Part I

Item 1.  Business

Overview

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

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We strive to generate royalty revenue by securing license agreements with leading vendors through sales of ICE-enabled security applications, subscriptions, services and maintenance contracts, as well as sales of our ultra-secure BlackICE gateway and our ultra-secure ICE Phone.  Our suite of security applications will be marketed as stand-alone applications and modules that integrate within security management systems deployed within enterprises.

We are also engaged in providing an array of confidential services in support of infrastructure projects, including the deployment of ICEmicro, IronClad’s proprietary technology and the world’s first context free and natively secure containers, throughout project-specific networks securing the data transmitted to the internal and external networks, databases, and systems.

Corporate History  

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

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

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

Liquidity 

Since the inception of our business we have incurred significant operating losses.  Through December 31, 2017, we have generated cumulative net losses of $10,691,782.  However, during the first quarter of 2018, IronClad formed a new wholly-owned subsidiary, Ironclad Pipeline IC, Inc. which has begun generating a modest level of revenue through a moderately profitable service contract with a major energy company in the eastern United States to provide an array of services in support of an infrastructure project.

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

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

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Employees and Independent Contractors

As of April 10, 2018, we have 18 employees, all of whom are based in the United States.  We also use independent contractors from time to time for specific projects and functions.  No employees are represented by a union.  Of the 18 employees 10 have been added since December 31, 2017.

Available Information

We are currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We file periodic reports, proxy materials and other information with the Securities and Exchange Commission (“SEC” or “Commission”). In addition, we expect to furnish stockholders with annual reports containing audited financial statements certified by our independent registered public accounting firm and interim reports containing unaudited financial information as may be necessary or desirable.

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

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

Item 1A.  Risk Factors

Risks Related to Our Business and Our Industry

  We lack an operating history and through 2017 have never had revenues or profits.  We anticipate continuing to sustain losses on a consolidated basis and as a result, we may have to suspend or cease operations.

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

Losses incurred through 2017 are a result of costs incurred from the issuance of stock, re-incorporation between states, and legal and accounting costs.  We have never had revenues and we have only very limited current prospects for future revenues.  Our ability to achieve and maintain profitability and positive cash flow depend on:

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

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

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

For the last two fiscal years we have incurred net losses, including net losses of approximately $10,498,114 in fiscal 2017 and $145,615 in fiscal 2016.  As a result, we had an accumulated deficit of $10,691,782 by the end of 2017.  We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to enhance our product and service offerings, broaden our end-customer base, expand our sales channels, expand our operations, hire additional employees, and continue to develop our technology.  These efforts may prove more expensive than we currently anticipate, and we may not succeed in establishing and increasing our revenues sufficiently, or at all, to offset these higher expenses.

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

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

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

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

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

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

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

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effectively manage the associated increases in expenses, our business, results of operations and financial condition would be harmed.

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

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

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

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

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

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

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

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

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

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

Our products may become quickly outdated.

The data security market for our products is characterized by rapidly changing technology.  Accordingly, we believe that our future success depends on our ability to develop products that can meet market needs on a timely basis.  Although the market expects rapid introduction of new products or product enhancements to respond to new threats, the development of these products is expensive and difficult to achieve.  Furthermore, the timetable for commercial release and availability is uncertain as there can be long time periods between releases and availability of new products.  There can be no assurance that we will even be successful in developing and marketing, on a timely basis, such new products or enhancements, or that our new products or enhancements will adequately address the changing needs of the marketplace, or that we will be able to respond effectively to technological changes introduced by strategic partners or future competitors.

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

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

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

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

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

Our products must interoperate with our end-customers’ existing infrastructure, which could have different specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain multiple

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generations of products that have been added over time.  As a result, when problems occur in a network, it may be difficult to identify the sources of these problems.

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

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

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

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

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

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

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

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

Our revenue will depend significantly on general economic conditions and the demand for products in the IT security market.  Economic weakness, customer financial difficulties, and constrained spending on IT security may result in decreased revenue and earnings.  Such factors could make it difficult to accurately forecast our sales and operating results and could negatively affect our ability to provide accurate forecasts to our contract manufacturers and manage our contract manufacturer relationships and other expenses.  If we do not succeed in

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convincing customers that our platform should be an integral part of their overall approach to IT security and that a fixed portion of their annual IT budgets should be allocated to our platform, general reductions in IT spending by our customers are likely to have a disproportionate impact on our business, results of operations and financial condition.

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

Our revenue may be variable and difficult to predict.

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

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

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

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

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

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

Our officers and directors are collectively the beneficial owners of a majority of the Company’s outstanding Class A common stock.  As such, they will be able to control most matters requiring approval by stockholders, including the election of directors and approval of significant corporate transactions.  This concentration of ownership may also have the effect of delaying or preventing a change in control, which in turn could have a material adverse effect on the market price of the Company’s Class A common stock or prevent stockholders from realizing a premium over the market price for their Shares.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us.  Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is in conflict with one another, and is inconsistent with our encryption practices or the features of our solutions.  If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our encryption software and hardware, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.

