FORWARD LOOKING STATEMENTS
In this annual report, references to “SmartMetric, Inc.,” “Smartmetric,” “SMME,” “the Company,” “we,” “us,” and “our” refer to SmartMetric, Inc.
This Annual Report on Form 10-K/A contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K/A. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this Annual Report on Form 10-K/A reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K/A. We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K/A, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Item 1. Business
Corporate History and Overview
SmartMetric, Inc. (“SmartMetric” or the “Company”) was incorporated pursuant to the laws of Nevada on December 18, 2002. SmartMetric is a development stage company engaged in the technology industry. SmartMetric has an issued patent to utilize technology that involves connection to networks using data cards. SmartMetric’s main product is a fingerprint sensor activated card with a finger sensor onboard the card and built inside the card a fingerprint reader with a rechargeable battery for portable biometric identification. This card may be referred to as a biometric card or the SmartMetric Biometric Datacard.
On September 14, 2004, C. Hendrick received a United States patent, U.S. Patent No. 6,792,464 (the “’464 Patent”) with regard to the use of the biometric card. C Hendrick transferred the ‘464 Patent, to Applied Cryptography, Inc., a Nevada corporation, owned by C. Hendrick, in June 2004 (“ACI”). On December 11, 2009, the Company entered into an Assignment and Assumption Agreement (“Assignment Agreement”) with ACI pursuant to which ACI assigned all or its rights, title and interest to the ‘464 Patent to the Company in exchange for 200,000 shares of the Company’s series B preferred stock. In connection with the Assignment Agreement, on December 11, 2009, the Company and ACI entered into an option agreement pursuant to which the Company agreed to grant ACI an option to purchase the ‘464 Patent from the Company for 100,000 shares of the Company’s series B preferred stock, only in the event that Company fails to generate at least $1,000,000 in gross revenues attributable to the Patent at the conclusion of 24 months from the date of Assignment Agreement.
SmartMetric has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on SmartMetric's financial condition, results of operations or liquidity.
The SmartMetric Biometric Datacard
SmartMetric has designed a biometric card. SmartMetric has completed development of its card along with pre mass manufacturing cards but has not yet begun to mass manufacture the biometric fingerprint activated cards. The manufacturing of the cards requires that the Company build not only a special factory, but also that the Company manufacture specialized mass production machines that will allow for the specialized manufacturing process required to mount sub micro thin silicon components; along with a credit card plastic manufacturing procedure that operates using low pressure and low heat so as not to harm the internal electronic components. We expect that mass production will commence in the first quarter of 2013, contingent upon and assuming that capital funding remains steady. The product, due to exposure in specialty trade publications and numerous press releases, is receiving much interest in the private sector. Also, the product has received interest from the governmental sector, including, but not limited to the Department of Defense.
The SmartMetric biometric fingerprint activated card has several functions:
The SmartMetric Biometric Datacard contains active and passive components mounted onto a paper-thin circuit board. Reducing a powerful processor to a thin sliver of silicon along with many other complex computer components including memory chips and then mounting them on the super thin board has required innovations in electronic manufacturing and the use of emerging technology.
Today SmartMetric has created the worlds first and to its knowledge the only portable biometric fingerprint scanner that resides inside a credit card sized card and acts independently of any other computing device.
Unlike a picture-based identification system, the SmartMetric biometric card has been designed to operate exclusively with the registered user. And unlike biometric security systems where the biometric information is stored at a central location, the Company believes that security is significantly increased during the verification process since the biometric information is embedded in the card itself, in a memory chip protected by encryption and no data is travelling over a network. The built-in fingerprint scanner is designed to activate the card. Without a match with the encrypted fingerprint already stored in the card, the SmartMetric Biometric Datacard will not operate.
SmartMetric, Inc. sees a significant market for its biometric fingerprint activated credit cards to replace the use of PIN numbers used in current Bank issued EMV (Smartcards’) around the World. There are more than 1.5 Billion Bank issued SmartCard Credit and ATM Cards in the World that have a chip that stores credit card information but still rely on a user entered PIN at the ATM or Point Of Sale machine to verify the Card user. The reliance on a PIN for these new kinds of Credit & ATM Cards still leaves them vulnerable to hackers because of the use of PIN’s that are still proving to be vulnerable to hackers. Replacing the PIN for these cards with a persons fingerprint to activate the card provides the next level of security for the 1.5 Billion already issued around the World, Credit and ATM Cards.
