IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
|
$0.62000
|
07/17/2018
|
$115,000
|
|
$(20,000)
|
61,538
|
$0.32500
|
8/23/2018
|
$105,000
|
|
$(10,000)
|
73,260
|
$0.13650
|
09/14/18
|
$85,000
|
|
$(20,000)
|
236,686
|
$0.08450
|
02/06/19
|
$45,000
|
|
$(40,000)
|
2,051,282
|
$0.01950
|
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.
On March 24, 2018 the first tranche of the 10% Convertible Note for $165,000 (less the $10,000 conversion in late March) 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 $1.00 or 65% of the average lowest two trades for the prior 20 days, resulting in an initial recognition for derivative treatment.
Derivative Liability. 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.
Interest Expense. During the six-month period ended September 30, 2019, $0 of regular interest and $0 derivative liability note discount. In the case of this one note, the discount related to the derivative liability had been fully expensed prior to the quarter because all amounts owed relating to the note were converted as of March 1, 2019. During the three-month period ended September 30, 2018, $12,921 of regular interest, $0 of original issue discount and $155,000 of derivative liability note discount was recognized as interest expense
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.
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
|
$0.0056225
|
03/25/19
|
$53,500
|
|
$(24,000)
|
5,351,171
|
$0.0044850
|
03/27/19
|
$49,500
|
|
$(4,000)
|
891,862
|
$0.0044850
|
03/28/19
|
$45,500
|
|
$(4,000)
|
891,862
|
$0.0044850
|
04/12/19
|
$22,500
|
|
$(23,000)
|
5,361,305
|
$0.0042900
|
04/16/19
|
$17,517
|
|
$(4,983)
|
1,161,539
|
$0.0042900
|
04/22/19
|
$-
|
|
$(17,517)
|
4,083,217
|
$0.0042900
|
|
|
|
Total
|
8,024,179
|
|
Interest Expense. During the six-month period ended September 30, 2019, $406 of regular interest, $0 of original issue discount, and $0 derivative liability note discount was expensed. During the six-month period ended September 30, 2018, $7,939 of regular interest, $20,916 of original issue discount and $57,024 of derivative liability note discount was recognized as interest expense.
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) was 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.
Interest Expense. During the six-month period ended September 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 September 30, 2018, $7,088 of regular interest, $11,544 of original issue discount and $57,024 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
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
Derivative Liability. 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 September 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 $1,680,757 for individual valuation amounts of $549,670, $624,607, and $506,480. There was no corresponding revaluation at September 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.
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.
Derivative Liability. At June 30, 2018 a derivative liability with an intrinsic value of $0.2404 was $57,990 using a binomial pricing model and a derivative liability note discount was recorded.
Interest Expense. The note was repaid in mid-July, 2018; thus, during the six-month period ended September 30, 2019 no interest was recorded on the note. During the six-month period ended September 30, 2018, $3,009 of regular interest and $2,032 of original issue discount, and $57,990 of derivative liability note discount was recognized as interest expense.
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
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 derivative liability note discount. The loan principal plus accrued interest, together totaling $75,620, was repaid on August 21, 2018 and the note was fully retired.
Interest Expense. Because the note was repaid in August, 2018 no interest was recorded on the note during the six-month period ended September 30, 2019. During the six-month period ended September 30, 2018, $2,492 of regular interest and $2,585 of original issue discount and $42,862 of derivative liability note discount was recognized as interest expense.
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.
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
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 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.
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.
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
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 note discount 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.
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 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.
Interest Expense. Because the note was repaid in November, 2018, no interest was recorded on the note during the six-month period ended September 30, 2019. During the six-month period ended September 30, 2018, $6,575 of regular interest and $117,501 of original issue discount and $13,647 of derivative liability note discount was recognized as interest expense.
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
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.
