The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1. Organization, Recent History, and Description of Businesses-Present and Past
Description of Businesses: Present and Past
IronClad Encryption Corporation (formerly Butte Highlands Mining Corporation) is a company developing and licensing cyber software technology to secure data files (stored and at rest) and electronic communications (in motion from electronic transmission over the internet or through telephone systems). Data at rest and in motion are both safeguarded from unauthorized access through the use of dynamic encryption and perpetual authentication.
InterLok Key Management, Inc. (formerly InterLok Key Management, LLC) is the company that initially developed and maintained the patents and was formed in Texas on June 12, 2006 and incorporated ten years later on June 16, 2016.
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 InterLok’s common stock for 56,655,891 shares of Class A common stock of Butte Highlands Mining Company.
The Share Exchange was treated as a “reverse merger” with InterLok Key Management, Inc. which is deemed—for accounting recognition purposes—as 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 prior year financial statements of operations are the operating results of its subsidiary InterLok Key Management, Inc., while the capital structure (in terms of authorized preferred and common stock) of its parent Butte Highlands Mining Company remains intact.
Subsequently, the company was renamed IronClad Encryption Corporation to better identify with IronClad’s products and services.
IronClad Encryption Corporation is a next-generation cyber defense company that secures digital assets and communications across a wide range of industries and technologies. IronClad Encryption-powered solutions use our patented Dynamic Encryption and Perpetual Authentication technologies to make all known key-based encryption technologies virtually impossible to compromise. Dynamic Encryption Technology eliminates vulnerabilities caused by exposure of any single encryption key by continuously changing encryption keys and keeping the keys synchronized in a fault-tolerant manner.
Perpetual Authentication Technology uses multiple virtual channels for encryption so that in the event one channel is compromised, the other channels maintain encryption integrity. Together, these technologies not only eliminate the single point of failure problem created by having keys exposed through brute force, side channel, or other types of attack, but do so with very low latency and system performance overhead. Developers, MSPs, MSSPs and IT organizations can now easily and effectively integrate ultra-secure authentication and encryption measures across essentially all mediums. This includes the latest processors and operating systems, legacy hardware and software, within or between networks, and on compartmentalized data or entire databases.
39
Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
History and Reverse Merger in January of 2017
The “Company” is the term used in these statements and notes to refer to the entity originally incorporated in the State of Delaware in 1929. The registered name of the Company until early in 2017 was Butte Highlands Mining Company (“Butte”).
Butte was formed to explore and mine primarily for gold in the Butte Highlands’ “Only Chance” mine, south of Butte, Montana. Butte ceased operating as a mining company in 1942. The Company was reorganized in October 1996 for the purpose of acquiring and developing additional mineral properties. At the time 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 meetings of shareholders to authorize the reorganization, 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, eleven years after the reorganization and very limited results from its mining activities, the Company had disposed of all of its historical mineral properties or mining claims and eventually became a “shell company” under the rules of the Securities and Exchange Commission (“SEC”).
In 2009, Butte registered under the Securities Exchange Act of 1934, as amended, for the purpose of becoming a reporting company. The Company’s common stock then became listed on the OTCBB, but in time the Company also listed its common stock to trade on the OTC QB electronic market, one of the OTC Markets Group over-the-counter markets, where the Company’s common stock is listed.
Then, following ten years of being a shell company with only nominal activity and limited cash or other assets, the business focus of Butte changed early in 2017. Most notably the Company raised significant capital to implement its new business and financial plans to further develop the licensing and commercial use of its patented encryption software. The change caused Butte to lose its previous shell company status.
The Company also changed its state of incorporation to Nevada and its name to IronClad Encryption Corporation (“IronClad”) and changed the stock symbol from BTHI to IRNC to more appropriately reflect the fundamental change of its business to developing cyber encryption technology and away from its historical mining activities. On October 16, 2017, the Company redomiciled in Delaware from Nevada and adopted a certificate of incorporation and bylaws as a Delaware corporation. The terms “Company”, “IronClad” and “Butte” all refer to the same individual corporate entity, but the uses of the IronClad and Butte names are used to refer to different eras of the Company’s long history. The historical eras generally coincide with the changes in business focus before and after 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. Through December 31, 2017, InterLok was the only subsidiary of the Company and InterLok’s patents and line of business now are the main basis of the business of the Company on a consolidated basis. During the year ended March 31, 2018, the Company incorporated a new wholly owned subsidiary IronClad Pipeline IC, Inc. (“Pipeline”).
40
Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of IronClad and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The above consolidated financial statements have been prepared in accordance with generally accepted accounting principles.
Note 2. Summary of Significant Accounting Policies
This summary of significant accounting policies is presented to assist in understanding the Company’s consolidated financial statements. The financial statements and notes are representations of the Company’s 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, 2019, the Company has limited financial resources with which to achieve its objectives and attain 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 $27,967,566. The Company's working capital deficit is $5,403,654 (current assets minus current liabilities; current liabilities in this case being greater than current assets).
Achievement of the Company's objectives will depend on its ability to obtain additional financing, to generate revenue from current and planned business operations, and to effectively manage product and software development, operating and capital costs. The Company is in a development stage and has generated no operating revenue, profits or positive cash flows from operations.
The Company plans to fund its future operations by potential sales of its common stock or by issuing debt securities. 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.
Revenue Recognition and Trade Accounts Receivable
The Company recognizes revenue in accordance with
ASC 606 — Revenue From Contracts With Customers
. We recognize revenue when we have identified a contract with a customer, identify the performance obligations in the contract, determine the transaction prices, when we allocate the transaction prices to the performance obligation in the contract and we recognize revenue when or as the Company satisfies the performance in the contract. Revenues for the years ended March 31, 2019 and 2018 were recognized as services were performed and invoiced to the customer based on the standard hourly rates agreed to in the terms of the contract.
41
Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
We record trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts, if any, to reflect any loss anticipated on the trade accounts receivable balances and charged to the provision for doubtful accounts.
Earnings (Losses) Per Share
Basic earnings per share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the year. Fully-diluted earnings per share is computed by dividing net income (loss) by the sum of the weighted-average number of common shares outstanding and the additional common shares that would have been outstanding if potential common shares had been issued. Potential common shares are not included in the computation of fully diluted earnings per share if their effect is anti-dilutive.
Cash Equivalents
The Company considers cash, certificates of deposit, and debt instruments with a maturity of three months or less when purchased to be cash equivalents.
Fair Value Measures
The Company's financial instruments, as defined by the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 825-10-50
Financial Instruments—Overall
(and subtopics)
, include cash, receivables, accounts payable and accrued liabilities. 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, 2019and March 31, 2018
The standards under ASC 820
Fair Value Measurement
define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. 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 or no market data, which require the reporting entity to develop its own assumptions.
At March 31, 2019 and 2018 the Company did not have any assets measured at fair value other than cash and deposits. At March 31, 2019 and 2018 the Company had conversion features embedded in its convertible notes payable. The fair value measurement of those derivatives, using a Binomial valuation model, was $2,147,415 at March 31, 2019 and $234,138 at March 31, 2018 and is reported as derivative liability on the balance sheet.
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 this 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
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
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 10.
Capitalization of Patent and Trademark Costs
The Company capitalizes its legal, patent agent and related filing fees and costs associated with the patents it holds and is developing. The amounts are carried as an intangible asset in the financial statements. The costs of the patents or trademarks are amortized ratably (expensed) over the expected useful technological or economic life of the individual assets, which the Company has determined to be ten years. The legal life of a patent is typically about 20 years. See Note 3.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified to provide greater line item detail for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. This change in classification has no effect on previously reported cash flows in the Condensed Consolidated Statement of Cash Flows and had no effect on the previously reported Condensed Consolidated Statements of Operations for any period
.
New Accounting Requirements and Disclosures
Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
FASB issued standard
ASU 2018-07 — Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
related to changes in stock compensation. IronClad has early adopted this new standard in the current period and recognition of expenses for outstanding options were re-evaluated for compliance and will be recognized on a straight line basis through final vesting of the respective options.
FASB issued standard
ASU 2017-11 —
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
. IronClad has early adopted this new standard in the current period and recognition of warrants with down round features were re-evaluated for compliance and an increase in valuation of $233,598 was recognized as a reduction in retained earnings.
FASB issued
ASU No. 2016-02, Leases
, which establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The standard is effective for calendar years beginning after December 15, 2018; no material impact is expected from adoption of this standard.
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses at the balance sheet date and for the period then ended. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these financial statements include:
estimates in the calculation of share-based compensation expense,
estimates in the value of our warrants derivative liability,
estimates made in our income tax calculations, and
estimates in the assessment of possible litigation claims against the company.
We are subject to claims and liabilities that arise in the ordinary course of business. We accrue for losses when such losses are considered probable and the amounts can be reasonably estimated.
Note 3. Patents
Patents and trademarks are as follows:
|
March 31,
2019
|
March 31,
2018
|
Patents and trademarks under development
|
$
217,744
|
$
170,946
|
|
|
|
Patents issued
|
153,801
|
398
|
Less accumulated amortization
|
(3,759)
|
(368)
|
|
150,042
|
30
|
|
|
|
Patents, net
|
$
367,786
|
$
170,976
|
Amortization expense for intangible assets during the year ended March 31, 2019 and March 31, 2018 was $3,759 and $30, respectively. Costs at March 31, 2019 totaling $367,786 are for $217,744 for new patents and trademarks under development (but as yet not awarded) and for $153,801 for new patents issued in December 2018 and January 2019. The patents and trademarks under development will not be amortized until formally issued. To the extent that a patent or trademark is not ultimately awarded the associated costs will be expensed accordingly at the time such an outcome is apparent.
IronClad filed fourteen patent applications during the years ended March 31, 2019 and March 31, 2018. These pending patents expand upon the initial scope of the original “seminal” patents and provide up to twenty additional years of enforceable intellectual property rights regarding authentication, validation, and encryption for all electronic transmissions associated devices. IronClad’s current and original patent portfolio included three issued and granted US patents. Each of the three original patents has expired and was written off at September 30, 2018.
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
IronClad was recently granted seven patents from the United States Patent and Trademark Office (“USPTO”) from its fourteen recent patent filings, and the remaining seven now continue under routine, formal examination and review. Based on previous process and timing, IronClad expects to have the remaining seven patents granted during 2019. International patent protection has also been filed for all fourteen of these granted and pending patents.
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, 2019 and March 31, 2018 the Company had $0 and $37,907 on deposit in excess of the FDIC insured limit, respectively.
The Company did have a nominal exposure to a concentration of credit risk: all of our revenue was from one customer. However, we viewed the risk was limited because of the financial strength and liquidity of the multi-billion dollar energy customer that has operated profitably for more than a century.
Note 5. Notes Payable
2017 Convertible Note 12%
On June 26, 2017 IronClad entered into a Securities Purchase Agreement to issue a 12% convertible note payable for an aggregate principal amount of $78,500 with the intent of meeting certain conditions precedent to closing and funding on or before July 7, 2017. The closing conditions were met prior to that date and the convertible note payable was closed and funded on July 6, 2017. The Company received cash proceeds of $75,000 net of transaction costs of $3,500. The $3,500 was recorded as a discount amount on the note payable and was amortized as interest expenses over the life of the note. $3,500 was amortized during the year ended March 31, 2018; accrued interest payable at March 31, 2018 was zero.
The note matures on March 30, 2018 and interest costs accrue on the unpaid principal balance at 12% annually until March 30, 2018, and after that if not paid at maturity interest accrues annually at 22% until the principal amount and all interest accrued and unpaid are paid.
The
holder of the note, at its sole election, could convert the note into shares of common stock of the Company at any time during the period beginning on the date which is one hundred and eighty days following the date of the note (
dated June 26, 2017) and
ending on the later of i) the maturity date
, or ii) the date of payment of a default amount, if any.
The shares to be issued are a function of a variable conversion price
which is 65% of
a market price defined to be the lowest
one day closing bid price for the Company’s common stock during
the fifteen-day trading
period ending on the last trading day prior to
exercising the conversion
right. The Company will keep available authorized shares reserved, initially 289,846 shares, but in any event authorized shares equal to six times the number of shares that would be issuable upon full conversion of the note from time to time.
The conversion feature of the note represented an embedded derivative. The derivative value at December 23, 2017 was determined using a Black-Scholes valuation model. Accounting recognition of $126,578 for the fair value of the derivative liability, $73,272 (net of $4,116 of amortization) was recorded as a contra liability to the original $78,500 recorded liability of the underlying convertible note, and a $49,190 loss was recognized as a fair valuation adjustment to earnings.
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
Between January 10, 2018 and January 28, 2018, the note holder exercised its rights under the conversion provisions and through operation of the five conversion elections was issued, in total, 50,322 shares of stock which effectively repaid the loan balance. $73,272 was recorded as a gain on conversion during the year ended March 31, 2019
The dates, shares issued and principal amounts repaid at each conversion event are as follows:
Conversion
Date
|
Principal
Outstanding
|
|
Principal
Reduction
|
Shares
Issued
|
Exercise
Price
|
12/31/2017
|
$78,500
|
|
|
|
|
1/10/2018
|
$63,500
|
|
$(15,000)
|
8,242
|
$1.82
|
1/12/2018
|
$43,500
|
|
$(20,000)
|
10,989
|
$1.82
|
1/18/2018
|
$28,500
|
|
$(15,000)
|
8,242
|
$1.82
|
1/23/2018
|
$13,500
|
|
$(15,000)
|
9,819
|
$1.53
|
1/25/2018
|
$ —
|
|
$(13,500)
|
13,030
|
$1.40
|
|
|
|
Total
|
50,322
|
|
Commitment Note and Convertible Note
On August 24, 2017, IronClad entered into an Investment Agreement to establish an equity line of funding for the potential future issuance and purchase of IronClad’s shares of Class A common stock. See Note
7.
As consideration for its commitment to purchase shares of IronClad’s Class A common stock pursuant to the Investment Agreement, IronClad issued to the counterparty of the agreement a seven-month 10% convertible promissory note (the “Commitment Note”) in the principal amount of $100,000. The Commitment Note matured on March 24, 2018. The Commitment Note is convertible into shares of IronClad’s Class A common stock at the fixed price of $3.25 per share; provided, however, that at any time and from time to time after a default occurs solely due to the fact the Commitment Note is not retired on or before the maturity date, all or any part of the Commitment Note is convertible into shares of Class A common stock of the Company at a per share price equal to the lower of: (a) $3.25 or (b) 65% of the average of the two lowest per share trading prices of the Class A common stock during the twenty consecutive trading days prior to the conversion date.
The Commitment Note is included
as a financing fee expense at the date of the transaction.
