As filed with the Securities and Exchange Commission on October 17, 2017

Registration No.

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

 

 

 

IRONCLAD ENCRYPTION CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   81-0409475
State or other jurisdiction   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization   Classification Code Number)   Identification Number)

 

 

 

One Riverway, 777 South Post Oak Lane, Suite 1700

Houston, Texas 77056

(888) 362-7972

(Address, including zip code, and telephone number, including area code of registrant’s principal executive offices)

 

Len E. Walker

One Riverway, 777 South Post Oak Lane, Suite 1700

Houston, Texas 77056

(888) 362-7972

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies of communications to:

Ted Schweinfurth

Louann Richard

Baker & McKenzie LLP
2001 Ross Avenue, Suite 2300
Dallas, Texas 75203
(214) 978-3000
(214) 978-3099 (Fax)

 

Approximate Date of Commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨

  

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨     (Do not check if a smaller reporting company) Smaller reporting company x
  Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x

  

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to be Registered
  Amount
to be
Registered (1)
 

Proposed
Maximum
Offering

Price
Per Share (2)

    Proposed
Maximum
Aggregate
Offering Price (2)
    Amount of
Registration
Fee (3)
 
                       
Class A common stock, $0.001 par value per share   5,407,500 shares   $ 6.20     $ 33,526,500     $ 4,175  
                             
Total   5,407,500 shares   $ 6.20     $ 33,526,500     $ 4,175  

 

(1) Pursuant to Rule 416(a) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), this registration statement shall also cover any additional shares of the registrant’s Class A common stock that become issuable by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without receipt of consideration that increases the number of the registrant’s outstanding shares of Class A common stock.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) and (o) promulgated under the Securities Act on the basis of the average of the high and low sale prices of the Class A common stock on October 11, 2017, as reported on the OTC QB.
(3) Paid by electronic transfer.

 

EXPLANATORY NOTE

 

This registration statement and the prospectus therein cover the registration of 5,407,500 shares of Class A common stock offered by the holders thereof.

 

 

 

 

 

 

PROSPECTUS

 

IRONCLAD ENCRYPTION CORPORATION

Up to 5,407,500 shares of Class A common stock

 

This prospectus relates to the 5,407,500 shares of Class A common stock (the “Shares”) of IronClad Encryption Corporation (“we,” “our,” “ICE,” “IRNC,” “IronClad” or the “Company”), $0.001 par value per share, being registered for possible resale, from time to time, by the holders thereof. Of such shares, 4,407,500 are Shares owned by stockholders of the Company who acquired such Shares directly from the Company in private transactions and the remaining 1,000,000 Shares are Shares that may be issued pursuant to an investment agreement which establishes a private equity line of credit (“Investment Agreement”) with Tangiers Global, LLC (“Tangiers”), who is deemed to be a statutory underwriter. See the section of this prospectus entitled “The Investment Agreement” for a description of the private equity line and the section entitled “Selling Stockholders” for additional information about Tangiers and the other selling stockholders.

 

The selling stockholders may sell their Shares at prevailing market or privately negotiated prices, including (without limitation) in one or more transactions that may take place by ordinary broker’s transactions, privately-negotiated transactions or through sales to one or more dealers for resale. The maximum number of Shares that can be sold pursuant to the terms of this offering by the selling stockholders is (in the aggregate) 5,407,500 Shares. Funds received by the selling stockholders will be immediately available to such selling stockholders for use by them. The Company will not receive any proceeds from the sale of the selling stockholders’ Shares. However, we will receive the sale price of any Class A common stock that we sell to Tangiers pursuant to the private equity line. Any proceeds we receive from the sale of the shares under the private equity line will be used for general corporate purposes. All costs incurred in the registration of the Shares are being borne by the Company.

 

The offering will terminate thirty-six (36) months from the date that the registration statement relating to the Shares is declared effective, unless earlier fully sold or terminated. The Company intends to maintain the effectiveness of the registration statement of which this prospectus is a part and to allow selling stockholders to offer and sell the Shares for a period of up to three (3) years, unless earlier completely sold, pursuant to Rule 415 of the General Rules and Regulations of the Securities and Exchange Commission (“SEC”).

 

Our Class A common stock is traded on the OTC QB, one of the OTC Markets Group over-the-counter markets, under the trading symbol “IRNC.” On October 11, 2017, the closing sale price for our Class A common stock was $6.20.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

These securities involve a high degree of risk. See “RISK FACTORS” contained in this prospectus beginning on page 3.

 

Prospectus dated                         , 2017

 

 

 

  

TABLE OF CONTENTS

 

  Page
   
PROSPECTUS SUMMARY 1
   
RISK FACTORS 3
   
FORWARD-LOOKING STATEMENTS 17
   
USE OF PROCEEDS 17
   
THE INVESTMENT AGREEMENT 17
   
THE DRAW DOWN PROCEDURE AND THE STOCK PURCHASES 18
   
SELLING STOCKHOLDERS 20
   
DILUTION 22
   
PLAN OF DISTRIBUTION 23
   
DESCRIPTION OF SECURITIES 24
   
THE COMPANY 25
   
THE BUSINESS AND BUSINESS PLAN 26
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 34
   
MANAGEMENT 37
   
EXECUTIVE COMPENSATION 39
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 43
   
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 44
   
LEGAL MATTERS 44
   
EXPERTS 44
   
WHERE YOU CAN FIND MORE INFORMATION 44
   
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE 45
   
FINANCIAL STATEMENTS F-1

 

 

 

  

PROSPECTUS SUMMARY

 

This summary highlights some information from this prospectus, and it may not contain all the information important to making an investment decision. To understand this offering fully, you should read the following summary together with the more detailed information regarding the Company and the Class A common stock, including “Risk Factors” and the financial statements and related notes, included elsewhere in this prospectus.

 

The Company

 

History

 

IronClad Encryption Corporation, an encryption technology company 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 OTCBB, 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”) and changed the stock symbol from BTHI to IRNC. 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.

 

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

 

Employees

 

At December 31, 2016, Butte had no full-time employees. The Company’s President served without compensation.

 

Upon completion of the share exchange on January 6, 2017, the Board of Directors appointed a President, Chief Technology Officer, Vice President of Planning, Vice President of Sales and Vice President of Legal, General Counsel and Secretary.

 

Subsequent to January 6, 2017, IronClad hired two additional employees; one is the Vice President, Treasurer and Chief Financial Officer and the other is the Director of Product Testing. The Company also uses the services of several outside consultants and contractors to provide additional services.

 

As of October 17, 2017, the Company has seven employees.

 

Business

 

The Company is engaged in the business of developing and licensing the use of cyber software technology that encrypts data files and electronic communications. The Company is currently developing and licensing a new approach that enhances the strength of today’s key-based encryption methods and technology. Through its patented Dynamic Synchronous Key Management and Perpetual Authentication technology, the Company seeks to bring needed innovation to data encryption security by increasing the effectiveness of current encryption products.

 

Focused on being the next generation data security leader, the Company’s products are designed to utilize the technology referenced above to address the current limitations of encryption technology, including cost, implementation and deployment and human interactions. The Company intends to generate royalty revenue by securing license agreements with leading vendors in each of the technology segments discussed below, through sales of hardware like the ICE Phone, subscriptions, and sales of ICE-enabled security applications, services and maintenance contracts. The Company expects its branded software and security solutions to be launched in the first half of 2018.

 

 

 

  

IronClad will initially market two products lines, including the ICE Phone and a suite of security applications for enterprise network management. The ICE Phone is designed to be an ultra-secure and ultra-rugged mobile phone platform intended to enable secure communication from the board-room to the military battlefield. The suite of security applications will be marketed as stand-alone applications and modules that seamlessly integrate within security management systems deployed within enterprises.

 

Risks and Uncertainties Facing the Company

 

As a development stage company, the Company has no operating history and has experienced losses since its inception. One of the biggest challenges facing the Company is the ability to raise adequate capital to develop and execute opportunities in the encryption technology industry.

 

Due to financial constraints, the Company has conducted limited operations to date. If the Company were unable to develop strong and reliable sources of funding for growth opportunities, it is unlikely that the Company could develop its operations to return revenue sufficient to further develop its business plan. Moreover, the above assumes that the Company’s efforts are met with customer satisfaction in the marketplace and exhibit steady adoption of its solutions among the potential base of customers, neither of which are currently known or guaranteed.

 

Trading Market

 

Our Class A common stock is traded on the OTC QB, one of the OTC Markets Group over-the-counter markets, under the trading symbol “IRNC.” On October 11, 2017, the closing sale price of our Class A common stock was $6.20.

 

The Offering

 

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

 

Pursuant to the Registration Rights Agreement, we have filed a registration statement of which this prospectus is a part, covering the possible resale by Tangiers of the shares that we issue to Tangiers under the Investment Agreement. The effectiveness of this registration statement is a condition precedent to our ability to sell shares of Class A common stock to Tangiers under the Investment Agreement. Through this prospectus, Tangiers may offer to the public for resale shares of our Class A common stock that we issue to Tangiers pursuant to the Investment Agreement.

 

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

 

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

 

This prospectus also covers the offering for resale of up to 4,407,500 shares of our Class A common stock by the other selling stockholders identified below. Each of the selling stockholders acquired these shares from us in private transactions pursuant to exemptions from registration.

 

The maximum number of Shares that can be sold by the selling stockholders pursuant to the terms of this offering is 5,407,500. The number of shares of Class A common stock issuable to Tangiers which are subject to this prospectus represents approximately 1.5% of our issued and outstanding Class A common stock as of October 17, 2017.

 

  2  

 

  

In the future, following the completion of this offering, the Company will likely need to raise additional capital for its operations. The Company anticipates that it may raise such capital by an offering of its shares of Class A common stock. If the Company does effect equity offerings of its securities and if the price paid for shares offered in such an offering is less than paid by the purchasers of Shares, then such purchasers will suffer a dilution in the value of their shares. Furthermore the issuance of such additional shares may impact the ability of any investor to sell their Shares once such shares are eligible for sale. The Company cannot anticipate that it will be able to effect such additional offerings of its securities and then failure of it to do so may severely impact its available capital to develop any products or further its business plan.

 

RISK FACTORS

 

A purchase of any Shares is an investment in the Company’s Class A common stock and involves a high degree of risk. Investors should consider carefully the following information about these risks, together with the other information contained in the registration statement of which this prospectus is a part, before the purchase of any Shares. If any of the following risks actually occur, the business, financial condition or results of operations of the Company would likely suffer, the market price of the Class A common stock would likely decline, and investors could lose all or a portion of the value of their investment. The Company has listed the following risk factors which it believes to be those that are material to an investment in our Class A common stock.

 

Risks Related to Our Business and Our Industry

 

We lack an operating history, have never had revenues, have no current prospects for significant future revenues, and have losses which we expect to continue into the future. 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.  The Company and its 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 are a result of costs incurred from the issuance of stock and, re-incorporation between states, and legal and accounting costs. We have never had revenues and we do not have any current prospects for future revenues. Our ability to achieve and maintain profitability and positive cash flow depend on:

 

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

 

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

 

· our ability to manage development and operating costs.

 

Based on current plans, we expect to incur operating losses and negative cash flows from 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 (if any) in the near future. As a result, we may not generate revenues, profits or positive net cash flows in the future.  Failure to generate revenues or positive cash flows from operating activities could cause us to suspend or cease operations.

 

Because we are small and do not have much capital, we may have to limit our development activity which may result in a loss of the value of your investment.

 

Since we are small and do not have much capital, we must limit our development activity. As such we may not be able to complete a software and hardware development program that is as thorough as we would like or as might be expected from potential customers.  Therefore, we have not considered and will not consider any activity beyond developing and generating revenue related to our current patented technology.

 

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

 

For the last two fiscal years we have incurred net losses, including net losses of approximately $39,733 in fiscal 2016 and $32,750 in fiscal 2015. As a result, we had an accumulated deficit of $213,581 in 2016. 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.

 

  3  

 

  

Revenue growth may slow for a number of possible reasons, including slowing demand for our products or services, increasing competition, a decrease in the growth of our overall market, or a failure to capitalize on growth opportunities. Any failure to establish and increase our revenues as we grow our business could prevent us from establishing, maintaining or increasing profitability or positive cash flow on a consistent basis. If we are unable to meet these risks and challenges as we encounter them, our business, financial condition, and operating results may suffer.

 

We have incurred significant operating losses in the past two years. As of June 30, 2017, the Company has an accumulated deficit of $4,555,191.

 

We have incurred operating losses during 2016 and 2015. During 2016, we incurred a net loss of $39,733. During 2015, we incurred a net loss of $32,750. There can be no assurance that we will be profitable in the future. Our continued failure to operate profitably may materially and adversely affect the value of our Class A common stock. Our losses to date have been funded by loans and equity sales. As of June 30, 2017, the Company had an accumulated deficit of $4,555,191 and incurred a net loss of $4,361,523 during the six months ended June 30, 2017. These deficits and losses may affect the Company in various ways including, but not limited to, making it more difficult to borrow money, sell stock or to maintain a good market price.

 

The Company has limited operating history through its subsidiary and may increase the risk that we will not be successful.

 

The Company is a development stage Company and has limited operating history in its current encryption technology activities. The Company is relying on management to develop and implement its business plan through its operating subsidiary. The Company’s subsidiary has limited business history and an investor will be required to make an investment decision based largely on the management and the projected operations in light of the risks, expenses and uncertainties that may be encountered by engaging in the technological development and marketing of encrypted software and hardware.

 

In order to implement its business plan and further develop its technology, the Company will need additional capital.

 

The Company will not receive any funds from the sale of the Shares offered herein and will require capital by loans, joint ventures or sales of its securities in order to execute its current business plan, namely to further develop the technology of its platforms for key-based encryption methods. If the Company were unable to locate such financing on terms acceptable to the Company, it is unlikely that the Company could develop its operations to return revenue sufficient to further develop its business plan.

 

In order to continue operations the Company has undertaken a private offering of its securities in order to raise necessary funds.

 

In order to raise necessary funds to continue operations and meet its obligations, the Company has undertaken a private offering of its securities in order to raise the necessary funds. There is no assurance that the Company can raise additional funds through its offering and without such influx of such capital, or without capital from other sources such as loans or debt offering, the Company may not be able to continue operations.

 

No assurance of commercial feasibility.

