NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Organization, Recent History, and Description of Businesses-Past and Present
History and Recent Transaction
The Company is the term used in these statements and notes to refer to the entity originally incorporated in the State of Delaware back in 1929 and recently reincorporated to the State of Nevada. The registered name of the Company until early in 2017 was Butte Highlands Mining Company (Butte). The name of the Company has been changed to Ironclad Encryption Corporation (Ironclad).
Butte was formed to explore and mine primarily for gold in the Butte Highlands Only Chance mine, south of Butte, Montana. The Company was reorganized in October 1996 for the purpose of acquiring and developing additional mineral properties. At of the date of the 1996 reorganization, stockholders representing approximately 76% of the outstanding capital stock could not be located. In order to obtain the quorum necessary for the special shareholder meetings, Butte obtained an order from the Superior Court of Spokane County, Washington appointing a trustee for the benefit of those stockholders who could not be located. By May 17, 2007 the Company had disposed of all of its historical mineral properties or claims and eventually became a shell company.
The business focus of the Company was changed early in 2017 and its legal name of registration and state of incorporation were changed to Ironclad to reflect the fundamental change of its business to encryption technology and away from its historical mining activities. The terms Company, Ironclad and Butte all refer to the same individual corporate entity, but the use of the Ironclad and Butte names is used to refer to different eras of the Companys long history. The historical eras generally coincide with the changes in business focus in the first weeks of 2017.
The business changes are a result of a common stock exchange transaction, accounted for as a reverse merger, between Butte and the owners of InterLok Key Management, Inc. (InterLok; at the time an independent and privately-held Texas corporation) whereby InterLok became a wholly-owned subsidiary of Butte. Butte issued shares of its common stock in exchange for acquiring all of the common stock of InterLok. At present, InterLok is the one and only subsidiary of the Company and InterLoks line of business now becomes the main business of the Company on a consolidated basis.
Along with the Companys change of business came the Companys adoption of Ironclad Encryption Corporation (and the discontinuance of using the Butte name) as the name of what is now the parent corporation and the change of the state of incorporation to Nevada from Delaware. The Company also has changed its stock market ticker symbol to IRNC from BTHI on one of the OTC Markets Group over-the-counter markets, OTCQB, where the Companys shares have been and continue to be traded.
Description of BusinessesPresent and Past
InterLok Key Management, Inc. (formerly InterLok Key Management, LLC) is a company in the business of developing and licensing the use of software technology that encrypts data communications. Information and data is safeguarded from unauthorized access and its use is securely protected by perpetual authentication through the use of a single-key, dynamic synchronization of authentications keys. InterLok was formed in Texas on June 12, 2006 and incorporated ten years later on June 16, 2016.
6
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 6, 2017 InterLok entered into a Share Exchange Agreement ("Share Exchange") with Butte Highlands Mining Company. Under the terms of the agreement, the shareholders of InterLok Key Management Inc. exchanged all 56,655,891 outstanding shares of InterLoks common stock for 56,655,891 shares of Class A common stock of Butte Highlands Mining Company. Upon completion of the Share Exchange, the state of incorporation was moved to the State of Nevada and the Butte name was changed to Ironclad Encryption Corporation.
The Share Exchange was treated as a reverse merger with InterLok Key Management Inc. deemed--for accounting recognition purposes--the accounting acquirer and Butte Highlands Mining Company deemed the accounting acquiree under the acquisition method of accounting. The reverse merger is deemed a recapitalization and the consolidated financial statements represent the substantive continuation of the operations and thus the financial statements of InterLok Key Management Inc., while the capital structure (in terms of authorized preferred and common stock) of Butte Highlands Mining Company remains intact.
Principles of consolidation
The accompanying unaudited consolidated financial statements include the accounts of Ironclad and its one subsidiary which is wholly-owned. All intercompany accounts and transactions have been eliminated in consolidation. The foregoing unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.
Accordingly, these unaudited interim consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements and the rules of the Securities and Exchange Commission. These unaudited interim consolidated financial statements should be read in conjunction with the Companys audited financial statements for the year ended December 31, 2016.
In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. Operating results for the three month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
Note 2 Summary of Significant Accounting Policies
This summary of significant accounting policies is presented to assist in understanding the Companys interim consolidated financial statements. The financial statements and notes are representations of the Companys management which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.
Going Concern
As shown in the accompanying financial statements, the Company has incurred cumulative operating losses since inception. As of March 31, 2017, the Company has limited financial resources with which to achieve its objectives and obtain profitability and positive cash flows from operations. As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $2,432,144 and the Company's working capital (current assets minus current liabilities) is $691,980.
