Annual Report (10-k)

Date : 07/16/2019 @ 9:37PM
Source : Edgar (US Regulatory)
Stock : Ironclad Encryption Corporation (QB) (IRNC)
Quote : 0.0051  -0.0002 (-3.77%) @ 5:27PM

Annual Report (10-k)

 

United States

Securities and Exchange Commission

Washington, D.C.  20549

Form 10-K

þ

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2019

or

o

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended from             

 

Commission File Number 000-53662

IronClad Encryption Corporation

(Exact name of registrant as specified in its charter)

Delaware

 

81-0409475

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification Number)

One Riverway, 777 South Post Oak Lane, Suite 1700

Houston, Texas  77056

(Address of principal executive offices, including zip code)

(888) 362 - 7972

(Issuer’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Class A, $0.001 par value

IRNC

OTC QB

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act   Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o

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

 

 

 

Large accelerated filer    o

 

Accelerated filer    o

Non-accelerated filer    þ

 

Smaller reporting company    þ

 

 

Emerging growth company    o

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act) Yes o  No þ

As of September 30, 2018, the last business day of the most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $12,930,788 based on the closing sale price on that date of $0.62 as reported on the OTC QB.  We had 303,415,017 shares of common stock outstanding on July 11, 2019.

DOCUMENTS INCORPORATED BY REFERENCE:  See exhibit table, page 86



 

Table of Contents

 

Part I 1  

Cautionary Statement on Forward Looking Information 1  

Item 1.  Business 1  

Item 1A. Risk Factors 3  

Item 1B. Unresolved Staff Comments 20  

Item 2.  Properties 20  

Item 3.  Legal Proceedings 20  

Item 4.  Mine Safety Disclosures 20  

Part II 21  

Item 5.  Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 21  

Item 6.  Selected Financial Data 22  

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations Reportable segments 22  

Item 7A. Quantitative and Qualitative Disclosures about Market Risk 32  

Item 8.  Financial Statements and Supplementary Data 33  

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 70  

Item 9A. Controls and Procedures 70  

Item 9B. Other Information. 70  

Part III 71  

Item 10.  Directors, Executive Officers and Corporate Governance. 71  

Item 11.  Executive Compensation. 75  

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 84  

Item 13.  Certain Relationships and Related Transactions, and Director Independence. 86  

Item 14.  Principal Accounting Fees and Services 86  

Part IV 87  

Item 15.  Exhibits, Financial Statement Schedules 87  

Signatures 90  



Table of Contents


Part I

 

Cautionary Statement on Forward Looking Information

 

This Report contains “forward-looking statements” within the meaning of Section 27 A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts.

 

Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially than those projected or anticipated.  Actual results could differ materially from those projected in the forward-looking statements.  Although the Company believes its assumptions underlying the forward-looking statements are reasonable, the Company cannot assure an investor that the forward-looking statements set out in this prospectus will prove to be accurate.

 

Such “forward-looking statements” can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends,” “estimates,” “forecast,” “projects,” “should” or “anticipates”, or the negative thereof, or other variations thereon or comparable terminology, or by discussion of strategy.  No assurance can be given that the future results covered by the forward-looking statements will be achieved.  The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, which could cause actual results to vary materially from the future results covered in such forward-looking statements.

 

An investor should not rely on forward-looking statements as predictions of future events.  The events and circumstances reflected in the forward-looking statements may not be achieved or occur.  The Company is not under a duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.

 

Throughout this report, references to “Company”, “IronClad,” “Butte”, “we,” “us,” and “our” refer to IronClad Encryption Corporation and its subsidiaries on a consolidated basis.  The terms “Company”, “IronClad” and “Butte” all refer to the same corporate entity, but the use of the IronClad and Butte names are used to refer to different eras of the Company’s history.  The historical eras generally coincide with the changes in business focus in the first weeks of 2017 from the Company’s historical mining activities (Butte) to its current encryption technology activities (IronClad).

 

 

Item 1.  Business

 

Overview

 

IronClad is engaged in the business of developing and licensing the use of cyber software technology that encrypts data files and electronic communications.  Through our patented Dynamic Synchronous Key Management and Perpetual Authentication technology, we seek to develop and license encryption technology that leads to improvements in cost, implementation, and deployment.

 

We strive to generate royalty revenue by securing license agreements with leading vendors through sales of ICE-enabled security applications, subscriptions, services and maintenance contracts, as well as sales of our ultra-secure BlackICE gateway and ICEmicro, IronClad’s proprietary technology and the world’s first context free and natively secure containers.  Our suite of security applications will be marketed as stand-alone applications and modules that integrate within security management systems deployed within enterprises.


1


Table of Contents


Corporate History

 

IronClad Encryption Corporation, now an encryption technology company but formerly known as Butte Highlands Mining Company (hereinafter “Butte” or the “Company”), was organized in May 1929 in Delaware as a mining company.  Butte ceased operating as a mining company in 1942.

 

In 2009, Butte registered its shares under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the purpose of becoming a reporting company.  The Company’s shares then became listed on the OTC BB, but in time the Company also listed its shares to trade on the OTC QB electronic market, one of the OTC Markets Group over-the-counter markets.

 

On January 6, 2017, Butte entered into a Share Exchange Agreement with owners of InterLok Key Management, Inc., a Texas corporation (“InterLok”), wherein it issued 56,655,891 shares of its Class A common stock in exchange for 100% of the outstanding shares of InterLok Key Management, Inc.  Immediately following the share exchange, the new Board of Directors of the Company (the “Board of Directors”) changed the Company name to IronClad Encryption Corporation (“IronClad”) changed the stock symbol from BTHI to IRNC and changed the company’s state of incorporation from Delaware to Nevada.  Later, on October 16, 2017, the Company redomiciled in Delaware from Nevada and adopted a certificate of incorporation (the “Certificate of Incorporation”) and bylaws (the “Bylaws”) as a Delaware corporation.

 

Liquidity

 

Since the inception of our business we have incurred significant operating losses.  Through March 31, 2019, we have generated cumulative net losses of $27,967,566.  During the three month period ended March 31, 2018, IronClad formed a new wholly-owned subsidiary, Ironclad Pipeline IC, Inc. which generated a modest level of revenue through a moderately profitable service contract with a major energy company in the eastern United States to provide an array of services in support of an infrastructure project. 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.

 

Our ability to become profitable on a consolidated basis depends on our ability to generate and sustain substantially higher revenue while maintaining reasonable expense levels.  We continue to explore various alternatives to increase our revenues and unless we can successfully increase our revenues (in excess of the costs we incur to generate these revenues) and our profitability, we will need to raise additional capital through equity or debt financings.

 

Such capital may not be available, or, if it is available, may not be available on terms that are acceptable to us.  If we are unable to raise sufficient additional capital on acceptable terms or achieve profitability in the near-term, we will likely have a cash shortage which would disrupt our operations, have a material adverse effect on our financial condition or business prospects and could result in us being unable to continue our operations.

 

Employees and Independent Contractors

 

As of July 3, 2019, we have 6 employees, all of whom are based in the United States.  We also use independent contractors from time to time for specific projects and functions.  No employees are represented by a union.


2


Table of Contents


Available Information

 

We are currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We file periodic reports, proxy materials and other information with the Securities and Exchange Commission (“SEC” or “Commission”). Required filings include an annual financial statement audited by an independent registered public accounting firm, selected by the company’s Audit Committee, and quarterly reports containing unaudited financial information.

 

Members of the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Members of the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Internet address of the Commission is www.sec.gov.  That website contains reports, proxy and information statements and other information regarding issuers, like IronClad Encryption Corporation, that file electronically with the Commission.  Visitors to the Commission’s website may access such information by searching the EDGAR database.

 

We will provide without charge to each person who receives a copy of this report, upon written or oral request, a copy of any information that is incorporated by reference in this report (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference).  Such request should be directed to: Mr. David G. Gullickson, Vice President, Treasurer and Chief Financial Officer at IronClad Encryption Corporation, One Riverway, 777 South Post Oak Lane, Suite 1700, Houston, Texas 77056, (888) 362-7972.  Our website Internet address is www.IronCladEncryption.com .

 

Item 1A.  Risk Factors

 

Risks Related to Our Business and Our Industry

 

We lack an operating history and through March 31, 2019 have had modest revenues and no profits.  We anticipate continuing to sustain losses on a consolidated basis and as a result, we may have to suspend or cease operations.

 

The Company, formerly named Butte Highlands Mining Company, was incorporated on May 3, 1929 for the purpose of mining.  On January 6, 2017, Butte completed an exchange of shares of Butte’s Class A common stock for 100% of the capital stock of InterLok and changed Butte’s business focus from mining to patented encryption technology.  Except for the modest operations of its new subsidiary, IronClad Pipeline IC, Inc. (formed in February 2018), the Company and its other wholly-owned subsidiary, InterLok, have no recent profitable operating history upon which an evaluation of our future success or failure can be made.

 

Losses incurred through March 31, 2019 are a result of costs incurred from the issuance of stock, re-incorporation between states, legal and accounting costs, and interest expense related to convertible debt.  We have had modest revenues and no profits, and have limited current prospects for future revenues.  Our ability to achieve and maintain profitability and positive cash flow depend on:

 

our ability to sell encrypted software licenses and related hardware and services, 

our ability to generate revenues and positive cash flows from the sale of encrypted software, services and hardware, and 

our ability to manage development and operating costs. 

 

Based on current plans, we expect to incur operating losses and negative cash flows from consolidated operations in future periods.  This will happen because the costs and expenses associated with the research and development of encryption applications are likely to exceed modest operating revenues in the near future.  As a result, we may not generate sufficient revenues, profits or positive net cash flows in the future.  Failure to generate significant revenues or positive cash flows from operating activities could cause us to suspend or cease operations.


3


Table of Contents


 

Due to our lack of capital, we must limit our development activity and may not be able to properly develop and complete a software and hardware development program related to our patented technology which will materially affect our business prospects.

 

We have a history of losses, anticipate increasing our operating expenses in the future, and may not be able to generate, maintain, or increase cash flow. If we cannot maintain or increase our cash flow, we will not be profitable and our business, financial condition, and operating results will suffer.

 

For the year ended March 31, 2019 and March 31, 2018 we have incurred net losses of $ 14,030,370 and $11,271,452, respectively.  As a result, we have an accumulated deficit of $27,967,566 as of March 31, 2019.  We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to enhance our product and service offerings, broaden our end-customer base, expand our sales channels, expand our operations, hire additional employees, and continue to develop our technology.  These efforts may prove more expensive than we currently anticipate, and we may not succeed in establishing and increasing our revenues sufficiently, or at all, to offset these higher expenses.

 

If the data security market does not adopt our data security platform, our sales will not grow as quickly as anticipated, or at all, and our business, results of operations and financial condition would be harmed.

 

We are seeking to disrupt the data security market with our patented encryption technology.  However, organizations that use legacy products and services for their data security needs may believe that these products and services sufficiently achieve their purpose.  Organizations may also believe that our products and services only serve the needs of a portion of the data security market.  Accordingly, organizations may continue allocating their information technology (“IT”) budgets for legacy products and services and may not adopt our data security platform.

 

If the market for data security solutions does not adopt our data security platform, if end-customers do not recognize the value of our platform compared to legacy products and services, or if we are otherwise unable to sell our products and services to organizations, then our revenue will not grow and it will have a material adverse effect on our operating results and financial condition.

 

Slow development of a market for our products is likely to materially and adversely affect our results of operations.

 

The demand for our products depends on, among other things, the introduction and widespread acceptance of our encryption software and hardware.  There can be no assurance as to the rate of development or acceptance of our encryption software.  Slow development of the demand for our products and services will adversely affect our operations.

 

If we fail to manage growth effectively, our business would be harmed.

 

Our operating structure has also been altered, and any changes or future growth will place significant demands on our management, employees, infrastructure and other resources.  We will also need to continue to improve our financial and management controls and reporting systems and procedures.  We may encounter delays or difficulties in implementing any of these systems.  Additionally, to manage any future change, we will need to hire, train, integrate and retain a number of highly skilled and motivated employees.  If we do not effectively hire, train, integrate and retain sufficient highly qualified personnel to support any future growth, and if we do not effectively manage the associated increases in expenses, our business, results of operations and financial condition would be harmed.


