,000);

 

Whereas, as an inducement to the Investor to execute and deliver the Equity Financing Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “1933 Act”), and applicable state securities laws, with respect to the shares of Common Stock issuable pursuant to the Equity Financing Agreement.

 

Now therefore, in consideration of the foregoing promises and the mutual covenants contained hereinafter and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows:

 

SECTION I
DEFINITIONS

 

As used in this Agreement, the following terms shall have the following meanings:

 

Execution Date” shall have the meaning set forth in the preambles.

 

Investor” shall have the meaning set forth in the preambles.

 

Person” means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency.

 

Register,” “Registered,” and “Registration” refer to the Registration effected by preparing and filing one (1) or more Registration Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis (“Rule 415”), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the “SEC”).

 

Registrable Securities” means (i) the shares of Common Stock issued or issuable pursuant to the Equity Financing Agreement, and (ii) any shares of capital stock issued or issuable with respect to such shares of Common Stock, if any, as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, which have not been (x) included in the Registration Statement that has been declared effective by the SEC, or (y) sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the 1933 Act.

 

 

 

Registration Statement” means the registration statement of the Company filed under the 1933 Act covering the Registrable Securities.

 

Registered Offering Transaction Documents” shall mean this Agreement and the Equity Financing Agreement between the Company and the Investor as of the date hereof.

 

All capitalized terms used in this Agreement and not otherwise defined herein shall have the same meaning ascribed to them as in the Equity Financing Agreement.

 

SECTION II
REGISTRATION

 

2.1 The Company shall, within sixty (60) calendardaysupon the date of execution of this Agreement, use its best efforts to file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form S-1 (or, if such form is unavailable for such a registration, on such other form as is available for such registration), covering the resale of all of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon stock splits, stock dividends or similar transactions. The Company shall initially register for resale all of the Registrable Securities which would be issuable on the date preceding the filing of the Registration Statement based on the closing bid price of the Company’s Common Stock on such date and the amount reasonably calculated that represents Common Stock issuable to other parties as set forth in the Equity Financing Agreement except to the extent that the SEC requires the share amount to be reduced as a condition of effectiveness.

 

2.2 The Company shall use all commercially reasonable efforts to have the Registration Statement(s) declared effective by the SEC within thirty (30) calendar days, but no more than ninety (90) calendar days after the Company has filed the Registration Statement.

 

2.3 The Company agrees not to include any other securities in the Registration Statement covering the Registrable Securities without Investor’s prior written consent which Investor may withhold in its sole discretion. Furthermore, the Company agrees that it will not file any other Registration Statement for other securities, until thirty calendar days after the Registration Statement for the Registrable Securities is declared effective by the SEC.

 

2.4 Notwithstanding the registration obligations set forth in Section 2.1, if the staff of the SEC (the “Staff”) or the SEC informs the Company that all of the unregistered Registrable Securities cannot, as a result of the application of Rule 415, be registered for resale as a secondary offering on a single Registration Statement, the Company agrees to promptly (i) inform the Investor and use its commercially reasonable efforts to file amendments to the Registration Statement as required by the SEC and/or (ii) withdraw the Registration Statement and file a new registration statement (the “New Registration Statement”), in either case covering the maximum number of Registrable Securities permitted to be registered by the SEC, on Form S-1 to register for resale the Registrable Securities as a secondary offering. If the Company amends the Registration Statement or files a New Registration Statement, as the case may be, under clauses (i) or (ii) above, the Company will use its commercially reasonable efforts to file with the SEC, as promptly as allowed by the Staff or SEC, one or more registration statements on Form S-1 to register for resale those Registrable Securities that were not registered for resale on the Registration Statement, as amended, or the New Registration Statement (each, an “Additional Registration Statement”).

 

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SECTIONIII
RELATED OBLIGATIONS

 

At such time as the Company is obligated to prepare and file the Registration Statement with the SEC pursuant to Section 2.1, the Company will affect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, with respect thereto, the Company shall have the following obligations:

 

3.1 The Company shall use all commercially reasonable efforts to cause such Registration Statement relating to the Registrable Securities to become effective and shall keep such Registration Statement effective until the earlier to occur of the date on which (A) the Investor shall have sold all the Registrable Securities; or (B) the Investor has no right to acquire any additional shares of Common Stock under the Equity Financing Agreement (the “Registration Period”). The Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company shall use all commercially reasonable efforts to respond to all SEC comments within ten (10) business days from receipt of such comments by the Company. The Company shall use all commercially reasonable efforts to cause the Registration Statement relating to the Registrable Securities to become effective no later than three(3) business days after notice from the SEC that the Registration Statement may be declared effective. The Investor agrees to provide all information which is required by law to provide to the Company, including the intended method of disposition of the Registrable Securities, and the Company’s obligations set forth above shall be conditioned on the receipt of such information.