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
|
|
|
|
|
02/04/2019
|
$120,000
|
|
$(15,000)
|
808,303
|
$0.019500
|
03/01/2019
|
$111,500
|
|
$(8,500)
|
921,451
|
$0.009750
|
03/21/2019
|
$99,000
|
|
$(12,500)
|
2,876,192
|
$0.004615
|
03/29/2019
|
$77,000
|
|
$(22,000)
|
5,218,503
|
$0.004485
|
04/04/2019
|
$56,000
|
|
$(21,000)
|
4,895,105
|
$0.004290
|
04/16/2019
|
$29,000
|
|
$(27,000)
|
6,293,706
|
$0.004290
|
04/17/2019
|
$-
|
|
$(29,000)
|
6,759,907
|
$0.004290
|
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $(697*) of (negative*) regular interest, $2,375 of unamortized original issue discount, and $35,351 of derivative liability note discount was recognized as interest expense There was no corresponding expense during the six-month period ended September 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.
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
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
|
$0.0975650
|
02/04/2019
|
$91,500
|
|
$(15,000)
|
794,872
|
$0.0195000
|
02/12/2019
|
$77,000
|
|
$(14,500)
|
769,231
|
$0.0195000
|
02/20/2019
|
$57,500
|
|
$(19,500)
|
1,025,642
|
$0.0195000
|
02/28/2019
|
$42,500
|
|
$(15,000)
|
1,402,715
|
$0.0110500
|
03/11/2019
|
$30,000
|
|
$(12,500)
|
2,105,264
|
$0.0061750
|
03/14/2019
|
$17,500
|
|
$(12,500)
|
2,312,139
|
$0.0056225
|
03/26/2019
|
$4,000
|
|
$(13,500)
|
3,121,517
|
$0.0044850
|
04/04/2019
|
$-
|
|
$(4,000)
|
932,401
|
$0.0042900
|
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $(22*) of (negative*) regular interest, $0 of original issue discount, and $0 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 30, 2018.
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, and the remaining note in the amount of $157,500, (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, 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
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
|
$0.1235000
|
02/04/2019
|
$132,500
|
|
$(15,000)
|
769,231
|
$0.0195000
|
02/07/2019
|
$115,000
|
|
$(17,500)
|
897,436
|
$0.0195000
|
02/20/2019
|
$90,000
|
|
$(25,000)
|
1,282,051
|
$0.0195000
|
02/27/2019
|
$75,000
|
|
$(15,000)
|
1,357,466
|
$0.0110500
|
03/07/2019
|
$60,000
|
|
$(15,000)
|
1,923,077
|
$0.0078000
|
03/13/2019
|
$45,000
|
|
$(15,000)
|
2,667,852
|
$0.0056225
|
03/25/2019
|
$35,000
|
|
$(10,000)
|
2,229,654
|
$0.0448500
|
03/26/2019
|
$20,937
|
|
$(14,063)
|
3,135,563
|
$0.0044850
|
03/29/2019
|
$1,000
|
|
$(19,937)
|
4,445,262
|
$0.0044850
|
04/01/2019
|
$-
|
|
$(1,000)
|
222,965
|
$0.0044850
|
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $(291*) of (negative*) regular interest, $0 of original issue discount, and $0 of derivative liability note discount was recognized as interest expense on the First note. There was no corresponding expense during the six-month period ended September 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.
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
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 note discount 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 $209,948 was expensed as financing fees as of the inception date of the note.
Interest Expense. During the six-month period ended September 30, 2019, $11,589 of regular interest, $12,992 of original issue discount, and $123,425 of derivative liability note discount was recognized as interest expense. on the Back-End Note. There was no corresponding expense during the six-month period ended September 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
|
$0.004290
|
04/30/2019
|
$47,000
|
|
$(32,000)
|
7,032,967
|
$0.004550
|
05/03/2019
|
$12,500
|
|
$(34,500)
|
7,582,418
|
$0.004550
|
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $816 of regular interest, $2,836 of original issue discount, and $57,847 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 30, 2018.
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 was 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 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. During the three-month period ended September 30, 2019, there were no events that caused the down round feature to be triggered.
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
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $11,589 of regular interest, $13,210 of original issue discount, and $64,434 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 30, 2018.