4


Table of Contents


Furthermore, growth forecasts are subject to significant uncertainty and are based on assumptions and estimates, which may not prove to be accurate.  Forecasts relating to our market opportunity and the expected growth in the data encryption market and other markets, including the forecasts or projections referenced in this prospectus, may prove to be inaccurate.  Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all.  Our growth will be affected by many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties.  Accordingly, the forecasts of our market opportunity and market growth included in this prospectus should not be taken as indicative of our future growth.

 

If we are unable to sell products, solutions and maintenance services to new customers, as well as renewals of our products, solutions and services to those customers, our future revenue and operating results will be harmed.

 

Our future success depends, in part, on our ability to increase sales of our solutions to new customers.  This may require increasingly sophisticated and costly sales efforts and may not result in additional sales.  The rate at which new customers purchase solutions depends on a number of factors, including those outside of our control, such as customers’ perceived need for security and general economic conditions.  If our efforts to sell our products and services to new customers are not successful, our business and operating results may suffer.

 

Furthermore, customers that purchase our platform have no contractual obligation to renew their subscriptions and support and maintenance services after the initial contract period, and given our limited operating history, we may not be able to accurately predict our renewal rates.  Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including the level of their satisfaction with our platform, our customer support, customer budgets and the pricing of our platform compared with the products and services offered by our competitors.

 

If our customers renew their subscriptions, they may renew for shorter contract lengths or on other terms that are less economically beneficial to us.  We cannot assure you that our customers will renew their subscriptions, and if our customers do not renew their subscriptions or renew on less favorable terms, our revenue may grow more slowly than expected, if at all.

 

If we do not accurately predict, prepare for, and respond promptly to the rapidly evolving technological and market developments and changing end-customer needs in the network security market, our prospects will be harmed.

 

The data security market is characterized by rapidly changing technology, changing customer needs, evolving operating system standards and frequent introductions of new offerings.  Additionally, many of our potential end-customers operate in markets characterized by rapidly changing technologies and business plans, which require them to add numerous network access points and adapt increasingly complex enterprise networks, incorporating a variety of hardware, software applications, operating systems, and networking protocols.  As their technologies and business plans grow more complex, we expect these customers to face new and increasingly sophisticated methods of attack.  We face significant challenges in ensuring that our platform effectively identifies and responds to these advanced and evolving attacks without disrupting our customers’ network performance.

 

The process of developing this new technology is expensive, complex and uncertain.  The success of new products and enhancements depends on several factors, including appropriate component costs, timely completion and introduction, differentiation of new products and enhancements from those of our competitors, and market acceptance.  To build our competitive position, we must commit significant resources to developing new products or enhancements to our platform before knowing whether these investments will be cost-effective or achieve the intended results.


5


Table of Contents


There can be no assurance that we will successfully identify product opportunities, develop and bring new products or enhancements to market in a timely manner, or achieve market acceptance of our platform, or that products and technologies developed by others will not render our platform obsolete or noncompetitive.  If we expend significant resources on researching and developing products or enhancements to our platform and such products or enhancements are not successful, our business, financial position and results of operations may be adversely affected.

 

These risks are greater in the mobile IT market because software is deployed on phones and tablets that run on different operating systems such as iOS, Android and Windows Phone, and these multiple operating systems change frequently in response to consumer demand.  As a result, we may need to release new software updates at a much greater pace than a traditional enterprise software company that supports only PCs.  We may experience technical design, engineering, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new solutions and enhancements.  As a result, we may not be successful in introducing solutions in a timely or appropriately responsive manner, or at all. If we fail to address these changes successfully, our business and operating results could be materially harmed.

 

Our products may become quickly outdated.

 

The data security market for our products is characterized by rapidly changing technology.  Accordingly, we believe that our future success depends on our ability to develop products that can meet market needs on a timely basis.  Although the market expects rapid introduction of new products or product enhancements to respond to new threats, the development of these products is expensive and difficult to achieve.  Furthermore, the timetable for commercial release and availability is uncertain as there can be long time periods between releases and availability of new products.

 

There can be no assurance that we will even be successful in developing and marketing, on a timely basis, such new products or enhancements, or that our new products or enhancements will adequately address the changing needs of the marketplace, or that we will be able to respond effectively to technological changes introduced by strategic partners or future competitors.

 

If we delay or fail to introduce new products, our results of operations and financial condition would be materially adversely affected.  Even if we develop timely and successful products and services, there can be no assurance that others will not introduce technology or services that significantly diminish the value of ours or render them obsolete.

 

We may not gain broad market acceptance for newly developed encrypted software and hardware.

 

We plan to release new encrypted software and hardware in order to meet the market’s rapidly evolving demands.  The return on our investments in these development efforts may be lower, or may develop more slowly, than we expect.  Further, these solutions may never gain broad market acceptance and may never prove to be profitable in the longer term. If we fail to achieve high levels of market acceptance for new data security solutions or if market acceptance is delayed, our business, operating results and financial performance could be materially, adversely affected.

 

Additionally, the Company is developing its proprietary software and intends to effect beta and other testing to ensure efficient launch and usability.  However, the Company’s software may experience or develop unanticipated “bugs” that would either delay its release or impede its use once released.  Such delays or problems could impact the Company’s ability to generate revenue or could negatively affect any contractual relationships with users of the software.

 


6


Table of Contents


If our products do not interoperate with our end-customers’ infrastructure, sales of our products and services could be negatively affected, which would harm our business.

 

Our products must interoperate with our end-customers’ existing infrastructure, which could have different specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain multiple generations of products that have been added over time.  As a result, when problems occur in a network, it may be difficult to identify the sources of these problems.

 

If we find errors in the existing software or defects in the hardware used in our customers’ infrastructure or problematic network configurations or settings, we may have to modify our software or hardware so that our products will interoperate with our customers’ infrastructure. In such cases, our products may be unable to provide significant performance improvements for applications deployed in our customers’ infrastructure.  These issues could cause longer installation times for our products and could cause order cancellations, either of which would adversely affect our business, results of operations and financial condition.

 

Changes in features and functionality by operating system providers and mobile device manufacturers could cause us to make short-term changes in engineering focus or product development or otherwise impair our product development efforts or strategy and harm our business.

 

IronClad’s software platforms depend on interoperability with operating systems, such as those provided by Apple, Google and Microsoft, as well as other device manufacturers.  Because mobile operating systems are released more frequently than legacy PC operating systems, and there is typically limited advance notice of changes in features and functionality of operating systems and mobile devices, we may be forced to divert resources from our product roadmap in order to accommodate these changes.

 

In addition, if we fail to enable IT departments to support operating system upgrades upon release, our business and reputation could suffer.  This could disrupt our product roadmap and cause us to delay introduction of planned solutions, features and functionality, which could harm our business.

 

If functionality similar to that offered by our products is incorporated into existing network infrastructure products, organizations may decide against adding our appliances to their network, which would have an adverse effect on our business.

 

Large, well-established providers of encryption software and hardware offer, and may continue to introduce, data security features that compete with our products, either in stand-alone security products or as additional features in their network infrastructure products.  The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our security solutions in networking products that are already generally accepted as necessary components of network architecture may have an adverse effect on our ability to market and sell our products.  Furthermore, even if the functionality offered by network infrastructure providers is more limited than our products, a significant number of end-customers may elect to accept such limited functionality in lieu of adding appliances from an additional vendor such as us.

 

Many organizations have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of networking products, which may make them reluctant to add new components to their networks, particularly from other vendors such as us. In addition, an organization’s existing vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match because we currently plan to offer only network security products and have fewer resources than many of our competitors.  If organizations are reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, our ability to increase our market share and improve our financial condition and operating results will be adversely affected.

 


7


Table of Contents


Fluctuating economic conditions make it difficult to predict revenue for a particular period, and a shortfall in revenue may harm our operating results.

 

Our revenue will depend significantly on general economic conditions and the demand for products in the IT security market.  Economic weakness, customer financial difficulties, and constrained spending on IT security may result in decreased revenue and earnings.  Such factors could make it difficult to accurately forecast our sales and operating results and could negatively affect our ability to provide accurate forecasts to our contract manufacturers and manage our contract manufacturer relationships and other expenses.  If we do not succeed in convincing customers that our platform should be an integral part of their overall approach to IT security and that a fixed portion of their annual IT budgets should be allocated to our platform, general reductions in IT spending by our customers are likely to have a disproportionate impact on our business, results of operations and financial condition.

 

General economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses, and lack of investment in our Company.  Furthermore, weakness and uncertainty in worldwide credit markets may adversely impact the ability of our potential customers to adequately fund their expected capital expenditures, which could lead to delays or cancellations of planned purchases of our platform.

 

Our revenue may be variable and difficult to predict.

 

Due to the nature of our business, our revenue in any particular period will be derived from sales to customers with whom we began to engage during that same period and therefore our sales may be variable and difficult to predict.  Given this unpredictability, we may be unable to accurately forecast our sales in any given period.  A failure to accurately predict the level of demand for our solutions may adversely impact our future revenue and operating results, and we are unlikely to forecast such effects with any certainty in advance.

 

We may acquire or enter into other businesses which could require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our operating results.

 

As part of our business strategy, we may enter into or make investments in complementary companies, products, or technologies.  We are a small organization and our ability to acquire and integrate other companies, products or technologies in a successful manner is unproven.  We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions or enter into other business ventures, we may not ultimately strengthen our competitive position or achieve our goals.

 

We may not have adequate resources to properly integrate and manage these new businesses and any acquisitions we complete could be viewed negatively by our end-customers, investors, and securities analysts. In addition, if we are unsuccessful at integrating such acquisitions, or the technologies associated with such acquisitions, into our Company, the revenue and operating results of the combined company could be adversely affected.

 

Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue convertible equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our Class A common stock.  The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

 


8


Table of Contents


The Company’s officers and directors control a significant majority, and will continue to control a majority, of the Company’s Preferred and Class A common stock and, as a result, can exercise voting control over stockholder and corporate actions.

 

Our officers and directors control a majority (more than 80%) of the Company’s outstanding voting shares of Preferred and Class A common stock through the recent issuance of Series A, Preferred voting shares to JD McGraw, the Company’s Chairman and Chief Executive Officer.  As such, they will be able to control most matters requiring approval by stockholders, including the election of directors and approval of significant corporate transactions.  This concentration of ownership may also have the effect of delaying or preventing a change in control, which in turn could have a material adverse effect on the market price of the Company’s Class A common stock or prevent stockholders from realizing a premium over the market price for their Shares.

 

The Exchange Act requires, among other things, that companies maintain effective disclosure controls and procedures and internal control over financial reporting.  In order to maintain the requisite disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required.  As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on the development of the Company’s business, financial condition and results of operations.

 

The Company has a small financial and accounting organization. Being a public company strains the Company’s resources, diverts management’s attention and affects its ability to attract and retain qualified officers and directors.

 

As a reporting company, the Company is already subject to the reporting requirements of the Exchange Act. However, the requirements of these laws and the rules and regulations promulgated thereunder entail significant accounting, legal and financial compliance costs which are potentially prohibitive to the Company as it develops its business plan, products and scope.  These costs have made, and will continue to make, some activities more difficult, time consuming or costly and may place significant strain on its personnel, systems and resources.

 

Our failure to adequately protect personal information could have a material adverse effect on our business.

 

A wide variety of provincial, state, national, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data.  These data protection and privacy-related laws and regulations are evolving and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. Our failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement action against us, including fines, imprisonment of Company officials and public censure, claims for damages by end-customers and other affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business.

 

Evolving and changing definitions of personal data and personal information, within the European Union, the United States, and elsewhere, especially relating to classification of IP addresses, machine identification, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data.  Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit adoption of our products by potential end-customers.

 


9


Table of Contents


If our security measures are breached or unauthorized access to customer data is otherwise obtained or our customers experience data losses, our brand, reputation and business could be harmed and we may incur significant liabilities.

