Quarterly Report (10-q)

Date : 08/19/2019 @ 9:46PM
Source : Edgar (US Regulatory)
Stock : Ironclad Encryption Corporation (QB) (IRNC)
Quote : 0.006  0.00124 (26.05%) @ 9:29PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2019

 

or

 

□  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                               to                          

 

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)

 

(I.R.S. Employer Identification No.)

 

 

 

One Riverway

777 South Post Oak Lane, Suite 1700, Houston, Texas

 

 

77056

(Address of principal executive offices)

 

(Zip Code)

 

(888) 362-7972

(Issuer's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value

IRNC

OTCQB

 

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 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 filings for the past 90 days.    Yes þ  No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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.

 

Large accelerated filer     o

 

Accelerated filer

o

Non-accelerated filer     þ

 

Smaller reporting company

þ

 

 

Emerging Growth Company

o

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  As of the close of business on August 12, 2019, there were 302,975,049 shares of Class A Common Stock and 1,538,872 shares of Class B Common Stock issued and outstanding.


1



IronClad Encryption Corporation and Subsidiaries

 

Table of Contents

 

 

Part I. Financial Information 3  

Item 1.  Financial Statements (Unaudited) 3  

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations 35  

Item 3.  Quantitative and Qualitative Disclosures about Market Risks 42  

Item 4.   Controls and Procedures 42  

Part II – Other Information 43  

Item 1.   Legal Proceedings 43  

Item 1A. Risk Factors 43  

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds 59  

Item 3.    Defaults Upon Senior Securities. 59  

Item 4.    Mine Safety Disclosures 59  

Item 5.    Other Information. 59  

Item 6.    Exhibits 60  

Signatures 63  

Exhibit Index 64  


2



Part I. Financial Information

Item 1. Financial Statements (Unaudited)

IronClad Encryption Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

June30,

 

March 31,

 

 

2019

 

2019

 

 

(Unaudited)

 

 

Assets

 

 

 

 

 

 

 

 

 

 Current assets

 

 

 

 

   Cash and cash equivalents

$

335,913   

$

277,575   

   Accounts receivable

 

 

 

 

   Prepaid expense and deposits

 

31,569  

 

29,900  

     Total current assets

 

367,482  

 

307,475  

 

 

 

 

 

 Other assets

 

 

 

 

   Patents, net

 

363,941  

 

367,786  

 

 

 

 

 

     Total assets

$

731,423   

$

675,261   

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 Current liabilities

 

 

 

 

   Accounts payable

$

619,079   

$

604,149   

   Accounts payable, legal fees

 

382,373   

 

382,885   

   Accounts payable, related parties

 

89,773   

 

96,506   

   Accrued liabilities

 

239,659   

 

237,660   

   Accrued liabilities, payroll

 

1,882,110   

 

1,686,260   

   Accrued interest

 

35,655   

 

109,534   

   Convertible note payable, 10%, net

 

 

 

82,500   

   Convertible note payable, 10%, net

 

 

 

45,500   

   Convertible note payable, 12%, net

 

 

 

4,000   

   Convertible note payable, 10%, net

 

 

 

82,500   

   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

 

130,573  

 

103,526   

   Convertible note payable, 10%, net

 

39,868  

 

13,192   

   Convertible note payable, 12%, net

 

21,518   

 

7,120   

   Convertible note payable,   9%, net

 

133,937   

 

21,083   

   Convertible note payable,   9%, net

 

22,151   

 

707   

   Convertible note payable,   9%, net

 

9,324   

 

 

   Convertible note payable, 10%, net

 

10,572   

 

 

   Convertible note payable, 10%, net

 

18,853   

 

 

   Convertible note payable derivative liabilities

 

1,389,114   

 

2,147,415   

Total current liabilities

 

5,024,559   

 

5,711,129   

 

 

 

 

 

 Commitments and contingencies

 

 

 

 

Total liabilities

 

5,024,559   

 

5,711,129   

 

 

 

 

 

 Stockholders’ Equity (Deficit)

 

 

 

 

   Preferred stock, $0.001 par value, 20,000,000 shares authorized,

                     100 and 0 shares issued and outstanding

 

 

 

 

   Common stock, Class A, $0.001 par value 800,000,000 shares authorized,

        301,876,153 and 140,168,393 shares issued and outstanding, respectively

 

301,876   

 

140,168   

   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

 

26,369,222   

 

22,783,591   

   Common shares of Class A stock to be issued

 

6,400   

 

6,400   

   Accumulated deficit

 

(30,972,173)  

 

(27,967,566)  

Total stockholders’ equity (deficit)

 

(4,293,136)  

 

(5,035,868)  

 

 

 

 

 

     Total liabilities and stockholders’ equity

$

731,423   

$

675,261   

 

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


3



IronClad Encryption Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

 

 

Three Months Ended

 

 

June 30,

 

 

2019

 

2018

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

Revenues

$

$

579,236 

 

 

 

 

 

Operating expenses

 

 

 

 

 Product development costs

 

408,587 

 

587,073 

 Services

 

 

389,281 

 General and administrative

 

430,513 

 

607,389 

 Officer and directors fees

 

1,388,456 

 

1,307,855 

 Investor relations

 

51,607 

 

49,450 

 Professional fees

 

12,406 

 

94,015 

 Amortization

 

3,845 

 

Total operating Expenses

 

2,295,414 

 

3,035,070 

 

 

 

 

 

 Loss from operations

 

(2,295,414)

 

(2,455,834)

 

 

 

 

 

Other income (expense)

 

 

 

 

 Interest income

 

 

 Interest expense

 

(572,374)

 

(351,113) 

 Financing expense

 

(1,500)

 

(162,869) 

 Loss on issuance of convertible notes with derivatives

 

(571,210)

 

 Gain (loss) on valuation of derivative liabilities

 

514,487 

 

4,921 

Total other income (expense)

 

(630,597)

 

(509,060) 

 

 

 

 

 

Loss before taxes

 

(2,926,011)

 

(2,964,894)

 

 

 

 

 

Income taxes

 

 

 

 

 Income tax benefit

 

 

 Tax expense

 

 

Total income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(2,926,011)

$

(2,964,894)

 

 

 

 

 

 

 

 

 

 

Net loss per common share, basic and diluted

$

(0.01)

$

(0.04)

 

 

 

 

 

Weighted average number of basic and diluted common stock shares

 

274,261,806 

 

68,118,349 

 

 

 

 

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


4



IronClad Encryption Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Unaudited)

 

 

Common Stock

 

 

 

Subscriptions

 

 

 

Total

 

 

Class A

 

Class B

 

Paid-in

 

Receivable or

 

Accumulated

 

Stockholders'

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Shares To Issue

 

Deficit

 

Equity (Deficit)

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for services

 

125,000

 

125

 

-

 

-

 

209,125

 

(101,750)

 

-

 

107,500 

Common stock issued for debt conversions

 

32,219

 

32

 

-

 

-

 

44,122

 

-

 

-

 

44,155 

Common stock issued for convertible debt

 

240,384

 

240

 

-

 

-

 

165,625

 

-

 

-

 

165,865 

Stock options issued for development

 

-

 

-

 

-

 

-

 

559,510

 

-

 

-

 

559,510 

Stocks options issued for services, g & a

 

-

 

-

 

-

 

-

 

548,077

 

-

 

-

 

548,077 

Stock options issued for officers and directors

 

-

 

-

 

-

 

-

 

1,168,605

 

-

 

-

 

1,168,605 

Stock options issued for convertible debt

 

-

 

-

 

-

 

-

 

43,123

 

-

 

-

 

43,123 

Net income for period

 

-

 

-

 

-

 

-

 

 

 

-

 

(2,964,894)

 

(2,964,894)

Balance, June 30, 2018

 

66,854,674

$

66,855

 

1,538,872

$

1,539

$

14,253,104

$

-

$

(16,668,491)

$

(2,346,993)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for services

 

2,000

 

2

 

-

 

-

 

898

 

-

 

-

 

900 

Common stock issued for debt conversions

 

371,484

 

371

 

-

 

-

 

49,629

 

-

 

-

 

50,000 

Exercise of stock options

 

140,000

 

140

 

-

 

-

 

20,860

 

-

 

-

 

21,000 

Stock options issued for development

 

-

 

-

 

-

 

-

 

562,724

 

-

 

-

 

562,724 

Stock options issued for services, g & a

 

-

 

-

 

-

 

-

 

518,466

 

-

 

-

 

518,466 

Stock options issued for officers and directors

 

-

 

-

 

-

 

-

 

1,181,447

 