In 2011 both Visa and MasterCard announced that they will be introducing “Chip & Pin” Credit / ATM Cards based on the same smartcard technology already used in most advanced banking systems around the World, in the United States.
The SmartMetric in-card fingerprint scanner will allow for a person to use their fingerprint to activate their Credit Card or ATM Card. For the banking and card industry it will allow for a much more secure verification process then the PIN system currently used.
SmartMetric plans to roll out its fingerprint activated cards in the United States. Latin America, Asia/Pacific and Europe over the next 12 months. In addition to the Financial Services Sector, the Company believes its SmartMetric Biometric Datacard may be used for a variety of security applications such as employee identity, building access and security control, computer network access, driver’s licenses, passports, welfare payments, health insurance, portable electronic medical records and check cashing identity verification, etc. Additionally, the Biometric Datacard contains a powerful on-card processor and varying degrees of encrypted memory, enabling the Biometric Datacard to not only store the full image of a fingerprint but also maintain a database capable of storing information such as medical records, financial or banking records or human resource data.
As an online purchasing card, the Biometric Datacard helps protect against identity theft and related fraudulent crimes that consumers can be exposed to when making purchases over the Internet. Unlike conventional credit cards, which require a consumer to type and deliver sensitive information over the Internet in order to make a purchase, the biometric card is designed to be inserted into the USB port of a computer using a USB port adapter and any purchasing information can only be released from the card when the owner’s finger print unlocks the card. The consumer’s information then travels across the Internet encrypted, minimizing exposure to interception by hackers and identity thieves.
As an online money transfer card, the Company has developed software and systems to allow money to be transferred from one card to another over the Internet with user confirmation of transaction by both sender and receiver. Much as in the same way that digital files are transferred in a process called Peer to Peer transfer. Because fingerprint activation is required at both ends of the transaction the sending and receiving parties can be confident that only the appropriate person is receiving the funds. This allows the low cost of Internet communication to now be used for person-to-person money transfer.
SmartMetric believes that its biometric card, by way of containing information unique to the individual user, will be useless in the hands of others. Unlike a picture-based identification system, the SmartMetric biometric card has been designed to operate exclusively with the registered user. And unlike biometric security systems where the biometric information is stored on a central database, we believe that confirmation of identify with the SmartMetric system may not be intercepted during the verification process since the biometric information is embedded in the card, itself, in a memory chip protected by encryption. The fingerprint sensor built into the card has been designed to activate the card. Without a match with the encrypted fingerprint already stored on the card, the biometric smartcard will not operate.
The SmartMetric access control and identity biometric card is a card that authorized persons will carry with them and activate to obtain access. Such activation will take place by placing a finger on a fingerprint sensor on the surface of the card. The SmartMetric biometric cards are designed to be read by both contact and contactless card acceptor devices. For contact card acceptor devices, the device must touch a chip mounted on the surface of the biometric card. This contact allows the card to transmit data to the reading device. For contactless acceptor devices, a radio frequency signal will be sent from the card to a radio frequency signal receiver in the acceptor device. In both types of card reading devices, the activation signal is sent only when there has been a positive match of the persons fingerprint by the cards fingerprint sensor. The card reader devices are standard smartcard readers available from a variety of third parties.
The memory and computational capacities of the biometric card are used to store a user's fingerprint(s). The computational capacity is used to process a digitized image from the fingerprint sensor to confirm a match (or no match) with the fingerprint template. Additional computational processes such as increased cryptography will depend on the requirements of specific customers.
FINGERPRINT ENROLEMENT ON THE SMARTMETRIC CARD
IN CARD FINGERPRINT MATCHING AND VERIFICATION
The fingerprint sensor used in the SmartMetric biometric card is known as the "Metric 2.0" fingerprint sensor. The Metric 2.0 allows for fingerprints, which are either wet or dry to be recognized or authenticated. It is also pressure sensitive. SmartMetric purchases its fingerprint sensors from various third party suppliers. SmartMetric has designed a method of integrating the fingerprint sensor on the card, which is then connected to a microprocessor, which is connected to a rechargeable power supply in the card and a memory chip for storage, retrieval and matching of the fingerprint on the card. The miniaturization of the complex electronic components to fit inside the thickness of an ISO standard credit card is what has been the biggest challenge for the company resulting in the extended amount of time necessary to complete the card and bring it to the point of being able to be mass produced.