 

Our customers will rely on our encryption solutions to secure and store their data, which may include financial records, credit card information, business information, customer information, health information, other personally identifiable information or other sensitive personal information.  A breach of our encryption methods or other events that cause the loss or public disclosure of, or access by third parties to, our customers’ stored files or data could have serious negative consequences for our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of our customers to use our solutions, harm to our brand and reputation and time-consuming and expensive litigation.

 

The techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, often are not recognized until launched against a target and may originate from less regulated or remote areas around the world.  As a result, we may be unable to proactively prevent these techniques, implement adequate preventative or reactionary measures or enforce the laws and regulations that govern such activities.  If our customers experience any data loss, or any data corruption or inaccuracies, whether caused by security breaches or otherwise, our brand, reputation and business could be harmed.

 

If an actual or perceived breach of network security occurs in our internal systems, our services may be perceived as not being secure and clients may curtail or stop using our solutions.

 

As a provider of data security solutions, we will be a high-profile target and our networks and solutions may have vulnerabilities that may be targeted by hackers and could be targeted by attacks specifically designed to disrupt our business and harm our reputation.  We will not succeed unless the marketplace continues to be confident that we provide effective encryption protection. If a breach of network security occurs in our internal systems it could adversely affect the market’s perception of our solutions.  We may not be able to correct any security flaws or vulnerabilities promptly, or at all. In addition, such a security breach could impair our ability to operate our business.  If this happens, our business and operating results could be adversely affected.

 

Additionally, the ability of our future solutions to operate effectively could be negatively impacted by many different elements unrelated to our solutions.  For example, a user’s experience may suffer from an incorrect setting in his or her mobile device, an issue relating to his or her employer’s corporate network or an issue relating to the underlying mobile operating system, none of which we control.  Even though technical problems experienced by users may not be caused by our solutions, users often perceive the underlying cause to be a result of poor performance of our solution.  This perception, even if incorrect, could harm our business and reputation.

 

Because our solutions could be used to collect and store personal information of our customers’ employees or customers, privacy concerns could result in additional cost and liability to us or inhibit sales of our solutions.

 

Personal privacy has become a significant issue in the United States and in other countries where we may offer our solutions.  The regulatory framework for privacy issues worldwide is currently complex and evolving, and it is likely to remain uncertain for the foreseeable future.  Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information.

 

In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996 and state breach notification laws. Internationally, virtually every jurisdiction in which we may eventually operate has established its own data security and privacy legal framework with which we or our customers must comply, including the Data Protection Directive established in the European Union, and the Federal Data Protection Act recently passed in Germany.

 


10


Table of Contents


In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us.  Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is in conflict with one another and is inconsistent with our encryption practices or the features of our solutions.

 

If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our encryption software and hardware, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.

 

Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions.  Privacy concerns, whether valid or not valid, may inhibit market adoption of our solutions particularly in certain industries and possibly, foreign countries.

 

Our use of open source software could impose limitations on our ability to commercialize our solutions.

 

Our solutions might contain software modules licensed for use from third-party authors under open source licenses.  Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code.  Some open source licenses might contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use.

 

If we combine our proprietary solutions with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary solutions to the public or offer our solutions to users at no cost.  This could allow our competitors to create similar solutions with lower development effort and time and ultimately could result in a loss of sales for us.

 

The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions.  In such event, we could be required to seek licenses from third parties in order to continue offering our solutions, to re-engineer our solutions or to discontinue the sale of our solutions in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our business and operating results.

 

If we are unable to hire, retain, train, and motivate qualified personnel and senior management, our business could suffer.

 

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel.  The loss of the services of our senior management or any of our key personnel, the inability to attract or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales and marketing, could significantly delay or prevent the achievement of our development and strategic objectives, and may adversely affect our business, financial condition and operating results.

 

In addition, many members of our management team only joined us in the last year as part of our investment in the expansion of our business.  Our productivity and the quality of our solutions may be adversely affected if we do not integrate and train our new employees quickly and effectively. Furthermore, if we are not effective in retaining our key personnel, our business could be adversely impacted and our operating results and financial condition could be harmed.

 


11


Table of Contents


Competition for highly skilled personnel is often intense.  We may not be successful in attracting, integrating or retaining qualified personnel to fulfill our current or future needs.  Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited, or that they have divulged proprietary or other confidential information, or that their former employers own their inventions or other work product.

 

The Company relies on key executives whose absence or loss could adversely affect the business.  We are highly dependent on our management team and consultants, and any failure to retain the services of such parties could adversely affect our ability to effectively manage our operations or successfully execute our business plan.

 

Our business is dependent on retaining the services of a small number of key personnel of the appropriate caliber as the business develops.  Our success is, and will continue to be to a significant extent, dependent upon the expertise and experience of the directors, senior management and certain key consultants, but the retention of their services cannot be guaranteed.  The loss of key members of our management team or other highly qualified professionals would adversely affect our ability to effectively manage our overall operations or successfully execute current or future business strategies and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

Additionally, because our Chief Technology Officer has other outside business activities, he will only be devoting not more than 50% of his time or approximately twenty hours per week to our operations.

 

Costs incurred because the Company is a public company may affect the Company’s profitability.

 

As a public company, the Company incurs significant legal, accounting, and other expenses, and the Company is subject to the rules and regulations of the Securities and Exchange Commission relating to public disclosure that generally involve a substantial expenditure of financial resources to prepare those disclosures. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, requires changes in corporate governance practices of public companies.

 

The Company expects that full compliance with such rules and regulations will significantly increase the Company’s legal and financial compliance costs and make some activities more time-consuming and costly, which may negatively affect the Company’s financial results.  To the extent the Company’s earnings are reduced as a result of the financial impact of the Company’s SEC reporting or compliance costs, the Company’s ability to develop an active trading market for the Company’s securities could be harmed.

 

In addition, as a public reporting company, we are subject to various laws, regulations and standards relating to corporate governance and public disclosure.  Our management team needs to invest significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to significant general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.  In addition, because public company directors and officers face increased liabilities, the individuals serving in these positions may be less willing to remain as directors or executive officers for the long-term, and we may experience difficulty in attracting qualified replacement directors and officers.

 

We also experience difficulties in obtaining director and officer liability insurance.  As a result, we may need to expend a significantly larger amount than we previously spent on recruiting, compensating and insuring new directors and officers.

 

We currently have material weaknesses in internal control over financial reporting.  If we fail to rectify these weaknesses and then maintain effective controls, we may be subject to litigation and/or costly remediation and the price of our common stock may be adversely affected.

 

Failure to establish the required controls or procedures, or any failure of those controls or procedures once established, could adversely impact our public disclosures regarding our business, financial condition or results of


12


Table of Contents


operations.  Our management and our auditors have identified a material weakness in our disclosure controls and procedures and in our internal control over financial reporting due to insufficient resources in the accounting and finance department.  Due to these weaknesses, there is more than a remote likelihood that a material misstatement of the consolidated financial statements would not have been prevented or detected.

 

Should we or our auditors identify any other material weaknesses and/or significant deficiencies; those will need to be addressed as well.  Any actual or perceived weaknesses or conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal control over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal control over financial reporting could adversely impact the price of our common stock and may lead to claims against us. See Item 9. a and b.

 

We may be unable to protect our intellectual property adequately, which could harm our business, financial condition and results of operations.

 

We believe that our intellectual property is an essential asset of our business.  We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual provisions, to establish and protect our intellectual property rights in the United States and abroad. The filing of a patent application or trademark application does not guarantee the issuance of a corresponding patent or trademark. Thus, our efforts to secure intellectual property rights may not result in enforceable rights against third parties.

 

Any U.S. or other patents that we acquire may not be sufficiently broad to protect our proprietary technologies, and given the costs of obtaining patent protection, we may choose not to seek patent protection for certain of our proprietary technologies or in certain jurisdictions.  Further, the enforceability of any U.S. or other patent we obtain would be limited by the term of said patent.

 

Variations in patent and trademark laws across different jurisdictions may also affect our ability to protect our proprietary technologies consistently across the globe.  The efforts we have taken to protect our intellectual property may not be sufficient or effective, and our trademarks, copyrights and patents may be held invalid or unenforceable.  We may not be effective in policing unauthorized use of our intellectual property, and even if we do detect violations, litigation may be necessary to enforce our intellectual property rights.

 

Any enforcement efforts we undertake, including litigation, could be time consuming and expensive, could divert management’s attention and may result in a court determining that our intellectual property rights are unenforceable.  If we are not successful in cost-effectively protecting our intellectual property rights, our business, financial condition and results of operations could be harmed.

 

Claims by others that we infringe their proprietary technology or other rights could harm our business.

 

Companies in the data encryption security industry own large numbers of patents, copyrights, trademarks, domain names, and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights.  Third parties may in the future assert claims of infringement of intellectual property rights against us.  As the number of products and competitors in our market increases and overlaps occur, infringement claims may increase.

 

In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection.  In addition, we have not registered our trademarks in all of our geographic markets and failure to secure those registrations could adversely affect our ability to enforce and defend our trademark rights.

 

Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract our management from our business and could require us to cease use of such intellectual property.  Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be


13


Table of Contents


compromised by disclosure during this type of litigation.  Although third parties may offer a license to their technology or other intellectual property, the terms of any offered license may not be acceptable to us and the failure to obtain a license or the costs associated with any license could cause our business, financial condition, and operating results to be materially and adversely affected.

 

In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us.  If a third party does not offer us a license to its technology or other intellectual property on reasonable terms, or at all, we could be enjoined from continued use of such intellectual property. As a result, we may be required to develop alternative, non-infringing technology, which could require significant time (during which we would be unable to continue to offer our affected products or services), effort, and expense and may ultimately not be successful.

 

Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain products or performing certain services or that requires us to pay substantial damages, royalties or other fees. Any of these events could seriously harm our business, financial condition, and operating results.

 

We could be subject to additional tax liabilities.

 

We are subject to U.S. federal, state, local and sales taxes in the United States and may become subject to foreign income taxes, withholding taxes and transaction taxes in several foreign jurisdictions.  Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes.  During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain.  In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities.

 

We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes, sales taxes and value-added taxes against us.  Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.

 

U.S. federal, state and local government sales are subject to a number of challenges and risks that may adversely impact our business.

 

Sales to U.S. federal, state, and local governmental agencies may in the future account for a significant portion of our revenue. Sales to such government entities are subject to the following risks:

 

selling to governmental agencies can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale; 

government certification requirements applicable to our products may change and, in doing so, restrict our ability to sell into the U.S. federal government sector until we have attained the revised certification; 

government demand and payment for our products and services may be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services; 

governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our platform, which would adversely affect our revenue and results of operations, or institute fines or civil or criminal liability if the audit uncovers improper or illegal activities; and 


14


Table of Contents


governments may require certain products to be manufactured in the United States and other relatively high-cost manufacturing locations, and we may not manufacture all products in locations that meet these requirements, thus affecting our ability to sell these products profitably to governmental agencies. 

 

Failure to comply with governmental laws and regulations could harm our business.

 

Our business is subject to regulation by various U.S. federal, state, local jurisdictions and may become subject to regulation by foreign governments in the future. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States.  Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, injunctions or other collateral consequences.

 

If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, results of operations and financial condition.

 

Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by man-made problems such as terrorism.

 

A significant natural disaster, such as an earthquake, a fire, a flood, or significant power outage could have a material adverse effect on our business, results of operations, and financial condition. In addition, natural disasters could affect our supply chain, manufacturing vendors, or logistics providers’ ability to provide materials and perform services such as manufacturing products or assisting with shipments on a timely basis.  In the event that our or our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter.

 

In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the business of our supply chain, manufacturers, logistics providers, partners, or customers or the economy as a whole.  Any disruption in the business of our supply chain, manufacturers, logistics providers, partners or end-customers that impacts sales at the end of a fiscal quarter could have a significant adverse impact on our financial results.  All of the aforementioned risks may be further increased if the disaster recovery plans for us and our suppliers prove to be inadequate.  To the extent that any of the above should result in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, our business, financial condition and results of operations would be adversely affected.

 

Risks Related to Our Class A Common Stock

 

You could lose the value of all of your investment.