-

 

-

 

1,181,447 

Retirement of derivative liability

 

-

 

-

 

-

 

-

 

145,664

 

-

 

-

 

145,664 

Net income for period

 

-

 

-

 

-

 

-

 

 

 

-

 

(7,656,675)

 

(7,656,675)

Balance, September 30, 2018

 

67,368,158

$

67,368

 

1,538,872

$

1,539

$

16,732,792

$

-

$

(24,325,166)

$

(7,523,467)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for services

 

50,000

 

50

 

-

 

-

 

15,950

 

3,200

 

-

 

19,200 

Common stock issued for debt conversions

 

1,210,654

 

1,210

 

-

 

-

 

98,789

 

-

 

-

 

100,000 

Stock options issued for development

 

-

 

-

 

-

 

-

 

562,724

 

-

 

-

 

562,724 

Stock options issued for services, g & a

 

-

 

-

 

-

 

-

 

550,056

 

-

 

-

 

550,056 

Stock option issued for officers and directors

 

-

 

-

 

-

 

-

 

1,206,447

 

-

 

-

 

1,206,447 

Retirement of derivative liability

 

-

 

-

 

-

 

-

 

800,244

 

-

 

-

 

800,244 

Net income for period

 

-

 

-

 

-

 

-

 

 

 

-

 

(325,172)

 

(325,172)

Balance, December 31, 2018

 

68,628,812

$

68,628

 

1,538,872

$

1,539

$

19,967,003

$

3,200

$

(24,650,338)

$

(4,609,968)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common stock issued for services

 

100,000

 

100

 

-

 

-

 

4,500

 

3,200

 

-

 

7,800 

  Common stock issued for debt conversions

 

63,964,811

 

63,968

 

-

 

-

 

257,439

 

-

 

-

 

321,407 

  Stock options issued for development

 

-

 

-

 

-

 

-

 

(42,223)

 

-

 

-

 

(42,223)

  Stock options issued for services, g & a

 

-

 

-

 

-

 

-

 

376,642

 

-

 

-

 

376,642 

  Stock option issued for officers and directors

 

-

 

-

 

-

 

-

 

1,155,764

 

-

 

-

 

1,155,764 

  Stock options issued for financing fees

 

-

 

-

 

-

 

-

 

10,265

 

-

 

-

 

10,265 

  Cashless exercise of warrants

 

7,474,770

 

7,473

 

-

 

-

 

113,536

 

-

 

-

 

121,009 

  Retirement of derivative liability

 

-

 

-

 

-

 

-

 

828,079

 

-

 

-

 

828,079 

  Dividend treatment, convertible note warrants

 

-

 

-

 

-

 

-

 

112,587

 

-

 

(233,599)

 

(121,012)

  Net income for period

 

-

 

-

 

-

 

-

 

-

 

-

 

(3,083,630)

 

(3,083,630)

Balance, March 31, 2019

 

140,168,393

$

140,169

 

1,538,872

$

1,539

$

22,783,591

$

6,400

 

(27,967,567)

 

(5,035,868)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for debt conversions

 

161,707,755

 

161,708

 

-

 

-

 

545,970

 

-

 

-

 

707,677 

Stock options issued for development

 

-

 

-

 

-

 

-

 

408,587

 

-

 

-

 

408,587 

Stocks options issued for services, g & a

 

-

 

-

 

-

 

-

 

338,349

 

-

 

-

 

338,349 

Stock options issued for officers and directors

 

-

 

-

 

-

 

-

 

1,168,606

 

-

 

-

 

1,168,606 

Retirement of derivative liability

 

-

 

-

 

-

 

-

 

1,045,523

 

-

 

-

 

1,045,523 

Dividend treatment, convertible note warrants

 

-

 

-

 

-

 

-

 

78,596

 

-

 

(78,596)

 

Net income for period

 

-

 

-

 

-

 

-

 

-

 

-

 

(2,926,011)

 

(2,926,011)

Balance, June 30, 2019

 

301,876,148

$

301,876

 

1,538,872

$

1,539

$

26,369,222

$

6,400

$

(30,972,173)

$

(4,293,136)

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


5



IronClad Encryption Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

Three Months Ended

 

 

June 30,

 

2019

 

2018

 

(Unaudited)

 

(Unaudited)

Cash flows from operating activities:

 

 

 

 

 

 Net loss

$

(2,926,011)  

 

$

(2,964,894)  

   Adjustments to reconcile net income (loss) to net cash

provided (used) by operating activities:

 

 

 

 

 

     Amortization expense

 

3,845   

 

 

 

     Amortization of notes discount amounts

 

35,693   

 

 

13,261   

     Amortization of loan discount costs, BCF

 

 

 

 

46,887   

     Amortization of loan discount costs, Derivatives

 

337,228   

 

 

257,579   

     Financing fees

 

1,500   

 

 

162,869   

     Loss on issuance of note with derivative

 

571,210   

 

 

 

     (Gain) loss on valuation of derivative liability

 

(514,487)  

 

 

(4,922)  

     Common stock issued for services, general and administrative

 

 

 

 

84,500   

     Common stock issued for services, professional fees

 

 

 

 

23,000   

     Stock options issued for services, development  

 

408,587   

 

 

559,510   

     Stock options issued for services, general and administrative

 

338,348   

 

 

548,077   

     Stock options issued for officers and directors

 

1,168,606   

 

 

1,168,606   

   Changes in assets and liabilities:

 

 

 

 

 

     Increase in accounts receivable

 

 

 

 

(69,261)  

     Decrease (increase) in prepaids

 

(1,669)  

 

 

13,156   

     Increase in accounts payable

 

7,685   

 

 

42,500   

     Increase in accrued expense

 

197,850   

 

 

64,272   

     Increase in accrued interest

 

199,453   

 

 

33,058   

Net cash used by operating activities

 

(172,162)  

 

 

(21,795)  

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

     Patent applications

 

 

 

 

(196,942)  

Net cash used by investing activities

 

 

 

 

(196,942)  

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 Proceeds from issuing convertible note payable,   8%

 

43,200   

 

 

 

 Less transaction costs

 

(5,200)  

 

 

 

 Proceeds from issuing convertible note payable, 12%

 

57,750   

 

 

 

 Less transaction costs

 

(7,750)  

 

 

 

 Repayments of amended note payable, 8.5%

 

 

 

 

(125,000)  

 Proceeds from issuing amended note payable, 8.5%

 

 

 

 

100,000   

 Less transaction costs

 

 

 

 

(2,000)  

 Repayment of note 6.5%, insurance

 

 

 

 

(10,195)  

 Proceeds from issuing convertible notes payable 10%

 

150,000   

 

 

250,000   

 Less transaction costs

 

(7,500)  

 

 

(15,000)  

Net cash provided by financing activities

 

230,500   

 

 

197,805   

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

58,338   

 

 

(20,932)  

Cash, beginning of period

 

277,575   

 

 

448,061   

Cash, end of period

$

335,913   

 

$

427,129   

 

 

 

 

 

 

Supplemental Cash Flow:

 

 

 

 

 

 Interest paid

$

 

 

$

327   

 Income taxes paid

$

 

 

$

 

 Common stock issued to retire convertible notes

$

707,677   

 

$

20,000   

 Beneficial conversion & derivative liability features related to notes issue

$

230,500   

 

$

24,155   

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


6


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Note 1. Organization, Recent History, and Description of Businesses-Past and Present

 

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.

 

History and Recent Transaction

 

The “Company” is the term used in these statements and notes to refer to the entity originally incorporated in the State of Delaware 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


7


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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 now 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 transition three month period ended March 31, 2018; the Company incorporated a new wholly owned subsidiary IronClad Pipeline IC, Inc. (“Pipeline”).

 

Principles of Consolidation, Basis of Presentation, and Management Judgement

 

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 unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information

 

Accordingly, these unaudited interim consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements and the rules of the SEC.  These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended March 31, 2019.

 

In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.  Operating results for the three month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending March 31, 2020.


8


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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 June 30, 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 $30,972,173. The Company's working capital deficit is $4,657,077 (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 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.  

 

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 June 30, 2019 and March 31, 2019.

 

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;  


9


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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 June 30, 2019 and March 31, 2019 the Company had conversion features embedded in its convertible notes payable.  The fair value measurements of those derivatives, using a binomial valuation model, was $1,389,113 at June 30, 2019 and $2,147,415 at March 31, 2019 and is reported as “convertible notes payable derivative liabilities” on the balance sheet.  The derivative liabilities are measured as Level 3 items.

