NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Organization, Recent History, and Description of Businesses-Past and Present
History and Recent Transaction
The Company is the term used in these statements and notes to refer to the entity originally incorporated in the State of Delaware in 1929. The registered name of the Company until early in 2017 was Butte Highlands Mining Company (Butte).
Butte was formed to explore and mine primarily for gold in the Butte Highlands Only Chance mine, south of Butte, Montana.
Butte ceased operating as a mining company in 1942. The Company was reorganized in October 1996 for the purpose of acquiring and developing additional mineral properties. At the time of the 1996 reorganization, stockholders representing approximately 76% of the outstanding capital stock could not be located. In order to obtain the quorum necessary for the special meetings of shareholders to authorize the reorganization, Butte obtained an order from the Superior Court of Spokane County, Washington appointing a trustee for the benefit of those stockholders who could not be located.
By May 17, 2007, eleven years after the reorganization and very limited results from its mining activities, the Company had disposed of all of its historical mineral properties or mining claims and eventually became a shell company under the rules of the Securities and Exchange Commission (SEC).
In 2009, Butte registered under the Securities Exchange Act of 1934, as amended, for the purpose of becoming a reporting company. The Companys 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 Companys common stock is listed.
Now, 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 Companys 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. At present, InterLok is the only subsidiary of the Company and InterLoks patents and line of business now are the main basis of the business of the Company on a consolidated basis.
6
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Description of Businesses: Present and Past
InterLok Key Management, Inc. (formerly InterLok Key Management, LLC) 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 was formed in Texas on June 12, 2006 and incorporated ten years later on June 16, 2016.
7
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 6, 2017 InterLok entered into a Share Exchange Agreement ("Share Exchange") with Butte Highlands Mining Company. Under the terms of the agreement, the shareholders of InterLok Key Management, Inc. exchanged all 56,655,891 outstanding shares of InterLoks common stock for 56,655,891 shares of Class A common stock of Butte Highlands Mining Company.
The Share Exchange was treated as a reverse merger with InterLok Key Management, Inc. which is deemed--for accounting recognition purposesas 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.
Principles of consolidation
The accompanying unaudited consolidated financial statements include the accounts of IronClad and its wholly-owned subsidiary. 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 Companys audited financial statements for the year ended December 31, 2016.
In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. Operating results for the nine month period ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
Note 2 Summary of Significant Accounting Policies
This summary of significant accounting policies is presented to assist in understanding the Companys interim condensed consolidated financial statements. The financial statements and notes are representations of the Companys management which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.
8
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Going Concern
As shown in the accompanying financial statements, the Company has incurred cumulative operating losses since inception. As of September 30, 2017, 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 $7,859,960. The Company's working capital deficit is $931,443 (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.
9
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company plans to fund its future operations by potential sales of its common stock 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.
Fair Value Measures
The Company's financial instruments, as defined by the Financial Accounting Standards Boards Accounting Standards Codification (ASC) 825-10-50
Financial InstrumentsOverall
(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 September 30, 2017 and at December 31, 2016.
The standards under ASC 820
Fair Value Measurement
define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
·
Level 1. Observable inputs such as quoted prices in active markets;
·
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
·
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company did not have any assets measured at fair value other than cash and deposits at September 30, 2017 and at December 31, 2016.
Provision for Income Taxes
Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25
Income Taxes Recognition
. Under 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 8.
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Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. 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
.
11
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Note 3
Patents
Patents and trademarks are as follows:
|
|
| |
|
September 30,
2017
|
|
September 30,
2016
|
Patents and trademarks under development
|
$
123,412
|
|
$
-
|
|
|
|
|
Patents issued
|
398
|
|
398
|
Less accumulated amortization
|
(353)
|
|
(315)
|
|
45
|
|
83
|
|
|
|
|
Patents, net
|
$
123,457
|
|
$
83
|
Amortization expense for intangible assets during the nine month periods ended September 30, 2017 and 2016 was $23 and $23, respectively. Costs totaling $123,412 for new patents and trademarks under development (but as yet not awarded) are capitalized at September 30, 2017. The patents and trademarks under development will not be amortized until formally issued.
In addition to its three original patents IronClad also has six, and soon to be nine, patents pending (both in the US and internationally). These pending patents expand upon the initial scope of the original seminal patents and provide up to 20 additional years of enforceable intellectual property rights regarding authentication, validation, and encryption for all electronic transmissions associated devices. IronClads current and original patent portfolio includes three granted US patents. One patent expired in September 2017 and two are scheduled to expire in 2018.
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Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At September 30, 2017 and 2016, the Company had no amounts on deposit in excess of the FDIC insured limit.