 

An investment in our securities is speculative and involves a high degree of risk.  Potential investors should be aware that the value of an investment in the Company may go down as well as up.  In addition, there can be no certainty that the market value of an investment in the Company will fully reflect its underlying value. You could lose the value of your entire investment.

 

You may experience dilution of your ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock.

 

In the future, we may issue our authorized but previously unissued equity securities, which would result in the dilution of the ownership interests of our present stockholders and the purchasers of our common stock offered hereby.  The Company is authorized to issue an aggregate of 800,000,000 shares of common stock and


15


Table of Contents


20,000,000 shares of preferred stock.  We may issue additional shares of our common stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes.

 

The future issuance of any such additional shares of our common stock may create downward pressure on the trading price of the common stock.  We will need to raise additional capital in the near future to meet our working capital needs, and there can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with these capital raising efforts, including at a price (or exercise price) below the price you paid for your stock.

 

Future sales of our common stock or securities convertible or exchangeable for our common stock, or the perception that such sales might occur, may cause our stock price to decline and may dilute your voting power and your ownership interest in us.

 

If our existing stockholders or warrant or option holders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the price of our common stock could decline.  The perception in the market that these sales may occur could also cause the price of our common stock to decline.

 

There currently is a limited market for our Class A common stock and there can be no assurance that an active public market will ever develop.  Failure to develop or maintain an active trading market could negatively affect the value of our common stock and make it difficult or impossible for you to sell your shares.

 

There is currently only a limited public market for shares of our common stock, and an active trading market may never develop.  Our Class A common stock is quoted on the OTC QB market.  The OTC QB market is a thinly traded market and lacks the liquidity of certain other public markets with which some investors may have more experience.  We may not ever be able to satisfy the listing requirements for our Class A common stock to be listed on a national securities exchange, which is often a more widely-traded and liquid market.  

 

Some, but not all, of the factors which may delay or prevent the listing of our Class A common stock on a more widely-traded and liquid market include the following: our stockholders' equity may be insufficient; the market value of our outstanding securities may be too low; our net income from operations may be too low; our Class A common stock may not be sufficiently widely held; we may not be able to secure market makers for our Class A common stock; and we may fail to meet the rules and requirements mandated by the several exchanges and markets to have our Class A common stock listed.

 

Should we fail to satisfy the initial listing standards of the national exchanges, or our Class A common stock is otherwise rejected for listing and remains listed on an OTC market or is suspended from the OTC QB market, the trading price of our Class A common stock could suffer and the trading market for our Class A common stock may be less liquid and our Class A common stock price may be subject to increased volatility .

 

The price of our Class A common stock historically has been volatile.  This volatility may affect the price at which you could sell your Class A common stock, and the sale of substantial amounts of our Class A common stock could adversely affect the price of our Class A common stock.

 

During the two years presented, ending March 31, 2019 and 2018, the closing price for our Class A common stock has varied between a high of $12.00 and a low of $0.0057.  This volatility may affect the price at which an investor could sell the Class A common stock, and the sale of substantial amounts of our Class A common stock could adversely affect the price of our Class A common stock.  Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors; variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts’ estimates; and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments.


16


Table of Contents


Our Class A common stock is currently subject to the "penny stock" rules of the SEC and the trading market in the securities is limited, which makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.

 

Rule 15g-9 under the Exchange Act establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.  For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person's account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person's account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction.  Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules.  This may make it more difficult for investors to dispose of our Class A common stock and cause a decline in the market value of our Class A common stock.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions.  Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

Our stock may be traded infrequently and in low volumes, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell your shares.

 

Until our Class A common stock is listed on a national securities exchange such as the NYSE American or the NASDAQ Stock Market, we expect our Class A common stock to remain eligible for quotation on the OTC QB market, or on another over-the-counter quotation system.  In those venues, however, the shares of our Class A common stock may trade infrequently and in low volumes, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent.

 

An investor may find it difficult to obtain accurate quotations as to the market value of our Class A common stock or to sell his or her shares at or near bid prices or at all. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors.  Consequently, such regulations may deter broker-dealers from recommending or selling our Class A common stock, which may further affect the liquidity of our Class A common stock.  This would also make it more difficult for us to raise capital.


17


Table of Contents


We are a smaller reporting company and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our Class A common stock less attractive to investors.

 

We qualify as a "smaller reporting company" (meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company, and we have a public float of less than $75 million as of the last business day of our most recently completed second fiscal quarter), which allows us to take advantage of a number of exemptions from SEC disclosure requirements in our periodic reports and proxy statements, including, among other things, simplified executive compensation disclosures, only being required to provide two (rather than three) years of audited financial statements, and not being required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting.

 

Decreased disclosures in our SEC filings due to our status as a "smaller reporting company" may make it harder for investors to analyze our results of operations and financial prospects and may cause some investors to find our Class A common stock less attractive because we rely on these exemptions, there may be a less active trading market for our Class A common stock, and our stock price may be more volatile.

 

Certain provisions of Delaware law and our charter documents may impede or discourage a takeover, which could adversely impact the market price of our shares.

 

As a Delaware corporation, we are governed by anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL") that prohibit certain publicly-traded Delaware corporations from engaging in a business combination with anyone who owns at least 15% of its common stock for a period of three years after the date of the transaction in which the person acquired the 15% ownership, unless the certificate of incorporation or by-laws of the corporation contain a provision expressly electing not to be governed by this anti-takeover statute, the merger or combination is approved in a prescribed manner, or the corporation does not have a class of voting stock that is listed on a national securities exchange or held by more than 2,000 stockholders of record.

 

We are currently not subject to these restrictions; however, our certificate of incorporation and by-laws do not contain a provision electing not to be governed by this statute, and once our common stock is listed on a national securities exchange or held by more than 2,000 stockholders of record, we will become subject to these restrictions, which may discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock.

 

Certain other provisions of Delaware law and of our certificate of incorporation and bylaws impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders or could discourage a potential acquirer from making a tender offer for our common stock.  In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our Board of Directors.  

 

These provisions include:

 

no cumulative voting in the election of directors;  

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director;  

a requirement that special meetings of stockholders be called only by the chairperson of the board of directors, the chief executive officer or by the board of directors pursuant to a resolution adopted by a majority of the total number of directors,  

an advance notice requirement for stockholder proposals and nominations;  


18


Table of Contents


the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and  

elimination of personal liability for breaches of fiduciary duty as a director, to the extent permitted under the Delaware law. 

 

These restrictions, under certain circumstances, could reduce the market price of our common stock.

 

Any failure to maintain effective internal control over our financial reporting could materially adversely affect us.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include in our annual reports on Form 10-K an assessment by management of the effectiveness of our internal control over financial reporting.  In addition, at such time, if any, as we are no longer a "smaller reporting company," our independent registered public accounting firm will have to attest to and report on management's assessment of the effectiveness of such internal control over financial reporting.

 

Based upon the last evaluation, our management concluded that our internal control over financial reporting was not effective as of such date to provide reasonable assurance to the Company's management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.  Our management identified a material weakness in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

If we fail to maintain effective internal control over financial reporting, we may be unable to prevent or detect fraud or provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements.  This could result in a loss of investor confidence in the reliability of our financial statements, which in turn could negatively affect the price of our common stock.

 

In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and (if required in future) our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404(b).  Our compliance with Section 404(b) may require that we incur substantial accounting expense and expend significant management efforts.

 

We currently do not have an internal audit group.  We may need to retain the services of additional accounting and financial staff or consultants with appropriate public company experience and technical accounting knowledge to satisfy the ongoing requirements of Section 404(b).  We intend to review the effectiveness of our internal controls and procedures and make any changes management determines appropriate, including to achieve compliance with Section 404(b) by the date on which we are required to so comply.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid any dividends on our Class A common stock. We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our Class A common stock if the market price of our Class A common stock increases.

 

We may not be able to draw funds from the private equity line.

 

We cannot be assured that we will obtain sufficient funds from the private equity line with Tangiers to continue operations.  The future market price and volume of trading of our Class A common stock limits the rate at which we can obtain money under the private equity line.  Further, we may be unable to satisfy the conditions contained in the Investment Agreement, which would result in our inability to draw down money on a timely basis, or at all. If the price of our Class A common stock declines, or trading volume in our Class A common stock is low, we will be unable to obtain sufficient funds to meet our liquidity needs.


19


Table of Contents


 

Private equity line draws may result in substantial dilution.

 

We will issue shares to Tangiers upon exercise of our put rights at a price equal to 80% of the lowest volume weighted average price, or if none, the lowest closing bid price, of our Class A common stock over the 5 trading days including and immediately after the date we deliver and Tangiers confirms receipt of notice of a drawdown request on the private equity line.  Accordingly, the exercise of our put rights may result in substantial dilution to the interests of the other holders of our Class A common stock.

 

Depending on the price per share of our Class A common stock during the 36-month period of the Investment Agreement, we may need to register additional shares for resale to access the full amount of financing available. Registering additional shares could have a further dilutive effect on the value of our Class A common stock.  If we are unable to register the additional shares of Class A common stock, we may experience delays in, or be unable to, access some of the $5,000,000 available under the private equity line.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

Our executive and administrative offices are located at One Riverway, 777 South Post Oak Lane, Suite 1700, Houston, Texas 77056 where we rent office space pursuant to a month-to-month rental agreement.

 

Item 3.  Legal Proceedings

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not Applicable.


20


Table of Contents


Part II

Item 5.  Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Price Range of Common Stock

 

Shares of our common stock, for the periods presented below, were traded on the OTC QB.  The following table sets forth the quarterly high and low sales prices per share for our common stock, as reported by the OTC QB exchange for the respective periods.

 

 

High

Low

Fiscal 2019:

 

 

Fourth Quarter

$0.21

$0.0069

Third Quarter

$0.64

$0.15

Second Quarter

$0.70

$0.05

First Quarter

$1.85

$0.45

Fiscal 2018:

 

 

Fourth Quarter

$7.00

$1.35

Third Quarter

$8.50

$4.00

Second Quarter

$12.00

$3.15

First Quarter

$3.79

$1.37

 

On July 5, 2019, the last price for our common stock as reported by the OTC QB was $0.0096 per share.  There are approximately 1,714 stockholders of record of the common stock.

 

Dividends

 

We have not paid, and we do not currently intend to pay in the foreseeable future, cash dividends on our common stock.  The current policy of our Board of Directors is to retain all earnings, if any, to provide funds for operation and expansion of our business.  The declaration of dividends, if any, will be subject to the discretion of the Board of Directors, which may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among others.

 

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”).


21


Table of Contents


The following table sets forth information about the Amended Plan as of March 31, 2019.

 

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

 

 

$

0.57

 

 

 

2,170,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not approved by security holders

 

 

307,500

 

 

 

2.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

28,137,500

 

 

$

0.59

 

 

 

2,170,000

 

 

 

(a)

The number of outstanding options awarded above includes an option awarded to Mr. James D, McGraw 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 our Class A common stock reaches a price of $15.00 per share.

 

Item 6.  Selected Financial Data

 

 

Year Ended

March 31,

Year Ended

March 31,

 

2019

2018

Revenue

$ 780,211   

$ 229,475   

Loss from operations

$ (10,113,724)  

$ (10,268,875)  

Net loss

$ (14,030,370)  

$ (11,271,452)  

 

 

 

Basic loss per common share

$ (0.20)  

$ (0.17)  

Weighted average shares outstanding

69,302,833   

67,630,197   

 

 

 

Cash and cash equivalents

$ 277,575   

$ 448,061   

Patents, net

$ 367,786   

$ 170,976   

Total assets

$ 675,261   

$ 976,734   

 

 

 

Notes payable

$ 989,170   

$ 1,068,956   

 Less discounts

(542,451)  

(364,762)  

 Notes payable, net

$ 446,719   

$ 722,684   

Derivatives liabilities

$ 2,147,415   

$ 234,138   

Stockholder’s equity (deficit)

$ (5,035,868)  

$ (2,018,934)  

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations Reportable segments

 

Forward-Looking Statements

 

When used in this Report on Form 10-K and in future filings by us with the Securities and Exchange Commission, the words or phrases “will likely result,” “management expects” or “we expect,” “will continue,” “is anticipated,” “estimated” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made.