The Commitment Note
was to finance the $100,000 cost of the commitment fee to the counterparty of the Investment Agreement and is accordingly included in the financing fee expenses for the period ended September 30, 2017. The amount of the commitment fee could be reduced by $35,000 or $17,500 if a registration statement registering the shares that would be issued under the equity line becomes effective within 90 or 135 days, respectively, of August 24, 2017. The registration statement was declared effective on December 18, 2017 a period less than 135 days (but more than 90 days) after August 24, 2017. Consequently, the principal balance of the commitment fee was reduced by $17,500 and $100,000 of financing fee expenses originally recognized in the three-month period ended September 30, 2017 were adjusted to reflect a lower $82,500 financing fee expense.
During the year ended March 31, 2019, $15,692 of regular interest and $79,138 of derivative liability was expensed. During the year ended March 31, 2018, $10,810 of regular interest was expensed.
On August 24, 2017, in connection with the entry into the Investment Agreement, IronClad also issued a 10% convertible note (the “Convertible Note”) in an aggregate principal amount of $330,000 with a 10% original issue discount (“OID”). The initial consideration in the amount of $165,000 was funded on August 24, 2017. The Company received net proceeds of $150,000 (which represents the deduction of the 10% original issue
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
discount for the note holder’s due diligence and legal fees). The Company may make additional borrowings in such amounts and at such dates as the note holder may choose in its sole discretion. The balance of individual borrowings matures seven months from its funding date.
The Convertible Note also has an embedded beneficial conversion feature (“BCF”) based on a stated conversion price of $1.00 per share. The market price of a share of IronClad’s common stock at the time of the first borrowing under the note was $3.50 thus establishing an intrinsic value of $2.50 on that date.
The Company received the first borrowing for $165,000 under the Convertible Note on August 24, 2017 and net cash proceeds of $150,000 were received after deducting for the original issue discount and lender transaction costs of $15,000. An additional $12,000 of costs was incurred by IronClad directly relating to the note. Both the $15,000 and the $12,000 are recorded as discount amounts on the $165,000 note payable and are amortized as interest expenses over the life of the borrowing. The maturity date of this borrowing under the note is seven months from its funding date which is March 24, 2018.
Between March 26, 2018 and February 25, 2019, the note holder exercised its rights under the conversion provisions and through operation of seven conversion elections was issued, in total, 4,588,586 shares of stock which effectively repaid the loan balance. Additionally, between March 14, 2019 and March 28, 2019, the note holder elected to convert approximately $37,698 of accrued interest into 7,683,614 shares of Class A common stock.
The dates, shares issued and principal amounts repaid at each conversion event are as follows:
Conversion
Date
|
Principal
Outstanding
|
|
Principal
Reduction
|
Shares
Issued
|
Exercise
Price
|
12/31/2017
|
165,000
|
|
|
|
|
3/26/2018
|
$
155,000
|
|
$(10,000)
|
9,958
|
$
1.00425
|
06/01/18
|
$
135,000
|
|
$(20,000)
|
32,219
|
$
0.62
|
07/17/2018
|
$
115,000
|
|
$(20,000)
|
61,538
|
$
0.325
|
8/23/2018
|
$
105,000
|
|
$(10,000)
|
73,260
|
$
0.1365
|
09/14/18
|
$
85,000
|
|
$(20,000)
|
236,686
|
$
0.0845
|
02/06/19
|
$
45,000
|
|
$(40,000)
|
2,051,282
|
$
0.0195
|
02/25/19
|
$
-
|
|
$(45,000)
|
2,123,643
|
$
0.02119
|
|
|
|
Total
|
4,588,586
|
|
The valuation of the BCF related to the $165,000 borrowing on the Convertible Note and with an intrinsic value of $2.50 per share (based on a $3.50 closing price less the $1.00 per share conversion price) is approximately $424,407 using a Black-Scholes valuation model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the beneficial conversion feature formally recorded is $138,000 ($165,000 net of $27,000) and will be amortized as interest expense over the life of the loan.
On March 24, 2018 both the Commitment Note ($100,000 contractually reduced to $82,500 in 2017) and the first tranche of the 10% Convertible Note for $165,000 (less the $10,000 conversion in late March) reached their maturity dates and, except for a $10,000 conversion by Tangiers on the Convertible Note, were not repaid in cash. Consequently both notes were in “maturity date default” and, pursuant to the terms of the loans, were convertible at the lesser of $3.25 for the Commitment Note, and $1.00 for $165,000 note or 65% of the average lowest two trades for the prior 20 days, resulting in an initial recognition for derivative treatments for both notes.
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
The valuation of the derivative liability related to the $82,500 borrowing on the Convertible Note and with an intrinsic value of $0.70 per share (based on a $1.67 closing price less the $0.97 per share present value of the conversion price) is approximately $79,138 using a Black-Scholes valuation model. That amount is recorded as a new contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. This results in a net liability value of $3,362. The amount will be amortized as interest expense over an estimated “remaining” three month life of the already matured loan.
The valuation of the derivative liability related to the $165,000 (reduced to $155,000) borrowing on the Convertible Note and with an intrinsic value of $0.70 per share (based on a $1.67 closing price less the $0.97 per share present value of the conversion price) is approximately $158,276 using a Black-Scholes valuation model. That amount is recorded as a new contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. Since the undiscounted (and unconverted) amount of the note is $155,000 the derivative valuation is recorded as $155,000. The amount will be amortized as interest expense over an estimated “remaining” three month life of the already matured loan.
During the year ended March 31, 2019, $21,039 of regular interest and $155,000 of derivative liability was expensed. During the year ended March 31, 2018, $16,500 of regular interest, $27,000 of original issue discount and $138,578 of beneficial conversion was expensed.
On October 23, 2017, a second borrowing of $82,500 under the Convertible Note for $330,000 was closed and funded. The Company received net proceeds of $75,000 after deducting for original issue discount and lender transaction costs of $7,500. An additional $6,000 of costs was incurred by IronClad relating to the Convertible Note. Both the $7,500 and the $6,000 were recorded as discount amounts on the $82,500 note payable and amortized as interest expenses over the life of the borrowing. The maturity date of this borrowing under the Convertible Note was also defined to be seven months from its borrowing date which is May 24, 2018. The market price of a share of IronClad’s common stock at the time of funding was $4.40 making the intrinsic value of the derivative $3.40. The valuation of the BCF is estimated to be approximately $289,000 and is capped at $69,000, the otherwise undiscounted amount of the note payable.
Between March 14, 2019 and March 28, 2019, the holder of the note elected to convert $37,000 of principal into 8,024,179 shares of Class A common stock.
The dates, shares issued and principal amounts repaid at each conversion event are as follows:
Conversion
Date
|
Principal
Outstanding
|
|
Principal
Reduction
|
Shares
Issued
|
Exercise
Price
|
12/31/18
|
82,500
|
|
|
|
|
3/14/2019
|
$77,500
|
|
$(5,000)
|
889,284
|
$.0056225
|
03/25/19
|
$53,500
|
|
$(24,000)
|
5,351,171
|
$0.004485
|
03/27/19
|
$49,500
|
|
$(4,000)
|
891,862
|
$0.004485
|
03/28/19
|
$45,500
|
|
$(4,000)
|
891,862
|
$0.004485
|
|
|
|
Total
|
8,024,179
|
|
During the year ended March 31, 2019, $16,026 of regular interest, $20,916 of original issue discount, and $57,024 of derivative liability was expensed. During the year ended March 31, 2018, $6,158 of regular interest, $12,136 of original issue discount and $49,449 of derivative liability was expensed.
On March 15, 2018, a third and final borrowing of $82,500 under the Convertible Note for $330,000 was
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
closed and funded. The Company received net proceeds of $75,000 after deducting for original issue discount and lender transaction costs of $7,500 and an additional $6,000 of loan closing costs incurred by IronClad. The maturity date of this borrowing under the Convertible Note is also defined to be seven months from its borrowing date which is October 24, 2018. The market price of a share of IronClad’s common stock at the time of funding was $1.85 making the intrinsic value of the derivative $0.85.
The valuation of the BCF related to the $82,500 borrowing on the Convertible Note and with an intrinsic value of $0.85 per share (based on a $1.85 closing price less the $1.00 per share conversion price) is approximately $109,861 using a Black-Scholes valuation model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the beneficial conversion feature formally recorded is $69,000 ($82,500 net of $13,500) and will be amortized as interest expense over the life of the loan.
During the year ended March 31, 2019, $20,606 of regular interest, $12,491 of original issue discount, $63,841 of beneficial conversion and $20,064 of derivative liability was expensed. During the year ended March 31, 2018, $620 of regular interest, $1,009 of original issue discount and $5,159 of beneficial conversion was expensed.
2018 Convertible Notes, 12%
On January 25, 2018 IronClad entered into a Securities Purchase Agreement to issue a new 12% convertible note payable for an aggregate principal amount of $88,000. The Company received cash proceeds of $85,000 net of transaction costs of $3,000. The $3,000 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. The general terms of the note, except for the principal amount borrowed, are identical to the initial 12% Convertible note entered into in 2017 and converted earlier in January 2018.
The note matures on October 30, 2018 and interest costs accrue on the unpaid principal balance at 12% annually until October 30, 2018, and after that if not paid at maturity interest accrues annually at 22% until the principal amount and all interest accrued and unpaid are paid.
The holder of the note, at its sole election, could convert the note into shares of common stock of the Company at any time during the period beginning on the date which is one hundred and eighty days following the date of the note (dated January 25, 2018) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any.
The shares to be issued are a function of a variable conversion price which is 65% of a market price defined to be the lowest one day closing bid price for the Company’s common stock during the fifteen-day trading period ending on the last trading day prior to exercising the conversion right. The Company would keep available authorized shares reserved, initially 289,846 shares, but in any event authorized shares equal to six times the number of shares that would be issuable upon full conversion of the note from time to time.
During the year ended March 31, 2019, $3,009 of regular interest, $2,302 of original issue discount and $57,990 of derivative liability was expensed. During the year ended March 31, 2018, $1,765 of regular interest and $698 of original issue discount was expensed.
The loan principal plus accrued interest, both totaling $124,268, was repaid on July 14, 2018 and the note was fully retired.
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
On February 27, 2018 IronClad entered into a Securities Purchase Agreement to issue a 12% convertible note payable for an aggregate principal amount of $53,000. The Company received cash proceeds of $50,000 net of transaction costs of $3,000. The $3,000 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. The general terms of the note, except for the principal amount borrowed, are identical to the initial 12% Convertible note entered into in 2017 and converted earlier in January 2018.
The note matures on November 03, 2018 and interest costs accrue on the unpaid principal balance at 12% annually until November 30, 2018, and after that if not paid at maturity interest accrues annually at 22% until the principal amount and all interest accrued and unpaid are paid.
The holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is one hundred and eighty days following the date of the note (dated February 27, 2018) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any.
The shares to be issued are a function of a variable conversion price which is 65% of a market price defined to be the lowest one day closing bid price for the Company’s common stock during the fifteen-day trading period ending on the last trading day prior to exercising the conversion right. The Company will keep available authorized shares reserved, initially 289,846 shares, but in any event authorized shares equal to six times the number of shares that would be issuable upon full conversion of the note from time to time.
The conversion feature of the note represents an embedded derivative. Once definitive pricing facts and circumstances are known later in the year regarding the market value of IronClad’s common stock at that time, the cost of that derivative will be determined using a Black-Scholes valuation model. At the close of accounting periods subsequent to the initial valuation a redetermination of the derivative valuation will be made using an updated Black-Scholes valuation model. Any gain or loss in the liability value will be recognized as a fair valuation adjustment to earnings. The loan principal plus accrued interest, both totaling $75,620, was repaid on August 21, 2018 and the note was fully retired.
During the year ended March 31, 2019. $2,492 of regular interest, $2,585 of original issue discount and $42,862 of derivative liability was expensed. During the year ended March 31, 2018, $558 of regular interest and $415 of original issue discount was expensed.
Working Capital Loan for Services to New Customer by IronClad Pipeline IC, Inc.
On February 27, 2018, IronClad borrowed $255,000 gross proceeds as an initial advance on a Credit Agreement (the “Agreement”) with a lending party. The Agreement, agreed to by both parties on February 1, 2018, enabled the Company, at its sole election, to borrow up to an aggregate amount of $500,000. The outstanding balance of any advances accrues interest at the annual rate of 8.5%. There is a transaction financing fee of 2% for any amount drawn under the facility. Proceeds received net of the transaction fee were $250,000.
On March 21, 2018, IronClad borrowed and additional $245,000 gross proceeds as a second advance under the Agreement. Proceeds received net of the transaction fee were $240,000.
During the period ended June 30, 2018, the Company repaid $100,000 of the principal, and then redrew another $100,000. On June 30, 2018 the Company repaid $25,000.
During the period ended September 30, 2018, the Company repaid all of the outstanding principal balance of the loan, however the accrued interest remains outstanding the amount of $17,816
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
Interest is to be paid annually in cash on March 1, 2019 and 2020. Outstanding interest was not paid at March 1, 2019; the Company is negotiating with the lender to issue common stock in exchange for the accrued amount of interest owed. There is no penalty for any early principal repayments. The Company has pledged 500,000 of its common stock as collateral under the terms of the Agreement. In the event of default by the Company, the lender is entitled to receive one share of Company common stock for every one dollar in principle, interest, penalties, and fees that are owed and outstanding by the Company to Layer 3 Communications.
The Agreement is also supported by a personal $500,000 guarantee from an officer of the Company. IronClad will pay a 5% guarantee fee of $25,000; $10,000 shortly after year end and the remaining $15,000 at such time as the Board of Directors determines the Company has sufficient liquidity to pay the balance owed. The guarantee fee was reviewed and approved by the Compensation Committee of the Board which determined that the 5% fee was an appropriate market-based rate for guarantees of loans of this nature and comparable risk.
Terms of the Agreement specify the use of funds to be limited to only supporting the operations of its new service contract. The terms of the Agreement were amended, effective June 11, 2018, to also permit the use of funds for certain new patent application filings of IronClad.
2018 Financing Note
On March 16, 2018, IronClad purchased several lines of corporate insurance coverage for a set of annual premiums that totaled $30,719. To pay for the coverage, IronClad paid $2,631 down on the coverages and entered into a financing agreement to borrow the $28,087 balance owed for the coverage. Interest on the loan is approximately 6% and the loan is repaid by eleven monthly principal and interest installment payments of $2,631 each. The cost of the insurance is recorded as a prepaid asset and is being amortized monthly over the annual period of the coverages. During the period ended September 30, 2018 this note was repaid in full.