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $3,474 of regular interest, $3,886 of original issue discount, and $25,068 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 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.
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $5,365 of regular interest, $2,836 of original issue discount, and $51,140 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 30, 2018.
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $5,261 of regular interest, $5,625 of original issue discount, and $37,500 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 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 an 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
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Company received cash proceeds of $38,000 from the First Note net of transaction costs of $5,200. The $5,200 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note.
The First Note matures on April 12, 2020 and interest costs accrue on the unpaid principal balance at 8% annually until February 14, 2020, and after that if not paid at maturity interest accrues annually at 24% until the principal amount and all interest accrued and unpaid are paid.
The Back-End Note carries the same terms as the First Note, except it may not be repaid, but only converted. The Company is under no obligation to accept the Back-End Note, but may do so at its sole discretion, following 180 days from the date of the note (dated April 12, 2019). As part of the SPA, the holder issued the Company a collateralized secured promissory note in the amount of $40,000 that may be exchanged for cash against the Back-End Note.
The holder of the note, at its sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is 180 days following the date of the note (dated July 11, 2018) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any.
The shares to be issued are a function of a fixed conversion price of $0.50 per share for six months, and thereafter until maturity at a variable conversion price which is 65% of a market price defined to be the lowest trading price for the Company’s common stock during the fifteen day trading period ending on the last trading day prior to the conversion date. The Company will keep available authorized shares reserved, initially 2,100,000 shares.
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $1,642 of regular interest, $2,430 of original issue discount, and $17,754 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 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.
27
Table of Contents
IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $3,019 of regular interest, $3,367 of original issue discount, and $21,721 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 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, 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 note discount 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.
Interest Expense. During the six-month period ended September 30, 2019, $5,750 of regular interest, $2,828 of original issue discount, and $53,730 of derivative liability note discount was recognized as interest expense. There was no corresponding expense during the six-month period ended September 30, 2018.
Note 7. Preferred and Common Stock
Preferred Stock
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.
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Table of Contents
IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 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 12), and iii) 75,000 shares at $2.90 per share for investment banking services valued at $217,500.
During the three-month period ended September 30, 2017, the Company issued i) 100,000 shares of Class A common stock at $3.49 per share for consulting services in the amount of $349,000 and ii) 37,500 shares at $3.50 per share for investment banking services valued at $131,250.
During the three-month period ended December 31, 2017, the Company issued 157,500 shares of Class A common stock at $4.10 per share to seven parties for consulting services in the amount of $660,750.
On August 24, 2017, IronClad entered into an Investment Agreement for the potential future issuance and purchase of shares of its Class A common stock to establish an equity line of funding to IronClad. The agreement enables IronClad to issue stock to the counterparty of the agreement in exchange for cash amounts under certain defined conditions for the purchase of IronClad’s stock. In addition to the equity line, the agreement also included IronClad entering into the Commitment Note in the principal amount of $100,000 to finance the commitment fee of the Investment Agreement and the Convertible Note to borrow up to $330,000 (of which $165,000 was borrowed on August 24, 2017 and a subsequent $82,500 was borrowed on October 23, 2017). See Notes 5 and 14.
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.
During the period ended June 30, 2018, the Company approved for issuance 50,000 shares of Class A common stock priced at $1.69 for accounts payable of $84,500; 20,000 shares of Class A common stock priced at $1.15 for accounts payable of $16,791 and services of $6,209; 32,219 shares of Class A common stock priced at $0.62 for conversion of $20,000 of convertible debt; 240,384 shares of Class A common stock priced at $0.69 in relation to the June 26, 2018 Convertible Note, the shares were valued at $166,105 and have been recorded on the balance sheet as a contra account to the Note.
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
At the close of March 31, 2018, there were 55,000 shares valued at $101,750 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 shares of Class A common stock for the exercise of stock options priced at $0.15 per share for cash in the amount of $21,000; 61,538 shares of Class A common stock priced at $0.325 for conversion of $20,000 of convertible debt; 73,260 shares of Class A common stock priced at $0.1365 for conversion of $10,000 of convertible debt; 236,686 shares of Class A common stock priced at $0.0845 for conversion of $20,000 of convertible debt.