 

3.2 The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the Investor thereof as set forth in such Registration Statement. In the event the number of shares of Common Stock covered by the Registration Statement filed pursuant to this Agreement is at any time insufficient to cover all of the Registrable Securities, the Company shall amend such Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within thirty (30) calendar days after the necessity therefor arises (based on the then Purchase Price of the Common Stock and other relevant factors on which the Company reasonably elects to rely), assuming the Company has sufficient authorized shares at that time, and if it does not, within thirty (30) calendar days after such shares are authorized. The Company shall use commercially reasonable efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof.

 

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3.3 The Company shall make available to the Investor and its legal counsel without charge (i) promptly after the same is prepared and filed with the SEC at least one (1) copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, the prospectus included in such Registration Statement (including each preliminary prospectus) and, with regards to such Registration Statement(s), any correspondence by or on behalf of the Company to the SEC or the staff of the SEC and any correspondence from the SEC or the staff of the SEC to the Company or its representatives; (ii) upon the effectiveness of any Registration Statement, the Company shall make available copies of the prospectus, via EDGAR, included in such Registration Statement and all amendments and supplements thereto; and (iii) such other documents, including copies of any preliminary or final prospectus, as the Investor may reasonably request from time to time to facilitate the disposition of the Registrable Securities.

 

3.4 The Company shall use commercially reasonable efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or “blue sky” laws of such states in the United States as the Investor reasonably requests; (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period; (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3.4, or (y) subject itself to general taxation in any such jurisdiction. The Company shall promptly notify the Investor of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose.

 

3.5 As promptly as practicable after becoming aware of such event, the Company shall notify Investor in writing of the happening of any event as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (“Registration Default”) and use all diligent efforts to promptly prepare a supplement or amendment to such Registration Statement and take any other necessary steps to cure the Registration Default (which, if such Registration Statement is on Form S-3, may consist of a document to be filed by the Company with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act (as defined below) and to be incorporated by reference in the prospectus) to correct such untrue statement or omission, and make available copies of such supplement or amendment to the Investor. The Company shall also promptly notify the Investor (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when the Registration Statement or any post-effective amendment has become effective (the Company will prepare notification of such effectiveness which shall be delivered to the Investor on the same day of such effectiveness and by overnight mail), additionally, the Company will promptly provide to the Investor, a copy of the effectiveness order prepared by the SEC once it is received by the Company; (ii) of any request by the SEC for amendments or supplements to the Registration Statement or related prospectus or related information, (iii) of the Company’s reasonable determination that a post-effective amendment to the Registration Statement would be appropriate, (iv) in the event the Registration Statement is no longer effective, or (v) if the Registration Statement is stale as a result of the Company’s failure to timely file its financials or otherwise

 

3.6 The Company shall use all commercially reasonable efforts to prevent the issuance of any stop order or other suspension of effectiveness of the Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor holding Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding concerning the effectiveness of the registration statement.

 

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3.7 The Company shall permit the Investor and one (1) legal counsel, designated by the Investor, to review and comment upon the Registration Statement and all amendments and supplements thereto at least one (1) calendar day prior to their filing with the SEC. However, any postponement of a filing of a Registration Statement or any postponement of a request for acceleration or any postponement of the effective date or effectiveness of a Registration Statement by written request of the Investor (collectively, the “Investor’s Delay”) shall not act to trigger any penalty of any kind, or any cash amount due or any in-kind amount due the Investor from the Company under any and all agreements of any nature or kind between the Company and the Investor. The event(s) of an Investor’s Delay shall act to suspend all obligations of any kind or nature of the Company under any and all agreements of any nature or kind between the Company and the Investor.

 

3.8 At the request of the Investor, the Company’s counsel shall furnish to the Investor, within two (2) business days, an opinion letter confirming the effectiveness of the registration statement. Such opinion letter shall be issued as of the date of the effectiveness of the registration statement, in a form suitable to the Investor.

 

3.9 The Company shall hold in confidence and not make any disclosure of information concerning the Investor unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, or (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction. The Company agrees that it shall, upon learning that disclosure of such information concerning the Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to the Investor and allow the Investor, at the Investor’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order covering such information.

 

3.10 The Company shall use all commercially reasonable efforts to maintain designation and quotation of all the Registrable Securities covered by any Registration Statement on the Principal Market. If, despite the Company’s commercially reasonable efforts, the Company is unsuccessful in satisfying the preceding sentence, it shall use commercially reasonable efforts to cause all the Registrable Securities covered by any Registration Statement to be listed on each other national securities exchange and automated quotation system, if any, on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or system. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3.10.