 

Even if the Company’s plans and projects are successfully initiated, there can be no assurance that such plans and projects will have any commercial success or advantage. Also, there is no assurance that the Company’s initiatives will perform as intended in the marketplace.

 

Our current research and development efforts may not produce successful products or enhancements to our platform that result in significant revenue, cost savings or other benefits in the near future, if at all.

 

We must continue to dedicate significant financial and other resources to our research and development efforts. However, developing products and enhancements to our platform is expensive and time consuming, and there is no assurance that such activities will result in significant new marketable products or enhancements to our platform, design improvements, cost savings, revenue or other expected benefits. If we spend significant resources on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be materially and adversely affected.

 

  4  

 

 

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 may not grow, which would have a material adverse effect on our operating results and financial condition.

 

Slow development of a market for our products would 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. While management believes that such demand exists and will develop, there can be no assurance as to the rate of development of such demand. Slow development of the demand for our products and services would adversely affect our short-term results of operations. If the demand for our products and services develops more slowly than management currently anticipates, we may need to raise additional capital sooner than currently projected to enable us to sustain our operations long enough to achieve profitability.

 

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

 

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

 

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

 

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

 

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

 

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.

 

  5  

 

  

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

 

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

 

The process of developing this new technology is expensive, complex and uncertain. The success of new products and enhancements depends on several factors, including appropriate component costs, timely completion and introduction, differentiation of new products and enhancements from those of our competitors, and market acceptance. To build our competitive position, we must commit significant resources to developing new products or enhancements to our platform before knowing whether these investments will be cost- effective or achieve the intended results. There can be no assurance that we will successfully identify product opportunities, develop and bring new products or enhancements to market in a timely manner, or achieve market acceptance of our platform, or that products and technologies developed by others will not render our platform obsolete or noncompetitive. If we expend significant resources on researching and developing products or enhancements to our platform and such products or enhancements are not successful, our business, financial position and results of operations may be adversely affected.

 

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

 

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 difficult and 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 plan to introduce, and will continue to introduce, new encrypted software and hardware, and we may not gain broad market acceptance for these new solutions. 

 

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, we cannot assure you that these solutions will gain broad market acceptance and that they will prove to be profitable in the longer term. Additionally, we intend to continue introducing new data security solutions to respond to the needs of our customers. If we fail to achieve high levels of market acceptance for these solutions or if market acceptance is delayed, we may fail to justify the amount of our investment in developing and bringing them to market, and our business, operating results and financial performance could be adversely affected.

 

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

 

  6  

 

  

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

 

Our products must interoperate with our end-customers’ existing infrastructure, which could have different specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. If we find errors in the existing software or defects in the hardware used in our customers’ infrastructure or problematic network configurations or settings, we may have to modify our software or hardware so that our products will interoperate with our customers’ infrastructure. In such cases, our products may be unable to provide significant performance improvements for applications deployed in our customers’ infrastructure. These issues could cause longer installation times for our products and could cause order cancellations, either of which would adversely affect our business, results of operations and financial condition.

 

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

 

IronClad’s software platforms depend on interoperability with operating systems, such as those provided by Apple, Google and Microsoft, as well as other device manufacturers. Because mobile operating systems are released more frequently than legacy PC operating systems, and there is typically limited advance notice of changes in features and functionality of operating systems and mobile devices, we may be forced to divert resources from our product roadmap in order to accommodate these changes. In addition, if we fail to enable IT departments to support operating system upgrades upon release, our business and reputation could suffer. This could disrupt our product roadmap and cause us to delay introduction of planned solutions, features and functionality, which could harm our business.

 

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

 

Large, well-established providers of encryption software and hardware offer, and may continue to introduce, data security features that compete with our products, either in stand-alone security products or as additional features in their network infrastructure products. The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our security solutions in networking products that are already generally accepted as necessary components of network architecture may have an adverse effect on our ability to market and sell our products. Furthermore, even if the functionality offered by network infrastructure providers is more limited than our products, a significant number of end-customers may elect to accept such limited functionality in lieu of adding appliances from an additional vendor such as us. Many organizations have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of networking products, which may make them reluctant to add new components to their networks, particularly from other vendors such as us. In addition, an organization’s existing vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match because we currently plan to offer only network security products and have fewer resources than many of our competitors. If organizations are reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, our ability to increase our market share and improve our financial condition and operating results will be adversely affected.

 

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

 

Our revenue will depend significantly on general economic conditions and the demand for products in the IT security market. Economic weakness, customer financial difficulties, and constrained spending on IT security may result in decreased revenue and earnings. Such factors could make it difficult to accurately forecast our sales and operating results and could negatively affect our ability to provide accurate forecasts to our contract manufacturers and manage our contract manufacturer relationships and other expenses. If we do not succeed in convincing customers that our platform should be an integral part of their overall approach to IT security and that a fixed portion of their annual IT budgets should be allocated to our platform, general reductions in IT spending by our customers are likely to have a disproportionate impact on our business, results of operations and financial condition. General economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses, and lack of investment in our Company. Furthermore, weakness and uncertainty in worldwide credit markets may adversely impact the ability of our potential customers to adequately fund their expected capital expenditures, which could lead to delays or cancellations of planned purchases of our platform.

 

  7  

 

  

Our billings may be variable and difficult to predict.

 

A substantial majority of our billings 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 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 make investments in complementary companies, products, or technologies. However, we have not made any significant acquisitions to date, and as a result, our ability as an organization 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, we may not ultimately strengthen our competitive position or achieve our goals, 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 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 and assuming sale of all the Shares, will still own a majority of the Company's then outstanding Class A common stock upon closing of the offering. As such, they will be able to control most matters requiring approval by stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control, which in turn could have a material adverse effect on the market price of the Company’s Class A common stock or prevent stockholders from realizing a premium over the market price for their Shares.

 

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

 

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

 

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

 

  8  

 

  

If we do not effectively establish and train a qualified sales force, we may be unable to add new customers or increase sales to our existing customers in the future, and our business will be adversely affected.

 

We will be substantially dependent on our direct sales force to obtain new customers and increase sales with these customers in the future. There is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and may take significant time before they achieve full productivity. Our new hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business.

 

In addition, because we were recently formed, a large percentage of our sales force will need to be hired and will be new to our Company. If we are unable to hire and train a sufficient number of effective sales personnel, or the sales personnel we hire are not successful in obtaining new customers or increasing sales to our existing customer base, our business will be adversely affected.

 

We operate in a rapidly evolving industry and changes in existing technologies or the emergence of new products or technologies could reduce demand for our products and significantly harm our business.

 

The encryption market is characterized by rapid technological change, frequent product introductions, new protocols, evolving industry standards, consolidation among our competitors, suppliers and customers, and evolving customer preferences. The introduction of new products by our competitors or us or new entrants into the storage market could render our existing products obsolete or uncompetitive. Additionally, changes in existing technologies could cause demand for our products to decline. For example, if changes in technology result in a significant reduction in cyber-attacks, enterprises may not need to utilize our encrypted software and hardware. One or more new technologies also could be introduced that compete effectively with our products or that cause our products to no longer be of significant benefit to our customers, and demand for our products could be reduced significantly.

 

FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

 

The Financial Industry Regulation Authority (“FINRA”) has adopted rules that apply to broker-dealers in recommending an investment to a customer. The broker-dealers must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities such as ours to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.

 

Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low-priced securities such as ours will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend buying our Class A common stock to their customers and this may have the effect of reducing the level of trading activity and liquidity of our Class A common stock. Further, many brokers charge higher transactional fees for penny stock transactions such as buying our Class A common stock. As a result, fewer broker-dealers may be willing to make a market in our Class A common stock, reducing our stockholder’s ability to resell shares of our Class A common stock.

 

The Company’s stock may be considered a penny stock and any investment in the Company’s stock will be considered a high-risk investment and subject to restrictions on marketability.

 

If the Shares commence trading, the trading price of the Company’s Class A common stock may be below $5.00 per Share. If the price of the Class A common stock is below such level, trading in its Class A common stock would be subject to the requirements of certain rules promulgated under the Exchange Act. These rules require additional disclosure by broker-dealers in connection with any trades generally involving any non-NASDAQ equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such rules require the delivery, before any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must determine the suitability of the penny stock for the purchaser and receive the purchaser’s written consent to the transaction before sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Company’s Class A common stock which could impact the liquidity of the Company’s Class A common stock.

 

  9  

 

 

We face significant competition and expect this competition to intensify, which could prevent us from increasing our revenue, reduce our gross margins, and result in the loss of market share.

 

The market for encryption technology is highly competitive and we expect competition to intensify in the future. Other companies have introduced, and may in the future introduce, new products in the same market we intend to enter. Currently, we expect to face competition from existing encryption products on the market. Further, many of our competitors have substantially greater financial, sales and other resources than we do and may in some cases benefit from lower costs than we do. In some cases, they also have more recognizable brands than our own.

 

Competition will likely result in pricing pressure on our products and services, and we anticipate that pricing pressure will increase in the future. Competition may in some instances result in a negative impact on the length of our sales cycle, and we may experience longer sales cycles in future periods due to increased competition. In particular, if a large number of orders, or a large dollar value order, is delayed or cancelled, our financial results may be harmed. Competition may result in reduced gross margins for our products, increased sales and marketing expenses and a failure to increase market share.

 

We face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial or other resources to improve our competitive position.

 

The market for network security and encryption products is intensely competitive, and we expect competition to increase in the future from established competitors and new market entrants. Many of our potential competitors could have substantial competitive advantages such as:

 

· greater name recognition and longer operating histories;

 

· larger sales and marketing budgets and resources;

 

· broader distribution and established relationships with distribution partners and end-customers;

 

· greater customer support resources;

 

· greater resources to make acquisitions;

 

· lower labor and development costs;

 

· larger and more mature intellectual property portfolios; and

 

· substantially greater financial, technical and other resources.

 

In addition, some of our potential larger competitors have substantially broader and more diverse product offerings and can leverage their relationships based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our products, including through selling at zero or negative margins, product bundling, or closed technology platforms. Potential end-customers may also prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. As a result, even if the features of our platform are superior, customers may not purchase our products.

 

Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering by our competitors or continuing market consolidation. New start-up companies that innovate and large competitors that are making significant investments in research and development may invent similar or superior products and technologies that compete with our products and technology. Our potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. If we are unable to compete successfully, or if competing successfully requires us to take costly actions in response to the actions of our competitors, our business, financial condition and results of operations could be adversely affected.

 

  10  

 

 

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

 

A wide variety of provincial, state, national, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These data protection and privacy-related laws and regulations are evolving and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. Our failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement action against us, including fines, imprisonment of Company officials and public censure, claims for damages by end-customers and other affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business. Evolving and changing definitions of personal data and personal information, within the European Union, the United States, and elsewhere, especially relating to classification of IP addresses, machine identification, location data, and other information, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit adoption of our products by potential end-customers.

 

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

 

Our customers will rely on our encryption solutions to secure and store their data, which may include financial records, credit card information, business information, customer information, health information, other personally identifiable information or other sensitive personal information. A breach of our encryption methods or other events that cause the loss or public disclosure of, or access by third parties to, our customers’ stored files or data could have serious negative consequences for our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of our customers to use our solutions, harm to our brand and reputation and time-consuming and expensive litigation. The techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, often are not recognized until launched against a target and may originate from less regulated or remote areas around the world. As a result, we may be unable to proactively prevent these techniques, implement adequate preventative or reactionary measures or enforce the laws and regulations that govern such activities. If our customers experience any data loss, or any data corruption or inaccuracies, whether caused by security breaches or otherwise, our brand, reputation and business could be harmed.

 

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

 

As a provider of data security solutions, we will be a high profile target and our networks and solutions may have vulnerabilities that may be targeted by hackers and could be targeted by attacks specifically designed to disrupt our business and harm our reputation. We will not succeed unless the marketplace continues to be confident that we provide effective encryption protection. If a breach of network security occurs in our internal systems it could adversely affect the market’s perception of our solutions. We may not be able to correct any security flaws or 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, or the EU, and the Federal Data Protection Act recently passed in Germany.

 

  11  

 

 

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

 

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

 

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

 

Our solutions might contain software modules licensed for use from third-party authors under open source licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses might contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary solutions with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary solutions to the public or offer our solutions to users at no cost. This could allow our competitors to create similar solutions with lower development effort and time and ultimately could result in a loss of sales for us.

 

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

 

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

 

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

 

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

 

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.

 

The Company relies on the services of its key executives. The loss of the services of any such executive could adversely affect the business. 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.

 

  12  

 

 

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.

 

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

 

We believe that our intellectual property is an essential asset of our business. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual provisions, to establish and protect our intellectual property rights in the United States and abroad. The filing of a patent application or trademark application does not guarantee the issuance of a corresponding patent or trademark. Thus, our efforts to secure intellectual property rights may not result in enforceable rights against third parties. Any U.S. or other patents that we acquire may not be sufficiently broad to protect our proprietary technologies, and given the costs of obtaining patent protection, we may choose not to seek patent protection for certain of our proprietary technologies or in certain jurisdictions. Further, the enforceability of any U.S. or other patent we obtain would be limited by the term of said patent.

 

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

 

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

 

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

 

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

 

  13  

 

 

We could be subject to additional tax liabilities.

 

We are subject to U.S. federal, state, local and sales taxes in the United States and may become subject to foreign income taxes, withholding taxes and transaction taxes in several foreign jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by recognizing tax losses or lower than anticipated earnings in jurisdictions where we have lower statutory rates and higher than anticipated earnings in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes, sales taxes and value-added taxes against us. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.

 

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

 

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

 

· selling to governmental agencies can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale;
· government certification requirements applicable to our products may change and, in doing so, restrict our ability to sell into the U.S. federal government sector until we have attained the revised certification;
· government demand and payment for our products and services may be affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services;
· governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our platform, which would adversely affect our revenue and results of operations, or institute fines or civil or criminal liability if the audit uncovers improper or illegal activities; and
· governments may require certain products to be manufactured in the United States and other relatively high-cost manufacturing locations, and we may not manufacture all products in locations that meet these requirements, thus affecting our ability to sell these products profitably to governmental agencies.

 

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

 

Our business is subject to regulation by various U.S. federal, state, local and may become subject to regulation by foreign governments in the future. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, injunctions or other collateral consequences. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, results of operations and financial condition.