Note 5
Related Party Transactions
The Company paid $15,249 in consulting fees during 2016 to Eagle Mountain 21, LLC, an entity owned by an officer of the Company. At December 31, 2016 the Company owed an additional $10,662 amount to that same officer for operating costs incurred and submitted for reimbursement during 2016. Reimbursement to the officer was made at the start of the quarter ended June 30, 2017.
See also Note 10 regarding stock option awards to management of the Company.
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Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Convertible Notes Payable
Securities Purchase Agreement
On June 26, 2017 IronClad entered into a Securities Purchase Agreement to issue a 12% convertible note payable for an aggregate principal amount of $78,500 with the intent of meeting certain conditions precedent to closing and funding on or before July 7, 2017. The closing conditions were met prior to that date and the convertible note payable was closed and funded on July 6, 2017. The Company received cash proceeds of $75,000 net of transaction costs of $3,500. The $3,500 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. $1,226 was amortized in the three months ended September 30, 2017; accrued interest payable at September 30, 2017 was $2,503.
The note matures on March 30, 2018 and interest costs accrue on the unpaid principal balance at 12% annually until March 30, 2018, and after that if not paid at maturity interest accrues annually at 22% until the principal amount and all interest accrued and unpaid are paid.
The
holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is one hundred and eighty days following the date of the note (
dated June 26, 2017) and
ending on the later of i) the maturity date
, or ii) the date of payment of a default amount, if any.
The shares to be issued are a function of a variable conversion price
which is 65% of
a market price defined to be the lowest
one day closing bid price for the Companys common stock during
the fifteen day trading
period ending on the last trading day prior to
exercising the conversion
right. The Company will keep available authorized shares reserved, initially 289,846 shares, but in any event authorized shares equal to six times the number of shares that would be issuable upon full conversion of the note from time to time.
The conversion feature of the note represents an embedded derivative. Once definitive pricing facts and circumstances are known in late December (and which are not known at present) regarding the market value of IronClads common stock at that time, the cost of that derivative will be determined using a Black-Scholes valuation model. At the close of accounting periods subsequent to the initial valuation a redetermination of the derivative valuation will be made using an updated Black-Scholes valuation model. Any gain or loss in the liability value will be recognized as a fair valuation adjustment to earnings.
Commitment Note and Convertible Note
On August 24, 2017, IronClad entered into an Investment Agreement to establish an equity line of funding for the potential future issuance and purchase of IronClads shares of Class A common stock. See Note 7.
As consideration for its commitment to purchase shares of IronClads Class A common stock pursuant to the Investment Agreement, IronClad issued to the counterparty of the agreement a 7 month 10% convertible promissory note (the Commitment Note) in the principal amount of $100,000. The Commitment Note matures on March 24, 2018. The Commitment Note is convertible into shares of IronClads 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 (as of September 30, 2017, and to the date of the filing of this report, no events of default have occurred) occurs solely due to the fact the Commitment Note is not retired on or before the maturity date, all or any part of the Commitment Note is convertible into shares of Class A common stock of the Company at a per share price equal to the lower of: (a) $3.25 or (b) 65% of the average of the two lowest per share trading prices of the Class A common stock during the twenty consecutive trading days prior to the conversion date.
14
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Commitment Note is included
as a financing fee expense at the date of the transaction.
The Commitment Note
was to finance the $100,000 cost of the commitment fee to the counterparty of the Investment Agreement, and is accordingly included in the financing fee expenses for the period ended September 30, 2017. The amount of the commitment fee can be reduced by $35,000 or $17,500 if a registration statement registering the shares that would be issued under the equity line becomes effective within 90 or 135 days, respectively, of August 24, 2017. As of the filing date of this report the registration statement has not become effective.
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 holders due diligence and legal fees). The Company may make additional borrowings in such amounts and at such dates as the note holder may choose in its sole discretion.
The balance of an individual borrowings mature seven months from its funding date.
The Convertible Note also has an embedded beneficial conversion feature (BCF) based on a stated conversion price of $1.00 per share. The market price of a share of IronClads common stock at the time of the first borrowing under the note was $3.50 thus establishing an intrinsic value of $2.50 on that date.
The Company received the first borrowing for $165,000 under the Convertible Note on August 24, 2017 and net cash proceeds of $150,000 were received after deducting for the original issue discount and lender transaction costs of $15,000. An additional $12,000 of costs was incurred by IronClad directly relating to the note. Both the $15,000 and the $12,000 are recorded as discount amounts on the $165,000 note payable and are amortized as interest expenses over the life of the borrowing. The maturity date of this borrowing under the note is seven months from its funding date which is March 24, 2018.