Achievement of the Company's objectives will be dependent upon the ability to obtain additional financing, to generate revenue from current and planned business operations, and to control operating and capital costs. The Company is in a development stage and has generated no operating revenue, profits or positive cash flows from operations.
7
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company plans to fund its future operations by potential sales of its common stock. However, there is no assurance that Ironclad will be able to achieve these objectives, therefore substantial doubt about its ability to continue as a going concern exists. The financial statements do not include adjustments relating to the recoverability of recorded assets nor the implication of associated bankruptcy costs should Ironclad be unable to continue as a going concern.
Fair Value Measures
The Company's financial instruments as defined by ASC 825-10-50, include cash, receivables, accounts payable and accrued expenses. All instruments are accounted for on an historical cost basis, which, due to the short maturity of these financial instruments, approximates their fair values at March 31, 2017 and at December 31, 2016.
The standards under ASC 820 define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. FASB ASC 820 establishes 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 of no market data, which require the reporting entity to develop its own assumptions.
The Company did not have any assets measured at fair value other than cash at March 31, 2017 and at December 31, 2016.
Provision for Income Taxes
Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25
Income Taxes Recognition
. Under the approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis amounts of assets and liabilities and their financial reporting amounts at each period-end. A valuation allowance is recorded against deferred tax asset amounts if management does not believe the Company has met the more likely than not standard imposed by ASC 740-10-25-5 to allow recognition of such an asset. See Note 7.
Note 3
Patents
Patents are as follows:
|
|
|
|
March 31, 2017
|
March 31, 2016
|
|
|
|
Patents
|
$
398
|
$
398
|
Less accumulated amortization
|
(338)
|
(308)
|
Patents, net
|
$
60
|
$
90
|
Amortization expense for intangible assets during the three month periods ended March 31, 2017 and 2016 was $8, respectively. The three patents expire in 2017, 2018 and 2021, respectively.
8
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4
-
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At March 31, 2017 and 2016, the Company had $463,784 and $0 in excess of the FDIC insured limit.
Note 5
Related Party Transaction
The Company paid $10,662 for 2016 advances payable and $5,338 in consulting fees to Eagle Mountain 21, LLC, an entity owned by an officer of the Company, during the period ended March 31, 2017.
Note 6 Convertible Notes Payable
On August 8, 2016, InterLok issued two 5% convertible senior promissory notes for a principal amount of $30,000 each and, on August 16, 2016, issued one 5% convertible senior promissory note for $150,000 for an aggregate principal amount of $210,000. Interest costs accrue on the unpaid principal balances at five percent (5%) annually until the principal amount and all interest accrued thereon are paid at the earlier of 1) the maturity date two years later on August 8, 2018 or August 16, 2018, respectively, or 2) on the conversion of the notes into shares of common stock at a price equal to a conversion price of $0.15 per share.
The notes automatically convert into shares of common stock at a conversion price of $0.15 per share, subject to adjustment under certain circumstances in the event of an acquisition transaction or a public offering event. The Company could not enter into an acquisition or public offering event without the prior written approval of any of the note holders. If any holder declined to provide approval for an acquisition transaction or public offering, the Company may immediately prepay the entire outstanding principal amounts and accrued interest amounts on the notes. Two of the notes contained the option to purchase additional shares of common stock.
During the period ended March 31, 2017, the principal balances of all three 5% convertible senior promissory notes were converted into 1,400,000 shares of Class A common stock. Accrued interest amounts on the notes were paid in cash subsequent to March 31, 2017.
Note 7 Common Stock
Immediately prior to the Share Exchange Agreement, there were 1,443,017 Class A and 1,538,872 Class B shares outstanding in Butte. Class A and Class B shares have identical rights, they are separate classes based on the need to distinguish lost or unidentifiable shareholders, i.e. Class B shares see the history above for explanation.
During the three month period ended March 31, 2017, the Company issued 5,843,954 shares of its Class A common stock at $0.15 per share for cash in the amount of $876,597 ($35,343 of which was only subscribed and still receivable at March 31, 2017), and 75,000 shares at $0.15 per share for services in the amount of $11,250.
Additionally, the three convertible note holders converted $210,000 into 1,400,000 shares of Class A common stock, and 250,000 shares were issued pursuant to the Share Exchange Agreement at $0.03 per share. Also, subscriptions receivable that were outstanding at December 31, 2016 were collected in the amount of $71,114.
9
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 Income Taxes
Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25
Income Taxes Recognition.
Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the more likely than not standard imposed by ASC 740-10-25-5.
Deferred income tax amounts reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes.