 

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

 

A significant natural disaster, such as an earthquake, a fire, a flood, or significant power outage could have a material adverse effect on our business, results of operations, and financial condition. In addition, natural disasters could affect our supply chain, manufacturing vendors, or logistics providers’ ability to provide materials and perform services such as manufacturing products or assisting with shipments on a timely basis. In the event that our or our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the business of our supply chain, manufacturers, logistics providers, partners, or customers or the economy as a whole. Any disruption in the business of our supply chain, manufacturers, logistics providers, partners or end-customers that impacts sales at the end of a fiscal quarter could have a significant adverse impact on our financial results. All of the aforementioned risks may be further increased if the disaster recovery plans for us and our suppliers prove to be inadequate. To the extent that any of the above should result in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, our business, financial condition and results of operations would be adversely affected.

 

  14  

 

 

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

 

Our products are subject to U.S. export controls, specifically the Export Administration Regulations and economic sanctions enforced by the Office of Foreign Assets Control. We incorporate standard encryption algorithms into our products, which, along with the underlying technology, may be exported outside of the U.S. only with the required export authorizations, including by license, license exception or other appropriate government authorizations, which may require the filing of an encryption registration and classification request. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, and persons targeted by U.S. sanctions. In addition, various countries regulate the import of certain encryption technology, including through import permit and license requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries.

 

Changes in our products or changes in export and import regulations may create delays in the introduction of our products into international markets, prevent our customers with international operations from deploying our products globally or, in some cases, prevent the export or import of our products to certain countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition and results of operations.

 

Risks Related to this Offering and Ownership of Our Class A Common Stock

 

Sales of substantial amounts of our Class A common stock in the public markets, or the perception that such sales might occur, could reduce the price that our Class A common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

 

Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our Class A common stock and may make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate. Based on shares outstanding as of October 17, 2017, following the effectiveness of the registration statement of which this prospectus forms a part, and assuming a full issuance of the 1,000,000 shares of Tangiers, a total of 67,145,695 shares of Class A common stock will be outstanding. Of these shares, 6,850,571 shares, including 4,407,500 shares covered by this prospectus, which are currently outstanding, and 1,000,000 shares covered by this prospectus, which are issuable pursuant to a private equity line, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by “affiliates,” as that term is defined in Rule 144 under the Securities Act, subject, where applicable, to vesting requirements and compliance with the terms of our insider trading policy.

 

The remaining 60,295,124 shares of Class A common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below.

 

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

 

The market price of our Class A common stock may be volatile.

 

The trading price of our Class A common stock may be highly volatile and could be subject to wide fluctuations in response to various factors.  Some of the factors that may cause the market price of our Class A common stock to fluctuate include:

 

· fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

· changes in estimates of our financial results or recommendations by securities analysts;

 

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· failure of any of our products to achieve or maintain market acceptance;

 

· changes in market valuations of similar companies;

 

· significant products, contracts, acquisitions or strategic alliances of our competitors;

 

· success of competing products or services;

 

· changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;

 

· regulatory developments;

 

· litigation involving our Company, our general industry or both;

 

· additions or departures of key personnel;

 

· investors’ general perception of us; and

 

· changes in general economic, industry or market conditions.

 

In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our Class A common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigation has often been instituted against these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

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.

 

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FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

USE OF PROCEEDS

 

We will not receive any proceeds from the sale of the shares of Class A common stock by the selling stockholders; rather, the selling stockholders will receive those proceeds directly. However, we will receive the sale price if and when Tangiers purchases our Class A common stock in accordance with the Investment Agreement. Any proceeds we receive from the sale of the shares under the private equity line will be used for general corporate purposes.

 

THE INVESTMENT AGREEMENT

 

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

 

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

 

For a period of 36 months from the first trading day following the effectiveness of this registration statement, we may, from time to time, at our discretion, and subject to certain conditions that we must satisfy, draw down funds under the Investment Agreement by selling shares of our Class A common stock to Tangiers. Each draw down request must be for at least $5,000 and may, in our discretion, be up to the lesser of $500,000 and a formula amount based on the average price and trading volume of our Class A common stock over a designated period preceding the draw down request. The purchase price of these shares will be at a discount to the volume weighted average price or if none, the lowest closing bid price, of the Class A common stock during a designated pricing period following the draw down request. The formulas for determining the actual draw down amounts, the number of shares we issue to Tangiers and the purchase price per share paid by Tangiers are described in detail below.

 

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

 

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As consideration for its commitment to purchase shares of our Class A common stock pursuant to the Investment Agreement, we have issued to Tangiers a 7 month 10% convertible promissory note (the “Commitment Note”) in the principal amount of $100,000. The Commitment Note is convertible into shares of our Class A common stock at the fixed price of $3.25 per share; provided, however, that at any time and from time to time after a default occurs solely due to the fact the Commitment Note is not retired on or before the maturity date, all or any part of the Commitment Note is convertible into shares of our Class A common stock of the Company at a per share equal to the lower of: (a) $3.25 or (b) 65% of the average of the two lowest per share trading prices of the Class A common stock during the twenty consecutive trading days prior to the conversion date.

 

On August 24, 2017, in connection with the entry into the Investment Agreement, we also issued a 10% convertible note (the “Convertible Note”) in an aggregate principal amount of $330,000 with a 10% original issue discount. The initial consideration (“Initial Consideration”) in the amount of $165,000 was funded on August 24, 2017. The Company received net proceeds of $150,000 (which represents the deduction of the 10% original discount for Tangiers’ due diligence and legal fees). Tangiers may pay additional consideration (each, “Additional Consideration”) to the Company in such amounts and at such dates as Tangiers may choose in its sole discretion.

 

The amount of principal due to Tangiers will be prorated based on the Initial Consideration and Additional Consideration actually paid (plus the “guaranteed” interest and 10% original issue discount, both which are prorated based on the Initial Consideration and Additional Consideration actually paid, as well as any other interest or fees) such that the Company is only required to repay the amount funded and the Company is not required to repay any unfunded portion of the Convertible Note. The maturity date is seven months from the effective date of each payment of Consideration and is the date upon which the principal amount of the Convertible Note, as well as any unpaid interest and other fees, will be due and payable. The Convertible Note is convertible into shares of our Class A common stock at a fixed price of $1.00 per share; provided, however, that at any time and from time to time after a default occurs solely due to the fact the Convertible Note is not retired on or before the maturity date, Tangiers shall have the right to convert all or any part of the unpaid and outstanding principal amount and the accrued and unpaid interest under the Convertible Note into shares of our Class A common stock at a price per share equal to the lower of: (a) $1.00 or (b) 65% of the average of the two lowest per share trading prices of our Class A common stock during the twenty consecutive trading days prior to the conversion date.

 

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

 

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

 

THE DRAW DOWN PROCEDURE AND THE STOCK PURCHASES

 

We may request a draw down by delivering a draw down notice to Tangiers, stating the share amount of the draw down we wish to exercise. The next 5 trading days including and immediately following the draw down notice are used to determine the actual amount of money Tangiers will provide. On the draw down settlement date the dollar amount of the draw is determined and delivered by Tangiers to the Company.

 

Amount of Each Draw Down

 

The share amount of the draw down is the amount we have requested, with a minimum request of at least $5,000 and the maximum investment amount by Tangiers being the lesser of:

 

· $500,000; and
· 200% of the average daily trading volume of the Class A common stock during the 10 trading days immediately prior to the Company’s draw down notice.

 

At no time is Tangiers required to purchase more than the maximum investment amount for a given pricing period. As a result, if we choose not to exercise the maximum investment amount in a given draw down pricing period Tangiers is not obligated to and will not purchase more than the scheduled maximum investment amount calculated above in a subsequent draw down pricing period.

 

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Purchase Price of each Draw Down

 

The purchase price of the shares we issue to Tangiers pursuant to a draw down is the lowest volume weighted average price or, if none, the lowest closing bid price of the Class A common stock during the 5 trading day period including and immediately following the date of the Company’s draw down notice multiplied by 80%.  

 

Conditions

 

Before Tangiers is obligated to buy any shares of our Class A common stock pursuant to a draw down, the following conditions, none of which is in Tangiers’ control, must be met:

 

· The registration statement, which includes this prospectus, shall have previously become effective and shall remain effective.
· At all times during the period beginning on the date of the relevant draw down notice and ending on the date of the closing of any resale, the Class A common stock shall have been listed or quoted for trading on the principal market on which the Class A common stock is traded and shall not have been suspended from trading thereon.
· We shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Investment Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by us.
· No injunction shall have been issued and remain in force, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the shares.
· The issuance of the shares of Class A common stock will not violate any stockholder approval requirements of the principal market on which the Class A common stock is traded.
· Each of our representations and warranties in the Investment Agreement shall be true and correct in all material respects as of the date when made and as of the draw down exercise date.
· Trading in our Class A common stock shall not have been suspended by the SEC or FINRA and trading in securities generally on the principal market shall not have been suspended or limited.
· No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated, endorsed or, to the knowledge of us, threatened by any court or governmental authority which prohibits the consummation of or which would materially modify or delay any of the transactions contemplated by the Investment Agreement.
· The Company shall have executed and delivered to Tangiers the certificates representing, or have executed electronic book-entry transfer of, the shares of Class A common stock being purchased.

 

There is no guarantee that we will be able to meet the foregoing conditions or any other conditions under the Investment Agreement or that we will be able to draw down any portion of the amounts available under the Investment Agreement.

 

Termination of the Investment Agreement

 

The Investment Agreement terminates (i) thirty-six (36) months after the Registration Statement is declared effective, (ii) when Tangiers has purchased an aggregate of $5,000,000 of Class A common stock, (iii) at any time the Registration Statement is no longer in effect, or, (iv) subject to certain exceptions set forth therein, at any time upon fifteen (15) days written notice from the Company to Tangiers.

 

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SELLING STOCKHOLDERS

 

This prospectus relates to the possible resale by the selling stockholders named below of shares of the Company’s Class A common stock that we may issue pursuant to the Investment Agreement we entered into with Tangiers and the possible resale of shares of the Company’s Class A common stock by the other selling stockholders listed below. We are filing the registration statement of which this prospectus is a part pursuant to the provisions of the Registration Rights Agreement we entered into with Tangiers. References in this prospectus to the “selling stockholder(s)” includes Tangiers, the other selling stockholders listed below, and any donees, pledgees, transferees or other successors in interest selling shares received after the date of this prospectus from a selling stockholder as a gift, pledge or other non-sale related transfer.

 

The selling stockholders and Tangiers, who is deemed to be a statutory underwriter, will offer their Shares at prevailing market or privately negotiated prices including (without limitation) in one or more transactions that may take place by ordinary broker’s transactions, privately-negotiated transactions or through sales to one or more dealers for resale or at prevailing market if a market should develop. Tangiers may from time to time offer and sell pursuant to this prospectus any or all of the shares of Class A common stock that it acquires under the Investment Agreement.

 

The distribution of the selling stockholders’ Shares may be effected in one or more transactions that may take place through customary brokerage channels, in privately-negotiated sales, by a combination of these methods or by other means. The selling stockholders may from time to time offer their shares through underwriters, brokers-dealers, agents or other intermediaries. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the selling stockholders in connection with sales of the Shares. The distribution of the Shares by the selling stockholders may be effected in one or more transactions that may take place through customary brokerage channels, in privately negotiated sales; by a combination of these methods; or by other means. We do not know how long the selling stockholders will hold the shares before selling them, and other than the Investment Agreement we entered into with Tangiers, we currently have no agreements, arrangements or understandings with the selling stockholders regarding the sale of any of the Shares. The Company will not receive any portion or percentage of any of the proceeds from the sale of the Shares.

 

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The following table sets forth ownership of shares held by each person who is a selling stockholder.

 

    Before Offering           After Offering (2)  
Name   Number of
Shares
Owned
    Percent
of
Class (1)
    Shares
Offered
for Sale
    Number of
Shares
Owned
    Percent
of
Class (1)
 
                                         
Tangiers Global, LLC   (3) -     * %     1,000,000       -       * %
Jeffrey McGraw     1,000,000       1.5 %     1,000,000       -       * %
Charles Gray     533,306       * %     500,000       33,306       * %
Delaney Equity Group     187,500       * %   (4)       187,500       187,500       * %
William Scott     2,000,000       3.0 %     25,000       1,975,000       2.9 %
Christopher Crawford     50,000       * %     25,000       25,000       * %
Christopher Severson     500,000       * %     500,000       -       * %
Peter Bernard     1,000,000       1.5 %     100,000       900,000       1.3 %
Terrence J. Dunne     915,000       1.4 %     200,000       715,000       1.1 %
Dawn S. Askew     50,000       * %     50,000       -       * %
Karla Velasquez     10,000       * %     10,000       -       * %
C. David Staffel     50,000       * %     25,000       25,000       * %
Scott Posell     217,000       * %     50,000       167,000       * %
Carissa L. Collett     500,000       * %     500,000       -       * %
Miguel A. Yanez     550,000       * %     500,000       50,000       * %
Cyber Security     500,000       * %     500,000       -       * %
Jeff B. Barrett     15,900,000       24.0 %     100,000       15,800,000       23.5 %
Keith Hofmann     50,000       * %     50,000       -       * %
Matthew A. McManus     10,000       * %     10,000       -       * %
Joseph S. Garcia     10,000       * %     10,000       -       * %
Donald L. Nesting     50,000       * %     50,000       -       * %
Kyle B. Manners     10,000       * %     10,000       -       * %
Barrett G. Blume     5,000       * %     5,000       -       * %
                                         
      24,097,806       36.4 %     5,407,500       19,877,806       29.6 %

 

  * Less than 1%.
  (1) Based on 66,145,695 shares of Class A Common Stock outstanding as of the date of this prospectus.  
  (2) The columns in the table above reflecting “After Offering”: “Number of Shares Owned” and “Percent of Class” are prepared on the basis that all shares being registered in this registration statement are resold to third parties.  Shares of our Class A common stock being offered pursuant to this prospectus by a selling stockholder are counted as outstanding for computing the percentage of the selling stockholder.  
  (3) As of October 17, 2017, Tangiers owned 0 shares of our Class A common stock pursuant to the puts made under the Investment Agreement and 0 shares of our Class A common stock issued pursuant to the Commitment Note or the Convertible Note.
  (4) Consists of 187,500 shares issuable within 60 days of October 17, 2017 pursuant to options and warrants awarded to Delaney Equity Group.   Does not include any of the 187,500 shares of Class A common stock currently owned by Delaney Equity Group as of October 17, 2017.