2019 New Loan Agreements including Convertible Notes
On June 26, 2018 IronClad entered into a Securities Purchase Agreement to issue a 10% convertible note payable for an aggregate principal amount of $250,000. The Company received cash proceeds of $235,000 net of transaction costs of $15,000. The $15,000 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. The general terms of the note, except for the principal amount borrowed, are identical to the initial 10% Convertible note entered into in 2017.
The note matures on December 26, 2018 and interest costs accrue on the unpaid principal balance at 10% annually until December 26, 2018, and after that if not paid at maturity interest accrues annually at 24% until the principal amount and all interest accrued and unpaid are paid.
The holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time on or following the date of the note and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any.
The shares to be issued are a function of a fixed conversion price of $1.00, or an alternate variable conversion price, triggered by events such as stock splits, stock dividends or rights offerings which is 70% of a market price defined to be the lowest five day closing bid price for the Company’s common stock during the twenty-day trading period ending on the last trading day prior to exercising the conversion right. The Company will keep available authorized shares reserved, initially 3,081,854 shares, but in any event authorized shares equal to five times the number of shares that would be issuable upon full conversion of the note from time to time.
51
Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
The conversion feature of the note represents an embedded derivative. A derivative liability with an intrinsic value of $0.03281 was $189,211 using a binomial pricing model and was calculated as a discount to the note. That amount is recorded as a new contra-note payable amount (similar to OID and transactions costs and amounts discussed immediately below), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $26,014 ($250,000 net of $223,986) and will be amortized as interest expense over the life of the loan. The remaining $163,197 is expensed as financing fees.
As a commitment fee for the Note, the Company issued the holder 240,384 shares of common stock to be held in escrow until the Note is repaid. The holder will keep the shares, if the Note is not retired prior to its maturity date. The shares were valued at $165,865 and were recorded as a discount on the note and amortized through repayment of the note on November 1, 2018. Upon repayment of the note the shares were returned and the $165,865 expense was reversed
Included in the share purchase agreement was a common stock purchase warrant issued by the Company to the holder to purchase 62,500 shares of common stock at $3.00 per share, exercisable for four years. The warrants were valued at $43,121 using a Black Scholes option pricing model and were recorded as a discount on the note. The warrants included a down round feature in January 2019.
The warrant included a down round feature that would reduce the exercise price of the warrant, if the Company sold or granted any option to purchase, or sell or grant any right to reprice, or otherwise disposed of or issued common stock or securities entitling any person or entity to acquire shares of common stock (upon conversion, exercise or otherwise) at an effective price per share less than the then exercise price. On January 17, 2019, the down round feature was triggered and the exercise price was reduced to $0.0195 and the number of warrants exercisable was increased to 9,615,385. As a result, the original valuation of $43,121 was increased to $164,132 and a reduction to retained earnings was recorded for the difference, similar to a dividend, in the amount of $121,011.
During the year ended March 31, 2019. $8,873 of regular interest, $58,121 of original issue discount, and $26,342 of derivative liability was expensed.
On October 11, 2018 the holder of the note converted $100,000 of the principal into 3,076,923 shares of Class A capital stock. On November 1, 2018 the Company paid off the remaining $150,000 of principal in cash.
On July 11, 2018 IronClad entered into a Securities Purchase Agreement (SPA) to issue a 9% convertible note payable for an aggregate principal amount of $270,000 comprised of the first note (“First Note”) being in the amount of $135,000.00, and the remaining note in the amount of $135,000.00, (a “Back End Note”). The Company received cash proceeds of $126,500 from the First Note net of transaction costs of $8,500. The $8,500 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note.
The First Note matures on July 11, 2019 and interest costs accrue on the unpaid principal balance at 9% annually until July 11, 2019, and after that if not paid at maturity interest accrues annually at 24% until the principal amount and all interest accrued and unpaid are paid.
The Back End Note carries the same terms as the First Note, except it may not be repaid, but only converted. The Company is under no obligation to accept the Back End Note, but may do so at its sole discretion, following 180 days from the date of the note (dated July 11, 2018). As part of the SPA, the Holder issued the Company a collateralized secured promissory note in the amount of $131,500 that may be exchanged for cash against the Back End Note. On January 25, 2019, the holder of the note chose to cancel the Back End Note.
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
The holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is 180 days following the date of the note (dated July 11, 2018) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any.
The shares to be issued are a function of a fixed conversion price of $1.00 per share for six months, and thereafter until maturity at a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen-day trading period ending on the last trading day prior to exercising the conversion right. The Company will keep available authorized shares reserved, initially 1,730,000 shares, but in any event the number of reserved shares at least equals 400% of the number of shares of Company common stock issuable upon conversion of the Note. During the year ended March 31, 2019 the holder of the note elected to convert $61,425 of principal and accrued interest into common stock.
The dates, shares issued and principal amounts repaid at each conversion event are as follows:
Conversion
Date
|
Principal
Outstanding
|
|
Principal
Reduction
|
Shares
Issued
|
Exercise
Price
|
12/31/2018
|
135,000
|
|
|
|
|
2/04/2019
|
$120,000
|
|
$(15,000)
|
808,303
|
$0.0195
|
03/01/2019
|
$111,500
|
|
$(8,500)
|
921,451
|
$0.00975
|
03/21/2019
|
$99,000
|
|
$(12,500)
|
2,876,192
|
$0.004615
|
03/29/2019
|
$77,000
|
|
$(22,000)
|
5,218,503
|
$0.004485
|
The valuation of the derivative liability related to the $135,000 borrowing on the First Note and with an intrinsic value of $0.54 per share is approximately $248,386 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $126,500 ($135,000 net of $8,500) and will be amortized as interest expense over the life of the loan. The remaining $121,886 is expensed as financing fees.
During the year ended March 31, 2019, $9,326 of regular interest, $4,029 of original issue discount, and $91,149 of derivative liability was expensed.
On July 17, 2018 (transaction documents were originally dated June 29, but amended for action taken on July 17), IronClad issued a 12% convertible note (the “Convertible Note”) to a lender (the “Holder”) in an aggregate principal amount of $115,500. The Company received cash proceeds of $101,500 net of transaction costs of $14,000 that included $3,500 for attorneys’ fees. The note matures on July 18, 2019. Interest costs accrue on the unpaid principal balance at 12% annually until maturity, and after that if not paid, interest accrues annually at 18% until any unpaid principal amount and unpaid interest accrued are paid.
The Holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is one hundred and eighty days following the date of the note (dated July 18, 2018) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any.
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
The shares to be issued upon conversion are a function of a variable conversion price which is 65% of a market price defined to be the lowest one (1) trading price for the Company’s common stock during the fifteen (15) day trading period ending on the last trading day prior to the conversion date. The Company will keep available authorized shares reserved, initially 1,500,000 shares. During the year ended March 31, 2019 the holder of the note elected to convert $111,500 of principal and $4,000 of financing fees into 11,628,751 shares of Class A common stock.
The dates, shares issued and principal amounts repaid at each conversion event are as follows:
Conversion
Date
|
Principal
Outstanding
|
|
Principal
Reduction
|
Shares
Issued
|
Exercise
Price
|
12/31/2018
|
115,500
|
|
|
|
|
01/22/2019
|
$106,500
|
|
$(9,000)
|
97,371
|
$0.097565
|
02/4/2019
|
$91,500
|
|
$(15,000)
|
794,872
|
$0.0195
|
02/12/2019
|
$77,000
|
|
$(14,500)
|
769,231
|
$0.0195
|
02/20/2019
|
$57,500
|
|
$(19,500)
|
1,025,642
|
$0.0195
|
02/28/2019
|
$42,500
|
|
$(15,000)
|
1,402,715
|
$0.01105
|
03/11/2019
|
$30,000
|
|
$(12,500)
|
2,105,264
|
$0.006175
|
03/14/2019
|
$17,500
|
|
$(12,500)
|
2,312,139
|
$0.0056225
|
03/26/2019
|
$4,000
|
|
$(13,500)
|
3,121,517
|
$0.004485
|
The valuation of the derivative liability related to the $115,500 borrowing on the Convertible Note and with an intrinsic value of $0.4751 per share is approximately $187,624 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $101,500 ($115,500 net of $14,000) and will be amortized as interest expense over the life of the loan. The remaining $86,124 is expensed as financing fees.
During the year ended March 31, 2019, $8,470 of regular interest, $14,000 of original issue discount, and $101,500 of derivative liability was expensed.
On July 19, 2018 IronClad entered into a Securities Purchase Agreement (SPA) to issue a 9% convertible note payable for an aggregate principal amount of $315,000 comprised of the first note (“First Note”) being in the amount of $157,500.00, and the remaining note in the amount of $157,500.00, (a “Back End Note”). The Company received cash proceeds of $142,500 from the First Note net of transaction costs of $15,000 that included $7,500 for attorneys’ fees.
The First Note matures on July 19, 2019 and interest costs accrue on the unpaid principal balance at 9% annually until July 19, 2019, and after that if not paid at maturity interest accrues annually at up to 24% until the principal amount and all interest accrued and unpaid are paid. The Back End Note carries the same terms as the First Note, except it may not be repaid in cash, but only converted. The Company accepted the Back End Note on March 19, 2019 As part of the SPA, the Holder issued the Company a collateralized secured promissory note in the amount of $150,000 that was exchanged for cash against the Back End Note (discussed below).
The holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is 180 days following the date of the note (dated July 19, 2018) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any. The shares to be issued are a function of a fixed conversion price of $1.00 per share for six months, and thereafter until maturity at a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen-day trading period ending on the last trading day
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
prior to exercising the conversion right. During the year ended March 31, 2019 the holder of the note elected to convert $156,500 of principal into 18,788,564 shares of Class A common stock.
The dates, shares issued and principal amounts repaid at each conversion event are as follows:
Conversion
Date
|
Principal
Outstanding
|
|
Principal
Reduction
|
Shares
Issued
|
Exercise
Price
|
12/31/2018
|
$157,500
|
|
|
|
|
01/24/2019
|
$147,500
|
|
$(10,000)
|
80,972
|
$0.1235
|
02/04/2019
|
$132,500
|
|
$(15,000)
|
769,231
|
$0.0195
|
02/07/2019
|
$115,000
|
|
$(17,500)
|
897,436
|
$0.0195
|
02/20/2019
|
$90,000
|
|
$(25,000)
|
1,282,051
|
$0.0195
|
02/27/2019
|
$75,000
|
|
$(15,000)
|
1,357,466
|
$0.01105
|
03/07/2019
|
$60,000
|
|
$(15,000)
|
1,923,077
|
$0.0078
|
03/13/2019
|
$45,000
|
|
$(15,000)
|
2,667,852
|
$0.0056225
|
03/25/2019
|
$35,000
|
|
$(10,000)
|
2,229,654
|
$0.04485
|
03/26/2019
|
$20,937
|
|
$(14,063)
|
3,135,563
|
$0.004485
|
03/29/2019
|
$1,000
|
|
$(19,937)
|
4,445,262
|
$0.004485
|
The valuation of the derivative liability related to the $157,500 borrowing on the First Note and with an intrinsic value of $0.5482 per share is approximately $295,227 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $142,500 ($157,500 net of $15,000) and will be amortized as interest expense over the life of the loan. The remaining $152,727 is expensed as financing fees.
During the year ended March 31, 2019, $8,766 of regular interest, $17,096 of original issue discount, and $142,500 of derivative liability was expensed on the First Note,
The Back End Note was accepted on March 14, 2019 and matures on July 19, 2019. Interest costs accrue on the unpaid principal balance at 9% annually until July 19, 2019, and after that if not paid at maturity interest accrues annually at up to 24% until the principal amount and all interest accrued and unpaid are paid. The Back End Note carries the same terms as the First Note, except it may not be repaid in cash, but only converted
The holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is 180 days following the date of the note (dated March 14, 2019) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any. The shares to be issued are a function of a fixed conversion price of $1.00 per share for six months, and thereafter until maturity at a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen-day trading period ending on the last trading day prior to exercising the conversion right.
The valuation of the derivative liability related to the $157,500 borrowing on the Back End Note and with an intrinsic value of $0.0096 per share is approximately $352,448 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $142,500 ($157,500 net of $15,000) and will be amortized as interest expense over the life of the loan. The remaining $209,948 is expensed as financing fees.
55
Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
During the year ended March 31, 2019, $660 of regular interest, $2,008 of original issue discount, and $19,075 of derivative liability was expensed on the Back End Note.
On October 24, 2018 IronClad entered into a Securities Purchase Agreement to issue a 10% convertible note payable for an aggregate principal amount of $107,000. The Company received cash proceeds of $102,000 net of transaction costs of $5,000. The $5,000 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. The note matures on July 19, 2019 and interest costs accrue on the unpaid principal balance at 10% annually until October 24, 2019, and after that if not paid at maturity interest accrues annually at up to 24% until the principal amount and all interest accrued and unpaid are paid.
The Holder of the note is entitled, at any time after cash payment, to convert all or any amount of the principal face amount of the Note then outstanding into shares of the Company's common stock. The shares to be issued upon conversion are a function of a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen day trading period ending on the last trading day prior to the conversion date. The Company will keep available authorized shares reserved, initially 2,993,000 shares.
The valuation of the derivative liability related to the $107,000 borrowing with an intrinsic value of $0.1759 per share is approximately $131,617 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $102,000 ($107,000 net of $5,000) and will be amortized as interest expense over the life of the loan. The remaining $29,617 is expensed as financing fees.
During the year ended March 31, 2019, $4,632 of regular interest, $2,164 of original issue discount, and $44,153 of derivative liability was expensed.
On October 26, 2018 IronClad entered into a Securities Purchase Agreement to issue a 12% convertible note payable for an aggregate principal amount of $181,170. The Company received cash proceeds of $150,346 net of transaction costs of $30,824. The $30,824 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. The note matures on July 26, 2019 and interest costs accrue on the unpaid principal balance at 12% annually until July 26, 2019, and after that if not paid at maturity interest accrues annually at up to 24% until the principal amount and all interest accrued and unpaid are paid.
The Holder shall have the right at any time following the 180th calendar day after the issue date (October 26, 2018), and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any, to convert all or any amount of the principal face amount of the Note then outstanding into shares of the Company's common stock. The shares to be issued upon conversion are a function of a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen day trading period ending on the last trading day prior to the conversion date.
The Company will keep available authorized shares reserved, initially 6,500,000 shares. In connection with the issuance of the Note, the Company issued a common stock purchase warrant to the Holder to purchase up to 30,195 shares of the Company’s common stock at an exercise price of $3.00 per share with an exercise period of five years. The warrants were valued at $10,265 using a Black Scholes option pricing model and were recorded as a financing expense.