 

3.11 The Company shall cooperate with the Investor to facilitate the prompt preparation and delivery of the Registrable Securities to be offered pursuant to the Registration Statement and enable such Registrable Securities to be in such denominations or amounts, as the case may be, as the Investor may reasonably request.

 

3.12 The Company shall provide a transfer agent for all the Registrable Securities not later than the effective date of the first Registration Statement filed pursuant hereto.

 

3.13 If requested by the Investor, the Company shall (i) as soon as reasonably practical incorporate in a prospectus supplement or post-effective amendment such information as the Investor reasonably determines should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as reasonably possible after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if reasonably requested by the Investor.

 

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3.14 The Company shall use all commercially reasonable efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to facilitate the disposition of such Registrable Securities.

 

3.15 The Company shall otherwise use all commercially reasonable efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

 

3.16 Within three (3) business day after the Registration Statement is declared effective by the SEC, the Company shall deliver to the transfer agent for such Registrable Securities, with copies to the Investor, confirmation that such Registration Statement has been declared effective by the SEC.

 

3.17 The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of Registrable Securities pursuant to the Registration Statement.

 

SECTION IV
OBLIGATIONS OF THE INVESTOR

4.1 At least five (5) calendar days prior to the first anticipated filing date of the Registration Statement, the Company shall notify the Investor in writing of the information the Company requires from the Investor for the Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities and the Investor agrees to furnish to the Company that information regarding itself, the Registrable Securities and the intended method of disposition of the Registrable Securities as shall reasonably be required to effect the registration of such Registrable Securities and the Investor shall execute such documents in connection with such registration as the Company may reasonably request. The Investor covenants and agrees that, in connection with any sale of Registrable Securities by it pursuant to the Registration Statement, it shall comply with the “Plan of Distribution” section of the then current prospectus relating to such Registration Statement.

 

4.2 The Investor, by its acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless the Investor has notified the Company in writing of an election to exclude all of the Investor’s Registrable Securities from such Registration Statement.

 

4.3 The Investor agrees that, upon receipt of written notice from the Company of the happening of any event of the kind described in Section 3.6 or the first sentence of 3.5, the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until the Investor’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 3.6 or the first sentence of 3.5.

 

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SECTION V
EXPENSES OF REGISTRATION

 

All legal expenses, other than underwriting discounts and commissions and other than as set forth in the Equity Financing Agreement, incurred in connection with registrations including comments, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, and printing fees shall be paid by the Company.

 

SECTION VI
INDEMNIFICATION

 

In the event any Registrable Securities are included in the Registration Statement under this Agreement:

 

6.1 To the fullest extent permitted by law, the Company, under this Agreement, will, and hereby does, indemnify, hold harmless and defend the Investor who holds Registrable Securities, the directors, officers, partners, employees, counsel, agents, representatives of, and each Person, if any, who controls, any Investor within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the “1934 Act”) (each, an “Indemnified Person”), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys’ fees, amounts paid in settlement or expenses, joint or several (collectively, “Claims”), incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in the Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other “blue sky” laws of any jurisdiction in which the Investor has requested in writing that the Company register or qualify the Shares (“Blue Sky Filing”), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the statements therein were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to the Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, “Violations”). Subject to the restrictions set forth in Section 6.3 the Company shall reimburse the Investor and each such controlling person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6.1: (i) shall not apply to a Claim arising out of or based upon a Violation which is due to the inclusion in the Registration Statement of the information furnished to the Company by any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (ii) shall not be available to the extent such Claim is based on (a) a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company or (b) the Indemnified Person’s use of an incorrect prospectus despite being promptly advised in advance by the Company in writing not to use such incorrect prospectus; (iii) any claims based on the manner of sale of the Registrable Securities by the Investor or of the Investor’s failure to register as a dealer under applicable securities laws; (iv) any omission of the Investor to notify the Company of any material fact that should be stated in the Registration Statement or prospectus relating to the Investor or the manner of sale; and (v) any amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the resale of the Registrable Securities by the Investor pursuant to the Registration Statement.

 

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6.2 In connection with any Registration Statement in which Investor is participating, the Investor agrees to severally and jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6.1, the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act and the Company’s agents (collectively and together with an Indemnified Person, an “Indemnified Party”), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation is due to the inclusion in the Registration Statement of the written information furnished to the Company by the Investor expressly for use in connection with such Registration Statement; and, subject to Section 6.3, the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6.2 and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall only be liable under this Section 6.2 for that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the resale of the Registrable Securities by the Investor pursuant to the Registration Statement. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6.2 with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus were corrected on a timely basis in the prospectus, as then amended or supplemented. This indemnification provision shall apply separately to each Investor and liability hereunder shall not be joint and several.