22


Table of Contents


Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  The risks are included in “Item 1A: Risk Factors” above and this “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report on Form 10-K.  We have no obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

 

You should read the financial information set forth below in conjunction with our financial statements and notes thereto.

 

Overview

 

Our corporate mission is to bring freedom to execute electronic transmissions and store electronic data absent the intrusion of cyber-terrorism that causes destruction and loss by offering proprietary cybersecurity encryption that operates without performance degradation or significant band-width usage.

 

Our primary business model is to develop and license cyber software technology that encrypts data files and electronic communications.  We seek to generate royalty revenue by securing license agreements with leading vendors through sales of ICE-enabled security applications, subscriptions, services and maintenance contracts, as well as sales of our ultra-secure BlackICE gateway and ICEmicro, IronClad’s proprietary technology and the world’s first context free and natively secure containers.  

 

Operating Plan

 

Our operating plan within the next twelve months includes the following:

 

Build on our existing support functions of infrastructure projects and operations through the deployment of our proprietary technology. 

Expand our licensing and deployment of our patented data protection solutions through strategic alliances. 

List our Class A common stock on a national securities exchange such as the NYSE American or the NASDAQ Stock Market. 

 

Segments

 

We have only one reportable segment and that segment is focused on expanding our portfolio of patents and developing commercial applications for our patents and identifying and engaging customers needing the dynamic key encryption advantages that our software provides to improve the security of their businesses.

 

Review of Comparative Results and Liquidity; year ended March 31, 2019 compared to the year ended March 31, 2018.

 

Results of Operations

 

Based on the factors discussed below, the net loss attributable to common shareholders for the year ended March 31, 2019, increased by $2,758,918 to a net loss of $14,030,370 or $0.20 per share in 2019 from a net loss of $11,271,452, or $0.17 per share in 2018.


23


Table of Contents


Year ended March 31, 2019 compared to Year ended March 31, 2018

 

Net loss.   For the year ended March 31, 2019, the Company had a net loss of $14,030,370 compared to a net loss of $11,271,452 for the year ended March 31, 2018.  This represents an increased net loss of $2,758,918 for the year ended March 31, 2019.  The increase in net loss is attributable to an increase in services expense (though offset by revenue), officer and director fees and financing expenses which were offset by a decrease in investor relations and professional fees during the year ended March 31, 2019.  Many of the costs incurred were non-cash and were recognized as compensation and financing expenses in connection with the issuance of IronClad common stock or stock options, warrants or derivative liabilities.

 

Product development costs .   The $1,670,298 of product development costs incurred during the year is primarily related to research and product development costs for cyber encryption software and prototype products being developed and tested.

 

Officer compensation .   Compensation expenses for officers and directors fee expenses were low until they were increased on July 1, 2017.  The rates of compensation for seven of the Company’s initial employees were a uniform $5,000 per person per month in the three months ended March 31, 2017 and were increased to amounts have averaged about $15,000 per person in mid-2017.  While the higher compensation rates do receive expense recognition, the deferred amounts in excess of $5,000 per person per month are accrued and are to be paid at a later date based on the liquidity and financial strength of the Company.  Until that time, individuals were generally paid $5,000 per person per month until mid-October 2017.

 

Accrued amounts for deferred salary in excess of the monthly $5,000 per person per month paid during the year ended March 31, 2019 total approximately $788,769 and $533,884 at March 31, 2018.

 

The uniform monthly compensation amounts that were being paid through much of 2017 were effectively suspended after the middle of October 2017 because of limited amounts of cash available to use for other operating costs of the company.  The $5,000 per person per month amounts that were suspended for half of October and all of November, December, January, February, and March (and continue to be suspended as of the date of the filing of this report) are nevertheless accrued and are to be paid at a later date based on the liquidity and financial strength of the Company.

 

Cumulative accrued amounts for suspended and deferred salaries for officers at March 31, 2019 were approximately $1,592,186 and $700,521 at March 31, 2018.

 

Stock options issued .   Of the $10,893,935 of operating expenses for the year ended March 31, 2019, $8,348,240 relates to stock options and warrants issued.  This total amount for options and warrants includes $1,642,735 for product development expenses, $1,993,242 for general and administrative, $4,712,263 for officers and directors and $10,265 for financing fees. Of the $10,498,620 of operating expenses for the year ended March 31, 2018, $5,337,248 relates to stock options and warrants issued.  This total amount for options and warrants includes $0 for product development expenses, $959,214 for general and administrative, $3,612,311 for officers and directors, $478,086 for investor relations and $287,629 for financing fees.

 

Stock grants issued . In addition to the $8,348,240 of expenses recognized above for stock options and warrants for the year ended March 31, 2019, another $13,509 of expenses was recognized for 177,000 stock grants issued (or shares held to be issued) at an issue price from $1.15 to $0.32.  The general and administrative expenses were recognized as a result of issuing shares of Class A common stock valued to support the Company’s activities.

 

In addition to the $5,337,248 of expense recognized above for stock options and warrants for the year ended March 31, 2018, another $818,442 of expense was recognized for 245,116 stock grants issued (or shares held to be issued) at an average issue price of $3.27. $212,248 of development expenses was recognized for shares of Class A common stock issued to consultants to support the Company’s development activities and $43,348 of general and administrative expenses were recognized as a result of issuing shares of Class A common stock valued


24


Table of Contents


to support the Company’s strategic business development activities.  An additional $517,500 of expenses was recognized for issuing shares of Class A common stock for investor relations services.

 

Private equity line of funding .  On August 24, 2017, we entered into an Investment Agreement with Tangiers Global, LLC (“Tangiers”) as the agreement’s counterparty, for the potential future issuance and purchase of shares of our Class A common stock.  The Investment Agreement establishes what is sometimes termed a “private equity line” of funding or an equity drawdown facility.  This facility is discussed in more detail below in the section titled Liquidity and Capital Resources .

 

During the year ended March 31, 2018 IronClad issued 38,596 shares of stock for cash proceeds of $64,596.  An additional $16,844 of financing expense was recognized to record the additional difference between the contractual sale price and the higher fair market value of the series of three transactions. During the year ended March 31, 2019, no such transactions occurred.

 

Associated convertible note .  On August 24, 2017, in connection with the entry into the Investment Agreement, we also issued a 10% convertible note (the “Convertible Note”) in an aggregate principal amount of $330,000 with a 10% original issue discount.  The initial consideration (“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 discount for Tangiers’ due diligence and legal fees).  Tangiers may advance additional consideration (each, “Additional Consideration”) to the Company in such amounts and at such dates as Tangiers may choose in its sole discretion.

 

On March 26, 2018 Tangiers converted $10,000 of the initial consideration into 9,958 shares of Class A common stock. During the year ended March 31, 2019 Tangiers converted the remaining $155,000 into 4,578,628 shares of Class A common stock.

 

Interest expenses and financing fees .  Interest expenses and financing fee expenses increased to $1,327,609 during the year ended March 31, 2019 as compared to $354,197 for the year ended March 31, 2018.  Most of the expense recognition relates to seventeen convertible notes payable, six were entered into during the fiscal year ended March 31, 2018, and eleven during the fiscal year ended March 31, 2019 three in the second quarter of 2019, two in the third quarter of 2019 and six in the fourth quarter of 2019.

 

The first six in 2018 are two 12% convertible notes in the principal amounts of $88,000 (net proceeds were $85,000 after deductions for transaction costs) and $53,000 (net proceeds were $50,000 after deductions for transaction costs), two 10% convertible notes related to the Investment Agreement in the principal amounts of $100,000 and $330,000 (of which only $165,000 was initially drawn), respectively, and  two 10% convertible notes, also related to the Investment Agreement, in the principal amount of $82,500(net proceeds of $75,000) and $82,500(net proceeds of $69,000), both of which were a second and third draw under the $330,000 facility and subsequent to the $165,000 draw referred to above.

 

Additionally, nine convertible notes were entered into during the period ended March 31, 2019: three 9% convertible notes in the principal amounts of $157,500 (net proceeds of $150,000), 157,500 (net proceeds of $150,000) and $135,000 (net proceeds of $131,500); two 10% convertible notes in the principal amounts of $107,000 (net proceeds of $102,000) and $107,000 (net proceeds of $102,000) and four 12% convertible notes in the principal amounts of $115,500 (net proceeds of $105,000), $57,750 (net proceeds of $50,000), $181,170 (net proceeds of $150,346) and $86,250 (net proceeds of $78,750). .

 

Two notes payable were entered into during the period ended March 31, 2018: one an 8.5% note in the principal amount of $500,000 (net proceeds were $490,000 after deductions for transaction costs) and another 6% note for $28,088 to finance the company’s annual insurance policy costs.


25


Table of Contents


Summary information regarding interest expense for the year ended March 31, 2019 and 2018:

 

 

 

 

 

Years ended March 31

Regular

Interest

Expense

Original Issue

Discount

Amortization

Beneficial

Conversion

Feature

Amortization

Derivative

Liability

Amortization

Total

Expense

2019

Total

Expense

2018

Note, 12%, convertible

$ -  

$ -  

$ -  

$ -  

$ -  

$ 80,888   

Note, 10%, convertible

15,692  

-  

-  

79,138  

94,830  

10,810   

Note, 10%, convertible

20,620  

-  

-  

155,000  

175,620  

182,078   

Note, 10%, convertible

16,026  

20,916  

-  

57,024  

93,966  

67,743   

Note, 12%, convertible

3,009  

2,302  

-  

57,990  

63,301  

2,463   

Note, 08.5%

14,843  

12,000  

-  

-  

26,843  

2,773   

Note, 12%, convertible

2,492  

2,585  

-  

42,862  

47,939  

972   

Note, 06%

726  

-  

-  

-  

726  

 

Note, 10%, convertible

20,606  

12,491  

63,841  

20,064  

117,002  

6,788   

Note, 10%, convertible

8,873  

58,121  

-  

26,342  

93,336  

 

Note, 12%, convertible

8,470  

14,000  

-  

101,500  

123,970  

 

Note, 09%, convertible

9,326  

4,029  

-  

91,149  

104,504  

 

Note, 09%, convertible

9,326  

12,575  

-  

142,500  

168,362  

 

Note, 10%, convertible

4,632  

2,164  

-  

44,153  

50,949  

 

Note, 12%, convertible

9,421  

17,613  

-  

85,912  

112,946  

 

Note, 10%, convertible

1,319  

616  

-  

12,575  

14,510  

 

Note, 12%, convertible

854  

955  

-  

6,164  

7,973  

 

Note, 0 9%, convertible

660  

2,008  

-  

19,075  

21,743  

 

Note, 12%, convertible

86  

92  

-  

615  

793  

 

Non Note Interest Expense

8,296  

-  

-  

-  

8,296  

(319)  

 

 

 

 

 

 

 

  Totals

$ 154,717  

$ 166,988  

$ 63,841  

$ 942,063  

$ 1,327,609  

$ 354,197   

 

Interest expenses for the 12% convertible note payable 78,500 .  There was no interest expense related to the 12% convertible note payable during the year ended March 31, 2019.  Interest expense of $80,888 during the year ended March 31, 2018 for the 12% convertible note payable includes $7,616 of expense recognition relating to the write off of accrued interest payable and the unamortized portions of the $3,500 of lender’s original discount costs.  Another $73,272 of expense recognition was related to the write-off of the unamortized original debt discount amount of $77,388 related to the recording of the $126,578 derivative liability at the stated conversion date of the note (December 23, 2017).  The write-offs are a result of elections made by the lender to convert the loan into 50,322 shares of Class A common stock in January 2018.

 

The $126,578 derivative liability originally recorded on the stated conversion date of the note (December 23, 2017) was reclassified to additional paid in capital.

 

Interest expenses for the 12% convertible note payable of $88,000 .  There was $63,301 of interest expense related to the 12% convertible note payable during the year ended March 31, 2019 (in addition to $3,009 of regular interest at 12%), $2,302 of expense recognition related to amortization of original issued debt discount and $57,990 related to amortization of derivative liability.  Interest expense of $2,463 during the year ended March 31, 2018 for the 12% convertible note payable includes (in addition to $1,765 of regular interest at 12%) , $698 of expense recognition related to amortization of original debt discount.