The warrant included a down round feature that would reduce the exercise price of the warrant, if the Company sold or granted any option to purchase, or sell or grant any right to reprice, or otherwise disposed of or issued common stock or securities entitling any person or entity to acquire shares of common stock (upon
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
conversion, exercise or otherwise) at an effective price per share less than the then exercise price. There were multiple events that triggered the down round provision, the cumulative effect reduced the exercise price to $0.004485 and the number of warrants exercisable was increased to 20,197,324. As a result, the valuation of the warrants increased to $123,067 and a reduction to retained earnings was recorded for the difference, similar to a dividend, in the amount of $112,587.
The valuation of the derivative liability related to the $181,170 borrowing with an intrinsic value of $0.2674 per share is approximately $220,204 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $150,346 ($181,170 net of $30,824) and will be amortized as interest expense over the life of the loan. The remaining $69,858 is expensed as financing fees.
During the year ended March 31, 2019, $9,421 of regular interest, $17,613 of original issue discount, and $85,912 of derivative liability was expensed.
On February 14, 2019 IronClad entered into a Securities Purchase Agreement to issue a 12% convertible note payable for an aggregate principal amount of $57,500. The Company received cash proceeds of $52,500 net of transaction costs of $7,750. The $7,750 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note.
The note matures on February 14, 2020. Interest costs accrue on the unpaid principal balance at 12% annually until maturity, and after that if not paid, interest accrues annually at 18% until any unpaid principal amount and unpaid interest accrued are paid.
The Holder of the note, at its sole election, may convert the note into shares of common stock of Company the six month anniversary of the note, the conversion price shall be equal to 65% of the lowest trading price for the fifteen prior trading days including the day upon which a notice of conversion is received.
The conversion feature of the note represents an embedded derivative. The valuation of the derivative liability related to the $57,750 borrowing on the Convertible Note and with an intrinsic value of $.039 per share is approximately $115,500 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $50,000 ($57,750 net of $7,750) and will be amortized as interest expense over the life of the loan. The remaining $65,500 is expensed as financing fees.
On February 14, 2019 IronClad entered into a Securities Purchase Agreement to issue a 10% convertible note payable for an aggregate principal amount of $107,000. The Company received cash proceeds of $102,000 net of transaction costs of $5,000. The $5,000 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. The note matures on February 14, 2020 and interest costs accrue on the unpaid principal balance at 10% annually until February 14, 2020, and after that if not paid at maturity interest accrues annually at up to 24% until the principal amount and all interest accrued and unpaid are paid.
The Holder of the note is entitled, at any time after cash payment, to convert all or any amount of the principal face amount of the Note then outstanding into shares of the Company’s common stock. The shares to be issued upon conversion are a function of a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen day trading period including the day upon which the notice of conversion is received conversion date. The Company will keep available authorized shares reserved, initially 11,551,000 shares.
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
The valuation of the derivative liability related to the $107,000 borrowing with an intrinsic value of $0.03099 per share is approximately $169,554 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $102,000 ($107,000 net of $5,000) and will be amortized as interest expense over the life of the loan. The remaining $67,554 is expensed as financing fees.
During the year ended March 31, 2019, $1,319 of regular interest, $616 of original issue discount, and $12,575 of derivative liability was expensed.
On March 28, 2019 IronClad entered into a Securities Purchase Agreement (SPA) to issue a 12% convertible note payable for an aggregate principal amount of $172,500 comprised of the first note (“First Note”) being in the amount of $86,250, and the remaining note in the amount of $86,250 (a “Back End Note”). The Company received cash proceeds of $75,000 from the First Note net of transaction costs of $11,250 that included $3,750 for attorneys’ fees.
The First Note matures on March 28, 2020 and interest costs accrue on the unpaid principal balance at 12% annually until March 28, 2020, and after that if not paid at maturity interest accrues annually at up to 24% until the principal amount and all interest accrued and unpaid are paid. The Back End Note carries the same terms as the First Note, except it may not be repaid in cash, but only converted. As part of the SPA, the Holder issued the Company a collateralized secured promissory note in the amount of $
78,750 that may be exchanged for cash against the Back End Note.
The holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is 180 days following the date of the note (dated March 28, 2019) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any. The shares to be issued are a function of a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen-day trading period ending on the last trading day prior to exercising the conversion right. The Company will keep available authorized shares reserved, initially 130,000,000 shares.
The valuation of the derivative liability related to the $86,250 borrowing with an intrinsic value of $0.009 per share is approximately $112,500 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $75,000 ($86,250 net of $11,250) and will be amortized as interest expense over the life of the loan. The remaining $37,500 is expensed as financing fees.
During the year ended March 31, 2019, $86 of regular interest, $92 of original issue discount, and $615 of derivative liability was expensed.
Note 6. 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 Butte’s 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.
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
On January 6, 2017, Butte completed its Share Exchange Agreement with the owners of InterLok and issued 56,655,891 restricted shares of Butte’s 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 Company’s new board of directors elected, through a series of board resolutions and regulatory filings, to change the Company’s 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.
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 of operations 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 7. Common Stock
During the three-month period ended March 31, 2017, i) 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 December 31, 2016), and ii) 75,000 shares at $0.15 per share for investment banking services in the amount of $11,250.
Additionally, i) the three convertible note holders elected to convert their $210,000 of notes into 1,400,000 shares of Class A common stock at $0.15 per share, and ii) 250,000 shares were issued pursuant to the Share Exchange Agreement at $0.03 per share. Also, iii) subscriptions receivable that were outstanding at December 31, 2016 in the amount of $81,481 were collected.
During the three-month period ended June 30, 2017, the Company issued i) 240,333 shares of Class A common stock at $0.15 per share for cash in the amount of $36,050 pursuant to a Section 4(a)2 private placement offering, ii) 25,000 shares at $0.15 per share for the conversion of stock options (see Note 8), and iii) 75,000 shares at $2.90 per share for investment banking services valued at $217,500.
During the three-month period ended September 30, 2017, the Company issued i) 100,000 shares of Class A common stock at $3.49 per share for consulting services in the amount of $349,000 and ii) 37,500 shares at $3.50 per share for investment banking services valued at $131,250.
During the three-month period ended December 31, 2017, the Company issued 157,500 shares of Class A common stock at $4.10 per share to seven parties for consulting services in the amount of $660,750.
On August 24, 2017 IronClad entered into an Investment Agreement for the potential future issuance and purchase of shares of its Class A common stock to establish an equity line of funding to IronClad. The agreement enables IronClad to issue stock to the counterparty of the agreement in exchange for cash amounts under certain defined conditions for the purchase of IronClad’s stock. In addition to the equity line, the agreement also included IronClad entering into the Commitment Note in the principal amount of $100,000 to finance the commitment fee of the Investment Agreement and the Convertible Note to borrow up to $330,000 (of which $165,000 was borrowed on August 24, 2017 and a subsequent $82,500 was borrowed on October 23, 2017). See Notes 5 and 14.
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
On January 24, 2018 IronClad issued, under the terms of the Investment Agreement, 14,331 shares of its Class A stock in exchange for receipts totaling $25,823 ($1.80 per share) from the counterparty of the Investment Agreement. Similarly, on February 16, 2018 24,265 shares were issued in exchange for proceeds of $38,824 ($1.60 per share). On March 26, 2018 9,958 shares of Class A common stock were issued for the conversion of $10,000 of the $165,000 referred to above.
On January 23, 2018, the Company issued 10,000 shares of its Class A common stock at $2.25 per share to two advisors for services in the amount of about $22,500.
On March 13, 2018, the Company approved the issuance of 100,000 shares of its Class A common stock at $1.85 per share to five parties for services in the amount of about $185,000, at March 31, 2018, 55,000 shares were as yet unissued but were issued in the subsequent quarter.
During the period ended March 31, 2018, the Company approved for issue a total of 50,322 shares of Class A common stock, priced between $1.40 and $1.82, for the complete conversion of a convertible note, at March 31, 2018 13,030 were as yet unissued and are disclosed on the balance sheet as Shares to be Issued.
At the March 31, 2018 year end, there were 55,000 shares of Class A common stock that were recorded and reported as “to be issued”, those shares were issued during the three month period ended June 30, 2018.
During the three month period ended September 30, 2018, the Company approved for issuance 2,000 shares of Class A common stock priced at $0.45 for services of $900; 140,000 share of Class A common stock for the exercise of stock options priced at $0.15 per share for cash in the amount of $21,000; 61,538 shares of Class A common stock priced at $0.325 for conversion of $20,000 of convertible debt; 73,260 shares of Class A common stock priced at $0.1365 for conversion of $10,000 of convertible debt; 236,686 shares of Class A common stock priced at $0.0845 for conversion of $20,000 of convertible debt.
During the three month period ended December 31, 2018, the Company approved for issuance 50,000 shares of Class A common stock priced at $0.2 for accounts payable of $16,000; 1,210,654 shares of Class A common stock priced at $0.0826 for conversion of $100,000 of convertible debt.
During the three month period ended March 31, 2019, the Company approved for issuance:
80,972 shares of Class A common stock priced at $0.1235 for conversion of $10,000 of convertible debt;
97,371 shares of Class A common stock priced at $0.0975659 for conversion of $9,000 of convertible debt and $500 of financing fees;
100,000 shares of Class A common stock at a price of $0.0975659 for financing fees of $4,600;
2,123,643 shares of Class A common stock at a price of $0.2119 for conversion of $45,000 of convertible debt;
8,398,048 shares of Class A common stock at a price of $0.0195 for conversion of $162,000 of convertible debt, $1,500 of financing fees and $762 of accrued interest;
7,474,770 shares of Class A common stock for a cashless exercise of stock options in the amount of $43,121 and a loss on conversion of $108,806;
2,760,181 shares of Class A common stock at a price of $0.01105 for conversion of $30,000 of convertible debt and $500 in financing fees;
921,451 shares of Class A common stock at a price of $0.00975 for conversion $8,500 of convertible debt, and $484 of financing fees;
1,923,077 shares of Class A common stock at a price of $0.0078 for conversion of $15,000 of convertible debt;
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
2,105,264 shares of Class A common stock at a price of $0.006175 for conversion of $12,500 of convertible debt and $500 of financing fees;
8,714,984 shares of Class A common stock at a price of $0.0056225 for conversion of $32,500 of convertible debt, $500 of financing fees and $16,000 of accrued interest;
2,876,192 shares of Class A common stock at a price of $0.004615 for conversion of $12,500 of convertible debt and $774 of accrued interest;
34,204,012 shares of Class A common stock at a price of $0.004485 for conversion of $111,500 of convertible debt, $500 of financing fees and $41,405 of accrued interest. Additionally,
240,384 shares of Class A common stock valued at $165,865 that had previously been issued as a discount on convertible debt was reversed.
At the close of March 31, 2019 there were 20,000 shares valued at $6,400 that were recorded and reported as “to be issued”.
Note 8. Share Based Compensation
Equity Incentive Plan
The Board of Directors adopted, and the Company’s stockholders subsequently approved, the IronClad Encryption Corporation 2017 Equity Incentive Plan (the “Plan”) effective as of January 6, 2017. The purpose of the Plan is to foster and promote the long-term financial success of the Company and thereby increase stockholder value. The Plan provides for the award of equity incentives to certain employees, directors, or officers of, or key advisers or consultants to, the Company and its subsidiaries who are responsible for or contribute to the management, growth or success of the Company or any of its subsidiaries.
The maximum number of shares available for issuance under the Plan is thirty million (30,000,000) shares of Class A common stock. On October 17, 2017, in connection with the change of the Company’s jurisdiction of incorporation from the State of Nevada to the State of Delaware, the Board of Directors adopted the Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan (the “Amended Plan”).
Additionally, from time to time, we issue non-compensatory warrants, such as warrants issued to investors.
Restricted Stock
The fair value of restricted stock awards classified as equity awards is based on the Company’s stock price as of the date of grant. Such awards do not grant any rights as a shareholder of the company until a certificate for the vested shares of common stock has been issued. During the year ended December 31, 2017, 287,500 shares were granted for services, none were forfeited (none were issued prior to 2017). Expenses of $709,000 were recorded in connection with the stock issued as grants for services; $349,000 for business development and $360,000 for investor relations.
Other stock grants were awarded for services, but the underlying stock was issued as unrestricted stock because it was otherwise registered under our S-8 and effective on November 28, 2017 and our S-1 as amended and effective on December 19, 2017.
Note 9. Stock Options and Warrants
During the three-month period ended March 31, 2017, the Company awarded 1,045,000 stock options and warrants for services and conversions of convertible notes valued at $1,305,565 and 9,000,000 stock options to officers of IronClad valued at $622,045. Of the total 10,145,000 options and warrants awarded, 1,045,000
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
vested immediately and received full expense recognition in the three-month period ended March 31, 2017. The remaining 9,883,470 options vest periodically over the subsequent three years and will be expensed on a straight line basis.
During the three-month period ended June 30, 2017, the Company awarded 2,945,000 stock options for services valued at $4,657,850 (using the Black-Scholes option pricing model) and 500,000 stock options to an officer of IronClad valued at $731,659 (using the Black-Scholes option pricing model). Of the total 3,445,000 options recorded as awarded during the period 85,000 vested immediately and received full expense recognition during the three-month period ended June 30, 2017. The remaining 3,360,000 options vest periodically over the next two to four years and will be expensed on a straight line basis.
During the three-month period ended September 30, 2017, the Company recorded the award of 372,500 stock options for services valued at $261,991 (using the Black-Scholes option pricing model) and 82,500 stock warrants for financing fees valued at $287,629 (using the Black-Scholes option pricing model). Of the total 455,000 options and warrants awarded during the period 155,000 vested immediately and received full expense recognition during the three-month period ended September 30, 2017. The remaining 300,000 options vest periodically over the next four years and will be expensed on a straight line basis.
During the three-month period ended December 31, 2017, the Company recorded the award of 37,500 stock options for services valued at $161,921 (using the Black-Scholes option pricing model). All of the options vested immediately and received full expense recognition during the three-month period ended December 31, 2017.
During the three-month period ended March 31, 2018, the Company awarded 2,700,000 stock options for services valued at $4,873,048 (using the Black-Scholes option pricing model) and 1,500,000 stock options to officers of IronClad valued at $2,700,000 (using the Black-Scholes option pricing model). Of the total 4,200,000 options recorded as awarded during the period 50,000 vested immediately and received full expense recognition during the three-month period ended March 31, 2018. The remaining 4,150,000 options vest periodically over the next three to seven years and will be expensed on a straight line basis.
During the three-month period ended June 30, 2018 the Company awarded 122,500 stock options and warrants for services value at $123,719. All options and warrants awarded vested in the period and received full expense recognition.