The SmartMetric Biometric Datacard incorporates a rechargeable, lithium polymer battery. This battery is rechargeable, very thin and has been designed by SmartMetric to fit inside the SmartMetric fingerprint Credit Card sized card. This battery is manufactured by a third party unaffiliated with SmartMetric. This battery is integrated into the card.
Other components needed for manufacture of the SmartMetric Biometric Datacard include, but are not limited to, microchips, memory chips and processor chips. The sources and availability of these materials are numerous and readily available, and should not affect the ability of SmartMetric to meet future demand. However, SmartMetric does re-engineer a number of important components at silicon level to achieve the component size required to fit inside a Credit Card. Both the supply of memory and processors in silicon wafers may be interrupted at anytime based on global silicon supply/demand issues and the re-engineering of Silicon by SmartMetric may also cause end component supply problems from time to time which may affect production and sale of the Cards.
The biometric card has been designed to offer the option of a built-in radio frequency transmitter for contactless long range access and identity verification. Another version of the card incorporates a short range RFID contactless chip that is also turned off and on using the card users fingerprint verification on the Card.
The thinness form factor of many of the components including the processor itself being an unpackaged wafer of silicon has also resulted in the Company having to develop its own process for mass electronic assembly. The Company was also challenged in the process of encapsulating the electronics in plastic creating the credit card sized biometric fingerprint activated card.
Standard credit card manufacturing utilizes machines that require high pressure and high temperature in fusing top and bottom sheets of plastic together thereby encasing any electronics inside the card. Given the complexity of the card’s electronics and vulnerability to an assembly process involving high heat and high pressure, damage to the electronic circuitry was a major challenge for the Company to overcome. Research and development activities of the Company allowed the Company to achieve this ability through a combination of adjusting the pressure and heat required using special polymers together with a trade secret process that protects the silicon that is mounted directly onto the electronics circuit board.
New mass manufacturing machinery has had to be developed for our manufacturing process along with other advanced processing techniques. Including pick and place electronics manufacturing for mounting non standard thickness, super thin silicon onto our electronic boards.
The challenges described above have delayed the expected release time of our product overcoming these technological issues has given the Company a product that it will be able to efficiently produce in large quantities.
The Company is currently concentrating on building out its manufacturing facility that will be incorporating SmartMetric’s advanced manufacturing processes.
Much of the machinery to be used in the manufacturing processes has to be specially made and will be shipped from various locations around the world to the Company’s manufacturing facility in Buenos Aires, Argentina. We will need approximately $1,500,000 in order to complete the production of the machinery to be used in our manufacturing processes.
The Security Technology Industry
Biometrics
Biometric technologies identify users by electronically capturing a specific biological or behavioral characteristic of that individual, such as a fingerprint or voice or facial feature, and creating a unique digital identifier from that characteristic. Because this process relies on largely unalterable human characteristics, positive identification can be achieved independent of any information possessed by the individual seeking authorization.
The process of identity authentication typically requires that a person present for comparison one or more of the following factors:
• Something known such as a password, PIN or mother's maiden name; • Something carried such as a token, card, or key; or • Something physical such as fingerprint, voice pattern, signature motion, facial shape or other biological or behavioral characteristic.
Comparison of biological and behavioral characteristics has historically been the most reliable and accurate of the three factors, but has also been the most difficult and costly to implement into a single product that can automatically verify the identity of a user accessing a computer network or the Internet. However, recent advances in biometric collection technologies (both biometric hardware products and their associated processing software) have increased the speed and accuracy and reduced the cost of implementing biometrics in commercial environments. Management believes that individuals, website operators, government organizations, and businesses will increasingly use this method of identity authentication.
Biometrics refers to the automatic identification of a person based on his/her physiological or behavioral characteristics. This method of identification is preferred over traditional methods involving passwords and personal identification numbers ("PINs") for various reasons: (i) the person to be identified is required to be physically present at the point of identification to be identification; (ii) identification based on biometric techniques obviates the need to remember a password or carry a token. By replacing PINs, biometric techniques can potentially prevent unauthorized access to or fraudulent use of cellular phones, Biometric cards, desktop PCs, workstations and computer networks. It can be used during transactions conducted via telephone and Internet (e-commerce and e- banking). In automobiles, biometrics could replace keys-less entry devices.