 

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DILUTION

 

Under the Investment Agreement, the purchase price of the shares to be sold to Tangiers will be at a price equal to the lowest volume weighted average price, or if none, the lowest closing bid price of the Class A common stock during the 5 trading day period including and immediately following the date of the Company’s draw down notice (“Market Price”) multiplied by 80%. The table below illustrates an issuance of Class A common stock to Tangiers under the Investment Agreement for a hypothetical draw down amount of $500,000 at an assumed Market Price of $6.00:

 

Draw Down Amount     Price to be paid by Tangiers     Number of Shares to be
Issued
 
                     
$500,000     $4.80       104,167  

 

By comparison, if the Market Price of the Class A common stock was $1.00, the number of shares that would be required to be issued in order to have the same draw down amount of $500,000 would be greater, as shown by the following table:

Draw Down Amount     Price to be paid by Tangiers     Number of Shares to be
Issued
 
                     
$500,000     $0.80       625,000  

 

Accordingly, there would be dilution of an additional 520,833 shares issued due to the lower stock price of $1.00 per share. In effect, if we are interested in receiving a fixed funding amount, a lower price per share of our Class A common stock means a higher number of shares to be issued to Tangiers in order to receive that fixed funding amount, which equates to greater dilution of existing stockholders. The effect of this dilution may, in turn, cause the price of our Class A common stock to decrease further, both because of the downward pressure on the stock price that would be caused by a large number of our shares sold to the public by Tangiers, and because our existing stockholders may disagree with a decision to sell shares to Tangiers at a time when our stock price is low, and may in response decide to sell additional numbers of shares, further decreasing our stock price.

 

The actual number of shares that will be issued to Tangiers under the Investment Agreement will depend upon the Market Price of our Class A common stock at the time of our puts to Tangiers and shortly thereafter. The price per share Tangiers ultimately pays for each share is determined by dividing the aggregate purchase price by the number of shares we issue to Tangiers.

 

Additionally, under the Registration Rights Agreement, we are registering 1,000,000 shares of Class A common stock for possible issuance and resale under the private equity line. Notwithstanding that Tangiers has committed to purchase, from time to time over a 36 month period, shares of our Class A common stock for cash consideration of up to an aggregate of $5,000,000 under the Investment Agreement, the likelihood that we would access the full $5,000,000 is low. This is due to several factors including the fact that the Investment Agreement’s share volume limitations will limit our use of the Investment Agreement and the market price may decrease and thus fewer dollars will be received by us as shares are issued.

 

Even if we were able to put all of the 1,000,000 of the Shares registered under this registration statement to Tangiers under the Investment Agreement at our current market prices, we would only realize approximately $4,800,000 under the Investment Agreement. We determined to register in this registration statement a total of 1,000,000 shares, which represents less than 5% of our public float (after subtracting the holdings of insiders and controlling stockholders) in order to allow the greatest possible flexibility under the Investment Agreement. The amount of shares that might be utilized under the Investment Agreement cannot be determined at this time as it will fluctuate with the market price of our stock and our financial requirements. Should the Market Price require us to issue more than 1,000,000 shares of Class A common stock to Tangiers, we may need to subsequently register additional shares of our Class A common stock.

 

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PLAN OF DISTRIBUTION

 

General

 

The selling stockholders may seek an underwriter, broker-dealer or selling agent to sell the Shares. As of the date of this prospectus, no selling stockholder has entered into any arrangements with any underwriter, broker-dealer or selling agent for the sale of the Shares. Other than the Investment Agreement we entered into with Tangiers, the Company has no arrangements nor has entered into any agreement with any underwriters, broker-dealer or selling agents for the sale of the Shares.

 

The selling stockholders and any underwriters, broker-dealers or agents who participate in the sale or distribution of the Shares may be deemed to be “underwriters” within the meaning of the Securities Act. As a result, any profits on the sale of the Class A common stock by the selling stockholders and any discounts, commissions or agent’s commissions or concessions received by any such broker-dealer or agents may be deemed to be underwriting discounts and commissions under the Securities Act. If any selling stockholder is deemed to be an “underwriter” within the meaning of Section 2(11) of the Securities Act, it will be subject to prospectus delivery requirements of the Securities Act. Underwriters are subject to certain statutory liabilities, including, but not limited to, Sections 11, 12 and 17 of the Securities Act.

 

There can be no assurance that the selling stockholders will sell any or all of the Shares under this prospectus. Further, we cannot assure you that the selling stockholders will not transfer, devise or gift the Shares by other means not described in this prospectus. In addition, any Shares covered by this prospectus that qualify for sale under Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or Rule 144A in certain instances, rather than under this prospectus.

 

The Shares covered by this prospectus may also be sold to non-U.S. persons outside the U.S. in accordance with Regulation S under the Securities Act rather than under this prospectus. The Shares may be sold in some states only through registered or licensed brokers or dealers. In addition, in some states the Shares may not be sold unless they have been registered or qualified for sale or an exemption from registration or qualification is available and complied with. If any of the Shares offered for resale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, the subsequent holders could not use this prospectus until a post-effective amendment to the registration statement of which this prospectus is a part or a prospectus supplement is filed naming such holders.

 

The selling stockholders and any other person participating in the sale of the Shares may be subject to the Exchange Act. The Exchange Act rules include, without limitation, Regulation M, which may limit the timing of purchases and sales of any of the Shares by the selling stockholders and any other such person. In addition, Regulation M may restrict the ability of any person engaged in the distribution of the common stock to engage in market-making activities with respect to the particular Shares being distributed. This may affect the marketability of the Shares and the ability of any person or entity to engage in market-making activities with respect to the Shares.

 

The Company intends to maintain the currency and accuracy of this prospectus for a period of up to three (3) years, unless earlier completely sold, pursuant to Rule 415 of the General Rules and Regulations of the Securities and Exchange Commission.

 

Resales of the Shares under State Securities Laws

 

The National Securities Market Improvement Act of 1996 (“NSMIA”) limits the authority of states to impose restrictions upon resales of securities made pursuant to Sections 4(1) and 4(3) of the Securities Act of companies which file reports under Sections 13 or 15(d) of the Exchange Act. Resales of the Shares in the secondary market will be made pursuant to Section 4(1) of the Securities Act (sales other than by an issuer, underwriter or broker).

 

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DESCRIPTION OF SECURITIES

 

Capitalization

 

On October 16, 2017, the Company changed its state of incorporation from the State of Nevada to the State of Delaware and decreased its authorized capital to 171,707,093 shares. Pursuant to the Company’s Certificate of Incorporation, the Company is authorized to issue 150,000,000 shares of Class A common stock, par value $0.001, of which 66,145,695 shares were outstanding as of the date of the registration statement, of which this prospectus is a part. The Company is also authorized to issue 1,707,093 shares of Class B common stock, par value $0.001, of which 1,538,872 shares were outstanding as of the date of the registration statement, of which this prospectus is a part, and 20,000,000 shares of preferred stock, par value $0.001, of which none are designated or outstanding.

 

The Company is registering 5,407,500 shares of Class A common stock for resale to the public by the holders thereof (selling stockholders). The selling stockholders will offer the Shares at prevailing market or privately negotiated prices including (without limitation) in one or more transactions that may take place by ordinary broker’s transactions, privately-negotiated transactions or through sales to one or more dealers for resale or at prevailing market prices if a market should develop.

 

Class A Common Stock

 

Authorized Shares : The Company is authorized to issue 150,000,000 shares of Class A common stock, par value $0.001 per share.

 

Voting Rights : The holders of Class A common stock shall at all times vote as one class, with each holder of record entitled to one vote for each share held. A holder of shares of Class A common stock shall not be entitled as a matter of right to cumulate its votes.

 

Dividend Rights : Each issued and outstanding share of Class A common stock shall entitle the holder thereof to receive dividends (whether payable in cash, stock or otherwise), when, as and if declared by the Board of Directors of the Company out of funds legally available therefore.

 

Liquidation, Dissolution or Winding Up : In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, each issued and outstanding share of Class A common stock shall entitle the holder of record thereof to receive ratably and equally all of the assets and funds of the Company available for distribution to its stockholders, whether from capital or surplus.

 

Preemptive Rights : Holders of Class A common stock shall not be entitled as a matter of right to preemptive rights to acquire additional shares of capital stock of the Company.

 

Limitation of Class A Common Stock Holders’ Rights : The Board of Directors has the authority, without action by the stockholders of the Company, to designate and issue preferred stock and to designate the rights, preferences and privileges of each series of preferred stock, which may be greater than the rights attached to the Class A common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of Class A common stock until the Board of Directors determines the specific rights attached to that preferred stock. The effects of issuing preferred stock could include one or more of the following:

 

· restricting dividends of the Class A common stock;

 

· diluting the voting power of the Class A common stock;

 

· impairing the liquidation rights of the Class A common stock; or

 

· delaying or preventing a change of control of our Company.

 

There are currently no shares of preferred stock outstanding.

 

Penny Stock Regulation

 

Penny stocks generally are equity securities with a price of less than $5.00 per share other than securities registered on national securities exchanges or listed on the Nasdaq Stock Market, provided that current price and volume information with respect to transactions in such securities are provided by the exchange or system. The penny stock rules impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase.

 

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Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. Because of these penny stock rules, broker-dealers may be restricted in their ability to sell the Company’s Class A common stock. The foregoing required penny stock restrictions will not apply to the Company’s Class A common stock if such stock reaches and maintains a market price of $5.00 per share or greater.

 

Dividends

 

The Company has not paid any dividends to date. The Company intends to employ all available funds for the growth and development of its business, and accordingly, does not intend to declare or pay any dividends in the foreseeable future.

 

Listing

 

The Company’s stock is listed on one of the OTC Markets Group over-the-counter markets, OTC QB, under the trading symbol “IRNC.”

 

Transfer Agent

 

Columbia Stock Transfer Company, Post Falls, Idaho, serves as transfer agent for the Company.

 

THE COMPANY

 

Background

 

IronClad Encryption Corporation, an encryption technology company 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 Exchange Act for the purpose of becoming a reporting company. The Company’s shares then became listed on the OTCBB, but in time also listed its shares to trade on OTC QB, 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. Following the share exchange, the new Board of Directors changed the Company’s name to IronClad Encryption Corporation, redomiciled the Company from Delaware to Nevada, and changed the stock symbol from BTHI to IRNC. On October 16, 2017, the Company redomiciled in Delaware from Nevada and adopted the Certificate of Incorporation and Bylaws as a Delaware corporation.

 

Employees

 

At December 31, 2016, Butte had no full-time employees. The Company’s President served without compensation.

 

Upon completion of the share exchange on January 6, 2017, the Board of Directors appointed a President, Chief Technology Officer, Vice President of Planning, Vice President of Sales and Vice President of Legal, General Counsel and Secretary.

 

Subsequent to January 6, 2017, IronClad hired two additional employees; one is the Vice President, Treasurer and Chief Financial Officer and the other is the Director of Product Testing. The Company also uses the services of several outside consultants and contractors to provide additional services.

 

As of October 17, 2017, the Company has seven employees.

 

Property

 

The Company maintains office space at: One Riverway, 777 South Post Oak, Suite 1700, Houston, Texas 77056.

 

Legal Proceedings

 

There are no pending, threatened or actual legal proceedings in which the Company is a party.

 

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THE BUSINESS AND BUSINESS PLAN

 

Business Operations and Business Plan

 

Overview

 

Product Development and Design Philosophy

 

IronClad envisions its core strength and future growth opportunity to be primarily in the software and services industry as it builds a portfolio of innovative encryption products, applications and services. In the development of our ICE ultra-secure and ultra-rugged mobile phone (“ICE Phone”), we believe long-term success will be realized by providing encryption services, software products, add-on applications and maintenance contracts for these phones. As such, we are integrating a complete suite of security measures, and our unique key management and authentication technology into our ICE Phone. Target customers include corporate executives, high-net worth individuals, politicians, civil servants, police officers, clandestine service agents, and military members. We are designing the ICE Phone to allow these customers to carry out their vocations without the threat of compromise or communication failure.

 

ICE Phone

 

At present, IronClad’s primary focus is the development and sale of the ICE Phone. In order to expedite development and leverage a well-known and established brand in the ruggedized mobile phone market, IronClad announced on June 5, 2017, a partnership with Sonim Technologies. Sonim Technologies is a provider of mission-critical solutions designed specifically for workers in extreme, hazardous and isolated environments. Using Sonim’s XP phone platform as our base, IronClad is modifying the phone’s operating system and installing a suite of ICE-developed software modules to deliver to market the world’s first ultra-rugged and ultra-secure mobile phone.

 

In terms of security features, the phone will seek to address the three principal attack surfaces: system/software, network, and human. To protect these attack surfaces, and differentiate against failed previous market entries, we are removing features that consumers would typically expect in a commercial smart phone offering. The features remaining are those identified by our prospective clients as mission critical for their vocational needs and responsibilities. Future phone offerings will include some excluded features when and if suitable solutions are developed to properly secure them. The list of features removed and remaining is presently proprietary and confidential. The ICE Phone is expected to enter mass production in the third quarter of 2018.

 

The benefits of our technology and its implementation in the ICE Phone include:

 

· Virtually no latency (delay) in voice or data transmissions - all communications are secured over an internet protocol (IP) carrier

· Low power consumption and low processor overhead requirements are extremely lightweight and can even run on 386-class processors or systems running Windows 3.0

· All devices engaged in communications are highly fault tolerant to real world disruptions of key exchanges

· Device agnostic and extensible to any digital data and digital voice transport

· Non-Intrusive and transparent to user

· Actual encryption keys are never transmitted using our unique patented technology, dramatically reducing the potential of an attack like a man-in-the-middle attack

 

Without any added encryption, all mobile phone communications are easily susceptible to attacks because cellular standards were never designed to be secure. In the ICE Phone, we took a different approach. Only in setting up the secure channel will the ICE Phone behave like a regular cellular handset. Calls and data are routed using the networks of cellular operators that the user is subscribed to including but not limited to AT&T, T-Mobile, Orange, and Korea Telecom Freetel. IronClad takes advantage of the cellular infrastructure to initiate a call and connect to other encrypted users, but once connected, the encryption algorithms between the users leverage the phone’s processor to create a peer-to-peer encrypted channel.