 

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 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 17 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 ASU No. 2016-02, Leases (Topic 842) , 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 to the reporting in the financial statements of the Company is expected from the adoption of this standard.

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


10


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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:

 

 

June 30,

2019

March 31,

2019

Patents and trademarks under development

$         217,744 

$         217,744 

 

 

 

Patents issued

153,801 

153,801 

Less accumulated amortization

(7,604)

(3,759)

 

146,197 

150,042 

 

 

 

Patents, net

$         363,941 

$         367,786 

 

Amortization expense for intangible assets during the period ended June 30, 2019 and year ended March 31, 2019 was $3,845 and $3,789, respectively.  Costs at June 30, 2019 totaling $371,545 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 fiscal years ended March 31, 2019 and March 31, 2018.  These awarded and 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 original patent portfolio included three issued and granted US patents. Each of the three original patents had expired and was written off at September 30, 2018.

 

 

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 June 30, 2019 and March 31, 2019, the Company had $45,241 and $0 on deposit in excess of the FDIC insured limit.


11


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Note 5 – Related Party Transactions

 

At June 30, 2019 and March 31, 2019 the Company owed approximately $89,773 and $96,506 in accounts payable to management and related parties.  Of the $239,659 and $237,660 of accrued liabilities at June 30, 2019 and March 31, 2019, approximately $0 and $75,003 of those amounts are owed to the president of the Company; the costs primarily related to travel costs incurred in raising funds for the Company.

 

See also Note 13 regarding stock option awards to management of the Company.

 

 

Note 6.  Notes Payable

 

Commitment Note and Convertible Note, Equity Line with 10% Interest Rate

 

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 8.

 

Commitment Note, $82,500 with 10% Interest Rate.  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 was 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 occurred solely due to the fact the Commitment Note was not retired on or before the maturity date, all or any part of the Commitment Note was 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 was 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 was 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 became 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 three-month period ended June 30, 2019, $2,102 of regular interest and $42,116 of default interest was expensed. During the three-month period ended June 30, 2018, $4,114 of regular interest was expensed.

 

Convertible Note, Initial Consideration: $165,000 First Tranche with 10% Interest Rate. 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 discount for the note holder’s due diligence and legal fees). The Company could make additional borrowings in such amounts and at such dates as


12


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


the note holder may choose in its sole discretion. The balance of an individual borrowing matured seven months from its funding date.

 

The Convertible Note also had 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 were recorded as discount amounts on the $165,000 note payable and were amortized as interest expenses over the life of the borrowing.  The maturity date of this borrowing under the note was seven months from its funding date which was March 24, 2018.

 

Between March 26, 2018 and February 25, 2019, the note holder exercised its rights under the conversion provisions and through the operation of seven conversion elections were 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) was approximately $424,407 using a Black-Scholes valuation model.  That amount was 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 was $138,000 ($165,000 net of $27,000) and was amortized as interest expense over the life of the loan.

 

Derivative Liabilities on Commitment and Convertible Notes (above). 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.

 

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) was approximately $79,138 using a Black-Scholes valuation model.  That amount was recorded


13


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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 was 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) was approximately $158,276 using a Black-Scholes valuation model.  That amount was 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 was $155,000 the derivative valuation was recorded as $155,000.  The amount was amortized as interest expense over an estimated “remaining” three month life of the already matured loan.

 

During the three-month period ended June 30, 2019, $0 of regular interest and $0 of derivative liability was expensed because all amounts owed relating to the note were converted as of March 1, 2019. During the three-month period ended June 30, 2018, $7,400 of regular interest, $0 of original issue discount and $155,000 of beneficial conversion was expensed.

 

Convertible Note, Second Tranche, $82,500 with 10% Interest Rate.   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 was 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 was estimated to be approximately $289,000 and was capped at $69,000, the otherwise undiscounted amount of the note payable.

 

Between March 14, 2019 and April 22, 2019, the holder of the note elected to convert $82,500 of principal into 18,630,240 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  

04/12/19

$ 22,500  

 

$ (23,000)  

5,361,305

$ 0.00429  

04/16/19

$ 17,517  

 

$ (4,983)  

1,161,539

$ 0.00429  

04/22/19

$ -  

 

$ (17,517)  

4,083,217

$ 0.00429  

 

 

 

Total

8,024,179

 

 

During the three month period ended June 30, 2019, $406 of regular interest, $0 of original issue discount, and $0 of derivative liability was expensed.  During the three month period ended June 30, 2018, $3,764 of regular interest, $20,916 of original issue discount and $23,443 of derivative liability was expensed.


14


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Convertible Note, Third Tranche, $82,500 with 10% Interest Rate.   On March 15, 2018, a third and final 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 and an additional $6,000 of loan closing costs incurred by IronClad.  The maturity date of this borrowing under the Convertible Note was also defined to be seven months from its borrowing date which was 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 was 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 was $69,000 ($82,500 net of $13,500) and was amortized as interest expense over the life of the loan.

 

During the three-month period ended June 30, 2019, $2,080 of regular interest, $0 of original issue discount, $0 of beneficial conversion and $0 of derivative liability and $134,308 of default interest was expensed.  During the three-month period ended June 30, 2018, $3,525 of regular interest, $5,930 of original issue discount and $29,205 of beneficial conversion was expensed.

 

Convertible Notes, Post Maturity Derivative Liabilities.   At May 23, 2018 the second tranche of the 10%  Convertible Note for $82,500 reached its maturity date and was not repaid in cash. Consequently the note was in “maturity date default” and pursuant to the terms of the loan was convertible at the lesser of $1.00 or 65% of the average lowest two trades for the prior 20 days, resulting in initial recognition for derivative treatment.

 

The valuation of the derivative liability related to the $82,500 borrowing on the Convertible Note and with an intrinsic value of $0.6912 per share is approximately $57,024 using a Binomial pricing model.  That amount was recorded as a contra-note payable amount (similar to the recorded OID and transaction costs). The amount was amortized as interest expense over an estimated “remaining” three month life of the already matured loan.

 

At June 30, 2018 the prior period’s derivative liabilities were remeasured, as the notes were still outstanding, the derivative liability was revalued using a binomial pricing model. At period end the total valuation of new derivative liabilities related to three loans was approximately $262,086 for individual valuation amounts of $67,531, $120,993 and $73,561. There was no corresponding revaluation at June 30, 2019 because the underlying notes had been converted to common stock and were no longer outstanding.

 

Fiscal Year Ended March 31, 2018 Notes

 

Convertible Note, $88,000 with 12% Interest Rate. On January 25, 2018 IronClad entered into a Securities Purchase Agreement to issue a 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 was recorded as a discount amount on the note payable and was amortized as interest expenses over the life of the note.  The general terms of the note, except for the principal amount borrowed, were identical to the initial 12% Convertible note entered into in 2017 and converted earlier in January 2018.

 

The note matured on October 30, 2018 and interest costs accrued on the unpaid principal balance at 12% annually until October 30, 2018, and after that if not paid at maturity interest accrued annually at 22% until the principal amount and all interest accrued and unpaid were 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 was 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.


15


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


The shares to be issued were a function of a variable conversion price which was 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. At June 30, 2018 a derivative liability with an intrinsic value of $0.2404 was $57,990 using a binomial pricing model and was recorded as a discount to the note.

 

The note was repaid in mid-July, 2018; thus during the three-month period ended June 30, 2019 no interest was recorded on the note. During the three-month period ended June 30, 2018, $2,633 of regular interest and $1,025 of original issue discount was expensed.

 

Convertible Note, $53,000 with 12% Interest Rate.   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 was recorded as a discount amount on the note payable and was amortized as interest expenses over the life of the note.  The general terms of the note, except for the principal amount borrowed, were identical to the initial 12% Convertible note entered into in 2017 and converted earlier in January 2018.

 

The note matured on November 3, 2018 and interest costs accrued on the unpaid principal balance at 12% annually until November 30, 2018, and after that if not paid at maturity interest accrued annually at 22% until the principal amount and all interest accrued and unpaid were 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 was 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 were a function of a variable conversion price which was 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 kept 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.

 

Derivative Liability.  The conversion feature of the note represented an embedded derivative.  The derivative liability with an intrinsic value of $0.2981 was $42,862 using a binomial pricing model and was recorded as a discount to the note. The loan principal plus accrued interest, together totaling $75,620, was repaid on August 21, 2018 and the note was fully retired.

 

Because the note was repaid in August, 2018 no interest was recorded on the note during the three-month period ended June 30, 2019. During the three-month period ended June 30,   2018, $1,586 of regular interest and $1,146 of original issue discount was expensed.