 

Interest expenses for the 12% convertible note payable of $53,000. There was $47,939 of interest expense related to the 12% convertible note payable during the year ended March 31, 2019 (in addition to $2,492 of regular interest at 12%), $2,585 of expense recognition related to amortization of original issued debt discount and $42,862 related to amortization of derivative liability. Interest expense of $972 during the year ended March 31, 2018 for the 12% convertible note payable includes (in addition to $558 of regular interest at 12%), $415 of expense recognition related to amortization of original debt discount.


26


Table of Contents


Interest expenses for the 10% commitment note of $100,000 .   For the year ended March 31, 2019 regular interest expense at the 10% rate was $15,692. For the year ended March 31, 2018 interest expense on the 10% Commitment Note for $100,000 included not only regular interest at the stated 10% rate, but an additional accrued amount that effectively increased the yield because of the guaranteed minimum interest amount equal to 10% of the note amount during the seven-month period and due at the maturity date of the note. Total interest recognized on the Commitment Note for the period ended March 31, 2018 was $10,810.

 

Interest expenses for the 10% convertible note payable of $165,000 .  Interest expense recognized on the 10% Convertible Note borrowing of $165,000 on August 24, 2017 totals $175,620, consisting of $20,620 of regular interest and $155,000 of derivative liability for the year ended March 31, 2019.  Interest expense recognized for the year ended March 31, 2018 totals $182,078. That amount has three components. Within the total, $16,500 of the expense relates to the guaranteed minimum interest amount ($16,500 to be recognized over the seven-month life of the Convertible Note and due at maturity), another $27,000 of the expense relates to the amortization of the $27,000 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note.  A third component for $138,578 is an amortization of the $138,000 cost recognized (but capped) as an offset (a debt discount) to the note based on the intrinsic value of the beneficial conversion feature related to the $1.00 per share conversion price stated in the Convertible Note (on a date in 2017 when the closing price per share was $3.50).

 

Interest expenses for the 10 % convertible note payable of $82,500 .  Interest expense recognized on the 10% Convertible Note borrowing of $82,500 on October 23, 2017 totals $93,966 for the year ended March 31, 2019, consisting of $16,026 of regular interest, $20,916 of original issue discount amortization and $57,024 of amortization of a derivative liability arising from a maturity date default.  Interest expense recognized totals $67,743 for the year ended March 31, 2018.That amount has three components. Within the total, $6,158 of the expense relates to the guaranteed minimum interest amount ($8,250 to be recognized over the seven-month life of the Convertible Note and due at maturity), another $12,136 of the expense relates to the amortization of the $16,500 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note.

 

A third component for $49,449 is an amortization of the $69,000 cost recognized (but capped) as an offset to the note based on the intrinsic value of the beneficial conversion feature related to the $1.00 per share conversion price stated in the Convertible Note (on a date that the closing price per share was $4.40).

 

Interest expenses for the 10 % convertible note payable of $82,500 .  Interest expense recognized on the 10% Convertible Note borrowing of $82,500 on March 15, 2018 totals $117,002 for the year ended March 31, 2019.  Within the total, $20,606 of the expense relates to regular interest, another $12,491 of the expense relates to the amortization of the $13,500 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, $63,841 of amortization of the notes beneficial conversion feature and $20,064 in amortization of a derivative liability arising from a maturity date default. Interest expense recognized for the year ended March 31, 2018 totals $6,788. That amount has three components. Within the total, $620 of the expense relates to the guaranteed minimum interest amount ($8,250 to be recognized over the seven-month life of the Convertible Note and due at maturity), another $1,009 of the expense relates to the amortization of the original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $5,159 of the expense relates to amortization of the notes beneficial conversion feature.

 

Interest expenses for the 10% convertible note payable of $250,000 .  Interest expense recognized on the 10% Convertible Note borrowing of $250,000 on June 26, 2018 totals $93,336 for the year ended March 31, 2019.  Within the total, $8,873 of the expense relates to regular interest, another $58,121 of the expense relates to the amortization of the $15,000 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $26,342 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 9% convertible note payable of $157,500 .  Interest expense recognized on the 9% Convertible Note borrowing of $157,500 on July 19, 2018 totals $168,362 for the year ended March 31, 2019.  Within the total, $8,766 of the expense relates to regular interest, another $17,096 of the expense relates to the amortization of the $15,000 lender’s original issue discount and IronClad’s transaction costs recognized on the


27


Table of Contents


Convertible Note, and $142,500 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 9% convertible note payable of $135,000 .  Interest expense recognized on the 9% Convertible Note borrowing of $135,000 on July 11, 2018 totals $104,504 for the year ended March 31, 2019.  Within the total, $9,326 of the expense relates to regular interest, another $4,029 of the expense relates to the amortization of the $8,500 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $91,149 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 12% convertible note payable of $115,500 .  Interest expense recognized on the 12% Convertible Note borrowing of $115,500 on July 17, 2018 totals $123,970 for the year ended March 31, 2019.  Within the total, $8,470 of the expense relates to regular interest, another $14,000 of the expense relates to the amortization of the $14,000 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note and $101,500 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 10% convertible note payable of $107,000 .  Interest expense recognized on the 10% Convertible Note borrowing of $107,000 on October 24, 2018 totals $50,949 for the year ended March 31, 2019.  Within the total, $4,632 of the expense relates to regular interest, another $2,164 of the expense relates to the amortization of the $5,000 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $44,153 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 12% convertible note payable of $181,170 .  Interest expense recognized on the 12% Convertible Note borrowing of $181,170 on October 26, 2018 totals $112,946 for the year ended March 31, 2019.  Within the total, $9,421 of the expense relates to regular interest, another $17,613 of the expense relates to the amortization of the $30,824 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $85,912 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 12% convertible note payable of $57,750 .  Interest expense recognized on the 12% Convertible Note borrowing of $7,974 on February 14, 2019 totals $7,973 for the year ended March 31, 2019.  Within the total, $854 of the expense relates to regular interest, another $955 of the expense relates to the amortization of the $7,750 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $6,164 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 10% convertible note payable of $107,000 .  Interest expense recognized on the 10% Convertible Note borrowing of $14,511 on February 14, 2019 totals $14,510 for the year ended March 31, 2019.  Within the total, $1,319 of the expense relates to regular interest, another $616 of the expense relates to the amortization of the $5,000 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $12,575 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 9% convertible note payable of $157,500 .  Interest expense recognized on the 9% Convertible Note borrowing of $21,743 on March 14, 2019 totals $21,743 for the year ended March 31, 2019.  Within the total, $660 of the expense relates to regular interest, another $2,008 of the expense relates to the amortization of the $15,000 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $19,075 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 12% convertible note payable of $86,250 .  Interest expense recognized on the 12% Convertible Note borrowing of $86,250 on March 28, 2019 totals $793 for the year ended March 31, 2019.  


28


Table of Contents


Within the total, $86 of the expense relates to regular interest, another $92 of the expense relates to the amortization of the $3,500 lender’s original issue discount and IronClad’s transaction costs recognized on the Convertible Note, and $615 in amortization of a derivative liability. There is no corresponding expense for the year ended March 31, 2018.

 

Interest expenses for the 8.5% note payable .  Interest expense recognized on the 8.5% Note borrowing on totals $26,843 for the year ended March 31, 2019.  Within the total, $14,843 of the expense relates to regular interest, another $12,000 of the expense relates to the amortization of the $12,000 lender’s original issue discount and IronClad’s transaction costs recognized on the Note. Interest expense totaled $2,773 for the year ended March 31, 2018.

 

Effective income tax rate.   The effective tax rate for the years ended March 31, 2019 and 2018 was dramatically lower than in 2016 due to the Tax Cuts and Jobs Act .  Because the Company only has cumulative losses to date and net deferred tax assets related the net operating losses we paid no taxes in 2019, 2018 and 2017.  Because of the uncertainty of ever using the deferred tax assets those assets are fully reserved for.  Consequently, the changes in the tax rate have had no net effect on our tax assets or net expense recognition.  There was certainly no net effect on our cash flows.  See Note 10, Income Taxes.

 

Recent Accounting Pronouncements .   Recent accounting pronouncements which may affect the Company are described in Note 2 — Summary of Significant Accounting Policies, subsection “ New Accounting Requirements and Disclosures ” in the annual financial statements below.

 

Liquidity and Capital Resources

 

General

Years Ended March 31

2019

2018

Net cash used in operating activities

$ (399,776)  

$ (1,476,889)  

Net cash used in investing activities

(200,599)  

(170,946)  

Net cash used in financing activities

429,889  

1,382,112  

Increase (Decrease) in the cash and cash equivalents

(170,486)  

(265,724)  

 

 

 

Cash and cash equivalents at the beginning of the year

448,061  

713,784  

Cash and cash equivalents at the end of the year

$ 277,575  

$ 448,061  

 

The Company’s working capital at March 31, 2019 was a deficit of $5,403,654 compared to a working capital deficit of $1,669,910 at March 31, 2018.  The working capital deficit increase is primarily due to the funds raised by entering into the new notes payable described above and an increase in accrued liabilities for costs incurred in activities for research and product development, patent and trademark filings for our technologies, general operating activities.

 

As of the date of this filing the Company’s cash balances, while approximately equal to the $277,575 total at March 31, 2019, and, notwithstanding recent funding received from borrowing on the convertible notes and other loans subsequent to March 31, 2019, continue to be significantly less than the combined sum of its accounts payable and accrued liabilities.

 

As a result, absent additional cash inflows, we do not have adequate capital resources to continue to meet all of our current and future obligations as they may come due over the next quarter and next twelve months. We expect that we will still need additional cash inflows of at least about $5,000,000 to continue to implement our business plans for the next twelve months.  Being able to continue with our operations will depend on our obtaining additional resources by issuing either debt or equity securities.  If we are not able to obtain additional capital resources, we may only be able to operate and maintain our periodic reporting obligations for the next few months.

 

No assurance can be given that any of these actions can be completed.


29


Table of Contents


Net cash used in operating activities was $399,776 during the year ended March 31, 2019 compared with $1,476,889 during the year ended March 31, 2018.  The uses of cash for operations are described above in the discussions of results of operations.

 

Cash flow used by investing activities was $200,599 for the year ended March 31, 2019 and 170,946 for year ended March 31, 2018. The costs relate directly to new patent applications and related filing costs.

 

Cash flow from financing activities was $429,889 for the year ended March 31, 2019, compared to $1,382,112 for the year ended March 31, 2018.  The single largest element of the cash sources for the year ended March 31, 2019 and 2018 relate to a series of convertible note placements and to the establishment of a working capital loan agreement.

 

As a net result of all cash flow activities, cash decreased by $170,486 during the year ended March 31, 2019.  The Company had cash of $277,575 as of March 31, 2019.  Cash at the beginning of the period at March 31, 2018 was $448,061.

 

Private Equity Line Established: The Investment Agreement dated August 24, 2017

 

On August 24, 2017, we entered into an Investment Agreement with Tangiers Global, LLC (“Tangiers”) as the agreement’s counterparty, for the potential future issuance and purchase of shares of our Class A common stock.  The Investment Agreement establishes what is sometimes termed a “private equity line” of funding or an equity drawdown facility.  In general, the private equity line provides that Tangiers has committed to purchase, from time to time over a 36-month period, shares of our Class A common stock for cash consideration of up to an aggregate of $5,000,000, subject to certain conditions and restrictions.  In connection with the Investment Agreement, we entered into a Registration Rights Agreement with Tangiers.

 

Shares of Class A common stock issued to Tangiers under the Investment Agreement will be issued pursuant to an exemption from registration under the Securities Act of 1933, as amended.  Pursuant to the Registration Rights Agreement, we have filed a registration statement covering the possible resale by Tangiers of the shares that we issue to Tangiers under the Investment Agreement.  Through the prospectus Tangiers may offer to the public for resale shares of our Class A common stock that we issue to Tangiers pursuant to the Investment Agreement.  The effectiveness of the registration statement was a condition precedent to our ability to sell shares of Class A common stock to Tangiers under the Investment Agreement.