 

This technology has two unique aspects. The first is that there is no external server required to encrypt voice calls or data. All encryption and decryption takes place on the user’s phone using a lightweight algorithm that consumes very little power and requires low processing overhead. By not using an external server for the encryption, latency is reduced so voice calls sound natural, and the attack surface is reduced thus minimizing the potential of a hack. The second is that IronClad’s implementation of encryption makes it virtually immune to man-in-the-middle attacks. By continuously changing the encryption keys and ensuring that the keys among all users remain synchronized even when the real world creates faults, a man-in-the-middle attack will at best grab and decode a single word of an entire conversation, but more likely will only extract “static” noise.

 

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One significant benefit to our approach is that we are not trying to convince the cyber-security ecosystem that we have “better” encryption algorithm. We simply take the industry-recognized key-based encryption algorithms and make them exponentially more effective. Our technology is not a new encryption algorithm; rather, we have created key management and authentication algorithms that we believe will make existing key-based encryption technologies more effective. The two breakthrough technologies are Dynamic Encryption and Perpetual Authentication.

 

Dynamic Encryption Technology eliminates the vulnerabilities caused by the exposure of any single encryption key by continuously changing encryption keys and keeping the keys synchronized in a fault-tolerant manner. This technology permits a single file or voice call to be encrypted with a streaming series of unique keys on a digital block-by-block basis, so that a hacker must decipher potentially millions of keys to gain access to and decode any meaningful amounts of information.

 

Perpetual Authentication Technology uses multiple virtual channels for encryption so that in the event one channel is compromised, the other channels maintain encryption integrity. Together, these technologies not only eliminate the single point of failure problem created by having keys exposed through brute force, side channel, or other types of attack, but do so with virtually no latency or computer chip performance overhead. Additionally, by using recognized and industry-accepted encryption technology, we are also future-proof and able to integrate any future key-based encryption algorithm into our products.

 

Other Security Applications

 

Our key management and authentication algorithms are also customizable to a wide range of other security applications. We are developing software to secure data and networks for enterprise and governmental agencies that require the highest levels of protection and security. This software will include the tools to monitor network traffic and database integrity and provide actionable information in the event of an attack.

 

The ICE secure platform we are developing can serve enterprise devices running mobile, thick and thin client, database, and local and cloud-based server applications. General functions within and across devices include:

 

· Configure and deliver applications to smartphones, tablets, laptops and desktops running operating systems such as Android, iOS, macOS and Windows. The lightweight nature of applications enables integration into older devices that cannot be easily upgraded, such as PC-based controls running Windows 3.0.

· Encrypt, secure and continuously authenticate data-in-motion and data-at-rest across all networks and devices.

· Secure access to back-end corporate networks and cloud services.

 

At this time, we are excluding certain enterprise-class products from our product portfolio. Although we will not offer these types of enterprise-class products, we will seek partnerships with innovative incumbents within each market to extend our reach and value proposition. These products include firewalls, intrusion prevention systems (IPS), security information and event management (SIEM), and associated management consoles. Regarding our future software product plans, our business model is to not directly compete with the various enterprise security products listed above, but to make them more secure. IronClad will provide software modules and complete product offerings for licensing to partners and to be integrated in our own products including the ICE Phone.

 

As these products mature, IronClad will develop complementary software security products for the enterprise market as well as for certain niches within the consumer market. Our vision is for every enterprise-class digital device that connects to an external network to implement the ICE secure platform for all data whether at rest or in motion because, even in an environment where world-class security measures are installed and diligently kept up to date, a successful attack can have debilitating consequences. The ICE secure platform we envision further mitigates the risk of a successful attack by ensuring that any breached information is not only minimized but also completely valueless to the hacker.

 

Presently, cyber-security professionals are well aware that any one encryption key, regardless of the type, is at risk of being cracked. A determined brute force attack, can break any single key allowing access to entire databases and systems. However, an encryption system based on our patented technologies renders the data exposed from any successful attack meaningless, as the information obtained is minimized and out of context from the rest of the secured data.

 

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Industry Trends

 

Cybersecurity breaches are an unavoidable part of modern life. These breaches impact our personal privacy and finances, the integrity of our organizations and institutions, and the effectiveness of our local and national defense. Our digital devices, as well as the complex and heterogeneous systems interconnected across global networks and data centers and networks connecting them, are vulnerable to hacking and cybersecurity attacks. Though nearly everyone has been affected by cybersecurity breaches, the general consumer market behavior assumes that consumers have some reasonable level of cyber privacy, and therefore, most consumers are unwilling to pay the added cost for preventative measures. However, IronClad’s target customers are not only convinced that cyber-security is paramount, but also understand that the cost of any security breach far outweighs the cost of prevention. We believe ruggedness is also a key requirement for many of ICE’s target customers. The most extreme situations where ruggedness is required would include situations that a combat soldier or policeman may face. However, corporate executives also expect and need a phone to work no matter the number of drops or abuse. To a lesser extent, all consumers expect a phone to be dependable within reasonable physical conditions. The ICE Phone is designed to be an ultra-secure and ultra-rugged mobile phone focused on addressing these two concerns.

 

The Secure Phone Market

 

The secure phone market is littered with failed products due to poor product performance, unreliable software operation, overpriced, and incorrectly marketed. Another key reason for these failures is the dependence on a single encryption key to secure data at rest or in motion. Our business model is based on targeting customers who understand the paramount importance of secured information and the ramifications of its unauthorized exposure. As such, our strategy is to market our phone solution directly to enterprise and high threat clients, focusing on two of the following four categories that we believe comprise the secure phone market:

 

· Enterprise clients , a disparate group whose members share similar requirements and include C-level executives, anyone in human resources departments, local politicians and officials, commercial scientists or researchers working on sensitive projects, low level government agencies with access to large databases of personal information such as the Social Security Administration, banking and medical institutions, or any world traveler visiting countries with known surveillance programs. This group is security conscious but may not understand the level of security they require. The threat consequences that this group is concerned with include the release of corporate secrets, classified information, financial information, employee records, voting records, medical records, credit card numbers, and social security numbers. The threat risk is exponentially more severe for this group due to the possible impact on an entire organization or an entire group of people served by that organization.

 

· High threat clients , a disparate group whose members share similar requirements and include military Special Forces, executives or researchers of aerospace and defense technology companies, operatives and analysts within top-secret federal government agencies, Non-Government Organizations (NGO), national politicians and officials, journalists reporting in unstable countries, activists operating in repressive countries, and local government emergency response teams including SWAT and police departments. This group is often the most security conscious and often requires very rugged phones as well. Threat consequences that concern this group are largely the same as the enterprise clients except the threat risk increases to loss of life, inability to apprehend criminals, compromised military operations, and damage to international relations.

 

· Elite consumer clients , including celebrities and high net worth individuals, who tend to be the least price-sensitive group among individual phone buyers. These clients tend to be driven by status and privacy, and will likely pay a premium for a high-priced device that distinguishes them from ordinary consumers, or protects them more effectively than ordinary mobile devices. Some vendors directly target and pursue elite consumers simply for the secondary marketing benefits. These elite consumer clients face similar threats as general consumers with added risks of blackmail, kidnapping, home invasion and other criminal activities targeted toward them as a result of their status.

 

· General consumer clients , including consumers that purchase mobile phones through standard retail channels or download publicly available encryption applications that operate on any smart phone. This group is the least security-conscious and least technical. They tend to be motivated primarily by price, and see security as a benefit but not a necessity. However, general consumers living in countries under authoritarian regimes, which limit freedom of speech, will have a greater “fear appeal” leading to increased concern regarding their security. This group is generally concerned with the release of private personal information including financial, medical, addresses, personal affiliations, and other information that could lead to identity theft, personal property theft or negatively impact personal relationships, employment, and public perception.

 

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We believe that focusing on enterprise and high threat clients (as defined above) provides the economies of scale required for long-term success. As we grow within these two markets, we also expect that a security conscious subset of the general consumer and elite customer base will purchase our products.

 

Customers

 

IronClad target customers are segmented according to our expected product portfolio including the ICE Phone platform, and software products and services ranging from security software modules for enterprise, to Encryption as a Service (EaaS) for cloud providers.

 

Our initial focus for IronClad is the ultra-secure and ultra-rugged ICE Phone. We will initially address only select markets within two customer categories to ensure proper execution and success: enterprise clients and high threat clients. Our ICE Phone will also be desirable for consumers with high security requirements, including politicians, public figures, high net worth individuals, corporate executives and others, but we expect this market to develop naturally by word of mouth or as a derivative or our primary marketing effort. Our initial direct sales and marketing efforts will leverage the internal expertise of the team in the enterprise and high threat markets. Once we have established our product portfolio in these markets, we envision expanding to a channel partners program including resellers and phone partners.

 

We envision our core strength and future growth opportunity to be primarily in the software and services industry as we build a portfolio of innovative encryption products, applications and services. We will also build hardware in support of our software and services when the market is not able to provide IronClad or its target customers with the required platforms. As an extension of this software and services strategy, IronClad in the future will also address other software security markets including encryption for data-at-rest, full disc encryption (FDE), file level encryption and other products including encryption for data in motion.

 

Though these markets are dominated by such companies as IBM, Microsoft and Oracle, these companies are still using file-level or database-level encryption based on a single ineffective encryption key. Through partnerships or direct competition, IronClad will enable OEM/ODM, enterprises and cloud services companies to upgrade the security of their products or organization to the next generation in encryption and key management.

 

Competition

 

Competition in the Digital Security Industry

 

We operate in the highly competitive digital security industry. However, within the industry, we have identified risk mitigation as a presently underserved market. While many vendors in the digital security space focus on prevention, prediction, monitoring and identification of security breaches, few focus on risk mitigation in the event of a breach. Our goal is to make any breach of information valueless to the hacker. Organizations are unwilling to fully encrypt their data and databases because today’s encryption creates degradation of system performance, increases costs, adds management requirements, adds time to basic processes, and frustrates employees. Therefore, organizations will encrypt only critical databases and networks, often utilizing vulnerable single key encryption methods, thus rendering their efforts still vulnerable to attacks. Generally, these encryption deployments are poorly applied and poorly managed.

 

According to a report published by Zion Market Research in Sept. 2016, the “global encryption software market will exceed USD 7.17 billion by 2021, growing at a compounded annual growth rate (CAGR) of 21.7% from 2016-2021.” Of the application segments identified in the report, we plan to participate in all four segments including encryption for data-at-rest, full disc encryption (FDE), file level encryption and data in motion. Though this market is dominated by companies like IBM, Microsoft and Oracle, these companies still utilize file level encryption based on a single encryption key.

 

Through partnerships or direct competition with these companies, IronClad’s vision is to enable organizations and individuals to upgrade to the next generation in encryption. IronClad core algorithms are lightweight, computationally efficient, and simple to deploy. Ultimately, they mitigate the risk of an unauthorized security breach into meaningless data. With the advent of our unique security measures, we envision a future where insurance companies will require integration of our technology prior to underwriting policy coverage. Ultimately, companies deciding to “under-secure” their information will pay higher premiums, or be denied coverage. An example of this trajectory can be seen in the Payment Card Industry Security Standard (PCI DSS) created by the leading card brands to increase protection of cardholder information and reduce fraud.

 

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Our Competitive and Technological Strengths

 

Publicly available survey information regarding the data security industry reveals that although companies are spending billions of dollars on cyber protection, they continue to experience data security breaches:

 

· Private sector companies globally spent more than $75 billion on security software to safeguard their systems and data in 2015.

 

· A survey of IT workers and end users at U.S. and European organizations found 76% had been hit by the loss or theft of important data over the two-year period of 2015-2016, a sharp increase from 67% in a similar survey done in 2014.

 

Clearly, current methods to combat cyber-security threats are not effective. Encryption key management systems and methods of providing secure data communications are essential in today’s interconnected world. With the ubiquitous use of the world-wide-web and internet protocol to achieve global interconnectivity for literally every aspect of business and our personal lives, the necessity for properly securing data transmissions is now a critical requirement. To make matters worse, data repositories are now being successfully hacked at alarming rates. They too, need to be practically and effectively secured from cyber threats.

 

The competitive advantages that IronClad has developed include the following:

 

· Pioneering techniques to ensure secure data across all government, financial, academic, and private industry sectors. Our ubiquitous hardware and software platforms that deliver proprietary securitization, validation, and encryption techniques that can be applied to essentially all forms of data transmission and data at rest. Our platform addresses the rapidly-evolving modern security requirements of the broad spectrum of communication and data storage requirements across the entire range of business, government, military, and individual needs.

 

· Application of our technology across a broad range of communications networks and devices. Our technology is applicable to data on the move, data at rest, databases, and authentication. Our technology can be applied across a broad range of communications, such as networked and stand-alone computers, satellite, direct broadcast television systems, radio systems, optical and sonic transmission. The use of dynamically changing auto-synchronous keys provides continuous, implicit, re-authentication which eliminates man-in-the-middle, cloning, and replay attacks. Robust operation is designed in by the use of our patented “tolerance” methodology.

 

· Dramatic reduction of the attack surface due to our unique, game-changing dynamic authentication and encryption technology. Our authentication and encryption methodologies utilize dynamically changing auto-synchronous keys, applied to data at granular levels. This dramatically reduces the attack surface available to intrusion attempts and protects devices and systems from exposure of meaningful data and cloning. IronClad uniquely protects communicating devices with the use of dynamically changing auto-synchronous keys. When data is transmitted, it is encrypted with dynamically changing encryption keys at a granular level. In contrast with commercially available systems which utilize a single key to protect transmitted data, our system protects the same data with a continuous flow of synchronized keys. Our system makes it virtually impossible for any unauthorized device to convert the communications (data) into an understandable, meaningful, and usable format. Other commercially available systems utilize a single key to protect the transmitted data. If an attacker is successful in gaining the encryption key, all the transmitted data is compromised, past, present and future. With the IronClad system, even if an attacker gains a single encryption key, only a single block of data is compromised. When IronClad encrypted data is received, it can only be decrypted using the same set of dynamically changing auto-synchronous keys which were used to encrypt the transmitted data. This is accomplished by the use of a master key which is known only to the communicating devices. By utilizing our master key and patented dynamically changing auto-synchronous key management system, the actual encryption keys are never transmitted. This game changing technique is unique to IronClad.