 

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6.3 Promptly after receipt by an Indemnified Person or Indemnified Party under this Section6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the Indemnified Person or Indemnified Party, the representation by counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one (1) separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such counsel shall be selected by the Investor, if the Investor is entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding affected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action.

 

6.4 The indemnity agreements contained herein shall be in addition to (I) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

 

SECTIONVII

CONTRIBUTION

 

7.1 To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities.

 

SECTION VIII

REPORTS UNDER THE 1934 ACT

 

8.1 With a view to making available to the Investor the benefits of Rule 144 promulgated under the1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investor to sell securities of the Company to the public without registration (“Rule 144”), provided that the Investor holds any Registrable Securities are eligible for resale under Rule 144, the Company agrees to:

 

a. make and keep adequate current public information available, as those terms are understood and defined in Rule 144;

 

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b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company’s obligations under Section 5(c) of the Equity Financing Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

 

c. furnish to the Investor, promptly upon request, (I) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration.

 

SECTION X

MISCELLANEOUS

 

9.1 NOTICES. Any notices or other communications required or permitted to be given under the terms of this Agreement that must be in writing will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by email; or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses for such communications shall be:

 

 

If to the Company:

 

 

 

 

 

 

SmartMetric, Inc.

3960 Howard Hughes Parkway

Suite 500

Las Vegas, NV 89169
Attn: Chaya Hendrick, President and CEO

 

With Copy to:

(which copy shall not constitute notice)

 

 

Lucosky Brookman LLP

101 Wood Avenue South, Fifth Floor

Woodbridge, New Jersey 08830

Attn: Joseph M. Lucosky, Esq.

 

  If to the Investor:  

GHS Investments, LLC

420 Jericho Turnpike, Suite 102
Jericho, NY 11753


 

Each party shall provide five (5) business days prior notice to the other party of any change in address, phone number or facsimile number.

 

9.2 NO WAIVERS. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

 

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9.3 NO ASSIGNMENTS. The rights and obligations under this Agreement shall not be assignable.

 

9.4 ENTIRE AGREEMENT/AMENDMENT. This Agreement and the Registered Offering Transaction Documents constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Registered Offering Transaction Documents supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. The provisions of this Agreement may be amended only with the written consent of the Company and Investor.

 

9.5 HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if all the parties had prepared the same.

 

9.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile transmission, PDF, electronic signature or other similar electronic means with the same force and effect as if such signature page were an original thereof.

 

9.7 FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

9.8 SEVERABILITY. In case any provision of this Agreement is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby.

 

9.9 Law Governing this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state or federal courts located in New York City, New York. The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The parties executing this Agreement and other agreements referred to herein or delivered in connection herewith on behalf of the Company agree to submit to the in personam jurisdiction of such courts and hereby irrevocably waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Registered Offering Transaction Documents by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

 

9.10 NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any other person, except that the Company acknowledges that the rights of the Investor may be enforced by its general partner.

 

[Signature page follows]

 

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Your signature on this Signature Page evidences your agreement to be bound by the terms and conditions of the Registration Rights Agreement as of the date first written above. The undersigned signatory hereby certifies that he has read and understands the Registration Rights Agreement, and the representations made by the undersigned in this Registration Rights Agreement are true and accurate, and agrees to be bound by its terms.

 

  GHS INVESTMENTS, LLC.
   
  By:
  Name:  
  Title: Member
   
  smartmetric, inc.
   
  By:
  Name:
  Title:
   

 

 

[SIGNATURE PAGE OF REGISTRATION RIGHTS AGREEMENT]

 

 

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Exhibit 23.1

 

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference, in the registration statement on Form S-1 dated August 5, 2020 of Smartmetric, Inc., of our report dated October 5, 2018 relating to our audit of the consolidated financial statements as of and for the year ended June 30, 2018, and the reference to us under the caption “Experts and Counsel.”

 

/s/ AMC Auditing

 

AMC Auditing

Las Vegas, Nevada

August 5, 2020

 

Exhibit 23.2

 

 

 

 

To the Board of Directors and Stockholders of

Smartmetric, Inc.

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT

 

We consent to the inclusion in this Registration Statement of Smartmetric, Inc. on Form S-1 of our report dated September 30, 2019 with respect to our audit of the financial statements of Smartmetric, Inc. as of June 30, 2019 and for the year ended June 30, 2019, which appears in the Prospectus, which is part of this the Registration Statement. We also consent to the reference to our Firm under the heading “Experts” in such the Registration Statement.

 

 

Prager Metis CPAs, LLC

Basking Ridge, New Jersey

August 5, 2020