During the three-month period ended December 31, 2018, the Company approved for issuance 50,000 shares of Class A common stock priced at $0.32 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. At the close of December 31, 2018 there were 10,000 shares valued at $3,200 that were recorded and reported as “to be issued”.
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”.
30
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
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.
During the three-month period ended September 30, 2019, the Company approved for issuance 10,000 shares of Class A common stock at a price of $1.14 for financing fees. Additionally, 20,000 that were approved in a prior period were moved from “to be issued”.
Change between Trading Markets within the OTC Markets Group.
Subsequent to the period September 30, 2019 and on November 4, 2019, the Company was notified by the OTC Markets Group that it was not in compliance with the continued listing standards set forth in Section 4.1(b) of the OTCQB Standards because the average closing bid price of IronClad’s Class A common stock was less than $0.001 over a consecutive five-day trading period.
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On November 5, 2019 The Company began trading, without interruption, on the OTCIQ Pink Open Market (OTCIQ).
The Company will continue to provide all requisite reports pursuant to the Securities and Exchange Act of 1934, as amended.
Note 8. General and Administrative Expenses
General and administrative expenses recognized for the three-month period ended September 30, 2019 and September 30, 2018 were $403,118 and $687,340, respectively of which $308,802 and $519,366 were recognized as compensation expenses in connection with the issuance of stock options or warrants.
General and administrative expenses recognized for the six-month period ended September 30, 2019 and September 30, 2018 were $833,631 and $1,294,604, respectively, of which $647,150 and $1,066,544 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 and 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 September 30, 2019 and March 31, 2019 are as follows:
|
September30,
2019
|
March 31,
2019
|
Net operating losses carryforwards
|
$4,543,407
|
$3,872,481
|
|
|
|
Deferred tax asset
|
954,116
|
813,221
|
Valuation allowance for deferred asset
|
(954,116)
|
(813,221)
|
Net deferred tax asset
|
$-
|
$-
|
At September 30, 2019, the Company has net operating loss carryforwards of approximately $4,543,407 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 September 30, 2019 was $140,895.
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
32
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 $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.
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 vested during the subsequent quarter and were expensed at that time.
During the three-month period ended December 31, 2018 the Company awarded 700,195 stock options and warrants for services valued at $137,058. Of the 700,195 options and warrants awarded, 200,195 vested during the period and received full expense recognition, the remaining 500,000 options vest during subsequent quarters and will be expensed at that time.
During the three-month period ended March 31, 2019, the Company awarded 100,000 stock options and warrants for services valued at $31,994. All options and warrants awarded vested in the period and received full expense recognition.
34
Table of Contents
IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
During the three-month period ended September 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 September 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
|
35
Table of Contents
IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Number of Warrants
|
Date Issued
|
|
Exercise Price
|
Risk-free Interest Rate
|
Volatility
|
Life of Warrants in Years
|
Vested
Warrants
|
‡†500,000
|
03/15/17
|
|
$0.15
|
1.02%
|
114.94%
|
1.40
|
‡†500,000
|
82,500
|
08/24/17
|
|
$3.50
|
1.63%
|
285.16%
|
4.00
|
82,500
|
†62,500
|
06/06/18
|
|
$3.00
|
2.69%
|
311.00%
|
4.00
|
†62,500
|
30,195
|
10/26/18
|
|
$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. No complaints have been filed in the three months ended September 30, 2019.
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.
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 14. Subsequent Events
The Company has evaluated events from September 30, 2019, through the date that this Form 10-Q was filed, and identified the following that required disclosure:
Increase in Authorized Shares of Common Stock: 0.8 Billion to 6.0 Billion then 50.0 Billion Shares
On October 1, 2019, a majority the outstanding voting interests of the shareholders of the Company voted, through written consent in lieu of a meeting, to approve an amendment of IronClad’s Certificate of Incorporation to increase the total number of authorized shares of stock to 6,021,707,093 shares (each with a par value of $0.001). The change primarily related to changing the number of Class A common stock to 6,000,000,000 shares.