 

For a period of 36 months from the first trading day following the effectiveness of the registration statement, we may, from time to time, at our discretion, and subject to certain conditions that we must satisfy, draw down funds under the Investment Agreement by selling shares of our Class A common stock to Tangiers.  Each draw down request must be for at least $5,000 and may, at our discretion, be up to the lesser of $500,000 or a formula amount based on the average price and trading volume of our Class A common stock over a designated period preceding the draw down request.

 

The purchase price of these shares will be at a discount to the volume weighted average price or if none, the lowest closing bid price, of the Class A common stock during a designated pricing period following the draw down request.  The formulas for determining the actual draw down amounts, the number of shares we issue to Tangiers and the purchase price per share paid by Tangiers are described in more detail in the agreement.

 

We are under no obligation to request a draw down for any period.  If we request a draw down, at least 10 trading days must pass before we submit a subsequent draw down request.  The aggregate total of all draws cannot exceed $5,000,000 and no single draw can exceed $500,000.  In addition, the Investment Agreement does not permit us to make a draw down if the issuance of shares to Tangiers pursuant to the draw down would result in Tangiers and certain of its affiliates owning more than 9.99% of our outstanding Class A common stock on the date we exercise a draw down.  Pursuant to the Registration Rights Agreement, we have registered 1,000,000 shares of Class A common stock for possible issuance and resale under the private equity line.


30


Table of Contents


As consideration for its commitment to purchase shares of our Class A common stock pursuant to the Investment Agreement, we issued to Tangiers a 7-month 10% convertible promissory note (the “Commitment Note”) in the principal amount of $100,000 (subsequently reduced automatically to $82,500 after our S-1 became effective on December 18, 2017).  The Commitment Note is convertible into shares of our 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 our Class A common stock of the Company at a per share 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.

 

On August 24, 2017, in connection with the entry into the Investment Agreement, we also issued a 10% convertible note (the “Convertible Note”) in an aggregate principal amount of $330,000 with a 10% original issue discount. The initial consideration (“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 discount for Tangiers’ due diligence and legal fees).  Tangiers may pay additional consideration (each, “Additional Consideration”) to the Company in such amounts and at such dates as Tangiers may choose in its sole discretion.

 

The amount of principal due to Tangiers will be prorated based on the Initial Consideration and Additional Consideration actually paid (plus a minimum “guaranteed” interest amount and 10% original issue discount, both of which are prorated based on the Initial Consideration and Additional Consideration actually borrowed, as well as any other interest or fees) such that the Company is only required to repay the amount borrowed and the Company is not required to repay any unfunded portion of the Convertible Note.  

 

The maturity date is seven months from the effective date of each payment of Consideration and is the date upon which the principal amount of the Convertible Note, as well as any unpaid interest and other fees, will be due and payable.  The Convertible Note is convertible into shares of our Class A common stock at a fixed price of $1.00 per share; provided, however, that at any time and from time to time after a default occurs solely due to the fact the Convertible Note is not retired on or before the maturity date, Tangiers shall have the right to convert all or any part of the unpaid and outstanding principal amount and the accrued and unpaid interest under the Convertible Note into shares of our Class A common stock at a price per share equal to the lower of: (a) $1.00 or (b) 65% of the average of the two lowest per share trading prices of our Class A common stock during the twenty consecutive trading days prior to the conversion date.

 

In connection with the issuance of the Convertible Note, the Company also issued to Tangiers a common stock purchase warrant (the “Warrant”) to purchase up to 82,500 shares of our Class A common stock. The Warrant is exercisable at a price of $3.00 per share.

 

The Investment Agreement does not prohibit the Company from conducting additional debt or equity financings, other than financings similar to the Investment Agreement and debt financings convertible into equity.

 

The maximum amount of $5,000,000 is a negotiated amount and, to our experience, was a scale on par with other competitive discussions with other potential counterparties offering similar lines.  While we are entitled to use any funds raised through the equity line as would be related to implementing our business plans—including repaying balances of any notes payable--it is not our intention to use any proceeds raised, particularly early on, to pay down any note obligations.

 

We began earning revenue from sales of our services in the last five weeks of the year ended March 31, 2018; however, since July 2018 we no longer had any earnings.  Regardless, we expect to need several million dollars to continue implementing our plans.  While the stated maximum amount under the equity line may appear to be sufficient for our purposes over the next several months the practical application of the equity line funding formulas which consider trading volumes and defined average prices of our common stock may “calculate out” in a way to limit the cumulative or individual amounts we might draw down over time.


31


Table of Contents


While our daily trading volumes have increased considerably to millions of shares per day, our stock price has decreased significantly, causing any utilization of the equity facility to be highly dilutive. If IronClad’s common stock price remains low, the Company may find it necessary to raise funds through additional and alternate sales of debt or equity securities.  Acting on such alternatives is not precluded by the Investment Agreement or any note agreement of IronClad.

 

Critical Accounting Policies

 

In Note 2 to the audited financial statements for the year ended March 31, 2019 included in this report, the Company discussed those accounting policies that are considered to be significant in determining the results of operations and our financial position.  We believe that the accounting principles used by us conform to accounting principles generally accepted in the United States of America.

 

The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  By their nature, these judgments are subject to an inherent degree of uncertainty.  On an on-going basis, we evaluate our estimates and base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities.  The actual results may differ from these estimates under different assumptions or conditions.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet agreements or understandings, preliminary or otherwise, between the Company and its officers, directors, affiliates or lending institutions with respect to any loan agreements.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Share-Based Compensation

 

We follow ASC 718 which requires recognition in the financial statements of the cost of employee services received in exchange for an award of equity instruments over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).  ASC 718 also requires measurement of the cost of employee services received in exchange for an award based on the award-date fair value of the award.  

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

 

All of our transactions are within the United States of America, our functional currency is the US dollar and consequently we have no exposure to risks associated with foreign currencies.  We have unamortized and undiscounted convertible notes payable debt of approximately $989,170 at March 31, 2019 (all of which have maturity dates within twelve months or less) and thus have limited exposure to interest rate risk.  We do not believe our exposure to these or similar financial instrument market risks to be material.


32


Table of Contents


Item 8.  Financial Statements and Supplementary Data

 

 

IronClad Encryption Corporation and Subsidiaries

(Previously named Butte Highlands Mining Corporation

 

Table of Contents

 

 

 

Report of Independent Registered Public Accounting Firm, Fruci & Associates II, PLLC

 

34

Consolidated Balance Sheets as of March 31, 2019 and March 31, 2018

35

Consolidated Statements of Operations for the fiscal years ended March 31, 2019 and March 31, 2018

36

Consolidated Statements of Shareholders’ Equity for the fiscal years ended March 31, 2019 and March 31, 2018

37

Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2019 and March 31, 2018

38

Notes to Consolidated Financial Statements

39

 

 


33


Table of Contents


PICTURE 2  

802 N Washington

Spokane, WA  99201

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of IronClad Encryption Corporation

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of IronClad Encryption Corporation (“the Company”) as of March 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended March 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has limited financial resources, an significant accumulated deficit, and a current working capital deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

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

 

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

 

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

 

/s/ Fruci & Associates, II, PLLC

Fruci & Associates, II, PLLC

 

We have served as the Company’s auditor since 2011.

 

Spokane, Washington

July 16, 2019


34


Table of Contents


IronClad Encryption Corporation and Subsidiaries

(Previously named Butte Highlands Mining Corporation

 

Consolidated Balance Sheets

 

 

March 31,

2019

March 31,

2018

Assets

 

 

Current assets:

 

 

Cash and cash equivalents

$ 277,575   

$ 448,061   

Accounts receivable

 

301,978   

Prepaid expenses and deposits

29,900   

55,719   

Total current assets

307,475   

805,758   

Other assets

 

 

Patents, net

367,786   

170,976   

Total other assets

367,786   

170,976   

Total assets

$ 675,261   

$ 976,734   

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

Current liabilities:

 

 

Accounts payable

$ 604,149   

$ 612,367   

Accounts payable, legal fees

382,885   

362,598   

Accounts payable, related parties

96,506   

104,542   

Accrued liabilities

237,660   

219,057   

Accrued liabilities, payroll

1,686,260   

700,521   

Accrued interest

109,534   

39,761   

Convertible note payable, 10%, net

82,500   

3,362   

Convertible note payable, 10%, net

45,500   

61,585   

Convertible note payable, 12%, net

 

85,698   

Convertible note payable, 12%, net

4,000   

50,415   

Convertible note payable, 10%, net

82,500   

6,168   

Note payable, 06%

 

25,456   

Convertible note payable, 09%, net

39,274   

 

Convertible note payable, 09%, net

1,000   

 

Convertible note payable, 10%, net

46,318   

 

Convertible note payable, 12%, net

103,526   

 

Convertible note payable, 10%, net

13,192   

 

Convertible note payable, 12%, net

7,120   

 

Convertible note payable, 09%, net

21,083   

 

Convertible note payable, 10%, net

707   

 

Convertible note payable derivative liabilities

2,147,415   

234,138   

Total current liabilities

5,711,129   

2,505,668   

Note payable, 8.5%

 

490,000   

Total other liabilities

 

490,000   

Commitments and contingencies

 

 

Total liabilities

5,711,129  

2,995,668   

Shareholders’ equity:

 

 

Preferred stock, $0.001 par value; 20,000,000 shares authorized, 100 issued

 

 

Common stock, Class A,  $0.001 par value, 800,000,000 shares authorized; 140,168,393 and 66,446,701 shares issued and outstanding, respectively

140,168   

66,457   

Common stock, Class B,  $0.001 par value, 1,707,093 shares authorized; 1,538,872 shares issued and outstanding

1,539   

1,539   

Additional paid-in capital

22,783,591   

11,514,917   

Common shares of Class A stock to be issued

6,400   

101,750   

Accumulated deficit

(27,967,566)  

(13,703,597)  

Total shareholders’ equity (deficit)

(5,035,868)  

(2,018,934)  

Total liabilities and shareholders’ equity

$ 675,261   

$ 976,734   

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


35


Table of Contents


IronClad Encryption Corporation and Subsidiaries

(Previously named Butte Highlands Mining Corporation

Consolidated Statements of Operations

 

 

Years Ended

 

March 31

 

2019

2018

 

 

 

Revenue

$ 780,211   

$ 229,745   

 

 

 

Operating expenses:

 

 

Product development costs

1,670,298   

1,892,595   

Service expenses

604,733   

194,422   

General, administrative and other operating

2,528,688   

2,365,482   

Officer and director fees

5,616,582   

4,309,945   

Investor relations

251,181   

1,280,547   

Professional fees

218,664   

455,599   

Amortization

3,789   

30   

Total operating expenses

10,893,935   

10,498,620   

 

 

 

Loss from operations

(10,113,724)  

(10,268,875)  

 

 

 

Other income (expense):

 

 

Interest income

 

30   

Interest expense

(1,327,609)  

(354,197)  

Financing expenses

(666,945)  

(212,247)  

Early repayment penalty

(51,065)  

(386,973)  

Loss on issuance of convertible notes with derivatives

(298,537)  

 

Loss on revaluations of derivatives

(1,569,018)  

(49,190)  

Total other income (expense)

(3,913,172)  

(1,002,577)  

 

 

 

Loss before income taxes

(14,026,896)  

(11,271,452)  

 

 

 

Income taxes

 

 

Income tax benefit

 

 

Income tax expense

(3,474)  

 

Total other income tax benefit (expense)

 

 

 

 

 

Net loss

$ (14,030,370)  

$ (11,271,452)  

 

 

 

 

 

 

Basic and diluted loss per common share

$ (0.20)  

$ (0.17)  

Weighted average shares outstanding, basic and diluted

69,302,833   

67,630,197   

 

 

 

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


36


Table of Contents


IronClad Encryption Corporation and Subsidiaries

(Previously named Butte Highlands Mining Corporation

Consolidated Statements of Stockholders’ Equity

 

 

 

Common Stock

Class A Shares

 

Common

Stock

Class A Amount

 

Common Stock

Class B Shares

 

Common

Stock

Class Amount

 

Paid-in

Capital

 