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

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

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

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

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

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

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

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

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

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

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

Additionally, because our Chief Technology Officer has other outside business activities, he will only be devoting 70% of his time or approximately thirty hours per week to our operations.

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

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

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

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

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

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

Failure to establish the required controls or procedures, or any failure of those controls or procedures once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations.  Our management and our auditors have identified a material weakness in our disclosure controls and procedures and in our internal control over financial reporting due to insufficient resources in the accounting and finance department.  Due to these weaknesses, there is more than a remote likelihood that a material misstatement of the consolidated financial statements would not have been prevented or detected.

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

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

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

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

Variations in patent and trademark laws across different jurisdictions may also affect our ability to protect our proprietary technologies consistently across the globe.  The efforts we have taken to protect our intellectual property may not be sufficient or effective, and our trademarks, copyrights and patents may be held invalid or unenforceable.  We may not be effective in policing unauthorized use of our intellectual property, and even if we do detect violations, litigation may be necessary to enforce our intellectual property rights.  Any enforcement efforts we undertake, including litigation, could be time consuming and expensive, could divert management’s attention and may result in a court determining that our intellectual property rights are unenforceable.  If we are not successful in cost-effectively protecting our intellectual property rights, our business, financial condition and results of operations could be harmed.

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

Companies in the data encryption security industry own large numbers of patents, copyrights, trademarks, domain names, and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights.  Third parties may in the future assert claims of infringement of intellectual property rights against us.  As the number of products and competitors in our market increases and overlaps occur, infringement claims may increase.  In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection.  In addition, we have not registered our trademarks in all of our geographic markets and failure to secure those registrations could adversely affect our ability to enforce and defend our trademark rights.

Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract our management from our business and could require us to cease use of such intellectual property.  Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.  Although third parties may offer a license to their technology or other intellectual property, the terms of any offered license may not be acceptable to us and the failure to obtain a license or the costs associated with any license could cause our business, financial condition, and operating results to be materially and adversely affected.

In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us.  If a third party does not offer us a license to its technology or other intellectual property on reasonable terms, or at all, we could be enjoined from continued use of such intellectual property. As a result, we may be required to develop alternative, non-infringing technology, which could require significant time (during which we would be unable to continue to offer our affected products or services), effort, and expense and may ultimately not be successful.  Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain products or performing certain services or that requires us to pay substantial damages, royalties or other fees. Any of these events could seriously harm our business, financial condition, and operating results.

We could be subject to additional tax liabilities.

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

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by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities.

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

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

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

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

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

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

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

A significant natural disaster, such as an earthquake, a fire, a flood, or significant power outage could have a material adverse effect on our business, results of operations, and financial condition. In addition, natural disasters could affect our supply chain, manufacturing vendors, or logistics providers’ ability to provide materials and perform services such as manufacturing products or assisting with shipments on a timely basis.  In the event that

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our or our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter.

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

Risks Related to Our Class A Common Stock

You could lose the value of all of your investment.

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

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

In the future, we may issue our authorized but previously unissued equity securities, which would result in the dilution of the ownership interests of our present stockholders and the purchasers of our common stock offered hereby.  The Company is authorized to issue an aggregate of 150,000,000 shares of common stock and 20,000,000 shares of preferred stock.  We may issue additional shares of our common stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes.

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

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

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

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

There is currently only a limited public market for shares of our common stock, and an active trading market may never develop.  Our Class A common stock is quoted on the OTC QB market.  The OTC QB market is a thinly traded market and lacks the liquidity of certain other public markets with which some investors

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may have more experience.  We may not ever be able to satisfy the listing requirements for our Class A common stock to be listed on a national securities exchange, which is often a more widely-traded and liquid market.  

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

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

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

The closing price for our Class A common stock has varied between a high of $12.00 and a low of $1.20.  This volatility may affect the price at which an investor could sell the Class A common stock, and the sale of substantial amounts of our Class A common stock could adversely affect the price of our Class A common stock.  Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors; variations in our quarterly operating results from our expectations or those of securities analysts or investors; downward revisions in securities analysts’ estimates; and announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments.

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

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

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

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

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

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

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

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

These provisions include:

·

no cumulative voting in the election of directors; 

·

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

·

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

·

an advance notice requirement for stockholder proposals and nominations; 

·

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

·

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

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

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

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

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

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

In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and (if required in future) our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404(b).  Our compliance with Section 404(b) may require that we incur substantial accounting expense and expend significant management efforts.  We currently do not have an internal audit group.  We may need to retain the

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services of additional accounting and financial staff or consultants with appropriate public company experience and technical accounting knowledge to satisfy the ongoing requirements of Section 404(b).  We intend to review the effectiveness of our internal controls and procedures and make any changes management determines appropriate, including to achieve compliance with Section 404(b) by the date on which we are required to so comply.

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

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

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

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

Private equity line draws may result in substantial dilution.

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

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

Item 1B.  Unresolved Staff Comments

Item 2.  Properties

Item 3.  Legal Proceedings

Item 4.  Mine Safety Disclosures

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