 

Working Capital Loan for Services to New Customer by IronClad Pipeline IC, Inc. with 8.5% Interest Rate.   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 accrued interest at an annual rate of 8.5%.  There was 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 an additional $245,000 gross proceeds as a second advance under the Agreement.  Proceeds received net of the transaction fee were $240,000.


16


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


During the period ended June 30, 2018, the Company repaid $125,000 of the principal, and then redrew another $100,000.  The outstanding principal balance of this loan at June 30, 2018 was $475,000 and was subsequently repaid in full by a series of cash payments through September 11, 2018.

 

Interest is to be paid annually in cash on March 1, 2019 and 2020.  Outstanding interest of $17,816 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 was no penalty for any of the 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 the lender.

 

The Agreement is also supported by a personal $500,000 guarantee from an officer of the Company. IronClad owed the officer a 5% guarantee fee of $25,000; $15,000 was paid shortly after June 30, 2019 and the remaining $10,000 is to be paid 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 specified that the uses of funds were to be limited to only supporting the operations of the service contract and loan repayment.  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.

 

Insurance Financing Note with 6% Interest Rate.   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 was approximately 6% and the loan was to be repaid by eleven monthly principal and interest installment payments of $2,631 each.  The cost of the insurance was recorded as a prepaid asset and was amortized monthly over the annual period of the coverages.

 

On July 14, 2018 the outstanding loan principal balance was repaid plus accrued interest, both totaling $10,195, and the note was fully retired.

 

Fiscal Year Ended March 31, 2019:  New Loan Agreements including Convertible Notes

 

Convertible Note, $250,000 with 10% Interest Rate.   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 was recorded as a discount amount on the note payable and was amortized as interest expenses over the life of the note.  The general terms of the note, except for the principal amount borrowed, were nearly identical to the initial 10% Convertible note entered into in 2017.

 

The note matured on December 26, 2018 and interest costs accrued on the unpaid principal balance at 10% annually until December 26, 2018, and after that if not paid at maturity interest accrued annually at 24% until the principal amount and all interest accrued and unpaid were 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 on or following the date of the Note from the 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 were a function of a fixed conversion price of $1.00 per share, 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


17


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


twenty-day trading period ending on the last trading day prior to exercising the conversion right.  The Company kept 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.

 

Derivative Liability.  The conversion feature of the note represented 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 was recorded as a new contra-note payable amount (similar to the recorded OID and transaction 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 was $26,014 ($250,000 net of $223,986) and was amortized as interest expense over the life of the loan. The remaining $163,197 was expensed as financing fees at the inception of the note.

 

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 was repaid. The holder kept the shares, if the Note was 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.

 

Warrants and “Down Round” Feature.  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.

 

Because the note was repaid in November, 2018 no interest was recorded on the note during the three-month period ended June 30, 2019. During the three-month period ended June 30, 2018, $274 of regular interest and $328 of original issue discount 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.

 

Convertible Note, $135,000 with 9% Interest Rate. 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 was recorded as a discount amount on the note payable and was amortized as interest expenses over the life of the note.

 

The First Note matured on July 11, 2019 and interest costs accrued on the unpaid principal balance at 9% annually until July 11, 2019, and after that if not paid at maturity interest accrued annually at 24% until the principal amount and all interest accrued and unpaid were paid.

 

The Back End Note carried the same terms as the First Note, except it could not be repaid, but only converted. The Company was under no obligation to accept the Back End Note, but could 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


18


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


issued the Company a collateralized secured promissory note in the amount of $131,500 that could 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.

 

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 was 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 were 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 was 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 kept 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. From February 4, 2019 thru April 17, 2019 the holder of the note elected to convert $135,000 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  

04/04/19

$ 56,000  

 

$ (21,000)  

4,895,105

$ 0.00429  

04/16/19

$ 29,000  

 

$ (27,000)  

6,293,706

$ 0.00429  

04/17/19

$ -  

 

$ (29,000)  

6,759,907

$ 0.00429  

 

Derivative Liability.  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 was approximately $248,386 using a binomial pricing model.  That amount was 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 was $126,500 ($135,000 net of $8,500) and was amortized as interest expense over the life of the loan. The remaining $121,886 was expensed as financing fees at the inception of the note.

 

During the three-month period ended June 30, 2019, $(697) of regular interest, $2,375 of unamortized original issue discount, and $35,351 of unamortized derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018.

 

Convertible Note, $115,500 with 12% Interest Rate. 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 matured on July 18, 2019. Interest costs accrued on the unpaid principal balance at 12% annually until maturity, and after that, if not paid, interest accrued annually at 18% until any unpaid principal amount and unpaid interest accrued were paid.

 


19


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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 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.

 

The shares to be issued upon conversion were 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 kept available authorized shares reserved, initially 1,500,000 shares. From January 22, 2019 thru April 4, 2019 the holder of the note elected to convert $115,500 of principal, $4,500 of financing fees and $8,448 of accrued interest into 14,646,896 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  

04/04/2019

$ -  

 

$ (4,000)  

932,401

$ 0.00429  

 

Derivative Liability.  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 was approximately $187,624 using a binomial pricing model.  That amount was 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 was $101,500 ($115,500 net of $14,000) and was amortized as interest expense over the life of the loan. The remaining $86,124 was expensed as financing fees at the inception of the note.

 

Convertible Note, $157,500 with 9% Interest Rate, First Note (and Back End Note).   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 matured on July 19, 2019 and interest costs accrued 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, could 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,


20


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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. From January 24, 2019 thru April 1, 2019 the holder of the note elected to convert $157,500 of principal into 19,011,529 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  

04/01/19

$ -  

 

$ (1,000)  

222,965

$ 0.004485  

 

Derivative Liability.  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 was approximately $295,227 using a binomial pricing model.  That amount was 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 was $142,500 ($157,500 net of $15,000) and was amortized as interest expense over the life of the loan. The remaining $152,727 was expensed as financing fees at the inception of the note.

 

During the three-month period ended June 30, 2019, $(291) of regular interest, $0 of original issue discount, and $0 of derivative liability was expensed on the First Note, There was no corresponding expense during the three-month period ended June 30, 2018.

 

Convertible Note, $157,500 with 9% Interest Rate, Back End Note. The Back End Note was accepted on March 14, 2019 and matured on July 19, 2019. Interest costs accrued 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 by converting to common stock.

 

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.

 

Derivative Liability.  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 was approximately $352,448 using a binomial pricing model.  That amount is recorded as a contra-note payable amount (similar to the recorded OID and


21


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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 was $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 was expensed as financing fees as of the inception date of the note.

 

During the three-month period ended June 30, 2019, $3,534 of regular interest, $10,748 of original issue discount, and $102,106 of derivative liability was expensed on the Back End Note. There was no corresponding expense during the three-month period ended June 30, 2018.

 

Convertible Note, $107,000 with 10% Interest Rate. 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 was 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 October 24, 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 kept available authorized shares reserved, initially 2,993,000 shares. From April 17, 2019 thru May 16, 2019 the holder of the note elected to convert $107,000 of principal into 23,378,328 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

$ 107,000  

 

 

 

 

04/17/2019

$ 79,000  

 

$(28,000)

6,526,807

$ 0.00429  

04/30/2019

$ 47,000  

 

$(32,000)

7,032,967

$ 0.00455  

05/03/2019

$ 12,500  

 

$(34,500)

7,582,418

$ 0.00455  

05/16/2019

$ -  

 

$(12,500)

2,236,136

$ 0.005589  

 

Derivative Liability.  The valuation of the derivative liability related to the $107,000 borrowing with an intrinsic value of $0.1759 per share was 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 was $102,000 ($107,000 net of $5,000) and was amortized as interest expense over the life of the loan. The remaining $29,617 was expensed as financing fees at the inception of the note.

 

During the three-month period ended June 30, 2019, $816 of regular interest, $2,836 of original issue discount, and $57,847 of derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018.

 

Convertible Note, $181,170 with 12% Interest Rate. 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 matured on July 26, 2019 and interest costs accrue on the unpaid principal balance at 12% annually


22


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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.  From May 7, 2019 thru June 10, 2019 the holder of the note elected to convert $33,342 of principal into 19,011,529 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

$181,170

 

 

 

 

04/17/2019

$168,261

 

$(12,909)

4,361,220

$0.00296

04/30/2019

$147,828

 

$(20,433)

8,374,250

$0.00244

 

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.

 

Warrants and “Down Round” Feature.  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. During the year ended March 31, 2019, 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.