 

· Protecting data at rest. We apply the same dynamically changing auto-synchronous key technique as used for “data on the move” to protect storage systems which have data at rest. At the file level, we encrypt each individual file with its own set of unique keys at a granular level. Thus, even if someone is able to gain access to the individual files, since each file is encrypted with its own set of unique keys, each file is individually protected from attack. Additionally, since each individual file is protected with its own set of unique keys at a granular level, even if an attacker gains a single encryption key, only a single grain of data is compromised

 

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· Protecting storage devices without storing individual keys on the device, within the data or in a key server. IronClad technology can also be used at the storage device level to protect individual disk drives, RAID systems, and entire arrays, with millions of individual encryption keys applied at granular level. This is accomplished without storing any of the individual encryption keys on the device, within the data or in a key server. This renders the data on the device unusable if the device is stolen, with the same benefits as explained in “data on the move”. Using this fine-grained level of encryption opens the possibilities of simplification in the operation of large data centers since once the master key for a device is destroyed, the data on the device is totally useless.

 

· Protecting databases at a granular level. Utilizing the same dynamically changing auto-synchronous key technique applied to database technology, the IronClad system provides a new level of database security which is not available from other vendors. The dynamically changing auto-synchronous keys can be used to encrypt each individual row, column, and table with individual keys at a granular level. These keys are not stored in the database. Access to decryption of each individual, row, column, and table can be individually managed. Both “flat” and “relational” databases can be secured with our system.

 

· Our patented “tolerance” methodology for multi-factor authentication. IronClad takes multi-factor authentication to a new level, utilizing our patented key management “tolerance” methodology. Our technology is applicable to authenticate computer and network user access, card reader building access, mass transit access, ticketing systems, vehicle identification and access, military, government, and aircraft access systems. We provide one-time use codes which operate only within specified “tolerance” ranges, to allow access without being bound to strict time and sequence rules. The authentication methodology prevents the successful use of multiple cloned or otherwise fraudulent access attempts, by individuals and fraudulent devices, as well as limiting the use of even a single cloned or an otherwise fraudulent device.

 

· Our expertise in the digital security field and our aggressive pursuit of our intellectual property rights. We have a history of thought leadership and product innovation. We hold key patents in this field, and are pursuing many more patents in both the US and international markets. Many of these patents relate to both hardware and software integration into devices utilized within our industry, such as application distribution and mobile data security. More detailed information on our patents is provided below. We believe successful mobile deployments and associated data transmission encryption and decryption requires intensive domain expertise.

 

Competition in the Secure Mobile Phone Market

 

Evaluating the competition for the ICE Phone is difficult as the secure mobile phone market is not a discrete industry. Industry analysts at market research firms currently cover many topics relevant to secure mobile phones including cybersecurity, privacy, mobility, mobile phones, and mobile security. However, there are no analysts, research groups, or even reports dedicated specifically to cover the secure mobile phone market. Given the uneven nature of vendor information and the scarcity of analyst material, we decided to provide an overview of what is available and explain how our approach differs.

 

Mobile phone design includes many aspects including the software design. As with any other design decisions, the engineers and management may decide to design their own operating system (OS) from the ground up, license an OS from a third party for a fee, or use an open source OS either “as is” or modified. Apple is the most famous example of a company that designed an OS from the ground up and is completely proprietary. iOS is used to run their mobile devices, including the iPhone, iPad, and iPod Touch. At the other end of the spectrum, there are many companies that have based their mobile phones on the Google-developed OS called Android. The reason so many companies, including Samsung, HTC, LG, Sony and Motorola just to name a few, have used the Android OS are quite simple. Android is open source and free. The open source nature of Android means that phone manufacturers, including secure phone providers, can modify or enhance the operating system as they see fit. The Android OS itself has security features built in, spanning many aspects and functions of the phone, but to truly secure the phone, developers must not only plug the existing security holes found in the OS, but must also improve the encryption algorithms, remove unnecessary functionality, add security-centric functions, and even provide some human engineering to minimize “user errors.” IronClad will be basing the ICE Phone OS on Android and significantly enhancing it with the security features Android lacks "out-of-the-box", thus ensuring the OS and the mobile phone itself are ultra-secure.

 

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Notable companies and products in the secure mobile phone market utilize various technologies and approaches. Publicly available information regarding the performance of these companies and products in the market indicate that the vast majority of these companies are facing significant challenges and many seem to be abandoning the market. IronClad seeks to redefine this market by carefully addressing the principal requirements of our target customers.

 

    Current Market Approach   ICE Phone Approach
         
Secure Custom Android Operating System (OS)   Some companies offer consumer mobile phones with a secure custom Android OS. However, these supposed secure phones still expose functions and features that do little to decrease the threat surface of the phone. For example, these phones still allow the download of non-secure applications, allow the use of the camera, exposed external memory ports and use only rudimentary authentication to access the phone. Some companies “feature” a dual Subscriber Identification Module (SIM) that enables users to switch between secure government and vulnerable commercial networks, in effect greatly increasing the risk of a malicious hack.   The ICE Phone is based on a ruggedized phone platform that has the IronClad custom secure Android OS with tightly controlled functionality to minimize the phone’s threat surface. For example, the phone will include secure voice and text, limited file exchange and email, limited access to external memory ports and no photo or video capabilities. The ICE phone prioritizes security of the entire phone, not just the operating system.
         
Technology and Roadmap   Some companies still design their own phone platforms and used, even at the time of design, outdated baseband technology that precluded the use of the latest and most secure base Android operating system.  Others rely on consumer third party phones that prevents secure provider from properly merging the phone hardware with the secure custom OS.   The ICE phone will be based on the most secure chipset and base Android OS to ensure platform security from the chipset to the highest level applications running on our modified Android OS. IronClad also intends to upgrade our phone software platform on an as needed basis to capture the latest improvements that enhance security. By taking this approach, IronClad ensures the use of future generations of the Android OS and also plans on updating the phone hardware platform to ensure the best use and synergy between the hardware platform and the secure custom Android OS.
         
End-to-End Encryption versus use of External Encryption Server   Some companies require the use of an external server to encrypt calls thus increasing call latency and the system’s vulnerability to brute-force man-in-the middle attacks.   The ICE phone will have end-to-end encryption meaning that calls are encrypted and decrypted on the phones themselves and will not rely on a vulnerable external server.
         
Luxury VoIP Phones   Some companies offer secure Voice over IP (VoIP) phones, smart phones, and other products that targets celebrities and Elite consumers. Some of these phones cost anywhere from $40,000 for a diamond dusted model to a $10,000 gold-plated model.   The ICE Phone customer base is by definition one that places a high value on security and also understands that the cost of a breach is far higher than the cost of a truly secure platform.
         
The Closest Competitor   A competitor that has perhaps come the closest to the embodiment of the ICE Phone markets a secure phone costing roughly $600 and uses the company's security-enhanced Android OS. These phones are not rugged and thus exclude large market segments that would benefit from a secure and ruggedized phone.  These phones have not achieved market traction or financial success due to poor reliability, unacceptable voice communication latency and disruptions, and therefore have not been able to provide a next generation platform to address these issues.   Direct customer feedback of these phones to IronClad has influenced the design of our initial product.  It is our intention for the ICE Phone to be distinguished from this competitor’s secure phone based on merit, innovation, and ingenuity. IronClad will strive to achieve the highest level of reliability and operational ruggedness for its products to make sure that user can truly depend on them even under challenging conditions.
         
Secure Messaging and Voice Calling applications   Other competitors provide secure messaging and voice calling applications for anyone around the world and are easy to download onto their phones, tablets or computers. These applications send end-to-end encrypted messages based on single key encryption. These applications are well known and for most consumer level demands, they perform appropriately. However, as downloaded applications, they cannot secure low level functionality of the phones or other vulnerable applications. Most importantly, they are based on a single encryption key making the application vulnerable to any determined brute force attack.   IronClad’s approach is holistic, encompassing the entire phone including the lowest levels or the software and hardware functionality. The ICE Phone leverages sophisticated encryption and authentication algorithms to ensure all users can benefit from high-grade security.

 

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Intellectual Property

 

IronClad protects its core and intellectual property rights with patents, trademarks, trade secrets, and where appropriate, copyrights. These rights have been extended throughout the United States as well as to international regions by filing for PCT applications and international trademarks. We also rely on confidentiality for invention assignment agreements with our employees, contractors, and third parties. Non-disclosure agreements are initiated and signed on an ongoing basis to protect required business discussions.

 

We continuously pursue protection of our intellectual property rights by recording documents at the USPTO, to ensure proper registration within the United States. In regions outside the U.S., we are also working to actively pursue protection of our intellectual property. We actively pursue patent protection covering inventions originating from the Company we believe may be useful, relevant and necessary for our business. In addition, we pursue intellectual property rights that may be available from third parties that complement our technologies and can provide competitive leverage in the field of transmission of data security and encryption. We currently own three (3) United States patents and have filed seven (7) additional applications (patents pending) to secure our intellectual property rights the U.S. and internationally. We continue to build our own independent technology platform, with plans to file an additional 20 patent applications within the next year.

 

Circumstances outside our control could pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available outside the United States. Also, the efforts we have taken to protect our proprietary technology and associated IP rights may not be sufficient in certain technology sectors. Companies in the mobile and other technology industries or non-practicing entities (NPE’s known as “trolls”) may own large numbers of patents, trademarks, copyrights, etc. These entities may require licensing agreements as well as threaten and/or pursue litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition and our business and associated challenges grow, we may face future claims of infringement. To date, we face no such threats or allegations.

 

Sales and Marketing

We will initially seek to sell our products in direct sales. We plan to maintain a focused sales force that works closely with customers to develop and close sales opportunities. The sales force will be split between the secure phones product line and the enterprise security as a service product lines. This outside sales force will target large enterprise companies while an inside sales team will support derivative sales from small organizations, enterprises and elite customers as well as volume sales generated by the outside sales force. Direct “ground truth” customer feedback is critical to our long-term success and even as IronClad expands its sales force through value-added resellers, channel partners and joint partnerships, we will always maintain close contact with all customers. We expect to broaden our sales activities through outside partners only after we have established beachheads in key markets and do so within the next 24 months.

 

Our sales organization will be supported by application engineers with deep technical expertise and responsibility for pre-sales technical support. Over time this responsibility will extend to technical training of our outside partners. This direct support will also provide an important feedback channels to our engineering development team. IronClad is a customer driven company. Our success is dependent not just on the sales team, but every department within our Company.

 

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As with all disruptive technologies, the initial goal for the IronClad marketing team will be to validate the patented products and demonstrate their resistance to hacking to our target customers. These efforts will be multi-faceted and include third-party validation and testing, endorsements from security industry experts, customer white papers and other traditional marketing activities. These activities can and will take place concurrently with the continuing development efforts for the ICE Phone. Upon release of the ICE Phone for sale, we expect to have addressed this barrier to market acceptance, allowing the Company to effectively market and sell the ICE Phone on the other merits of its performance and security.

 

Our marketing efforts will cover both marketing communications as well as technical and product marketing. The role of our marketing communications team will cover all the traditional responsibilities as well as growing and supporting our external community of developers interested in testing and prototyping systems with our software and service security products. Our technical and product marketing teams will provide the interface between our customers and our engineering development team. This team will spend significant time with customers understanding and filtering their needs and requirements.

 

As with all marketing teams involved in these activities, they will also be responsible for the roll out of new products, defining new products, new updates, working with sales to ensure proper forecasts, pricing and margin, coordinating customer support activities, and other activities. IronClad seeks to be a customer driven company. As such, post-sales support will be critically important to the success of the Company’s products and brand. Responsiveness to customer issues and agility in addressing new security threats will be of paramount importance to the Company.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Review of Comparative Results and Liquidity; Period ended June 30, 2017 compared to period ended June 30, 2016

 

Results of Operations

 

Three months ended June 30, 2017 compared to Three months ended June 30, 2016

 

During the three month period ended June 30, 2017, the Company had a net loss of $2,123,046 compared to a net loss of $6,698 during the three month period ended June 30, 2016.  This represents an increased net loss of $2,116,580 during the three month period ended June 30, 2017. The increase in net loss is attributable to an increase in costs for software and new patent development costs, general and administrative expenses, officer and director fees, and professional fees during the three month period ended June 30, 2017.  Many of the costs incurred were non-cash and were recognized as compensation expenses in connection with the issuance of IronClad common stock or stock options.

 

The $327,749 of product development costs incurred during the quarter ended June 30, 2017 (and which also represents most of the year to date development costs incurred of $332,842) are primarily related to research and development costs for cyber encryption software and prototype products being developed and tested.  Of those costs incurred (both for the quarter and for the period year to date) $65,092 was recognized as compensation expense in connection with the issuance of stock options.

 

Six months ended June 30, 2017 compared to Six months ended June 30, 2016

 

During the six month period ended June 30, 2017, the Company had a net loss of $4,361,523 compared to a net loss of $9,249 during the six month period ended June 30, 2016.  This represents an increased net loss of $4,325,274 during the six month period ended June 30, 2017 compared to the same prior year period. The increase in net loss for the six month period is similar to that for the three month period ended June 30, 2017 in that the increases are attributable to an increase in costs for software and new patent development costs, general and administrative expenses, officer and director fees, and professional fees during the six month period ended June 30, 2017.  Many of the costs incurred were non-cash in that they were recognized as compensation expense in connection with the issuance of IronClad common stock or stock options.

 

General and administrative expenses recognized for the six month period ended June 30, 2017 were $1,597,661 of which $1,258,648 was recognized as compensation expense in connection with the issuance of stock options.  Similarly, of the $1,569,730 of officer and director expenses recognized, $1,458,730 was recognized as compensation expense in connection with the issuance of stock options.

 

General and administrative expense recognition in future quarters will be higher on a quarterly basis in the second half of 2017 because of the recent hiring of more employees and their related salary costs which increased effective July 1, 2017 in accordance with the terms of their employment agreements.

 

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Investment banking fees and investor relation costs totaled $739,050.  Of the expenses incurred, $236,250 was paid for by directly issuing common stock and another $390,170 of the expenses was recognized as compensation expense in connection with the issuance of issuing stock options.  Most of expenses and especially those related to equity-based payments were made for investment banking related services targeted at raising capital for the Company.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements which may affect the Company are described in Note 2 — “ New Accounting Requirements and Disclosures ” in the quarterly financial statements below.