The authority is for three types of stock and for specified amounts:
20,000,000 shares of Preferred Stock (no change from prior authorization)
6,000,000,000 shares of Common Stock, Class A (changed from 800,000,000 shares)
1,707,093 shares of Common stock, Class B (no change from prior authorization)
On November 4, 2019, a majority the outstanding voting interests of the shareholders of the Company voted, through written consent in lieu of a meeting, to approve an amendment of IronClad’s Certificate of Incorporation to increase the total number of authorized shares of stock to 50,021,707,093 shares (each with a par value of $0.001). The change primarily related to changing the number of Class A common stock to 50,000,000,000 shares.
The authority is for three types of stock and for specified amounts:
20,000,000 shares of Preferred Stock (no change from prior authorization)
50,000,000,000 shares of Common Stock, Class A (changed from 6,000,000,000 shares)
1,707,093 shares of Common stock, Class B (no change from prior authorization)
New Loan Agreements: Convertible Notes for 8% and 10%
On October 1, 2019, IronClad entered into a Securities Purchase Agreement to issue an 8% convertible note payable for an aggregate principal amount of $84,500. The Company received cash proceeds of $76,000 net of transaction costs of $8,500. The $8,500 is recorded as a discount amount on the note payable and will be amortized as interest expenses over the life of the note. The note matures on October 1, 2020 and interest costs accrue on the unpaid principal balance at 8% annually until October 1, 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 180 days following the issue date, to convert all or any amount of the principal face amount of the note payable then outstanding into shares of the Company's Class A common stock. The shares to be issued upon conversion are a function of a variable conversion price which is 66% 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 including the conversion date. The Company will keep available authorized shares reserved of 400% of the conversion amount, initially 113,804,000 shares.
Derivative Liability. The valuation of the derivative liability related to the $84,500 borrowing with an intrinsic value of $0.0047 per share was approximately $150,436 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
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IronClad Encryption Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
an amount not in excess of and thus capped by the otherwise undiscounted amount of the note payable. The amount of the derivative liability note discount formally recorded was $76,000 ($84,500 net of $8,500) and will be amortized as interest expense over the life of the loan. The remaining $74,436 was expensed as financing fees at the inception of the note.
On October 31, 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 October 31, 2020 and interest costs accrue on the unpaid principal balance at 10% annually until October 31, 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 180 days following the issue date, to convert all or any amount of the principal face amount of the Note then outstanding into shares of the Company's Class A 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 including the conversion date. The Company will keep available authorized shares reserved of 400% of the conversion amount, initially 400,000,000 shares.
Derivative Liability. The valuation of the derivative liability related to the $84,500 borrowing with an intrinsic value of $0.0008 per share was approximately $307,692 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 note discount formally recorded was $142,500 ($150,000 net of $7,500) and will be amortized as interest expense over the life of the loan. The remaining $165,192 was expensed as financing fees at the inception of the note.
Additional Stock Issuances
Subsequent to September 30, 2019 1,118,644,874 shares of Class A common stock were issued to repay $286,750 of convertible notes principal balances, $23,098 of accrued interest and $8,000 of related financing fees.
Change between Trading Markets within the OTC Markets Group.
On November 4, 2019, IronClad was notified by the OTC Markets Group that it was not in compliance with the continued listing standards set forth in Section 4.1(b) of the OTCQB Standards because the average closing price of IronClad’s Class A common stock was less than $0.001 over a consecutive five-day trading period.
On November 5, 2019 IronClad began trading, without interruption, on the OTC Pink Open Market (OTCIQ).
IronClad will continue to provide all requisite reports pursuant to the Securities and Exchange Act of 1934, as amended.
IronClad is evaluating its options and is monitoring the closing bid price of its common stock and will consider options available to it to potentially regain compliance with the listing standards of the OTCQB Venture Market and possibly resume trading on that market.
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