 

During the three-month period ended June 30, 2019, there were also multiple events that caused the down round feature to be triggered again. The cumulative effect reduced the exercise price to $0.0024 and the number of warrants exercisable was increased to 37,743,750.  As a result, the valuation of the warrants increased to $201,663 and a reduction to retained earnings was recorded for the difference, similar to a dividend, in the amount of $78,596.

 

Derivative Liability.  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 was $150,346 ($181,170 net of $30,824) and was amortized as interest expense over the life of the loan. The remaining $69,858 was expensed as financing fees at the inception of the note.

 

During the three-month period ended June 30, 2019, $4,143 of regular interest, $10,275 of original issue discount, and $50,115 of derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018.

 


23


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Convertible Note, $57,500 with 12% Interest Rate.   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 was 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.

 

Derivative Liability.  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 was 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 was expensed as financing fees at the inception of the note.

 

During the three-month period ended June 30, 2019, $1,728 of regular interest, $1,932 of original issue discount, and $12,466 of derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018.

 

Convertible Note, $107,000 with 10% Interest Rate.   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 was 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.

 

Derivative Liability.  The valuation of the derivative liability related to the $107,000 borrowing with an intrinsic value of $0.03099 per share was approximately $169,554 using a binomial pricing model.  That amount was 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 was $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 was expensed as financing fees at the inception of the note.

 

During the three-month period ended June 30, 2019, $2,668 of regular interest, $1,247 of original issue discount, and $25,430 of derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018.


24


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Convertible Note, $86,250 with 12% Interest Rate, First Note (and Back End and Collateralized Notes).   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 by a conversion to Class A common stock. 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.

 

Derivative Liability.  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 was amortized as interest expense over the life of the loan. The remaining $37,500 was expensed as financing fees at the inception of the note.

 

During the three-month period ended June 30, 2019, $2,616 of regular interest, $2,797 of original issue discount, and $18,648 of derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018.

 

Convertible Note, $43,200 with 8% Interest Rate, First Note (and Back End and Collateralized 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


25


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


(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.

 

Derivative Liability.  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 a loss on the issuance of the note during the three month period ended June 30, 2019.

 

During the three-month period ended June 30, 2019, $758 of regular interest, $1,122 of original issue discount, and $8,202 of derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018.

 

Convertible Note, $57,750 with 12% Interest Rate.   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 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.

 

Derivative Liability.  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 a loss on the issuance of the note during the three month period ended June 30, 2019.

 

During the three-month period ended June 30, 2019, $1,272 of regular interest, $1,419 of original issue discount, and $9,153 of derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018.

 

Convertible Note, $150,000 with 10% Interest Rate.   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,


26


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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.

 

Derivative Liability.  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 a loss on the issuance of the note during the three month period ended June 30, 2019.

 

During the three-month period ended June 30, 2019, $1,917 of regular interest, $943 of original issue discount, and $17,910 of derivative liability was expensed. There was no corresponding expense during the three-month period ended June 30, 2018

 

 

Note 7. Preferred and Common Stock

 

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 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.

 

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.


27


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


 

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 Note 6.

 

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.

 


28


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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;   

 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”. 

 

During the three month period ended June 30, 2019, the Company approved for issuance:

 

 2,112,711 shares of Class A common stock at a price of $.004485 for conversion of $1,000 of convertible debt and $8,476 of accrued interest.  

 5,214,962 shares of Class A common stock at a price of $.00429 for conversion of $21,000 of convertible debt and $1,372 of accrued interest.  

 3,018,145 shares of Class A common stock at a price of $.00429 for conversion of $4,000 of convertible debt, $500 of financing fees and $8,448 of accrued interest.  

 5,361,305 shares of Class A common stock at a price of $.00429 for conversion of $23,000 of convertible debt.  

 6,723,575 shares of Class A common stock at a price of $.00429 for conversion of $27,000 of convertible debt and $1,844 of accrued interest.  

 7,223,284 shares of Class A common stock at a price of $.00429 for conversion of $29,000 of convertible debt and $1,988 of accrued interest.  

10,742,597 shares of Class A common stock at a price of $.00429 for conversion of $4,983 of convertible debt and $41,103 of accrued interest.  


29


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


 6,836,159 shares of Class A common stock at a price of $.00429 for conversion of $28,000 of convertible debt and $1,327 of accrued interest.  

28,972,086 shares of Class A common stock at a price of $.00429 for conversion of $60,001 of convertible debt and $64,289 of accrued interest.  

 7,393,286 shares of Class A common stock at a price of $.00455 for conversion of $32,000 of convertible debt and $1,639 of accrued interest.  

21,214,413 shares of Class A common stock at a price of $.00455 for conversion of $40,016 of convertible debt and $59,510 of accrued interest.  

 7,975,042 shares of Class A common stock at a price of $.00455 for conversion of $34,500 of convertible debt and $1,786 of accrued interest.  

 8,333,300 shares of Class A common stock at a price of $.00296 for conversion of $12,909 of convertible debt, $500 of financing fees and $11,257 of accrued interest.  

 9,695,513 shares of Class A common stock at a price of $.00468 for conversion of $41,250 of convertible debt and $4,125 of accrued interest.  

 2,360,503 shares of Class A common stock at a price of $.005590 for conversion of $12,500 of convertible debt and $695 of accrued interest.  

19,180,871 shares of Class A common stock at a price of $.0056225 for conversion of $41,250 of convertible debt and $66,594 of accrued interest.  

 9,350,000 shares of Class A common stock at a price of $.00244 for conversion of $20,433 of convertible debt $500 of financing fees and $1,881 of accrued interest.  

 

 

Note 8.  General and Administrative Expenses

 

General and administrative expenses recognized for the three-month period ended June 30, 2019 and June 30, 2018 were $430,516 and $607,389, respectively of which $338,348 and $548,078 were recognized as compensation expenses in connection with the issuance of stock options or warrants.

 

 

Note 9.  Income Taxes

 

Federal and state income taxes are not currently due since IronClad has had losses since inception.  Because the Company provided services (discontinued after July 2018) to a customer in Virginia, IronClad was also subject to Virginia state income tax reporting through the date services were discontinued.

 

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.

 

Significant components of the deferred tax asset amounts at an anticipated tax rate of 21% for the period ended June 30, 2019 and March 31, 2019 are as follows:

 

 

June 30,

2019

March 31,

2019

Net operating losses carryforwards

$ 4,291,650   

$ 3,872,481   

 

 

 

Deferred tax asset

901,247   

813,221   

Valuation allowance for deferred asset

(901,247)  

(813,221)  

Net deferred tax asset

$  

$  


30


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


At June 30, 2019, the Company has net operating loss carryforwards of approximately $4,291,650 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, 2019 to June 30, 2019 was $88,026.

 

 

Note 10.  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.

 

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 11.  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 approximately


31


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


$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 12.  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 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.

 

In addition, 25,000 stock options that were awarded during the three-month period ending March 31, 2017 were exercised for cash in the amount of $3,750.

 

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 valued at $123,719.  Of the total 122,500 options and warrants awarded, 102,500 vested during the period and received full recognition in the three-month period ended June 30, 2018.  The remaining 20,000 options vest during the subsequent quarter and will be expensed at that time.

 

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


32


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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.

 

During the three-month period ended June 30, 2019 the Company did not award any stock options or warrants.

 

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 June 30, 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

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  


33


IronClad Encryption Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


†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 13.  Commitments and Contingencies

 

In the three month period ended June 30, 2019 complaints were filed against the Company by two contractors requesting disputed compensation.  We are answering these claims, and are vigorously defending our legal rights.  Because of the preliminary nature of the complaints the Company is unable to predict any likely outcome of addressing the complaints.

 

We rent office space on a month-to-month basis.  The annual cost is less than $17,000.  We have no other leases or rental agreements.  Because the rent is considered “short term” in the context of the Financial Accounting Standards Board’s ASU No. 2016-02, Leases (Topic 842) IronClad considers the monthly rental outside the scope of this pronouncement.

 

 

Note 14.  Subsequent Events

 

Subsequent to June 30, 2019 1,098,901 shares of Class A common stock were issued to repay $5,000 of convertible notes principal balances.


34



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement on Forward-looking Information

 

When used in this Quarterly Report on Form 10-Q 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.

 

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 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.  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 our ultra-secure ICE Phone.  We are also engaged in providing an array of confidential services in support of infrastructure projects, including the deployment of ICEmicro, IronClad’s proprietary technology and the world’s first context free and natively secure containers, throughout project-specific networks securing the data transmitted to the internal and external networks, databases, and systems.

 

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.