Subscriptions

Receivable or

Shares to Issue

 

Accumulated

Deficit

 

Total

Stockholders'

Equity (Deficit)

Balance, March 31, 2017

 

 65,667,862

 

 $ 65,668

 

 1,538,872

 

 $ 1,539

 

 $ 3,102,687 

 

 $ (45,710)

 

 $ (2,432,144)

 

 $ 692,040 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for cash

 

 278,929

 

  289

 

 -

 

  -

 

  127,214 

 

  - 

 

  - 

 

  127,503 

Stock issued for debt conversions

 

 60,280

 

  50

 

 -

 

  -

 

  78,450 

 

  - 

 

  - 

 

  78,500 

Exercise of stock options

 

 25,000

 

  25

 

 -

 

  -

 

  3,725 

 

  - 

 

  - 

 

  3,750 

Stock issued for services

 

 425,000

 

  425

 

 -

 

 

 

  1,463,824 

 

  101,750 

 

  - 

 

  1,565,999 

Stock options issued: development

 

 -

 

  -

 

 -

 

  -

 

  967,910 

 

  - 

 

  - 

 

  967,910 

Stock options issued: g&a

 

 -

 

  -

 

 -

 

 

 

  990,464 

 

  - 

 

  - 

 

  990,464 

Stock options issued: officers, directors

 

 -

 

  -

 

 -

 

  -

 

  3,612,311 

 

  - 

 

  - 

 

  3,612,311 

Stock options issued: investor relations

 

 -

 

  -

 

 -

 

  -

 

  478,086 

 

  - 

 

  - 

 

  478,086 

Stock options issued: financing fees

 

 -

 

  -

 

 -

 

  -

 

  287,629 

 

  - 

 

  - 

 

  287,629 

Beneficial conversion

 

 -

 

  -

 

 -

 

  -

 

  276,000 

 

 

 

  - 

 

  276,000 

Subscriptions receivable

 

 -

 

  -

 

 -

 

  -

 

  - 

 

  45,710 

 

  - 

 

  45,710 

Retirement of derivative liability

 

 -

 

  -

 

 -

 

  -

 

  126,578 

 

  - 

 

  - 

 

  126,578 

Other

 

 -

 

  -

 

 -

 

  -

 

  39 

 

  - 

 

  - 

 

  39 

Net income for period

 

 -

 

  -

 

 -

 

  -

 

  - 

 

  - 

 

  (11,271,453)

 

  (11,271,453)

Balance, March 31, 2018

 

 66,457,071

 

 $ 66,457

 

 1,538,872

 

 $ 1,539

 

$ 11,514,917 

 

$ 101,750 

 

$ (13,703,597)

 

$ (2,018,934)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for services, G&A

 

 177,000

 

  177

 

 -

 

  -

 

  225,973 

 

  (95,350)

 

  - 

 

  130,800 

Stock issued for services, financing

 

 100,000

 

  100

 

 -

 

  -

 

  4,500 

 

  - 

 

  - 

 

  4,600 

Stock issued for debt conversions

 

 65,819,552

 

  65,821

 

 -

 

  -

 

  615,604 

 

  - 

 

  - 

 

  681,425 

Stock options issued: development

 

 -

 

  -

 

 -

 

  -

 

  1,642,735 

 

  - 

 

  - 

 

  1,642,735 

Stock options issued: G&A

 

 -

 

  -

 

 -

 

  -

 

  1,993,242 

 

  - 

 

  - 

 

  1,993,242 

Stock options issued: officers, directors

 

 -

 

  -

 

 -

 

  -

 

  4,712,264 

 

  - 

 

  - 

 

  4,712,264 

Stock option issued: convertible debt

 

 -

 

  -

 

 -

 

  -

 

  53,386 

 

  - 

 

  - 

 

  53,386 

Retirement of derivative

 

 -

 

  -

 

 -

 

  -

 

  1,773,987 

 

  - 

 

  - 

 

  1,773,987 

Cashless exercise of warrants

 

 7,474,770

 

  7,473

 

 -

 

  -

 

  113,536

 

  - 

 

  - 

 

  121,009

Exercise of options

 

 140,000

 

  140

 

 -

 

  -

 

  20,860 

 

  - 

 

  - 

 

  21,000 

Dividend treatment of convertible note warrants

 

 -

 

  -

 

 -

 

  -

 

  112,587 

 

  - 

 

  (233,599)

 

  (121,012)

Net income for period

 

 -

 

  -

 

 -

 

  -

 

  - 

 

  - 

 

  (14,030,370)

 

  (14,030,370)

Balance, March 31, 2019

 

 140,168,393

 

 $ 140,168

 

 1,538,872

 

 $ 1,539

 

$ 22,783,591 

 

 $ 6,400 

 

$ (27,967,566)

 

$ (5,035,868)

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


37


Table of Contents


IronClad Encryption Corporation and Subsidiaries

(Previously named Butte Highlands Mining Corporation

Consolidated Statements of Cash Flows

Cash flows from operating activities:

Year Ended

March 31, 2019

Year Ended

March 31, 2018

Net loss:

$ (14,030,370)  

$ (11,271,452)  

Adjustments to reconcile net loss to net operating cash used:

 

 

Amortization expense

3,789   

30   

Amortization of notes discount amounts

166,988   

42,700   

Amortization of loan discount costs, BCF

63,841   

194,666   

Amortization of loan discount costs, derivative liabilities

942,063   

 

Financing fees

666,946   

1,845   

Loss on revaluations of derivatives

1,569,018   

 

Loss on issuance of convertible notes with derivative liabilities

298,537   

126,578   

 

 

 

Common stock issued for services, product development

 

967,911   

Common stock issued for services, general and administrative

13,509   

425,000   

Common stock issued for services, investor relations

 

517,500   

Stock options issued for services, development

1,642,735   

 

Stock options issued for services, general and administrative

1,993,242   

959,214   

Stock options issued for services, officers and directors

4,712,263   

3,612,311   

Stock options issued for services, investor relations

 

478,086   

Stock options issued for services, financing fees

 

287,629   

Changes in operating assets and liabilities:

 

 

Decrease (increase) in accounts receivable

301,978   

(301,978)  

Decrease in prepaid expenses and deposits

25,819   

318,373   

Increase in accounts payable

96,324   

1,213,726   

Increase in accrued liabilities

1,004,344   

917,577   

Increase in accrued interest

129,198   

33,395   

Net cash used in operating activities

(399,776)  

(1,476,889)  

Cash flows from investing activities:

 

 

Patent applications

(200,599)  

(170,946)  

Net cash used in investing activities

(200,599)  

(170,946)  

Cash flows from financing activities:

 

 

Proceeds from options exercise, issuance of common stock, respectively

21,000   

272,789   

Proceeds from issuance of convertible notes payable, 10% and 12%, respectively

250,000   

78,500   

 Less transaction costs

(15,000)  

(3,500)  

Repayment of convertible note payable, 10%

(150,000)  

 

Proceeds from issuance of convertible notes payable, 12% and 10%, respectively

115,500   

100,000   

 Less transaction costs

(14,000)  

(17,500)  

Proceeds from issuance of convertible notes payable, 09% and 10%, respectively

135,000   

165,000   

 Less transaction costs

(8,500)  

(12,000)  

Proceeds from issuance of convertible notes payable, 09% and 10%, respectively

157,500   

82,500   

 Less transaction costs

(15,000)  

(13,500)  

Proceeds from issuance of convertible notes payable, 10% and 12%, respectively

107,000   

88,000   

 Less transaction costs

(5,000)  

(3,000)  

 Repayment of convertible notes payable, 12%

(88,000)  

 

Proceeds from issuance of convertible note payable, 8.5%, amended

100,000   

500,000   

 Less transaction costs

(2,000)  

(10,000)  

 Repayment of note payable, 8.5%, amended

(600,000)  

 

Proceeds from issuance of convertible notes payable, 12%

181,170   

53,000   

 Less transaction costs

(30,824)  

(3,000)  

 Repayment of convertible notes payable, 12%

(53,000)  

 

 (Repayment) proceeds from note payable, 6.5%

(25,457)  

25,457   

Proceeds from issuance of convertible notes payable, 10%

107,000   

82,500   

 Less transaction costs

(5,000)  

(13,500)  

Proceeds from issuance of convertible note payable, 12%

57,750   

 

 Less transaction costs

(7,750)  

 

Proceeds from issuance of convertible note payable, 09%

157,500   

 

 Less transaction costs

(15,000)  

 

Proceeds from issuance of convertible note payable, 10%

86,250   

 

 Less transaction costs, and other respectively

(11,250)  

10,366   

Net cash provided by financing activities

429,889   

1,382,112   

Increase (decrease) in cash and cash equivalents

(170,486)  

(265,723)  

Cash and cash equivalents at beginning of period

448,061   

713,784   

Cash and cash equivalents at end of period

$ 277,575   

$ 448,061   

 

 

 

Supplemental disclosures:

 

 

Interest paid in cash

$ 9,022   

$  

Income taxes paid

$ 1,810   

$  

Common stock issued to retire convertible notes payable, interest and fees

$ 681,425   

$ 93,266   

Non-cash beneficial conversion rights & derivative liabilities related to convertible notes

$ 1,359,498   

$ 297,979   

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


38


Table of Contents


IronClad Encryption Corporation and Subsidiaries

(Previously named Butte Highlands Mining Corporation

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


42


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.


43


Table of Contents

 

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.


44


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.


45


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


46


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.


47


Table of Contents

 

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


48


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.


49


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


50


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.


52


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.


53


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


54


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


56


Table of Contents

 

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.

 


57


Table of Contents

 

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.


58


Table of Contents

 

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.


59


Table of Contents

 

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; 


60


Table of Contents

 

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


61


Table of Contents

 

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.


62


Table of Contents

 

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   


63


Table of Contents

 

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.


64


Table of Contents

 

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.


65


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.


66


Table of Contents

 

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


67


Table of Contents

 

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


68


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.


69


 

 

Table of Contents


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

 

None.

 

Item 9A. Controls and Procedures

 

a)   Evaluation of Disclosure Controls and Procedures

 

During the first quarter of 2017 the Company underwent a reverse merger with InterLok and experienced a complete change in board membership and executive officer leadership.  As a result, it changed from a shell corporation to an active operational entity and is in the process of implementing more efficient and effective disclosure controls and procedures.  This is an evolving process, and leadership continues to update and evaluate its policies, though an official evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) has not been completed as of March 31, 2017.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, to allow timely decisions regarding required disclosures.

 

b)   Changes in Internal Control over Financial Reporting

 

Since transitioning from a shell corporation to an active operating company, additional staff and constant policy and procedural assessments have continued to improve our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period ended December 31, 2017.  During the quarter ended September 30, 2017 a new director joined the board of directors as an independent director and assumed the role of Chairman of our newly constituted Audit Committee.  Since we are a developing company these processes are continually evolving.  Nevertheless, management has identified at least two material weaknesses in internal control over financial reporting.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weaknesses identified are:

 

Lack of appropriate Independent Oversight .  The board of directors has not provided an appropriate level of independent oversight of the Company’s consolidated financial reporting and procedures for internal control over financial reporting.  The independent directors do not provide oversight of the adequacy of financial reporting and internal control procedures. 

Lack of sufficient staffing and full-time personnel; incomplete segregation of duties .  Without sufficient staffing it is not possible to ensure appropriate segregation of duties between incompatible functions, and, furthermore, formalized monitoring procedures have not been established or implemented. 

 

As a result of these material weaknesses in internal control over financial reporting the Company’s management has concluded that as of March 31, 2019 the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework by COSO - 2013 .

 

Item 9B.  Other Information.

 

None.


70


 

 

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 .


71


 

 

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.


72


 

 

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.


73


 

 

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.


74


 

 

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.


75


 

 

Table of Contents


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.


76


 

 

Table of Contents


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:


77


 

 

Table of Contents


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.


78


 

 

Table of Contents


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.


79


 

 

Table of Contents


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.


80


 

 

Table of Contents


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.


81


 

 

Table of Contents


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.


82


 

 

Table of Contents


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.


83


 

 

Table of Contents


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”).


84


 

 

Table of Contents


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