During the three-month period ended December 31, 2018 the Company awarded 700,195 stock options and warrants for services value at $137,058. Of the 700,195 options and warrants awarded, 200,195 vested during the period and received full expense recognition, the remaining 500,000 options vest during subsequent quarters and will be expensed at that time.
During the three-month period ended March 31, 2019 the Company awarded 100,000 stock options and warrants for services valued at $31,994. All options and warrants awarded vested in the period and received full expense recognition.
Of the $292,771 in option expense for the year ended March 31, 2019 above, $50,000 remains to be expensed as they vest.
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
The fair value of stock options and warrants is estimated on the date of each award using the Black-Scholes option pricing model to value the stock option or warrant based on its terms and conditions. There was one exercise of 25,000 options during 2017. The tables below summarize the assumptions used to estimate the fair values of the options and warrants at March 31, 2019:
Number of Options*
|
Date Issued
|
|
Exercise Price
|
Risk-free Interest Rate
|
Volatility
|
Life of Options in Years
|
Vested
Options*
|
75,000
|
01/16/17
|
|
$0.75
|
1.54%
|
226.01%
|
3.00
|
75,000
|
6,000,000
|
01/20/17
|
|
$0.15
|
1.54%
|
220.00%
|
3.00
|
3,000,000
|
3,000,000
|
01/20/17
|
|
$0.15
|
1.54%
|
220.00%
|
4.00
|
2,000,000
|
‡350,000
|
01/31/17
|
|
$0.15
|
1.19%
|
132.84%
|
1.93
|
‡350,000
|
‡100,000
|
02/01/17
|
|
$0.15
|
1.22%
|
134.90%
|
2.00
|
‡100,000
|
†100,000
|
03/13/17
|
|
$0.15
|
1.40%
|
144.84%
|
2.00
|
†100,000
|
20,000
|
03/21/17
|
|
$0.15
|
1.54%
|
233.07%
|
3.00
|
20,000
|
5,000
|
04/30/17
|
|
$0.75
|
1.45%
|
219.35%
|
3.00
|
5,000
|
1,700,000
|
05/05/17
|
|
$1.47
|
1.71%
|
565.34%
|
4.00
|
850,000
|
1,000,000
|
05/05/17
|
|
$1.47
|
1.32%
|
202.99%
|
2.00
|
1,000,000
|
80,000
|
05/31/17
|
|
$0.75
|
1.44%
|
196.06%
|
3.00
|
80,000
|
‡660,000
|
06/12/17
|
|
$2.50
|
1.64%
|
589.85%
|
4.00
|
230,000
|
5,000
|
06/30/17
|
|
$3.49
|
1.55%
|
197.13%
|
3.00
|
5,000
|
300,000
|
07/26/17
|
|
$3.16
|
1.63%
|
296.38%
|
4.00
|
150,000
|
5,000
|
07/31/17
|
|
$3.50
|
1.51%
|
170.61%
|
3.00
|
5,000
|
37,500
|
08/25/17
|
|
$2.50
|
1.62%
|
170.38%
|
3.00
|
37,500
|
25,000
|
08/31/17
|
|
$3.75
|
1.44%
|
170.57%
|
3.00
|
25,000
|
37,500
|
10/26/17
|
|
$4.50
|
1.76%
|
220.28%
|
3.00
|
37,500
|
25,000
|
01/25/18
|
|
$2.70
|
2.20%
|
247.35%
|
3.00
|
25,000
|
25,000
|
03/02/18
|
|
$1.80
|
2.52%
|
297.39%
|
3.84
|
25,000
|
400,000
|
03/02/18
|
|
$1.80
|
2.71%
|
369.15%
|
5.84
|
134,000
|
‡3,400,000
|
03/02/18
|
|
$1.80
|
2.79%
|
369.05%
|
6.84
|
1,601,000
|
350,000
|
03/02/18
|
|
$1.80
|
2.79%
|
395.11%
|
7.84
|
116,667
|
20,000
|
04/02/18
|
|
$1.69
|
2.55%
|
372.73%
|
4.75
|
20,000
|
20,000
|
05/01/18
|
|
$1.20
|
2.82%
|
365.73%
|
4.67
|
20,000
|
20,000
|
06/06/18
|
|
$1.14
|
2.81%
|
312.26%
|
4.57
|
20,000
|
270,000
|
10/11/18
|
|
$0.32
|
2.97%
|
361.56%
|
2.97
|
270,000
|
500,000
|
12/19/18
|
|
$0.15
|
2.62%
|
488.82%
|
6.4
|
166,667
|
18,530,000
|
Issued
|
|
|
|
|
Vested
|
10,468,334
|
†(25,000)
|
Exercised
|
|
|
|
|
Exercised
|
†(25,000)
|
‡(1,050,000)
|
Forfeited
|
|
|
|
|
Forfeited
|
‡(450,000)
|
17,455,000
|
Unexercised
|
|
|
|
|
Unexercised
|
9,993,334
|
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
Number of Warrants
|
Date Issued
|
|
Exercise Price
|
Risk-free Interest Rate
|
Volatility
|
Life of Warrants in Years
|
Vested
Warrants
|
‡†500,000
|
03/15/17
|
|
$0.15
|
1.02%
|
114.94%
|
1.40
|
‡†500,000
|
82,500
|
08/24/17
|
|
$3.50
|
1.63%
|
285.16%
|
4.00
|
82,500
|
†62,500
|
06/06/18
|
|
$3.00
|
2.69%
|
311.00%
|
4.00
|
†62,500
|
30,195
|
10/26/2018
|
|
$3.00
|
2.44
|
263.28%
|
5.00
|
30,195
|
675,195
|
Issued
|
|
|
|
|
|
675,195
|
†(193,559)
|
Exercised
|
|
|
|
|
|
†(193,559)
|
‡(368,941)
|
Forfeited
|
|
|
|
|
|
‡(368,941)
|
112,695
|
Outstanding
|
|
|
|
|
|
112,695
|
|
|
|
|
|
|
|
|
Options* and
Warrants
|
|
|
|
|
|
|
|
Options and
Warrants
|
19,205,195
|
Issued
|
|
|
|
|
|
Vested
|
11,143,529
|
† (218,559)
|
Exercised
|
|
|
|
|
|
Exercised
|
† (218,559)
|
(1,418,941)
|
Forfeited
|
|
|
|
|
|
Forfeited
|
(818,941)
|
17,567,695
|
Outstanding
|
|
|
|
|
|
Unexercised
|
10,106,029
|
* The number of outstanding options above does not include an option awarded to the Company’s President to purchase 10,000,000 shares of Class A common stock at an exercise price of $1.00 per share. The option is only exercisable under certain limited circumstances, one of which is that the market price of the Class A common stock reaches a price of $15.00 per share. Once vested, these additional options must be exercised within two years of vesting. The number of options and warrants including these 10,000,000 options totals 24,045,000.
† 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 August 14, 2018 a debt holder exercised warrants for 140,000 shares of Class A common stock for $21,000 in cash.
† On March 1, 2019 a debt holder exercised warrants for 7,474,770 shares of Class A common stock on a cashless exercise that resulted in a trigger to a down round feature and the recognition of a reduction of retained earnings of $121,011.
‡During the year ended March 31, 2019 1,410,000 options and warrants were forfeited, 810,000 as a result of expiration, 600,000 due to employee termination, and 8,941 due to other causes. Of the 1,410,000 options and warrants that were forfeited, 600,000 had not previously vested.
Note 10. Income Taxes
Federal Income taxes are not currently due since IronClad has had losses since inception.
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 required 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.
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
Significant components of the deferred tax asset amounts at an anticipated tax rate of 21% for the period ended March 31, 2019 and March 31, 2018 are as follows:
|
March 31,
2019
|
March 31,
2018
|
Net operating losses carryforwards
|
$
3,872,481
|
$
2,726,760
|
|
|
|
Deferred tax asset
|
813,221
|
572,619
|
Valuation allowance for deferred asset
|
(813,221)
|
(572,619)
|
Net deferred tax asset
|
$
-
|
$
-
|
At March 31, 2019, the Company has net operating loss carryforwards of approximately $3,872,481 which will begin to expire in the year 2033. The increase in the allowance account amount (and also in the deferred tax asset amount) from March 31, 2018 to March 31, 2019 was $240,602.
On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. The Company will compute its income tax expense for the December 31, 2017 fiscal year using a Federal Tax Rate of 21%.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
IronClad is subject to federal level income taxes under the jurisdiction of the US, but is not subject to income taxes at any state level except for the State of Virginia. Tax periods that may still be subject to review by the Internal Revenue Service are the years 2016, 2017, and 2018. The Company has not identified any aggressive tax positions.
Note 11 – Related Party Transactions
At March 31, 2019 the Company owed approximately $96,506 in accounts payable to management and related parties.
At March 31, 2018 the Company owed approximately $104,542 in accounts payable to management and related parties.
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
During the year ended March 31, 2018, IronClad entered into a loan agreement to borrow up to $500,000 shares at 8.5% interest. The Company has borrowed the full amount of the loan. The Company has pledged 500,000 of its common stock as collateral under the terms of the Agreement. In the event of default by the Company, the lender is entitled to receive one share of Company common stock for every one dollar in principle, interest, penalties, and fees that are owed and outstanding by the Company to the lender.
The Agreement is also supported by a personal $500,000 guarantee from the President of the Company. The Company will pay a 5% guarantee fee of $25,000; $10,000 shortly after year end and the remaining $15,000 at such time as the Board of Directors determines the Company has sufficient liquidity to pay the balance owed. The guarantee fee was reviewed and approved by the Compensation Committee of the Board which determined that the 5% fee was an appropriate market-based rate for guarantees of loans of this nature and comparable risk.
See also Note 9 regarding stock option awards to management of the Company.
Note 12. General and Administrative Expenses
General and administrative expenses recognized for the year ended March 31, 2019 were $2,528,688 of which $1,993,242 were recognized as compensation expenses in connection with the issuance of stock options or warrants; an additional $13,509 of expense was recognized as a result of issuing stock for consulting services ($12,609 which were recorded as professional fees).
General and administrative expenses recognized for the year ended March 31, 2018 were $2,365,482 of which $959,214 were recognized as compensation expenses in connection with the issuance of stock options or warrants; an additional $88,695 of expense was recognized as a result of issuing stock for consulting services.
Note 13. Accounts Receivable and Revenue
Customer Service: Information Center
During the year ended March 31, 2018, IronClad formed a new wholly-owned subsidiary, Ironclad Pipeline IC, Inc. which began generating a modest level of revenue through a moderately profitable service contract with a major energy company in the eastern United States. The services are to provide an array of services in support of an infrastructure project.
The $0 and $301,978 of receivables at March 31, 2019 and 2018 is for $229,745 of services rendered and the balance is for reimbursable costs incurred, approved by the customer, billed (and paid promptly subsequent to March 31, 2018). Payment terms are for payment to be made within 30 days; the receivables were collected well within that period. There were no billings subsequent to July 31, 2018.
In mid-July 2018 our customer notified the Company of its intent to exercise an option in its contract to end our services under the contract. Consequently, our services were discontinued effective July 28, 2018. Revenue earned and invoiced through July 28, 2018 was $200,975. The customer also elected to retain the services of the individuals previously employed by IronClad Pipeline IC, Inc. on a going forward basis. All invoiced amounts that were billed for services under the contract through the end-date of the contract were submitted, approved and paid promptly and in full by the customer. Nor further services will be provided to this customer and thus no further revenue will be earned from this customer in the foreseeable future.
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
Note 14. Commitments and Contingencies
Subsequent to year end, complaints were filed against the Company by two contractors requesting disputed compensation. We are answering these claims, and will defend ourselves within our legal rights.
We lease office space on a month-to-month basis. The annual cost is less than $17,000. We have no other leases or rental agreements.
Note 15. Subsequent Events
Convertible Notes
On April 12, 2019 IronClad entered into a Securities Purchase Agreement (SPA) to issue a 8% convertible note payable for an aggregate principal amount of $86,400 comprised of the first note (“First Note”) being in the amount of $43,200, and the remaining note in the amount of $43,200, (a “Back End Note”). The Company received cash proceeds of $38,000 from the First Note net of transaction costs of $5,200. The $5,200 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note.
The First Note matures on April 12, 2020 and interest costs accrue on the unpaid principal balance at 8% annually until February 14, 2020, and after that if not paid at maturity interest accrues annually at 24% until the principal amount and all interest accrued and unpaid are paid.
The Back End Note carries the same terms as the First Note, except it may not be repaid, but only converted. The Company is under no obligation to accept the Back End Note, but may do so at its sole discretion, following 180 days from the date of the note (dated April 12, 2019). As part of the SPA, the Holder issued the Company a collateralized secured promissory note in the amount of $40,000 that may be exchanged for cash against the Back End Note.
The holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is 180 days following the date of the note (dated July 11, 2018) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any.
The shares to be issued are a function of a fixed conversion price of $0.50 per share for six months, and thereafter until maturity at a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen day trading period ending on the last trading day prior to the conversion date. The Company will keep available authorized shares reserved, initially 2,100,000 shares.
The conversion feature of the note represents an embedded derivative. The valuation of the derivative liability related to the $43,200 borrowing with an intrinsic value of $.0076 per share is approximately $76,531 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $38,000 ($43,200 net of $5,200) and will be amortized as interest expense over the life of the loan. The remaining $38,531 is expensed as financing fees.
On April 23, 2019 IronClad entered into a Securities Purchase Agreement to issue a 12% convertible note payable for an aggregate principal amount of $57,750. The Company received cash proceeds of $50,000 net of
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IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
transaction costs of $7,750. The $7,750 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note.
The note matures on April 23, 2020. Interest costs accrue on the unpaid principal balance at 12% annually until maturity, and after that if not paid, interest accrues annually at 18% until any unpaid principal amount and unpaid interest accrued are paid.
The Holder of the note, at its sole election, may convert the note into shares of common stock of the Company after the six month anniversary of the note; the conversion price shall be equal to 65% of the lowest trading price for the fifteen prior trading days including the day upon which a notice of conversion is received.
The conversion feature of the note represents an embedded derivative. The valuation of the derivative liability related to the $57,750 borrowing on the Convertible Note and with an intrinsic value of $.025 per share is approximately $317,308 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $50,000 ($57,750 net of $7,750) and will be amortized as interest expense over the life of the loan. The remaining $267,308 is expensed as financing fees.
On May 15, 2019 IronClad entered into a Securities Purchase Agreement to issue a 10% convertible note payable for an aggregate principal amount of $150,000. The Company received cash proceeds of $142,500 net of transaction costs of $7,500. The $7,500 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. The note matures on May 15, 2020 and interest costs accrue on the unpaid principal balance at 10% annually until May 15, 2020, and after that if not paid at maturity interest accrues annually at up to 24% until the principal amount and all interest accrued and unpaid are paid.