35



Review of Comparative Results and Liquidity; three-month period ended June 30, 2019 compared to the three-month period ended June 30, 2018.

 

Results of Operations

 

Based on the factors discussed below, the net loss attributable to common shareholders for the three-month period ended June 30, 2019, decreased by $38,883 to a net loss of $2,926,011, or $0.01 per share in 2019 from a net loss of $2,964,894, or $0.04 per share in 2018.

 

Three months ended June 30, 2019 compared to Three months ended June 30, 2018

 

Net loss.   During the three month period ended June 30, 2018, the Company had a net loss of $2,926,011 compared to a net loss of $2,964,894 during the three month period ended June 30, 2018.  This represents a decreased net loss of $38,883 during the three-month period ended June 30, 2019.  The decrease in net loss is attributable to a decrease in product development costs, general and administrative expenses, and professional fees. Many of the costs incurred were non-cash and were recognized as compensation and in connection with the issuance of IronClad common stock or stock options, warrants or derivative liabilities.

 

Customer Service . In February 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 were to provide an array of services in support of an infrastructure project.  Revenues during the three month period ended June 30, 2018 were $587,236.  The contract and services ended at the end of July 2018, thus, there were no revenues in the quarter ended June 30, 2019.

 

Expenses recognized in the three month period ended June 30, 2018 for providing the services under the contract were $389,281 and are mostly related to the salary and compensation costs of the staff of approximately ten to eleven employees.

 

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 that point in time was approximately $170,000.  The customer also elected to retain the services of most of the individuals previously employed by IronClad Pipeline, Inc. on a going forward basis.  All invoice amounts that were billed for services under the contract through the end-date of the contract were submitted, approved and, as of the filing date of this report, have been paid promptly by the customer and collected in full by IronClad.

 

During the course of the contract through July 29, 2018 IronClad billed approximately $1,375,000 of which approximately $975,000 was for services rendered and earned since the inception of the contract in late February 2018.  Amounts invoiced in excess of the amounts recognized as services revenue were for certain project costs incurred under the terms of contract that were reimbursed by the customer.

 

Product development costs .   The $408,587 for the quarter ended June 30, 2019 and $587,073 for the quarter ended June 30, 2018 of product development costs incurred are primarily related to research and product development costs for cyber encryption software and prototype products being developed and tested.  Of those amounts, $408,587 and $559,510 are related to expenses related to stock options (non-cash costs).

 

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 that 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


36



monthly $5,000 per person per month paid during the period and any unpaid $5,000 monthly amounts total approximately $1,788,036 at June 30, 2019 and $810,290 at June 30, 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, 2017 through to January 2019 (with some ad hoc exceptions), but were nevertheless accrued and are to be paid at a later date based on the liquidity and financial strength of the Company.  The $5,000 monthly payments were made between February 2019 through June 30, 2019 (and possibly through August 30, 2019).

 

Accrued amounts for suspended and deferred salaries during the three-month period ended June 30, 2019 were approximately $195,850, and 145,879 at June 30, 2019 and June 30, 2018, respectively Cumulative accrued amounts for suspended and deferred salaries at June 30, 2019 and June 30, 2018 were approximately $1,788,036 and $810,290.

 

Stock options issued .   Of the $2,295,414 of operating expenses for the three-month period ended June 30, 2019, $1,915,541 relates to stock options and warrants issued.  This total amount for options and warrants includes $408,587 for product development expenses, $338,348 for general and administrative $1,168,606 for officers and directors.   Of the $3,035,070 of operating expenses for the three-month period ended June 30, 2018, $2,276,193 relates to stock options and warrants issued.  This total amount for options and warrants includes $559,510 for product development expenses, $548,077 for general and administrative $1,168,605 for officers and directors.

 

Stock grants issued .   In addition to the $2,276,193 of expenses recognized above for stock options and warrants during the three-month period ended June 30, 2018, another $6,209 of expenses was recognized for 20,000 stock grants issued awarded at a price of $1.15per share. During the three-month period ending June 30, 2019, there were no stock grants issued.

 

Interest expenses and financing fees .  Interest expenses and financing fee expenses increased to $572,374 during the three-month period ended June 30, 2019 compared to $351,138 during the three-month period ended June 30, 2018.  Most of the expense recognition relates to convertible notes payable, three of which were entered into during the three month period ended June 30, 2019.  See the tables below.


37



Summary information regarding interest expense for individual notes for the three-month period ended June 30, 2019 and 2018 are as follows:

 

 

 

 

Years ended June 30, 2019

Regular

Interest

Expense

Original Issue

Discount

Amortization

Beneficial

Conversion

Feature

Amortization

Derivative

Liability

Amortization

Default

Interest

Total

Expense

2019

Note, 10%, convertible

$ 2,102   

$  

$  

$     -   

$ 42,116  

$ 44,218   

Note, 10%, convertible

406   

 -   

 

    -   

-  

406   

Note, 10%, convertible

2,080   

 

 

    -   

134,308  

136,388   

Note, 12%, convertible

(22)  

 

 

 

-  

(22)  

Note,  9%, convertible

(698)  

2,375   

 

35,351   

-  

37,028   

Note,  9%, convertible

(291)  

 

 

 

-  

(291)  

Note, 10%, convertible

816   

2,836   

 

57,847   

-  

61,499   

Note, 12%, convertible

4,143   

10,275   

 

50,115   

-  

64,533   

Note, 10%, convertible

2,668   

1,247   

 

25,430   

-  

29,345   

Note, 12%, convertible

1,728   

1,932   

 

12,466   

-  

16,126   

Note,  9%, convertible

3,534   

10,748   

 

102,106   

-  

116,388   

Note, 12%, convertible

2,616   

2,797   

 

18,648   

-  

24,061   

Note,   8%, convertible

758   

1,122   

 

8,202   

-  

10,082   

Note, 12%, convertible

1,272   

1,418   

 

9,153   

-  

11,843   

Note, 10%, convertible

1,917   

943   

 

17,910   

-  

20,770   

 

 

 

 

 

 

 

  Totals

$ 23,029   

$ 35,693   

$  

$ 337,228   

$ 176,424   

$ 572,374   

 

 

Three Months Ended June 30, 2018

Regular

Interest

Expense

Original Issue

Discount

Amortization

Beneficial

Conversion

Feature

Amortization

 

Derivative

Liability

Amortization

2018

Convertible note, 10%

 $ 4,114 

$ -  

$ -  

$ 79,138  

$ 83,252  

Convertible note, 10%

  7,400 

-  

-  

155,000  

162,400  

Convertible note, 10%

  3,764 

20,916  

-  

23,443  

48,123  

Convertible note, 12%

  2,633 

1,025  

-  

-  

3,658  

Note,                     8.5%

 11,384 

-  

-  

-  

11,384  

Convertible note, 12%

1,586 

1,146  

-  

-  

2,732  

Insurance,              6%

327 

-  

-  

-  

327  

Convertible note, 10%

3,525 

5,930  

29,205  

-  

38,660  

Convertible note, 10%

  274 

328  

-  

-  

602  

Totals

 $ 35,007 

$ 29,345  

$ 29,205  

$ 257,581  

$ 351,138  

 

Effective income tax rate.   Our effective tax rate for the three month period ended June 30, 2019 and June 30, 2018 was estimated to be 21%.

 

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.


38



Liquidity and Capital Resources

 

General

 

Three Months Ended June 30

2019

2018

Net cash used in operating activities

$ (172,162)  

$ (21,795)  

Net cash used in investing activities

 

(196,942)  

Net cash used in financing activities

230,500   

197,805   

Increase (Decrease) in the cash and cash equivalents

58,338   

(20,932)  

 

 

 

Cash and cash equivalents at the beginning of the period

277,575   

448,061   

Cash and cash equivalents at the end of the period

$ 335,913   

$ 427,129   

 

Working Capital Deficits

 

The Company’s working capital at June 30, 2019 was a deficit of $4,657,077 compared to working capital deficits of $5,403,654 at March 31, 2019 and $2,250,307 at June 30, 2018.  Working capital declined in the three month period ended June 30, 2019 due to increases in accrued liabilities (mostly accrued and unpaid compensation) and accrued interest on convertible notes payable (though increases in accrued interest payable were offset by paying off some accrued interest ($199,453) by the issuance of common stock in retiring some notes).

 

The funds raised by entering into the new notes payable described above and an increase in accounts payable and 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, are approximately just over 50% of the $335,913 total at June 30, 2019, and cash remains 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.

 

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

 

Sources and Uses

 

Net cash used in operating activities was $172,163 during three-month period ended June 30, 2019 compared with $20,932 during the three-month period ended June 30, 2018.  The uses of cash for operations are described above in the discussions of results of operations.