The valuation of the BCF related to the $165,000 borrowing on the Convertible Note and with an intrinsic value of $2.50 per share (based on a $3.50 closing price less the $1.00 per share conversion price) is approximately $424,407 using a Black-Scholes valuation model. That amount is recorded as a contra-note payable amount (similar to the recorded OID and transaction costs), but only for an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative formally recorded is $138,000 ($165,000 net of $27,000) and will be amortized as interest expense over the life of the loan.
Subsequent to September 30, 2017, a second borrowing of $82,500 under the Convertible Note for $330,000 was closed and funded on October 23, 2017. 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 will be 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 is also defined to be seven months from its borrowing date which is May 24, 2018. The market price of a share of IronClads common stock at the time of funding was $4.40 making the intrinsic value of the derivative $3.40. The valuation of the BCF is estimated to be approximately $289,000 and is capped at $69,000, the otherwise undiscounted amount of the note payable.
15
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
InterLok Convertible Notes
On August 8, 2016, InterLok issued two 5% convertible senior promissory notes for a principal amount of $30,000 each and, on August 16, 2016, issued one 5% convertible senior promissory note for $150,000 for an aggregate principal amount of $210,000. Interest costs accrued on the unpaid principal balances at five percent (5%) annually until the principal amount and all interest accrued thereon was paid at the earlier of 1) the maturity date two years later on August 8, 2018 or August 16, 2018, respectively, or 2) on the conversion of the notes into shares of common stock at a price equal to a conversion price of $0.15 per share.
The notes automatically converted into shares of common stock at a conversion price of $0.15 per share, subject to adjustment under certain circumstances in the event of an acquisition transaction or a public offering event. The Company was precluded from entering into an acquisition or public offering event without first obtaining the prior written approval of any of the note holders. If any holder declined to provide approval for an acquisition transaction or public offering, the Company could have immediately prepaid the entire outstanding principal amounts and accrued interest amounts on the notes. Two of the notes contained the option to purchase additional shares of common stock.
During the period ended March 31, 2017, the principal balances of all three 5% convertible senior promissory notes were converted into 1,400,000 shares of IronClad Class A common stock. Accrued interest of $6,115 on the notes was paid in cash during the quarter ended June 30, 2017, $1,973 of which was incurred as interest expense in 2017.
Note 7 Common Stock
During the three month period ended March 31, 2017,
i)
the Company issued 5,843,954 shares of its Class A common stock at $0.15 per share for cash in the amount of $876,597 ($35,343 of which was only subscribed and still receivable at December 31, 2016), and
ii)
75,000 shares at $0.15 per share for investment banking services in the amount of $11,250.
Additionally,
i)
the three convertible note holders elected to convert their $210,000 of notes into 1,400,000 shares of Class A common stock at $0.15 per share, and
ii)
250,000 shares were issued pursuant to the Share Exchange Agreement at $0.03 per share. Also, iii) subscriptions receivable that were outstanding at December 31, 2016 in the amount of $81,481 were collected.
During the three month period ended June 30, 2017, the Company issued i) 240,333 shares of Class A common stock at $0.15 per share for cash in the amount of $36,050 pursuant to a Section 4(a)2 private placement offering, ii) 25,000 shares at $0.15 per share for the conversion of stock options (see Note 10), 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.
16
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 IronClads 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.
A precondition to selling shares of our stock and thus making any draws under the equity line is to have in place a registration statement that has become effective. The Company filed a registration statement on October 17; that registration statement as of the date of the filing of this report has not gone effective. Consequently, as of the date of the filing of this report, no amounts of funding have occurred under the equity line.
Note 8 Income Taxes
Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25
Income Taxes Recognition.
Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the more likely than not standard 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 35% for the periods ended September 30, 2017 and December 31, 2016 are as follows:
|
|
| |
|
September 30,
2017
|
|
December 31,
2016
|
Net operating losses carryforwards
|
$
2,901,083
|
|
$
193,668
|
|
|
|
|
Deferred tax asset
|
$
1,015,379
|
|
$
67,780
|
Valuation allowance for deferred asset
|
(1,015,379)
|
|
(67,780)
|
Net deferred tax asset
|
$
-
|
|
$
-
|
At September 30, 2017, the Company has net operating loss carryforwards of approximately $2,901,083 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 December 31, 2016 to September 30, 2017 was $947,599.
IronClad is subject to federal level income taxes under the jurisdiction of the US, but is not subject to income taxes at any state level. Tax periods that may still be subject to review by the Internal Revenue Service are the years 2014, 2015, and 2016. The Company has not identified any aggressive tax positions.
17
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 Share Exchange Agreement
On January 6, 2017, the Company entered into a Share Exchange Agreement with InterLok Key Management, Inc. wherein Butte agreed to issue 56,655,891 restricted shares of Buttes common stock in exchange for 100% of the outstanding shares of InterLok Key Management, Inc. common stock. InterLok Key Management, Inc. is engaged in the business of developing and licensing its patented key-based encryption methods.