The Holder of the note is entitled, at any time after cash payment, to convert all or any amount of the principal face amount of the Note then outstanding into shares of the Company's common stock. The shares to be issued upon conversion are a function of a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen day trading period including the day upon which the notice of conversion is received conversion date. The Company will keep available authorized shares reserved, initially 61,538,000 shares.
The valuation of the derivative liability related to the $150,000 borrowing with an intrinsic value of $0.0152 per share is approximately $407,871 using a binomial pricing model. That amount is recorded as a contra-note payable amount (similar to the transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability formally recorded is $142,500 ($150,000 net of $7,500) and will be amortized as interest expense over the life of the loan. The remaining $265,371 is expensed as financing fees.
Subsequent to year end 161,707,754 shares of Class A common stock were issued to repay $432,842 of principal balances of convertible notes.
Preferred Stock, Series A
On April 12, 2019, the Board of Directors (the “Board”) ratified the amendment of the Company’s Certificate of Incorporation, effective as of April 3, 2019, upon filing a Certificate of Designation with the Secretary of State of Delaware, which sets forth the rights, preferences and privileges of the Series A Preferred Stock. The Board also approved the issuance of 100 shares of Series A Preferred Stock with a stated value of $0.001 per share
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
(Previously named Butte Highlands Mining Corporation
Notes to Consolidated Financial Statements.
for no consideration to the Company’s President pursuant to Rule 4(a)(2) under the Securities Act of 1933, as amended (the “Securities Act”)
and Rule 506 of Regulation D as promulgated by the SEC under the Securities Act.
Except as otherwise required by law or by the Certificate of Incorporation, or by the Certificate of Designation, the outstanding shares of Series A Preferred Stock shall vote together with the shares of Common Stock and other voting securities of the Company as a single class and, regardless of the number of shares of Series A Preferred Stock outstanding and as long as at least one of such shares of Series A Preferred Stock is outstanding, shall represent eighty percent (80%) of all votes entitled to be voted at any annual or special meeting of shareholders of the Company or action by written consent of shareholders. Each outstanding share of the Series A Preferred Stock shall represent its proportionate share of the 80% which is allocated to the outstanding shares of Series A Preferred Stock.
The shares of the Series A Preferred Stock are not convertible into Common Stock of the Company. The holder of the shares will not be entitled to receive any dividends.
Complaints by Suppliers
Subsequent to year end, two separate complaints were filed against the Company by two contractors requesting disputed compensation. We are answering these claims, and will defend ourselves within all our available legal rights. However, the Company and its counsel are unable to estimate or evaluate the likelihood of each outcome with any degree of certainty. See the Commitments and Contingencies footnote above.
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Table of Contents
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Board of Directors
Past.
Ms. Doris Marie Prater, Ms. Susan Ann Robinson-Trudell, and Paul A. Hatfield resigned as Directors of the Company effective January 16, 2017, in connection with the Share Exchange Agreement between Butte Highlands Mining Company (“Butte”) and Ironclad dated January 6, 2017. Mr. Gregory B. Lipsker was an original IronClad board member and served from January 6, 2017 until his resignation on June 1, 2018.
Present.
The following table sets forth the name, age, and positions and offices held within IronClad by each of our Directors as of the date of this Amendment. There is no family relationship between or among any of the Directors and our Executive Officers. Board of Directors vacancies are filled by a majority vote of the Board of Directors. We have a Compensation Committee, a Nominating and Corporate Governance Committee (“CNCG Committee”) and an Audit Committee.
Name
§
|
|
Position
|
|
Age
|
James D. McGraw
|
|
Director, Chairman, President and Chief Executive Officer
|
|
|
60
|
Jeff B. Barrett
†
|
|
Director
|
|
|
62
|
John S. Reiland
‡
|
|
Director *
|
|
|
69
|
Mark A. Watson
‡
|
|
Director *
|
|
|
50
|
* Independent Director
† Mr. Barrett was re-elected to the board effective May 15, 2018. He previously served as a Board member from the time of the share exchange through September 11, 2017.
‡
Mr. Reiland was elected to the Board effective September 12, 2017; Mr. Watson effective February 28, 2018.
§ Mr. Gregory B. Lipsker served as a Board member until his resignation effective on June 1, 2018.
James D. McGraw.
Mr. McGraw
serves as a Director and Chairman of the Board (and Principal Executive Officer). Mr. McGraw joined the Board on January 16, 2017. Mr. McGraw oversees IronClad’s day-to-day operations, negotiating strategic partnerships and raising growth capital. Prior to IronClad, Mr. McGraw was co-founder of Nova Biosource Fuels, Inc. where he served as its President and as a Board Member. Mr. McGraw addressed venture capital and investment funding needs guiding the company to a successful public offering in 2006. In this role, Mr. McGraw proved himself to be an effective champion of stockholders’ interests.
In previous roles, Mr. McGraw provided investment banking services to over 150 companies including Adtec Digital, American Rice, Blockbuster Video, Chuck E. Cheese, Dryper, DataVan, International Recovery, Republic Industries and Swift Energy. Over his twenty-five-year career, he has held posts as founder, CEO and President in a wide range of business sectors, including oil and gas, and computer technology, and has experience in large-scale roll-ups. Mr. McGraw holds a Secret security clearance with the U.S. Government.
Jeff B. Barrett
. Mr. Barrett was reelected to the Board effective May 15, 2018. Mr. Barrett joined the company on January 6, 2017, was elected and served as a Board member through September 11, 2017. At the time he joined the company he was also appointed as Vice President of Planning for IronClad. He is a co-founder of the Company. Prior to IronClad, Mr. Barrett founded and operated Foresight Security Systems, a high-end custom electronics sales and installation company. Over the 20 years he ran the company, he gained extensive experience in sales, marketing, management, research, strategic business analysis, and budgeting
.
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Table of Contents
John S. Reiland.
Mr. Reiland joined the Board of Ironclad on September 12, 2017 and is the Chairman of the Audit Committee as well as the CNCG Committee. Mr. Reiland brings a diverse forty-year business background which has included key management positions and principal roles in public and private companies. He has successfully navigated posts as Chief Executive Officer, Chief Financial Officer, and Chief Restructuring Officer in a variety of industries, primarily redirecting and strategically restructuring large-scale companies.
His leadership experience also includes religious nonprofits and technology companies. For the decade up to mid-2018 Mr. Reiland served on the corporate board of directors for Flotek Industries, Inc. which earned revenue of over $175,000,000 in 2018. Flotek is listed with and its stock trades on the New York Stock Exchange. His Flotek board responsibilities included Chairman of the Audit Committee, and member of the Corporate Governance and Nominating Committee and of the Compensation Committee.
Mr. Reiland’s outstanding leadership won for him a nomination for the Los Angeles Business Journal Chief Financial Officer of the Year award in 2009. He earned a B.B.A. in accounting from the University of Houston and he completed the Stanford Executive Program with the Stanford Graduate School of Business.
Mark A. Watson.
Mr. Watson joined the Board on February 28, 2018. Mr. Watson brings twenty-six years of corporate and international leadership, and start-up and managerial experience as the internal founder of Accessories Operations and current Director of Device Sourcing of Fitbit, Inc. Fitbit is the world leader in health and fitness accessories.
He previously served as Client Team Director of PCH International, driving growth, delivery, manufacturing, and distribution of high quality, high-end consumer electronics, including Android devices and iPhones. Mr. Watson’s management and development experience with Microsoft includes pioneering the evolution of the popular Xbox video gaming product as a founding member of Xbox Operations and Xbox Accessory Operations. He steered design of the sourcing processes and architected the IT vision for Xbox manufacturing.
Mr. Watson is a former Senior Consultant with Deloitte Consulting and began his career in Operations at Coca-Cola Enterprises, Inc. He attended Baylor University.
Gregory B. Lipsker.
Mr. Lipsker resigned from the board effective June 1, 2018. He joined the Board of Ironclad on January 16, 2017 and had served as a member of the Audit Committee and the CNCG Committee. Prior to his election to the board in 2017 Mr. Lipsker’s legal practice had been limited to serving as legal counsel to Butte Highlands Mining Company.
Executive Officers
James D. McGraw
,
60, is the President and Chief Executive Officer and is also a Director and Chairman of the Company. Mr. McGraw has served as Chief Executive Officer since January 6, 2017. Information about his professional background is discussed in the section above regarding the Board of Directors.
Jeff B. Barrett,
62, joined the company on January 6, 2017 and serves as a Vice President for IronClad and is a member of Board of Directors. He is also a co-founder of the Company. Prior to IronClad, Mr. Barrett founded and operated Foresight Security Systems, a high-end custom electronics sales and installation company. Over the 20 years he ran the company, he gained extensive experience in sales, marketing, management, research, analyzing, and budgeting
.
Daniel M. Lerner
, 64, serves as IronClad’s Chief Technology Officer and Vice President of Engineering. He is also a co-founder of the Company. He is responsible for all aspects of the Company’s technical developments and strategy. Prior to IronClad, Mr. Lerner served as Chief Technology Officer for Teledrill Inc. and was responsible for all aspects of technology, including design, engineering, production and field testing. Mr.
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Table of Contents
Lerner has extensive experience as a developer of technological products, electronics, computer software, and network security services and is an adept leader of multi-disciplinary teams in the technology industry.
He has architected data acquisition and signal processing systems and patented, designed and implemented ultra-high security data encryption. Mr. Lerner’s previous experience as Senior Applications Engineer for Teradyne included electronic design, system program administration and sales assistance. He received a B.S.E.E. and M.S.E.E. from La Salle University.
Len E. Walker,
48, joined the Company on January 6, 2017 and serves as IronClad’s Vice President, Secretary and General Counsel. He has also specialized in drafting government contracts and coordinating financial and legal agreements. He completed his twenty-year career in the United States Marine Corps as a Major and the Executive Officer and Chief-of-Staff of a USMC combat helicopter squadron, second in command of a 200-person organization with nine aircraft and equipment valued at over $100,000,000. As the Squadron Security Manager, he was responsible for maintaining and safeguarding all classified material and equipment, as well as initiating and revoking security clearances.
As an officer and pilot in command, he flew over 3,000 hours and served five combat tours in Afghanistan and Iraq. He was awarded the Meritorious Service Medal and Air Medal with 10 Strike Flights. Mr. Walker earned a B.B.A. degree from Baylor University, and a Juris Doctor degree from South Texas College of Law. He continues to hold a Top-Secret security clearance with the U.S. Government.
David G. Gullickson
,
68, joined the Company on April 17, 2017 and serves as IronClad’s Vice President of Finance, Treasurer and Chief Financial Officer (and, for SEC reporting purposes, Principal Financial and Accounting Officer). He has over twenty-five years of experience as a corporate executive officer, Chief Financial Officer or Chief Accounting Officer (and corporate Secretary) of several SEC-registered companies on each of the major U.S. (and a Canadian) exchanges and markets, as well as for companies owned by private-equity companies that planned or implemented initial and secondary public offerings.
He has held positions most recently as Vice President, Treasurer, and Principal Financial and Accounting Officer of Hyperdynamics Corporation (OTC QX “HDYN”), Chief Financial Officer of the Southern Ute Indian Tribe (a domestic sovereign nation with over $4,000,000,000 in assets and $300,000,000 of Tribe issued bonds that are “AAA” rated by Fitch and Moody’s), CFO of Greenfields Petroleum Corporation (TSX Venture: “GNF”) operating offshore, Caspian Sea oil and gas properties in Baku, Afghanistan, and similar companies. He holds two degrees from the University of Texas in Austin: a B.A. degree in Economics, and a Master of Professional Accounting degree. Mr. Gullickson is a Certified Public Accountant.
Board Committees
As of the date hereof, the Board of Directors has established two standing committees: The Compensation, Nominating and Corporate Governance Committee, and the Audit Committee.
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Table of Contents
Committee Assignments
The table below reflects the composition of the committees of the Board of Directors.
Name of Director
|
|
Compensation, and
Corporate Governance and Nominating
Committees
|
|
Audit
Committee
|
John S. Reiland
|
|
|
Chairman
|
|
|
Chairman
|
Mark A. Watson
|
|
|
Member
|
|
|
Member
|
Jeff B. Barrett
|
|
|
|
|
|
|
James D. McGraw *
|
|
|
|
|
|
|
* Chairman of the Board.
|
|
|
|
|
|
|
Audit Committee
The Audit Committee of the Company reviews the adequacy of systems and procedures for preparing the financial statements and the suitability of internal financial controls. The Audit Committee also reviews and approves the scope and performance of the Company's independent registered public accounting firm. Mr. Reiland and Mr. Watson are the members of the Audit Committee. All committee members are independent directors. The Audit Committee has a written charter, which the Audit Committee reviews periodically to assess its adequacy that was adopted in October 2017. The Audit Committee charter is available at the Company's website at
www.IroncladEncryption.com
. During the year ended March 31, 2018, the Audit Committee met two times.
The Board has determined that Mr. John S. Reiland, the Chairman of the Audit Committee, is an audit committee financial expert within the meaning of SEC regulations.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the SEC and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended March 31, 2019 and March 31, 2018, no person who at any time during the fiscal year was a director, officer, or beneficial owner of more than ten percent of any class of equity securities of the Company failed to file on a timely basis, reports required by Section 16(a) of the Exchange Act.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer or Controller, or persons performing similar functions and our directors and officers. We will provide without charge a copy of our Code of Business Conduct and Ethics upon request. Such request should be directed in writing to our Corporate Secretary, Len Walker, IronClad Encryption Corporation, One Riverway, 777 South Post Oak Lane, Suite 1700, Houston, Texas 77056. Our Code of Business Conduct and Ethics is available on our website at
www.IroncladEncryption.com
.
We may change our Code of Ethics periodically; any updated versions will be posted to our website.
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Table of Contents
Item 11. Executive Compensation.
Compensation Overview, Objectives, and Elements
We are an early-stage, small company that is focused on bringing innovative secure technology to the public. We have accomplished this with a small team of management and technical individuals with significant industry experience. We have designed our compensation program to attract and retain these highly experienced individuals, who have competing opportunities at more established companies, as well as to motivate and reward these individuals for the successful execution of our business plan.
The CNCG Committee of the Board of Directors reviews the performance of our executives and develops and makes recommendations to the Board of Directors with respect to executive compensation policies. The CNCG Committee is empowered by the Board of Directors to establish and administer our executive compensation programs.
Because of the uniqueness of our business and operations, the CNCG Committee has concluded that we do not have a single group of peer or comparison companies for purposes of traditional benchmarking and percentile targeting and, as such, the CNCG Committee does not use traditional benchmarking or percentile targeting against a stated peer group in setting compensation. Rather than looking to a single peer or comparison group of companies, our compensation practice concerning our executives is to review compensation on a position-by-position basis and determine the particular skill set required to be successful at the Company for the particular position in question.