 

Cash flow used by investing activities was $0 for the three-month period ended June 30, 2019 and $196,942 for the three-month period ended June 30, 2018. The costs in 2018 relate directly to new patent applications and related filing costs.

 

Cash flow from financing activities was $230,500 for the three-month period ended June 30, 2019, compared to $197,805 for the three-month period ended June 30, 2018.  The elements of the cash sources for the three-month period ended June 30, 2019 relate to  three convertible note placements: $43,200  ($38,000 of proceeds net of $5,200 loan discount and closing costs), $57,750 ($50,000 of proceeds net of $7,750 loan discount and closing costs) and $150,000 ($140,500 net of proceeds net of $7,500 loan discount and closing costs).

 

The elements of the net cash source for the cash raised during the quarter ended June 30, 2018 related to one convertible note placement and a draw on the amended working loan agreement for operations in our subsidiary.  Gross loan amounts were $250,000 ($235,000 proceeds net of $15,000 loan discount and closing costs) and $100,000 ($98,000 proceeds net of $2,000 loan discount costs).  Prior to the draw on the amended loan agreement the company had repaid $125,000 of principal on the original loan amounts totaling $500,000.


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Since June 20, 2017 the Company has entered into approximately 21 note agreements of which 19 are convertible (3 were entered into in the three month period ending June 30, 2019).  Of the notes 8 (all convertible) are outstanding at June 30, 2019.  In conjunction with the convertible notes, the company recognized an additional 21 derivative liabilities, 8 of which are still outstanding.

 

As a net result of all cash flow activities, cash increased by $58,338 during the three-month period ended June 30, 2019.  The Company had cash of $335,913 as of June 30, 2019.  Cash at the beginning of the period at March 31, 2019 was $277,575.

 

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 established what is sometimes termed a “private equity line” of funding or an equity drawdown facility.  In general, the private equity line provided 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 were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended.  Pursuant to the Registration Rights Agreement, we filed a registration statement covering the possible resale by Tangiers of the shares that we issued to Tangiers under the Investment Agreement.  Through the prospectus Tangiers could offer to the public for resale shares of our Class A common stock that we issued 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.

 

The purchase price of these shares was 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 a 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 were described in more detail in the agreement.

 

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 was 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 was not retired on or before the maturity date, all or any part of the Commitment Note was 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 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


40



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 was exercisable at a price of $3.00 per share.

 

The Investment Agreement did 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.

 

Critical Accounting Policies

 

In Note 2 to the unaudited financial statements for the three month period ended June 30, 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.  We account for non-employee share-based awards based upon the provisions of ASC 505-50, “Equity-Based Payments to Non-Employees.”

 

IronClad had early adopted this new standard in the three month period ended June 30, 2018 and recognition of expenses for outstanding options were re-evaluated for compliance and have been recognized on a straight line basis through final vesting of the respective options.


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Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

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 do not believe our exposure to these or similar financial instrument market risks to be material.

 

Item 4.  Controls and Procedures

 

a)   Evaluation of Disclosure Controls and Procedures

 

During the quarter ended March 31, 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 June 30, 2019.

 

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 improved our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period ended June 30, 2019.  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 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 June 30, 2019 the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework by COSO - 2013 .


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Part II – Other Information

 

Item 1.  Legal Proceedings

 None

 

Item 1A.  Risk Factors

 

Risks Related to Our Business and Our Industry

 

We lack an operating history and through June 30, 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.  Its business conducted through was IronClad Pipeline IC, Inc. subsidiary, the Company’s only source of revenues to date, and wound down the operations of that subsidiary after July 31, 2018.

 

One large element of the losses incurred through June 30, 2019 are a result of costs recognized and incurred from the issuance of stock options, stock grants, re-incorporation between states, and legal and accounting costs.  We have had modest revenues in the past and no profits, and have limited current prospects for future new revenues.  Our ability to achieve and maintain profitability and positive cash flow in the future will 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 operating revenues, if any, 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.

 

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 three month period ending June 30, 2019 and the last three fiscal years we have incurred net losses of $2,926,011 in the three month period ended June 30, 2019, $14,030,370 in the fiscal year ended March 31, 2019 and $11,271,452 in fiscal year ended March 31, 2018.  As a result, we have an accumulated deficit of $30,972,172 as of June 30, 2019.  We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to enhance our product and service offerings, establish an end-customer base, our sales channels, 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.


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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.

 

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.


44



Furthermore, customers that might purchase our platform may 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.  Any customer 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.

 

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.


45



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.

 

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.


46



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.

 

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.


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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.

 

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

 

Our officers and directors are collectively the beneficial owners of a majority of the Company’s outstanding Class A common stock.  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.


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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.

 

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


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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.

 

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.


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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.

 

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 70% of his time or approximately thirty 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


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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 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.


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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 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.


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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  

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


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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 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 prices) 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.


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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.

 

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.

 

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.


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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.

 

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;  


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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;  

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


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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.

 

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 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

 Not applicable.

 

Item 3.  Defaults Upon Senior Securities.

 

 Not applicable.

 

Item 4.  Mine Safety Disclosures

 

 Not applicable: As of May 17, 2007 the Company had disposed of all of its mineral properties or claims.

 

Item 5.  Other Information.


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Item 6.  Exhibits

 

Exhibit
Number

 

Description

2.1

 

Share Exchange Agreement between Butte Highlands Mining Company and InterLok Key Management, Inc., dated January 6, 2017 (incorporated by reference from Exhibit 10.1 of the Company’s current report on Form 8-K (No. 000-53662) filed January 6, 2017)

3.1

 

Certificate of Incorporation of IronClad Encryption Corporation, dated October 16, 2017 (incorporated by reference from Exhibit 3.4 of the Company’s current report on Form 8-K (No. 000-53662) filed October 17, 2017).

3.2

 

Bylaws of IronClad Encryption Corporation, dated October 16, 2017 (incorporated by reference from Exhibit 3.5 of the Company’s current report on Form 8-K (No. 000-53662) filed October 17, 2017).

3.3

 

Certificate of Amendment of Certificate of Incorporation of IronClad Encryption Corporation, dated February 12, 2019 (incorporated by reference from Exhibit 3.3 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed February 19, 2019.)

3.4

 

Certificate of Amendment of Certificate of Incorporation of IronClad Encryption Corporation, dated March 19, 2019. (incorporated by reference from Exhibit 3.4 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

3.5

 

Certificate of Designation of the Series A Preferred Stock, dated April 3, 2019 (incorporated by reference from Exhibit 3.1 of the Company’s current report on Form 8-K (No. 000-53662) filed April 16, 2019).

4.1

 

Form of Common Stock Certificate (Class A) of IronClad Encryption Corporation (incorporated by reference from Exhibit 4.1 of Amendment No. 2 to the Company’s registration statement on Form S-1 (No. 333-220995) filed November 28, 2017).

4.2

 

Common Stock Purchase Warrant by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017 (incorporated by reference from Exhibit 4.2 of the Company’s registration statement on Form S-1 (No. 333-220995) filed October 17, 2017).

4.3

 

Registration Rights Agreement by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017 (incorporated by reference from Exhibit 4.3 of the Company’s registration statement on Form S-1 (No. 333-220995) filed October 17, 2017).

10.1

 

Investment Agreement by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017 (incorporated by reference from Exhibit 10.12 of the Company’s registration statement on Form S-1 (No. 333-220995) filed October 17, 2017).

10.2

 

Convertible Promissory Note by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017 (incorporated by reference from Exhibit 10.13 of the Company’s registration statement on Form S-1 (No. 333-220995) filed October 17, 2017).

10.3

 

Convertible Promissory Note by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017 (incorporated by reference from Exhibit 10.14 of the Company’s registration statement on Form S-1 (No. 333-220995) filed October 17, 2017).

10.4

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and Power Up Lending Group, Ltd. dated January 25, 2018 .  (incorporated by reference from Exhibit 10.04 of the Company’s annual report on Form 10-K (No. 000-53662) filed April 17, 2018).

10.5

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Power Up Lending Group, Ltd. dated January 25, 2018 .  (incorporated by reference from Exhibit 10.05 of the Company’s annual report on Form 10-K (No. 000-53662) filed April 17, 2018).

10.6

 

Credit Agreement between IronClad Encryption Corporation and Layer 3 Communications dated February 1, 2018 . (incorporated by reference from Exhibit 10.06 of the Company’s annual report on Form 10-K (No. 000-53662) filed April 17, 2018).