 

Liquidity and Capital Resources

 

The Company’s working capital (current assets minus current liabilities) at June 30, 2017 was $37,246 compared to working capital of $23,339 at December 31, 2016. Working capital increased primarily due to the sale of unregistered common stock of IronClad.

 

As of the date of this filing the Company’s cash balances are less than the $250,000 total at June 30, 2017, and are less than the combined sum of its accounts payable and accrued liabilities.  As a result, and absent additional cash inflows, we do not have adequate capital resources to continue to meet all of our current and future obligations as they may come due over the next quarter and next twelve months.  Being able to continue with our operations will depend on our obtaining additional resources by issuing either debt or equity securities.

 

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

 

Net cash used in operating activities was $756,545 during the six month period ended June 30, 2017 compared with $642 during the six month period ended June 30, 2016.  The uses of cash for operations are described above in the discussions of results of operations.

 

Cash flow used by investing activities was $79,733 for the six month period ended June 30, 2017 and zero for the six month period ended June 30, 2016.  The costs primarily relate to new patent applications and related filing costs.

 

Cash flow from financing activities was $1,035,596 for the six month period ended June 30, 2017, compared to $700 for the six month period ended June, 2016.  The single largest element of the cash source for the six month period ended June 30, 2017 relates to the cash raised during the quarter ended March 31, 2017 in a private placement of unregistered IronClad common stock for gross proceeds of approximately $1,086,593.

 

As a net result of all cash flow activities, cash increased by $199,318 during the six month period ended June 30, 2017.  The Company had cash of $250,000 as of June 30, 2017.  Cash at the beginning of the period at December 31, 2016 was $50,682.

 

Review of Comparative Results and Liquidity; Year ended December 31, 2016 compared to year ended December 31, 2015.

 

Result of Operations

 

During 2016, the Company had a net loss of $39,733 compared to a net loss of $32,750 during 2015.  This loss, which represents an increase in the loss by $6,983 over the year ended December 31, 2015, is primarily due to an increase in professional fees in the amount of $768 and general and administrative expenses in the amount of $6,224.   

 

Total operating expenses decreased to $39,733 in 2016 from $32,741 in 2015.  The difference is due to increases in professional fees and general and administrative expenses.

 

For 2016, the Company had net other income of $0 from interest expense compared to net other (loss) of ($9) from interest income during 2015.

 

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Liquidity and Capital Resources

 

The Company’s working capital at December 31, 2016 was $58,870 compared to working capital of $98,603 at December 31, 2015. Working capital decreased primarily because the Company had no income in 2016 (or in 2015) to offset its operating expenses.  

 

Net cash used in operating activities was $42,694 in 2016 compared with $28,534 in 2015.

 

Cash flow from investing activities was zero in 2016, remaining unchanged from 2015.

 

Cash flow from financing activities was zero in 2016, remaining unchanged from 2015.

 

As a result, cash decreased by $42,694 in 2016. The Company had cash of $60,125 as of December 31, 2016.

 

The Company estimates that the annual costs associated with being a reporting public company will be approximately $40,000. This amount is comprised of accounting fees of approximately $15,000 and legal fees of $25,000.

 

Critical Accounting Policies

 

In Note 2 to the audited financial statements for the year ended December 31, 2016 included in the Company’s Form 10-K, the Company discussed those accounting policies that are considered to be significant in determining the results of operations and our financial position. We believe that the accounting principles utilized by us conform to accounting principles generally accepted in the United States of America.

 

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

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) as of June 30, 2017 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Quantitative and Qualitative Disclosures About Market Risk

 

All of our transactions are within the United States of America, our functional currency is the US dollar and consequently we have no exposure to risks associated with foreign currencies. We have no debt at June 30, 2017 and thus have no exposure to interest rate risk. We do not believe our exposure to these or similar financial instrument market risks to be material.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

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MANAGEMENT

 

The following tables set forth information regarding the Company’s Board of Directors and its executive officers.

 

Officers and Directors of IronClad Encryption Corporation

 

In connection with the Share Exchange, Butte’s then current directors agreed to resign and be replaced by nominees of InterLok. Ms.   Doris Marie Prater resigned and Mr. Jeff B. Barrett was appointed to fill that vacancy. Thereafter,  Ms. Susan Ann Robinson-Trudell resigned and Mr. James D. McGraw was appointed to fill that vacancy. Mr. Paul A. Hatfield resigned and Mr. Gregory B. Lipsker was appointed to fill the final vacancy on the Board of Directors.

 

The resignations of Ms.   Prater, Ms.   Robinson-Trudell and Mr.   Hatfield as directors and the subsequent appoint of a new Board of Directors became effective on January 16, 2017 upon the conclusion of the 10-day period that followed the date on which an Information Statement on Schedule 14f-1 was filed with the SEC and transmitted to our Class A common stock stockholders of record on the effective date of the Share Exchange Agreement, January 6, 2017.

 

The current Directors and Officers are:

 

Name and Address   Age   Affiliation with Registrant   Expiration of Term
Gregory B. Lipsker   67   Director   Annual Meeting
John S. Reiland   67   Director   Annual Meeting
James D. McGraw   59   Director, President and Chief Executive Officer   Annual Meeting
Jeff B. Barrett   60   Vice President   Annual Meeting
Daniel M. Lerner   62   Chief Technology Officer   Annual Meeting
Miguel A. Yanez   45   Vice President of Sales (Mobile Communications)   Annual Meeting
Len E. Walker   46   Vice President, General Counsel and Secretary   Annual Meeting
David G. Gullickson   66   Vice President of Finance, Treasurer and CFO   Annual Meeting

 

Business Experience of Directors and Executive Officers

 

Gregory B. Lipsker is a graduate of the Georgetown University Law Center. For 35 years Mr. Lipsker practiced law specializing in corporate transactions and securities law, focusing on junior mineral exploration companies. For more than the past five years Mr. Lipsker’s principal occupation has been as the owner/winemaker of Barrister Winery in Spokane, Washington. During that period Mr. Lipsker’s legal practice has been limited to serving as legal counsel to Butte Highlands Mining Company.

 

John S. Reiland brings a diverse forty-year business background encompassing various principal roles in public and private companies. He has successfully navigated posts as chief executive officer, chief financial officer, and chief restructuring officer in a variety of industries, primarily redirecting and strategically restructuring large scale companies. His extensive leadership experience includes religious nonprofits and technology companies and he currently serves on the board of directors for Flotek Industries, Inc., which earned revenue upwards of $330 million in 2015. Mr. Reiland’s superior leadership secured a nomination for the Los Angeles Business Journal CFO of the Year award in 2009. He earned a BBA in accounting from the University of Houston and has completed the Stanford Executive Program with the Stanford Graduate School of Business.

 

James D. McGraw serves as IronClad’s CEO, President and Vice Chairman of the Board (and Principal Executive Officer). Mr. McGraw oversees IronClad’s day-to-day operations, negotiating strategic partnerships and raising growth capital. Prior to IronClad, Mr. McGraw was co-founder of Nova Biosource Fuels, Inc. where he served as its President and as a Board Member. Mr. McGraw addressed venture capital and investment funding needs guiding the company to a successful public offering in 2006. In this role, Mr. McGraw proved himself to be a strong champion of stockholder’s concerns. In previous roles, Mr. McGraw administered services to over 150 companies including Adtec Digital, American Rice, Blockbuster Video, Chuck E. Cheese, Dryper, DataVan, International Recovery, Republic Industries and Swift Energy. Over his twenty-five-year career, he has held posts as founder, CEO and President in a wide range of business sectors, including oil and gas, and computer technology, and has experience in large-scale roll-ups. Mr. McGraw holds a secret security clearance.

 

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Jeff B. Barrett serves is a Vice President for IronClad. He is also a co-founder of the Company. Prior to IronClad, Mr. Barrett founded and operated Foresight Security Systems, a high-end custom electronics sales and installation company. Over the 20 years he ran the company, he gained extensive experience in sales, marketing, management, research, analyzing, and budgeting .

 

Daniel M. Lerner serves as IronClad’s Chief Technology Officer and Vice President of Engineering. He is also a co-founder of the Company. He is responsible for all aspects of the Company’s technical developments and strategy. Prior to IronClad, Mr. Lerner served as Chief Technology Officer for Teledrill Inc. and was responsible for all aspects of technology, including design, engineering, production and field testing. Mr. Lerner has vast experience as a developer of technological products, electronics, computer software, and network security services and is an adept leader of multi-disciplinary teams in the technology industry. He has architected data acquisition and signal processing systems and patented, designed and implemented ultra-high security data encryption. Mr. Lerner’s previous experience as Senior Applications Engineer for Teradyne included electronic design, system program administration and sales assistance. He received a BSEE and MSEE from La Salle University.

 

Miguel A. Yanez serves as IronClad’s Vice President of Sales (Mobile Communications). He brings extensive experience in the fields of aerospace and defense business development, national security operations, counter-terrorism and military/police training. Mr. Yanez currently sits on the board of AirCover Integrated Solutions. His current activities also include outside consulting for the Athena Gun Club of Houston where he developed and is running the Athena Development Program or ADP, an intensive six-month defensive arms program. He previously worked at Silent Circle, a company offering secure enterprise communication solutions including software, devices including phones, and services. In his business development role, he initiated and grew sales across Africa, Central America and South America. Prior to entering the civilian and business worlds Miguel served with distinction in the United States military as a member of the elite Navy SEALs team. Miguel attended Texas Tech University and the University of Houston majoring in Architecture. Miguel currently speaks and consults on topics of counter and narco terrorism, global insecurity and private security matters.

 

Len E. Walker serves as IronClad’s Vice President of Legal, General Counsel, and Secretary. He specializes in drafting government contracts and coordinating financial and legal agreements. He completed his 20 year career in the United States Marine Corps as a Major and the Executive Officer and Chief-of-Staff of a Marine Corps helicopter squadron, second in command of a 200-person organization with nine aircraft and $100,000,000 in equipment. As the Security Manager, he was responsible for maintaining and safeguarding all classified material and equipment, as well as initiating and revoking security clearances. As an officer and pilot in command, he flew 3,000 hours and served five combat tours in Afghanistan and Iraq. He was awarded the Meritorious Service Medal and Air Medal with 10 Strike Flights. Mr.   Walker earned a BBA from Baylor University, a JD from South Texas College of Law, and continues to hold a Top Secret Security Clearance.

 

David G. Gullickson serves as IronClad’s Vice President of Finance and Treasurer (and Principal Financial and Accounting Officer). He has over 25 years of experience as a corporate executive officer, Chief Financial Officer or Chief Accounting Officer (and corporate Secretary) of several SEC-registered companies on each of the major U.S. (and a Canadian) exchanges and markets, as well as for companies owned by private-equity companies that planned or implemented initial and secondary public offerings. He has held positions most recently as Vice President, Treasurer and Principal Financial Officer of Hyperdynamics Corporation (OTCQX “HDYN”), Chief Financial Officer of the Southern Ute Indian Tribe (a domestic sovereign nation with over $4 billion in assets and $300 million of Tribe issued bonds that are “AAA” rated by Fitch and Moody’s), CFO of Greenfields Petroleum Corporation (TSX Venture: “GNF”) operating oil and gas properties in Baku, Afghanistan, and similar companies. He holds two degrees from the University of Texas in Austin: a B.A. degree in Economics and a Master of Professional Accounting degree. Mr.   Gullickson is a Certified Public Accountant.

 

Board Committees

 

As of the date hereof, the Board of Directors has established two standing committees: the Audit Committee (the “Audit Committee”) and the Compensation, Nominating and Corporate Governance Committee (the “CNCG Committee”). The Audit Committee and the CNCG Committee were each formed in October 2017. The committee charters are posted on our website at www.ironcladencryption.com .

   

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Audit Committee

 

The Audit Committee oversees our accounting and financial reporting processes, internal systems of accounting and financial controls, relationships with independent auditors and audits of financial statements. Specific responsibilities include the following:

 

· providing independent oversight of our accounting and financial reporting processes;

 

· providing independent oversight of our relationship with our independent auditing firm, including evaluation of its qualifications, independence and performance;

 

· providing independent oversight of the performance our Company’s internal audit function; and

 

· assuring compliance with legal and regulatory requirements, including, but not limited to, the preparation of the disclosure required by Item 407(d)(3)(i) of Regulation S-K.

 

The Audit Committee is comprised of Gregory B. Lipsker and John S. Reiland. John S. Reiland serves as Chairman of the Audit Committee.

 

Compensation, Nominating and Corporate Governance Committee

 

The CNCG Committee assists the Board of Directors in determining and developing plans for the compensation of our officers, directors and employees, identifying and recommending individuals qualified to become members of our Board of Directors and establishing, evaluating and overseeing our corporate governance guidelines. Specific responsibilities include the following:

 

· identifying individuals qualified to become directors and selecting, or recommending that the Board of Directors select, the candidates for all directorships to be filled by the Board of Directors or by the stockholders;

 

· developing and recommending to the Board of Directors a set of corporate governance principles applicable to the Company;

 

· overseeing the evaluation of the Board of Directors and management; and

 

· discharging the Board of Directors’ responsibilities with respect to all forms of compensation of the Company’s executive officers and producing a report on executive compensation for inclusion in the Company’s proxy statement and annual report on Form 10-K if required by SEC rules.

 

The CNCG Committee is comprised of Gregory B. Lipsker and John S. Reiland. John S. Reiland serves as Chairman of the CNCG Committee.

 

Compliance with Section 16(a) of the Exchange Act

 

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Section 240.16a-3 during the current fiscal year, and Form 5 and amendments thereto furnished to the Registrant with respect to the current fiscal year, no person who at any time during the fiscal year was a director, officer, or beneficial owner or more than ten percent of any class of equity securities of the Company failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Exchange Act, except that Mr. McGraw filed two late Form 4 reports with respect to non-exempt transactions and Mr. Gullickson filed one late Form 3 report with respect to equity securities of the Company beneficially owned by him on the date he became an officer of the Company.

 

Director Independence

 

John S. Reiland and Gregory B. Lipsker are independent members of the Board of Directors. James D. McGraw is not an independent director. Jeff B. Barrett resigned as a director, effective September 11, 2017 and John S. Reiland, an independent director, filled the vacancy on September 12, 2017.