The skill set necessarily varies among positions but may include: executive management experience; technical expertise; security experience; Secret or Top-Secret security clearance; experience growing and maturing a company; relevant financial and commercial experience; and relevant compliance and legal experience. As a result, the CNCG Committee's determinations in setting compensation are often qualitative and subjective, depending on the executive's position.
The details of the processes and procedures for the consideration and determination of executive compensation are described below.
What are the objectives of our executive officer compensation program?
The objectives of the CNCG Committee in determining executive compensation are to (1) attract and retain key individuals, and (2) provide strong financial incentives, at reasonable cost to the stockholders, for senior management to enhance the value of the stockholders' investment.
What is our executive officer compensation program designed to reward?
Our compensation program is designed to reward individuals for the achievement of our business goals and to foster continuity of management by encouraging key individuals to maintain long-term careers with IronClad.
What are the elements of our executive officer compensation program and why do we provide each element?
The elements of compensation that the CNCG Committee uses to accomplish these objectives include: (1) base salaries and (2) long term incentives in the form of stock and stock options. From time to time, we also provide perquisites to certain executives and health insurance to all employees. The elements of compensation that we offer help us to attract and retain our officers. The specific purpose of each element of compensation is outlined below.
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Base Salaries
We provide fixed annual base salaries as consideration for each executive's performance of his or her job duties. Salaries are set based on level of responsibility, skills, knowledge, experience, and contribution to IronClad’s business.
Long-term Incentives
We can provide long-term incentives in the form of stock and stock options. Our practice has been to provide stock options as our preferred form of long-term incentives. Long-term incentives are a component of variable compensation because the amount of income ultimately earned is dependent upon and varies with our common stock price over the term of the option. The stock option awards tie a portion of executive compensation to the stock price and accordingly our financial and operating results. We do not use a formula to determine stock and stock option awards to executives. Stock option awards are not designed to be tied to yearly results. We view stock option awards as a means to encourage equity ownership by executives and thus to generally align the interests of the executives with the stockholders.
Our 2017 Plan authorizes the CNCG Committee to award stock options, restricted stock, and stock registered under a Form S-8 registration statement to officers and other key employees. The CNCG Committee implements this authority by awarding stock options designed to align the interests of all senior executives to those of stockholders. This is accomplished by awarding stock options, which rise in value based upon the market price rise of IronClad’s common stock, on a systematic basis.
We report the estimated fair value of our stock option awards, as determined for accounting purposes in accordance with ASC 718, using the Black-Scholes option pricing model in the Summary Compensation Table and the Outstanding Equity Awards at 2017 Fiscal Year End Table. The amount reflected for accounting purposes does not reflect whether the executive has or will realize a financial benefit from the awards. Because stock option awards are made at a price equal to or above the market price on the date of award, stock options have no intrinsic value at the time of award. We believe the potential appreciation of the option awards over the stock price provides motivation to executives.
Perquisites
Perquisites are determined on a case-by-case basis by the CNCG Committee. During the year ended March 31, 2019 and year ended March 31, 2018, no executive officer received any perquisites.
How do we determine the amount for each element of executive officer compensation?
Our policy is to provide compensation packages that are competitively reasonable and appropriate for our business needs. We consider such factors as competitive compensation packages as negotiated with our officers; evaluations of the President and Chief Executive Officer and other executive officers; achievement of performance goals and milestones as additional motivation for certain executives; officers' ability to work in relationships that foster teamwork among our executive officers; officers' individual skills and expertise; and labor market conditions. We did not engage a third-party compensation consultant during the year ended March 31, 2019 or March 31, 2018.
During the year ended March 31, 2019 and 2018, total executive compensation consisted of base salary and option awards. Generally, the option awards for executives are negotiated in the executive's contract, with an exercise price based on the market price on the award date. Special option awards are also issued to executives and employees on a case-by-case basis during the year for significant achievement. Because of the simplicity of the compensation package, there is very little interaction between decisions about the individual elements of compensation.
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Administration of Executive Compensation
The CNCG Committee reviews and approves corporate goals and objectives relevant to compensation of the NEOs, evaluates the NEOs' performance, and sets their compensation. In determining compensation policies and procedures, the CNCG Committee considers the results of stockholder advisory votes on executive compensation and how the votes have affected executive compensation decision and policies.
Chief Executive Officer involvement in compensation decisions
The Chief Executive Officer makes recommendations to the CNCG Committee concerning the employment packages of all subordinate officers. Neither the Chief Executive Officer nor any other Company officer or employee attends periodic executive sessions of the CNCG Committee.
How compensation or amounts realizable from prior compensation are considered
The amount of past compensation generally does not affect current year considerations because long term incentives are awarded for each individual’s fiscal year job performance. As part of its ongoing review process, the Committee regularly evaluates our compensation programs to ensure they meet changing business needs and support alignment with stockholders' interests.
Tax considerations
Our compensation plans are designed generally to ensure full tax deductibility of compensation paid under the plans.
This includes compliance with Section 162(m) of the Internal Revenue Code, which limits our tax deduction for an executive's compensation to $1,000,000 unless certain conditions are met. For the fiscal years ended March 31, 2019 and March 31, 2018, the full amount of all compensation provided to all executives was tax deductible to the Company.
Timing, award date, and exercise price for stock option awards
Our policy is to award stock options upon hiring of the employee and on a case by case basis throughout the year. Stock option exercise prices are the closing price on the date of grant. We foresee making certain awards based on the completion of performance criteria.
Analysis of variations in individual NEOs compensation
Each NEO's compensation is detailed in the Compensation Tables below. For those NEOs who have employment agreements, each such agreement is described under the caption "Agreements with Executives and Officers."
Employment Agreements
More fully described below in "Agreements with Current Executives and Officers”.
Described below are the details of the processes and procedures for the consideration and determination of executive compensation for fiscal year ended March 31, 2019, the transition period ended March 31, 2018, and fiscal year 2017.
Salaries
On August 17, 2017, the Board of Directors approved the annual base salaries for the Chief Executive Officer and all Named Executive Officers:
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Mr. McGraw: $104,400. Effective January 6, 2017, Mr. McGraw received a monthly salary of $5,000. Mr. McGraw agreed to receive $5,000 and to defer $3,700 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amounts. Eventually, and only once the Board determines that the Company has sufficient resources and liquidity, Mr. McGraw’s annualized base salary will be adjusted to $500,000.
Mr. Barrett: $150,000. Effective January 6, 2017, Mr. Barrett received a monthly salary of $5,000, and Mr. Barrett agreed to a deferral of $7,500 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Barrett’s annualized base salary of $150,000.
Mr. Lerner: $200,000. Effective January 6, 2017, Mr. Lerner received a monthly salary of $5,000, and Mr. Lerner agreed to a deferral of $11,667 per month commencing July 1, 2017 and commencing on September 1, 2017 will be paid $12,000 per month and will defer receipt of $4,667 per month until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Lerner’s annualized base salary of $200,000.
Mr. Walker: $200,000. Effective January 6, 2017, Mr. Walker received a monthly salary of $5,000, and Mr. Walker agreed to a deferral of $11,667 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Walker’s annualized base salary of $200,000.
Mr. Gullickson: $225,000. Effective May 1, 2017, Mr. Gullickson received a monthly salary of $5,000, and Mr. Gullickson agreed to a deferral of $13,750 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Gullickson’s annualized base salary of $225,000.
Subsequently, on October 15, 2017, payment of all salaries for all IronClad officers and employees were suspended indefinitely until such time as the company is financially able to resume the payments. The salary liability and expense amounts continue to be accrued, however, even though the payments are being suspended and deferred.
Long-Term Incentive Stock Option Awards
On August 17, 2017, the Compensation, CNCG Committee approved stock option awards to the NEOs effective January 6, 2017. Those details are discussed the table below.
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Compensation Table
The following table shows salaries, bonuses, incentive awards, retirement benefits and other compensation relating to year ended March 31, 2019, March 31, 2018 for our Principal Executive Officer (“PEO”), Principal Financial Officer (“PFO”) and other executive officers. Columns for some compensation categories for which there was no compensation have been omitted.
Summary Compensation Table
Name and
Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Award
Granted
($)(1)
|
|
Option
Awards
Granted
($)(1)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James D. McGraw
|
|
2019
|
|
$ 15,2500
|
|
—
|
|
—
|
|
—
|
|
$
17,924
|
|
$
33,174
|
President, PEO
|
|
2018
|
|
$ 35,000
|
|
—
|
|
—
|
|
$ 320,328
|
|
$
15,018
|
|
$
370,346
|
David G. Gullickson
|
|
2019
|
|
$ 34,750
|
|
—
|
|
—
|
|
$ 75,000
|
|
$
23,891
|
|
$
133,641
|
Vice President, PFO
|
|
2018
|
|
$ 48,750
|
|
—
|
|
—
|
|
$ 900,000
|
|
$
13,438
|
|
$
962,188
|
Len E. Walker
|
|
2019
|
|
$ 31,800
|
|
—
|
|
—
|
|
—
|
|
—
|
|
$
31,800
|
Vice President, Secretary
|
|
2018
|
|
$ 35,000
|
|
—
|
|
—
|
|
$ 1,800,000
|
|
—
|
|
$
1,835,000
|
Daniel M. Lerner
|
|
2019
|
|
$ 6,000
|
|
—
|
|
—
|
|
—
|
|
$
17,924
|
|
$
23,924
|
Vice President, CTO
|
|
2018
|
|
$ 44,000
|
|
—
|
|
—
|
|
$ 324,590
|
|
$
15,018
|
|
$
383,608
|
Jeff B. Barrett
|
|
2019
|
|
$ 26,500
|
|
—
|
|
—
|
|
—
|
|
$
26,887
|
|
$
53,387
|
Vice President
|
|
2018
|
|
$ 3,5000
|
|
—
|
|
—
|
|
$80,027
|
|
$
22,528
|
|
$
137,555
|
(1) Reflects the award date fair value, computed using the Black-Scholes option pricing model for options awarded in fiscal years 2018, 2017 and 2016. For a description of the assumptions used for purposes of determining award date fair value, see
Note 9. Stock Options and Warrants
to the Financial Statements included in this report.
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Equity Awards
The following table shows stock awards made to the named executives in fiscal year 2019 and their outstanding equity awards as of March 31, 2019.
Outstanding Equity Awards at March 31, 2019 Fiscal Year End
|
Option Awards
|
Name
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
|
Number of
Securities
Underlying
Unexercised
Options
Un-Exercisable
(#)
|
Options
Exercise
Price
($/Share)
|
Options
Expiration
Date
|
Number of
Shares
of Stock
Underlying
Options
That Have
Not Vested
(#)
|
Market
Value of
Shares
of Stock
Underlying
Options
That Have
Not Vested
($)
†
|
James D. McGraw, PEO
|
—
|
10,000,000
|
$
1.00
|
*
|
10,000,000
|
$
110,000
|
|
|
4,000,000
|
$
0.15
|
1/05/2024
|
2,000,000
|
$
22,000
|
David G. Gullickson, PFO
|
—
|
500,000
|
$
1.47
|
1/05/2024
|
250,000
|
$
2,750
|
|
|
500,000
|
$
1.80
|
12/31/2024
|
333,000
|
$
3,663
|
|
|
500,000
|
$
0.15
|
12/31/2024
|
166,667
|
$
1,834
|
Len E. Walker
|
—
|
1,000,000
|
$
0.15
|
1/05/2024
|
500,000
|
$
5,500
|
|
|
1,000,000
|
$
1.80
|
12/31/2024
|
333,000
|
$
3,663
|
Daniel M. Lerner
|
---
|
3,000,000
|
$
0.15
|
1/05/2023
|
1,000,000
|
$
11,000
|
Jeff B. Barrett
|
---
|
1,000,000
|
$
0.15
|
1/05/2024
|
500,000
|
$
5,500
|
* These outstanding options are options awarded to the Company’s President to purchase 10,000,000 shares of Class A common stock at an exercise price of $1.00 per share. The option is only exercisable under certain limited circumstances, one of which is that the market price of the Class A common stock reaches a price of $15.00 per share. Once vested (which occurs also at the time the stock price reaches $15.00 per share), these additional options must be exercised within two years of vesting.
† The price at which the last stock sale occurred for the period ended March 31, 2019 was $0.011 per share.
# Options vesting schedule for all awards above: one quarter of the shares vest per year beginning January 5, 2018, continuing in 2019, 2020, and 2021. This schedule does not apply to Mr. McGraw’s option to purchase 10,000,000 shares.
Agreements with Current Executives and Officers
Employment Agreements
The Company has entered into employment agreements with certain executive officers of the Company, as described below.
Employment Agreement of James D. McGraw
On August 17, 2017, we entered into an employment agreement with Mr. McGraw (the “McGraw Employment Agreement”) effective January 6, 2017, pursuant to which we agreed to pay Mr. McGraw a monthly payment of salary of $5,000 for a temporary period, and Mr. McGraw agreed to a deferral of an additional $3,700 per month commencing July 1, 2017 and continuing until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. McGraw’s intended annualized base salary of $500,000.
Cumulative accrued and unpaid salary compensation at March 31, 2019 was $149,450.
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The Board of Directors or CNCG Committee will also determine the timing and amount of payment to Mr. McGraw of all deferred salary amounts. Mr. McGraw is also eligible to participate in any annual incentive plan established by the Company. Eventually, and only once the Board determines that the Company has sufficient resources and liquidity, Mr. McGraw’s annualized base salary will be adjusted to $500,000.
In addition, we agreed to award Mr. McGraw an option to purchase 4,000,000 shares of our Class A common stock at an exercise price of $0.15 per share, with one quarter of the shares underlying the option to be vested on January 5, 2018 and the remaining shares to be vested equally over three years on each anniversary of January 5 for three consecutive years.
We also agreed to award Mr. McGraw an option to purchase 10,000,000 shares of our Class A common stock at an exercise price of $1.00 per share, which shall vest and become exercisable once the fair market value of the Company’s Class A common stock equals or exceeds $15.00 per share. Once vested, these additional options must be exercised within two years of vesting. These options were awarded under our Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan when the plan was approved by our stockholders. The McGraw Employment Agreement expires on January 31, 2021, with automatic renewal for successive one-year terms, unless terminated in writing by either party at least 90 days prior to the expiration.