10.7

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and Power Up Lending Group, Ltd. dated February 27, 2018 . (incorporated by reference from Exhibit 10.07 of the Company’s annual report on Form 10-K (No. 000-53662) filed April 17, 2018).

10.8

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Power Up Lending Group, Ltd. dated February 27, 2018 . (incorporated by reference from Exhibit 10.08 of the Company’s annual report on Form 10-K (No. 000-53662) filed April 17, 2018).

10.9

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and Labrys Fund, LP dated June 26, 2018 (incorporated by reference from Exhibit 10.09 of the Company’s annual report on Form 10-KT (No. 000-53662 filed July 16, 2018.)

10.10

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Labrys Fund, LP dated June 26, 2018 (incorporated by reference from Exhibit 10.10 of the Company’s annual report on Form 10-KT (No. 000-53662 filed July 16, 2018.)

10.11

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and GS Capital Partners, LLC dated July 11, 2018 (incorporated by reference from Exhibit 10.11 of the Company’s annual report on Form 10-KT (No. 000-53662 filed July 16, 2018.)

10.12

 

Convertible Promissory Note “First Note” pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and GS Capital Partners, LLC dated July 11, 2018 (incorporated by reference from Exhibit 10.12 of the Company’s annual report on Form 10-KT (No. 000-53662 filed July 16, 2018.)

10.13

 

Convertible Promissory Note “Back End Note” pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and GS Capital Partners, LLC July 11, 2018 (incorporated by reference from Exhibit 10.13 of the Company’s annual report on Form 10-KT (No. 000-53662 filed July 16, 2018.)

10.14

 

Collateralized Secured Promissory Note pursuant to Securities Purchase Agreement by and between GS Capital Partners, LLC and IronClad Encryption Corporation dated July 11, 2018 (incorporated by reference from Exhibit 10.14 of the Company’s annual report on Form 10-KT (No. 000-53662 filed July 16, 2018.)

10.15

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and Morningview Financial, LLC dated June 29, 2018 (incorporated by reference from Exhibit 10.15 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed August 20, 2018.)

10.16

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Morningview Financial, LLC dated June 29, 2018 (incorporated by reference from Exhibit 10.16 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed August 20, 2018.)

10.17

 

Amendment #1 to Convertible Promissory Note and related Securities Purchase Agreement by and between IronClad Encryption Corporation and Morningview Financial, LLC both dated July 17, 2018 (incorporated by reference from Exhibit 10.17 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed August 20, 2018.)

10.18

 

Convertible Promissory Note “First Note” pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Adar Bays, LLC dated July 19, 2018 (incorporated by reference from Exhibit 10.18 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed August 20, 2018.)

10.19

 

Convertible Promissory Note “Back End Note” pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Adar Bays, LLC July 19, 2018 (incorporated by reference from Exhibit 10.19 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed August 20, 2018.)


60



10.20

 

Collateralized Secured Promissory Note pursuant to Securities Purchase Agreement by and between Adar Bays, LLC and IronClad Encryption Corporation dated July 19, 2018 (incorporated by reference from Exhibit 10.20 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed August 20, 2018.)

10.21

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and One44 Capital, LLC dated October 24, 2018 (incorporated by reference from Exhibit 10.21 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed November 26, 2018.)

10.22

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and One44 Capital, LLC dated October 24, 2018 (incorporated by reference from Exhibit 10.22 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed November 26, 2018.)

10.23

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and Auctus Fund, LLC dated October 26, 2018 (incorporated by reference from Exhibit 10.23 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed November 26, 2018.)

10.24

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Auctus Fund, LLC dated October 26, 2018 (incorporated by reference from Exhibit 10.24 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed November 26, 2018.)

10.25

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and One44 Capital, LLC dated February 14, 2018 (incorporated by reference from Exhibit 10.25 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed February 19, 2019).

10.26

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and One44 Capital, LLC dated February 14, 2018 (incorporated by reference from Exhibit 10.26 of the Company’s quarterly report on Form 10-Q (No. 000-53662 filed February, 2019).

10.27

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and Morningview Financial, LLC dated February 14, 2019 . (incorporated by reference from Exhibit 10.27 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.28

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Morningview Financial, LLC dated February 14, 2019 . (incorporated by reference from Exhibit 10.28 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.29

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and GW Holdings Group, LLC dated March 28, 2019 .  (incorporated by reference from Exhibit 10.29 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.30

 

Convertible Promissory Note “First Note” pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and GW Holdings Group, LLC dated March 28, 2019 . (incorporated by reference from Exhibit 10.30 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.31

 

Convertible Promissory Note “Back End Note” pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and GW Holdings Group, LLC dated March 28, 2019 . (incorporated by reference from Exhibit 10.31 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.32

 

Collateralized Secured Promissory Note pursuant to Securities Purchase Agreement by and between GW Holdings Group, LLC and IronClad Encryption Corporation dated March 28, 2019 . (incorporated by reference from Exhibit 10.32 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.33

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and LG Capital Funding, LLC dated April 12, 2019 . (incorporated by reference from Exhibit 10.33 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.34

 

Convertible Promissory Note “First Note” pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and LG Capital Funding, LLC dated April 12, 2019 . (incorporated by reference from Exhibit 10.34 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.35

 

Convertible Promissory Note “Back End Note” pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and LG Capital Funding, LLC dated April 12, 2019 . (incorporated by reference from Exhibit 10.35 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.36

 

Collateralized Secured Promissory Note pursuant to Securities Purchase Agreement by and between LG Capital Funding, LLC and IronClad Encryption Corporation dated April 12, 2019 . (incorporated by reference from Exhibit 10.36 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.37

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and Morningview Financial, LLC dated April 23, 2019 . (incorporated by reference from Exhibit 10.37 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.38

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Morningview Financial, LLC dated April 23, 2019 . (incorporated by reference from Exhibit 10.38 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.39

 

Securities Purchase Agreement by and between IronClad Encryption Corporation and Odyssey Capital Funding, LLC dated May 15, 2019 . (incorporated by reference from Exhibit 10.39 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.40

 

Convertible Promissory Note pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and Odyssey Capital Funding, LLC dated May 15, 2019 . (incorporated by reference from Exhibit 10.40 of the Company’s annual report on Form 10-K (No. 000-53662) filed July 16, 2019).

10.41**

 

Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.01 of the Company’s current report on Form 8-K (No. 000-53662) filed October 17, 2017)

10.42**

 

Employment Agreement by and between IronClad Encryption Corporation and Jeff B. Barrett effective as of January 6, 2017 (incorporated by reference from Exhibit 10.05 of the Company’s quarterly report on Form 10-Q (No. 000-53662) filed August 21, 2017).

10.43**

 

Employment Agreement by and between IronClad Encryption Corporation and Daniel M. Lerner effective as of January 6, 2017 (incorporated by reference from Exhibit 10.06 of the Company’s quarterly report on Form 10-Q (No. 000-53662) filed August 21, 2017).

10.44**

 

Employment Agreement by and between IronClad Encryption Corporation and James D. McGraw effective as of January 6, 2017 (incorporated by reference from Exhibit 10.07 of the Company’s quarterly report on Form 10-Q (No. 000-53662) filed August 21, 2017).

10.45**

 

Employment Agreement by and between IronClad Encryption Corporation and Len E. Walker effective as of January 6, 2017 (incorporated by reference from Exhibit 10.08 of the Company’s quarterly report on Form 10-Q (No. 000-53662) filed August 21, 2017).

10.46**

 

Employment Agreement by and between IronClad Encryption Corporation and David G. Gullickson effective as of May 1, 2017 (incorporated by reference from Exhibit 10.09 of the Company’s quarterly report on Form 10-Q (No. 000-53662) filed August 21, 2017).

10.47**

 

Employment Agreement by and between IronClad Encryption Corporation and Monty R. Points effective as of May 1, 2017 (incorporated by reference from Exhibit 10.10 of the Company’s quarterly report on Form 10-Q (No. 000-53662) filed August 21, 2017).

10.48**

 

Employment Agreement by and between IronClad Encryption Corporation and Randall W. Rice effective as of June 1, 2017 (incorporated by reference from Exhibit 10.11 of the Company’s quarterly report on Form 10-Q (No. 000-53662) filed August 21, 2017).


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21

 

Subsidiaries of the Registrant (incorporated by reference from Exhibit 21 of the Company’s annual report on Form 10-KT (No. 000-53662 filed July 16, 2018.)

31.1 *

 

Certification of Principal Executive Officer of IronClad Encryption Corporation requ