On January 6, 2017, Butte completed its Share Exchange Agreement with the owners of InterLok, and issued 56,655,891 restricted shares of Buttes common stock to 29 persons and entities in exchange for all of the outstanding shares of InterLok Key Management, Inc.s common stock. Immediately following completion of the share exchange agreement the Companys new board of directors elected, through a series of board resolutions and regulatory filings, to change the Companys name to IronClad Encryption Corporation from Butte, to move the Company to Nevada from Delaware, and to change its stock trading symbol to IRNC from BTHI.
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 10 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 as they periodically vest.
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 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 as they periodically vest.
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 as they periodically vest.
18
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
.
The tables below summarize the assumptions used to estimate the fair values of the options and warrants:
|
|
|
|
|
| |
Number of Options*
|
Date Issued
|
|
Exercise Price
|
Risk-free Interest Rate
|
Volatility
|
Life of Options in Years
|
75,000
|
01/16/17
|
|
$0.75
|
1.54%
|
226.01%
|
3.00
|
6,000,000
|
01/20/17
|
|
$0.15
|
1.54%
|
220.00%
|
3.00
|
3,000,000
|
01/20/17
|
|
$0.15
|
1.54%
|
220.00%
|
4.00
|
350,000
|
01/31/17
|
|
$0.15
|
1.19%
|
132.84%
|
1.93
|
100,000
|
02/01/17
|
|
$0.15
|
1.22%
|
134.90%
|
2.00
|
100,000
|
03/13/17
|
|
$0.15
|
1.40%
|
144.84%
|
2.00
|
20,000
|
03/21/17
|
|
$0.15
|
1.54%
|
233.07%
|
3.00
|
5,000
|
04/30/17
|
|
$0.75
|
1.45%
|
219.35%
|
3.00
|
1,700,000
|
05/05/17
|
|
$1.47
|
1.71%
|
565.34%
|
4.00
|
1,000,000
|
05/05/17
|
|
$1.47
|
1.32%
|
202.99%
|
2.00
|
80,000
|
05/31/17
|
|
$0.75
|
1.44%
|
196.06%
|
3.00
|
660,000
|
06/12/17
|
|
$2.50
|
1.64%
|
589.85%
|
4.00
|
5,000
|
06/30/17
|
|
$3.49
|
1.55%
|
197.13%
|
3.00
|
5,000
|
07/31/17
|
|
$3.50
|
1.51%
|
170.61%
|
3.00
|
300,000
|
07/31/17
|
|
$3.16
|
1.63%
|
296.38%
|
4.00
|
37,500
|
08/25/17
|
|
$2.50
|
1.62%
|
170.38%
|
3.00
|
25,000
|
08/31/17
|
|
$3.75
|
1.44%
|
170.57%
|
3.00
|
13,462,500
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of Warrants
|
Date Issued
|
|
Exercise Price
|
Risk-free Interest Rate
|
Volatility
|
Life of Warrants in Years
|
500,000
|
03/15/17
|
|
$0.15
|
1.02%
|
114.94%
|
1.40
|
82,500
|
08/24/17
|
|
$3.00
|
1.63%
|
285.16%
|
4.00
|
582,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options* and Warrants
|
|
|
|
|
|
|
14,045,000
|
|
|
|
|
|
|
|
*The number of outstanding options above does not include an option awarded to the Companys 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.
19
Table of Contents
IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY
(Previously named Butte Highlands Mining Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11
Subsequent Events
On October 23, 2017, the Company borrowed an additional $82,500 under the Convertible Note, the second borrowing made under the Convertible Note bringing the total cumulative borrowings to $247,500 and leaving $82,500 available for future borrowings under the Convertible Note. The borrowing under the Convertible Note is subject to a 10% original issue discount for due diligence. The Company received net proceeds of $75,000 (which represents the deduction of the 10% OID and legal fees). IronClad also incurred additional direct costs of $6,000 related to closing the transaction. The borrowed amount has a maturity date of about May 24, 2018, which is seven months after the date of the borrowing.
The underlying Convertible Note has a BCF relating to the $1.00 conversion price per common share which is well below the $4.40 closing price per share on October 23, 2017. The valuation of the BCF based on an intrinsic value of $3.40 per share and using a Black-Scholes pricing model is estimated, in the aggregate, to be approximately $289,000, $69,000 of which will be recorded as a contra-liability, or discount. The $69,000 amount is effectively a capped amount determined by the borrowed amount less the $7,500 OID of the lender and the $6,000 of direct transaction costs incurred by IronClad. See Note 6.
20
Table of Contents