Mr. McGraw is also eligible to participate in other standard benefits plans offered to similarly situated employees by us from time to time, including group health, vision and dental insurance and our 401(k) program. Upon a termination of Mr. McGraw’s employment without Cause by the Company or by Mr. McGraw for Good Reason in connection with a Material Event or Change of Control of the Company (each as defined in the McGraw Employment Agreement), Mr. McGraw will receive certain severance benefits, including severance payments equal to his base salary then in effect as of the date of termination for a period of twelve months, a pro rata portion of any annual incentive award for the year during which such termination occurs and immediate vesting of all outstanding stock options with a right to exercise for two years.
Employment Agreement of Jeff B. Barrett
On August 17, 2017, we entered into an employment agreement with Mr. Barrett (the “Barrett Employment Agreement”) effective January 6, 2017, pursuant to which we agreed to pay Mr. Barrett a monthly salary of $5,000, and Mr. Barrett agreed to a deferral of an additional $7,500.00 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Barrett’s annualized base salary of $150,000. The Board of Directors or CNCG Committee will also determine the timing and amount of payment to Mr. Barrett of all deferred salary amounts. Mr. Barrett is also eligible to participate in any annual incentive plan established by the Company. Cumulative accrued and unpaid salary compensation at March 31, 2019 was $218,000.
In addition, we agreed to award Mr. Barrett an option to purchase 1,000,000 shares of our Class A common stock at an exercise price of $0.15 per share, with one quarter of the shares underlying the option to be vested on January 5, 2018 and the remaining shares to be vested equally over three years on each anniversary of January 5 for three consecutive years. These options were awarded under our Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan when the plan was approved by our stockholders. The Barrett Employment Agreement expires on January 31, 2021, with automatic renewal for successive one-year terms, unless terminated in writing by either party at least 90 days prior to the expiration.
Mr. Barrett is also eligible to participate in other standard benefits plans offered to similarly situated employees by us from time to time, including group health, vision and dental insurance and our 401(k) program. Upon a termination of Mr. Barrett’s employment without Cause by the Company or by Mr. Barrett for Good Reason in connection with a Material Event or Change of Control of the Company (each as defined in the Barrett Employment Agreement), Mr. Barrett will receive certain severance benefits, including severance payments equal to his base salary then in effect as of the date of termination for a period of twelve months, a pro rata portion of any annual incentive award for the year during which such termination occurs and immediate vesting of all outstanding stock options with a right to exercise for two years.
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Employment Agreement of Daniel M. Lerner
On August 17, 2017, we entered into an employment agreement with Mr. Lerner (the “Lerner Employment Agreement”) effective January 6, 2017, pursuant to which we agreed to pay Mr. Lerner a monthly salary of $5,000, and Mr. Lerner agreed to a deferral of an additional $11,667.00 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Lerner’s annualized base salary of $200,000. The Board of Directors or CNCG Committee will also determine the timing and amount of payment to Mr. Lerner of all deferred salary amounts. Mr. Lerner is also eligible to participate in any annual incentive plan established by the Company. Cumulative accrued and unpaid salary compensation at March 31, 2019 was $313,002.
In addition, we agreed to award Mr. Lerner an option to purchase 3,000,000 shares of our Class A common stock at an exercise price of $0.15 per share, with one quarter of the shares underlying the option to be vested on January 5, 2018 and the remaining shares to be vested equally over three years on each anniversary of January 5 for three consecutive years. These options were awarded under our Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan when the plan was approved by our stockholders. The Lerner Employment Agreement expires on January 31, 2021, with automatic renewal for successive one-year terms, unless terminated in writing by either party at least 90 days prior to the expiration.
Mr. Lerner is also eligible to participate in other standard benefits plans offered to similarly situated employees by us from time to time, including group health, vision and dental insurance and our 401(k) program. Upon a termination of Mr. Lerner’s employment without Cause by the Company or by Mr. Lerner for Good Reason in connection with a Material Event or Change of Control of the Company (each as defined in the Lerner Employment Agreement), Mr. Lerner will receive certain severance benefits, including severance payments equal to his base salary then in effect as of the date of termination for a period of twelve months, a pro rata portion of any annual incentive award for the year during which such termination occurs and immediate vesting of all outstanding stock options with a right to exercise for two years.
Employment Agreement of Len E. Walker
On August 17, 2017, we entered into an employment agreement with Mr. Walker (the “Walker Employment Agreement”) effective January 6, 2017, pursuant to which we agreed to pay Mr. Walker a monthly salary of $5,000, and Mr. Walker agreed to a deferral of an additional $11,667.00 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Walker’s annualized base salary of $200,000. The Board of Directors or CNCG Committee will also determine the timing and amount of payment to Mr. Walker of all deferred salary amounts. Mr. Walker is also eligible to participate in any annual incentive plan established by the Company. Cumulative accrued and unpaid salary compensation at March 31, 2019 was $298,201.
In addition, we agreed to award Mr. Walker an option to purchase 1,000,000 shares of our Class A common stock at an exercise price of $0.15 per share, with one quarter of the shares underlying the option to be vested on January 5, 2018 and the remaining shares to be vested equally over three years on each anniversary of January 5 for three consecutive years. These options were awarded under our Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan when the plan was approved by our stockholders. The Walker Employment Agreement expires on January 31, 2021, with automatic renewal for successive one-year terms, unless terminated in writing by either party at least 90 days prior to the expiration.
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Mr. Walker is also eligible to participate in other standard benefits plans offered to similarly situated employees by us from time to time, including group health, vision and dental insurance and our 401(k) program. Upon a termination of Mr. Walker’s employment without Cause by the Company or by Mr. Walker for Good Reason in connection with a Material Event or Change of Control of the Company (each as defined in the Walker Employment Agreement), Mr. Walker will receive certain severance benefits, including severance payments equal to his base salary then in effect as of the date of termination for a period of twelve months, a pro rata portion of any annual incentive award for the year during which such termination occurs and immediate vesting of all outstanding stock options with a right to exercise for two years.
Employment Agreement of David G. Gullickson
On August 17, 2017, we entered into an employment agreement with Mr. Gullickson (the “Gullickson Employment Agreement”) effective May 1, 2017, pursuant to which we agreed to pay Mr. Gullickson a monthly salary of $5,000, and Mr. Gullickson agreed to a deferral of an additional $13,750 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Gullickson’s annualized base salary of $225,000. The Board of Directors or CNCG Committee will also determine the timing and amount of payment to Mr. Gullickson of all deferred salary amounts. Mr. Gullickson is also eligible to participate in any annual incentive plan established by the Company. Cumulative accrued and unpaid salary compensation at March 31, 2019 was $344,000.
In addition, we agreed to award Mr. Gullickson an option to purchase 500,000 shares of our Class A common stock at an exercise price of $1.47 per share, with one quarter of the shares underlying the option to be vested on January 5, 2018 and the remaining shares to be vested equally over three years on each anniversary of January 5 for three consecutive years. These options were awarded under our Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan when the plan was approved by our stockholders. The Gullickson Employment Agreement expires on January 31, 2021, with automatic renewal for successive one-year terms, unless terminated in writing by either party at least 90 days prior to the expiration.
Mr. Gullickson is also eligible to participate in other standard benefits plans offered to similarly situated employees by us from time to time, including group health, vision and dental insurance and our 401(k) program. Upon a termination of Mr. Gullickson’s employment without Cause by the Company or by Mr. Gullickson for Good Reason in connection with a Material Event or Change of Control of the Company (each as defined in the Gullickson Employment Agreement), Mr. Gullickson will receive certain severance benefits, including severance payments equal to his base salary then in effect as of the date of termination for a period of twelve months, a pro rata portion of any annual incentive award for the year during which such termination occurs and immediate vesting of all outstanding stock options with a right to exercise for two years.
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Director Compensation for Period Ended March 31, 2019
The following table sets forth compensation amounts for our Independent Directors for the years ended March 31, 2019 and 2018.
Director Compensation
Name
|
|
Fees
Earned or
Paid in Cash
($)
|
|
Stock
Grants
($)
|
|
Option
Awards
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
John S. Reiland
(1)
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Mark A. Watson
(1) (3)
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Jeff B. Barrett
(1) (4)
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1) During the two years ended March 31, 2019 no Director received compensation for his services.
(2) Mr. Lipsker resigned effective June 1, 2018. He was an original board member, but did not receive any compensation for serving on the board. Mr. Lipsker received 250,000 shares during the share exchange agreement that occurred on January 6, 2017, and purchased 70,000 shares during the company’s private placement memorandum offering in early 2017.
(3) On February 28, 2018, Mr. Watson was elected to the Board of Directors. Mr. Watson previously acquired 2,000,000 shares of Class A Common Stock through the share exchange agreement that occurred on January 6, 2017. Mr. Watson has received no compensation for serving as a board member.
(4) On May 15, 2018, Mr. Barrett was elected to the Board of Directors. Mr. Barrett preciously acquired 15,900,000 shares of Class A Common Stock through the share exchange agreement that occurred on January 6, 2017. Mr. Barrett has received no compensation for serving as a board member.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
2017 Equity Incentive Plan
The Board of Directors adopted, and the Company’s stockholders subsequently approved, the IronClad Encryption Corporation 2017 Equity Incentive Plan (the “Plan”) effective as of January 6, 2017. The purpose of the Plan is to foster and promote the long-term financial success of the Company and thereby increase stockholder value. The Plan provides for the award of equity incentives to certain employees, directors, or officers of, or key advisers or consultants to, the Company and its subsidiaries who are responsible for or contribute to the management, growth or success of the Company or any of its subsidiaries.
The maximum number of shares available for issuance under the Plan is thirty million (30,000,000) shares of Class A common stock. On October 17, 2017, in connection with the change of the Company’s jurisdiction of incorporation from the State of Nevada to the State of Delaware, the Board of Directors adopted the Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan (the “Amended Plan”).
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The following table sets forth information about the Amended Plan as of June 15, 2018.
Plan Category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
|
|
Weighted-average exercise price of outstanding options, warrants and rights
(b)
|
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
27,830,000
|
|
$0.54
|
|
2,170,000
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
307,500
|
|
$2.04
|
|
—
|
|
|
|
|
|
|
|
Total
|
|
28,137,500
|
|
$0.68
|
|
3,000,000
|
The following table sets forth certain information as of July 12, 2019 with respect to the beneficial ownership of shares of common stock by (a) each person known to us that owns beneficially more than 5% of the outstanding shares of common stock, (b) each of our directors, (c) each of our executive officers, and (d) all of our executive officers and directors as a group.
Owners of more than 5% of Shares,
Directors and Executive Officers:
|
|
Number of Shares of Common Stock Beneficially Owned
|
|
Percent
of Class
|
Director: John S. Reiland
|
|
50,000
(1)
|
|
*%
|
Director: Mark A. Watson
|
|
1,950,000
(2)
|
|
*%
|
Director and President: James D. McGraw
|
|
39,837,091
(3)
|
|
20.6%
|
Director and Vice President: Jeff B. Barrett
|
|
16,900,000
(4)
|
|
10.7%
|
Vice President: Daniel M. Lerner
|
|
7,929,000
(5)
|
|
5.3%
|
Vice President: Len E. Walker
|
|
2,150,000
(6)
|
|
1.5%
|
Vice President: David G. Gullickson
|
|
1,025,000
(7)
|
|
0.7%
|
Executives Officers and Directors as a Group
|
|
† 45,841,091
|
|
† 32.3%
|
* Less than 1% of class.
† Shares in total for the group on this line exclude any shares related to the hypothetical exercise of any options outstanding; total shares of common stock issued and outstanding at March 31, 2018 were 141,707,264 (shares of Class A: 140,168,392, and Class B: 1,538,872).
(1) This amount includes: 50,000 shares of Class A Common Stock and options to purchase 0 shares of common stock.
(2) This amount includes: 1,950,000 shares of Class A Common Stock and options to purchase 0 shares of common stock.
(3) This amount includes: 22,837,091 shares of Class A Common Stock and options to purchase 4,000,000 and then 10,000,000 shares of common stock.
(4) This amount includes: 15,900,000 shares of Class A Common Stock and options to purchase 1,000,000 shares of common stock.
(5) This amount includes: 4,929,000 shares of Class A Common Stock and options to purchase 3,000,000 shares of common stock.
(6) This amount includes: 150,000 shares of Class A Common Stock and options to purchase 2,000,000 shares of common stock.
(7) This amount includes: 25,000 shares of Class A Common Stock and options to purchase 1,000,000 shares of common stock.
85
Table of Contents
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Certain Transactions, Corporate Governance
Related Persons Transactions
Stock Purchase Agreement between Historical and New Owners and Officers.
In an agreement dated June 20, 2016 and related to eventually setting up the reverse merger transaction governed by the Share Exchange Agreement (entered into and closed later on January 6, 2017), Mr. Paul A. Hatfield, at the time an officer and shareholder of Butte, entered into a Stock Purchase Agreement with Mr. James D. McGraw, of Houston, Texas and now the President and Chief Executive Officer of IronClad. Mr. McGraw at the time was instrumental in negotiating the definitive letter of intent to enter into the Share Exchange Agreement.
Pursuant to the terms of the Stock Purchase Agreement, Mr. McGraw or his assigns were granted the right to purchase from Mr. Hatfield a maximum of 500,000 shares of Butte that were personally owned by Mr. Hatfield at a price of $0.15 per share. The Stock Purchase Agreement is effective for twenty-four months starting at the closing of the Share Exchange Agreement transaction that was contemplated by the letter of intent.
The twenty-four month period expired on June 20, 2018; none of the contractual purchase rights under the agreement were ever exercised.
Director Independence
Our common stock is listed on the OTC QB. We use SEC Rule 10A-3 in determining whether a director is independent in the capacity of director and in the capacity as a member of a Board committee. In determining director independence, we have not relied on any exemptions from any rule's definition of independence.
We currently have four directors, two of whom are Independent Directors. The Board has determined that the following Directors are independent under SEC Rule 10A-3 because they have no relationship with the Company (other than being a Director and stockholder of the Company): John S. Reiland and Mark A. Watson.
Item 14. Principal Accounting Fees and Services
Audit, Audit-related and Other Fees
Aggregate fees for professional services rendered to the Company by Fruci & Associates II, PLLC for the years ended March 31, 2019 and 2018 were as follows:
|
Years Ended
|
|
March 31,
|
March 31
|
Item
|
2019
|
2018
|
Audit and audit related fees
|
$
55,583
|
$
54,750
|
Tax fees
|
3,080
|
2,800
|
Total
|
$
58,663
|
$
57,550
|
Audit Committee Pre-Approval
Our Audit Committee Charter provides that the Audit Committee has the sole authority to appoint or to retain the independent auditor and to oversee the auditor’s work on the annual audit and quarterly reviews. The Audit Committee must approve any proposed discharge of the auditor by a majority vote. The Audit Committee shall also pre-approve any non-audit services that the independent auditor may perform.
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