Significant components of the deferred tax asset amounts at an anticipated tax rate of 35% for the periods ended March 31, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Net operating loss carryforwards
|
$
504,533
|
|
$
193,667
|
|
|
|
|
Deferred tax asset
|
$
176,587
|
|
$
67,780
|
Valuation allowance for deferred asset
|
(176,587)
|
|
(67,780)
|
Net deferred tax asset
|
$
-
|
|
$
-
|
|
|
|
|
At March 31, 2017, the Company has net operating loss carryforwards of approximately $504,530 which will begin to expire in the year 2033. The increase in the allowance account amount from December 31, 2016 to March 31, 2017 was $108,807
The Company has not identified any aggressive tax positions.
Note 9 Share Exchange Agreement
On January 6, 2017, the Company entered into a Share Exchange Agreement with InterLok Key Management, Inc. wherein Butte agreed to issue 56,655,891 restricted shares of Buttes common stock in exchange for 100% of the outstanding shares of InterLok Key Management, Inc. common stock. InterLok Key Management, Inc. is engaged in the business of developing and licensing its patented key-based encryption methods.
On January 6, 2017, Butte completed its Share Exchange Agreement with the owners of InterLok, and issued 56,655,891 restricted shares of Buttes common stock to 29 persons and entities in exchange for all of the outstanding shares of InterLok Key Management, Inc.s common stock. Immediately following completion of the share exchange agreement the Companys new board of directors elected, through a series of board resolutions and regulatory filings, to change the Companys name to Ironclad Encryption Corporation from Butte, to move the Company to Nevada from Delaware, and to change its stock trading symbol to IRNC from BTHI.
10
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Share Exchange was treated as a reverse merger with InterLok Key Management Inc. deemed, for accounting recognition purposes, the accounting acquirer and Butte Highlands Mining Company deemed the accounting acquiree under the acquisition method of accounting. The reverse merger is deemed a recapitalization and the unaudited pro forma consolidated financial statements represent the substantive continuation of the operations and thus the financial statements of InterLok Key Management Inc., while the capital structure (with respect to authorized, issued and outstanding shares of preferred and common stock) of Butte Highlands Mining Company--now using the name Ironclad--remains intact.
Note 10 Stock Options
During the three month period ended March 31, 2017, the Company granted 1,145,000 stock options for services, and contractual obligations associated with the conversion of senior convertible notes valued at $1,305,565 as well as 9,000,000 stock options to officers of Ironclad valued at $622,045. Of the 10,145,000 options awarded, 1,045,000 vested immediately and were fully expensed in the three month period ended March 31, 2017, the remaining 9,883,470 vest periodically over the next three years and will be expensed as they vest.
The fair value of stock options is estimated on the date of each award using the Black-Scholes option pricing model to value the stock option based on its terms and conditions
.
The following table summarizes the assumptions used to estimate the fair values of the options:
|
|
|
|
|
|
|
Number of Options
|
Date Issued
|
Stock Price
|
Exercise Price
|
Risk-free Interest Rate
|
Volatility
|
Life of Option in years
|
75,000
|
01/16/17
|
$1.27
|
$0.75
|
1.54%
|
226.01%
|
3.00
|
6,000,000
|
01/20/17
|
$1.30
|
$0.15
|
1.54%
|
220.00%
|
3.00
|
3,000,000
|
01/20/17
|
$1.30
|
$0.15
|
1.54%
|
220.00%
|
4.00
|
350,000
|
01/31/17
|
$1.01
|
$0.15
|
1.19%
|
132.84%
|
1.93
|
100,000
|
02/01/17
|
$1.01
|
$0.15
|
1.22%
|
134.90%
|
2.00
|
100,000
|
03/13/17
|
$1.35
|
$0.15
|
1.40%
|
144.84%
|
2.00
|
500,000
|
03/15/17
|
$1.63
|
$0.15
|
1.02%
|
114.94%
|
1.40
|
20,000
|
03/21/17
|
$1.50
|
$0.15
|
1.54%
|
233.07%
|
3.00
|
10,145,000
|
|
|
|
|
|
|
Note 11
Subsequent Events
During the month of April 2017, Ironclad sold an additional 240,333 restricted shares of Class A common stock at $0.15 per share to three accredited investors for $36,050 in cash pursuant to the on-going private placement that was opened on January 30, 2017. Subsequently, this private placement offering was closed on April 20, 2017.
On April 11, 2017 an independent company advisor exercised Options for 25,000 shares of Class A common stock for $3,750 in cash.
On April 30, 2017 the Company issued Options for 5,000 shares of Class A common stock at Seventy-Five Cents ($0.75) per share to an independent technical advisor.
11