 

EXECUTIVE COMPENSATION

 

Summary Compensation

 

No directors’ fees were paid during the years ended December 31, 2016 and December 31, 2015. No officers were compensated by the Company for the years ended December 31, 2016 and December 31, 2015. As of December 31, 2016 the Company provided no stock options, warrants, or stock appreciation rights, and there were no employment contracts, incentive pay agreements or outstanding options with any officer or director.

 

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Employment Agreements

 

The Company has entered into employment agreements with certain executive officers of the Company, as described below. 

 

Employment Agreement of James D. McGraw

 

On August 17, 2017, we entered into an employment agreement with Mr. McGraw (the “McGraw Employment Agreement”) effective January 6, 2017, pursuant to which we agreed to pay Mr. McGraw a monthly salary of $5,000 for a temporary period, and Mr. McGraw agreed to a deferral of $3,700 per month commencing July 1, 2017 and continuing until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. McGraw’s intended annualized base salary of $500,000. The Board of Directors or CNCG Committee will also determine the timing and amount of payment to Mr. McGraw of all deferred salary amounts. Mr. McGraw is also eligible to participate in any annual incentive plan established by the Company. 

 

In addition, we agreed to award Mr. McGraw an option to purchase 4,000,000 shares of our Class A common stock at an exercise price of $0.15 per share, with one quarter of the shares underlying the option to be vested on January 5, 2018 and the remaining shares to be vested equally over three years on each anniversary of January 5 for three consecutive years.  We also agreed to award Mr. McGraw an option to purchase 10,000,000 shares of our Class A common stock at an exercise price of $1.00 per share, which shall vest and become exercisable once the fair market value of the Company’s Class A common stock equals or exceeds $15.00 per share.  Once vested, these additional options must be exercised within two years of vesting.  These options were awarded under our Amended & Restated IronClad Encryption Corporation 2017 Equity Incentive Plan when the plan was approved by our stockholders.  The McGraw Employment Agreement expires on January 31, 2021, with automatic renewal for successive one-year terms, unless terminated in writing by either party at least 90 days prior to the expiration.  Mr. McGraw is also eligible to participate in other standard benefits plans offered to similarly situated employees by us from time to time, including group health, vision and dental insurance and our 401(k) program.  Upon a termination of Mr. McGraw’s employment without Cause by the Company or by Mr. McGraw for Good Reason in connection with a Material Event or Change of Control of the Company (each as defined in the McGraw Employment Agreement), Mr. McGraw will receive certain severance benefits, including severance payments equal to his base salary then in effect as of the date of termination for a period of twelve months, a pro rata portion of any annual incentive award for the year during which such termination occurs and immediate vesting of all outstanding stock options with a right to exercise for two years.

 

Employment Agreement of David G. Gullickson

 

On August 17, 2017, we entered into an employment agreement with Mr. Gullickson (the “Gullickson Employment Agreement”) effective May 1, 2017, pursuant to which we agreed to pay Mr. Gullickson a monthly salary of $5,000, and Mr. Gullickson agreed to a deferral of $13,750 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Gullickson’s annualized base salary of $225,000. The Board of Directors or CNCG Committee will also determine the timing and amount of payment to Mr. Gullickson of all deferred salary amounts. Mr. Gullickson is also eligible to participate in any annual incentive plan established by the Company.

 

In addition, we agreed to award Mr. Gullickson an option to purchase 500,000 shares of our Class A common stock at an exercise price of $1.47 per share, with one quarter of the shares underlying the option to be vested on January 5, 2018 and the remaining shares to be vested equally over three years on each anniversary of January 5 for three consecutive years. These options were awarded under our Amended & Restated IronClad Encryption Corporation 2017 Equity Incentive Plan when the plan was approved by our stockholders. The Gullickson Employment Agreement expires on January 31, 2021, with automatic renewal for successive one-year terms, unless terminated in writing by either party at least 90 days prior to the expiration. Mr. Gullickson is also eligible to participate in other standard benefits plans offered to similarly situated employees by us from time to time, including group health, vision and dental insurance and our 401(k) program. Upon a termination of Mr. Gullickson’s employment without Cause by the Company or by Mr. Gullickson for Good Reason in connection with a Material Event or Change of Control of the Company (each as defined in the Gullickson Employment Agreement), Mr. Gullickson will receive certain severance benefits, including severance payments equal to his base salary then in effect as of the date of termination for a period of twelve months, a pro rata portion of any annual incentive award for the year during which such termination occurs and immediate vesting of all outstanding stock options with a right to exercise for two years.

 

  40  

 

 

Employment Agreement of Daniel M. Lerner

 

On August 17, 2017, we entered into an employment agreement with Mr. Lerner (the “Lerner Employment Agreement”) effective January 6, 2017, pursuant to which we agreed to pay Mr. Lerner a monthly salary of $5,000, and Mr. Lerner agreed to a deferral of $11,667 00 per month commencing July 1, 2017 until the Board of Directors or the CNCG Committee determines when the Company is financially able to pay the full monthly amount of Mr. Lerner’s annualized base salary of $200,000. The Board of Directors or CNCG Committee will also determine the timing and amount of payment to Mr. Lerner of all deferred salary amounts. Mr. Lerner is also eligible to participate in any annual incentive plan established by the Company. 

 

In addition, we agreed to award Mr. Lerner an option to purchase 3,000,000 shares of our Class A common stock at an exercise price of $0.15 per share, with one quarter of the shares underlying the option to be vested on January 5, 2018 and the remaining shares to be vested equally over two years on each anniversary of January 5 for two consecutive years.  These options were awarded under our Amended & Restated IronClad Encryption Corporation 2017 Equity Incentive Plan when the plan was approved by our stockholders.  The Lerner Employment Agreement expires on January 31, 2021, with automatic renewal for successive one-year terms, unless terminated in writing by either party at least 90 days prior to the expiration.  Mr. Lerner is also eligible to participate in other standard benefits plans offered to similarly situated employees by us from time to time, including group health, vision and dental insurance and our 401(k) program.  Upon a termination of Mr. Lerner’s employment without Cause by the Company or by Mr. Lerner for Good Reason in connection with a Material Event or Change of Control of the Company (each as defined in the Lerner Employment Agreement), Mr. Lerner will receive certain severance benefits, including severance payments equal to his base salary then in effect as of the date of termination for a period of twelve months, a pro rata portion of any annual incentive award for the year during which such termination occurs and immediate vesting of all outstanding stock options with a right to exercise for two years.

 

2017 Equity Incentive Plan

 

The Board of Directors adopted, and the Company’s stockholders subsequently approved, the IronClad Encryption Corporation 2017 Equity Incentive Plan (the “Plan”) effective as of January 6, 2017. The purpose of the Plan is to foster and promote the long-term financial success of the Company and thereby increase stockholder value. The Plan provides for the award of equity incentives to certain employees, directors, or officers of, or key advisers or consultants to, the Company and its subsidiaries who are responsible for or contribute to the management, growth or success of the Company or any of its subsidiaries. The maximum number of shares available for issuance under the Plan is thirty million (30,000,000) shares of Class A common stock. On October 17, 2017, in connection with the change of the Company’s jurisdiction of incorporation from the State of Nevada to the State of Delaware, the Board of Directors adopted the Amended and Restated IronClad Encryption Corporation 2017 Equity Incentive Plan (the “Amended Plan”).

 

  41  

 

 

The following table sets forth information about the Amended Plan as of October 11, 2017.

 

 

Plan Category

  Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (a)
    Weighted-average
exercise price
of outstanding
options,
warrants and
rights (b)
    Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)) (c)
 
                   
Equity compensation plans approved by security holders     22,800,000     $0.79     7,200,000  
                         
Equity compensation plans not approved by security holders                  
                         
Total     22,800,000     $0.79     7,200,000  

 

(a) The number of outstanding options awarded above includes an option awarded to Mr. James D, McGraw to purchase 10,000,000 shares of Class A common stock at an exercise price of $1.00 per share. The option is only exercisable under certain limited circumstances, one of which is that the market price of our Class A common stock reaches a price of $15.00 per share.

 

Limitations on Liability and Indemnification Matters

 

Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. Our Bylaws provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. Our Certificate of Incorporation does not specifically indemnify the officers or directors or controlling persons against liability under the Securities Act. At present, there is no pending litigation or proceeding involving a director or officer of IronClad regarding which indemnification is sought, nor is the registrant aware of any threatened litigation that may result in claims for indemnification

 

We may also purchase and maintain insurance on behalf of our directors, officers, employees and agents for any liability asserted against such persons and liability or expenses incurred by such persons in their capacity as a director, officer, employee or agent, or arising out of status as such, whether or not the company has the authority to indemnify such persons against such liability and expenses.

 

  42  

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

(a) Security ownership of certain beneficial owners:

 

At October 11, 2017, three stockholders of record owned more than 5% of the Company's Class A common stock. Each of the individuals are officers of IronClad (Mr. McGraw, Mr. Barrett and Mr. Lerner) and are listed in the “Security Ownership of Management” section below.

 

(b)  Security Ownership of Management:  

 

At October 11, 2017, these Directors and Officers owned the Company's Class A common stock as follows:

 

        Number of     Percentage of  
Name of Beneficial Owner   Position   Shares     Ownership (1)  
Gregory B. Lipsker   Director     320,000       0.50 %
                     
John S. Reiland   Director     50,000       0.08 %
                     
James D. McGraw   Director, President and Chief Executive Officer    

(2) 22,865,891

      34.57 %
                     
Jeff B. Barrett   Vice President     15,900,000       24.00 %
                     
Daniel M. Lerner   Chief Technology Officer, Vice President     5,000,000       7.60 %
                     
Miguel A. Yanez   Vice President of Sales (Mobile Communications)     550,000       0.80 %
                     
Len E. Walker   Vice President, General Counsel, Secretary     150,000       0.20 %
                     
David G. Gullickson   Vice President of Finance, Treasurer and CFO     25,000       0.04 %
                     
    All officers and directors as a group (7 individuals)     44,860,891       67.82 %

 

(1) Based upon 66,145,695 shares of Class A common stock outstanding as of October 11, 2017

(2) Includes a private contractual agreement dated June 20, 2016 to acquire up to 500,000 shares privately owned from Mr. Paul A. Hatfield, a former Director and President of Butte

 

(c)  Arrangements for Change of Control of the Company:

 

We are unaware of any contract, or other arrangement or provision, the operation of which may at a subsequent date result in a change of control of our Company.

 

  43  

 

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

In a related party agreement dated June 20, 2016 and with respect to eventually setting up the reverse merger transaction governed by the Share Exchange Agreement (entered into and closed later on January 6, 2017), Mr. Paul A. Hatfield, at the time an officer and stockholder of Butte, entered into a Stock Purchase Agreement with Mr. James D. McGraw, of Houston, Texas and now the President of IronClad.  Mr. McGraw was instrumental in negotiating the definitive letter of intent to enter into the Share Exchange Agreement.

 

Pursuant to the terms of the Stock Purchase Agreement, Mr. McGraw or his assigns were granted the right to purchase from Mr. Hatfield a maximum of 500,000 shares of Butte that were personally owned by Mr. Hatfield at a price of $0.15 per share.  The Stock Purchase Agreement is effective for a period of twenty-four months commencing upon the closing of the Share Exchange Agreement.

 

LEGAL MATTERS

 

Baker & McKenzie LLP has given its opinion as attorneys-at-law regarding the validity of the issuance of the Shares offered by the Company.

 

EXPERTS

 

Fruci & Associates II, PLLC, an independent registered public accounting firm, has audited the balance sheets of IronClad Encryption Corporation as of December 31, 2016 and December 31, 2015 and the related statements of operations, changes in members’ equity (deficit), and cash flows for the year ended December 31, 2016 and December 31, 2015. The Company has included such financial statements in the prospectus and elsewhere in the registration statement in reliance on the report of Fruci & Associates II, PLLC, given their authority as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement to register the securities offered by this prospectus under the Securities Act. This prospectus is part of that registration statement, but omits certain information contained in the registration statement, as permitted by SEC rules. For further information with respect to our Company and this offering, reference is made to the registration statement and the exhibits and any schedules filed with the registration statement. Statements contained in this prospectus as to the contents of any document referred to are not necessarily complete and in each instance, if the document is filed as an exhibit, reference is made to the copy of the document filed as an exhibit to the registration statement, each statement being qualified in all respects by that reference. You may obtain copies of the registration statement, including exhibits, as noted in the paragraph below or by writing or telephoning us at:

 

IronClad Encryption Corporation
One Riverway, 777 South Post Oak Lane, Suite 1700

Houston, Texas 77056

(888) 362-7972
Attn: James D. McGraw

 

We file annual, quarterly and other reports and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov . You may also read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including any amendments to those reports, and other information that we file with or furnish to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act can also be accessed free of charge on under the “Reports and Filings” section of our “Investor Relations” page of our website at the following address: ironcladencryption.com .

 

These filings will be available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not part of this prospectus.

 

  44  

 

 

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

 

For purposes of this prospectus, the SEC allows us to “incorporate by reference” certain information we have filed with the SEC, which means that we are disclosing important information to you by referring you to other information we have filed with the SEC. The information we incorporate by reference is considered part of this prospectus. We specifically are incorporating by reference the following documents filed with the SEC (excluding those portions of any Form 8-K that are not deemed “filed” pursuant to the General Instructions of Form 8-K):

 

· The Annual Report on Form 10-K of IronClad Encryption Corporation for the year ended December 31, 2016, filed with the SEC on March 31, 2017;
· The Quarterly Reports on Form 10-Q of IronClad Encryption Corporation for the periods ended March 31, 2017 and June 30, 2017, filed with the SEC on May 22, 2017 and August 21, 2017 and the Amendment to the Quarterly Report on Form 10-Q of IronClad Encryption Corporation for the period ended June 30, 2017, filed with the SEC on August 23, 2017; and
· Current Reports on Form 8-K filed with the SEC on January 6, 2017, January 12, 2017, February 13, 2017, March 2, 2017, March 31, 2017, May 18, 2017, August 28, 2017 and October 17, 2017 and the Amendment to the Current Report on Form 8-K filed with the SEC on October 16, 2017.

 

We also incorporate by reference into this prospectus additional documents that we may file with the SEC under Section 13(a), 13(c) or 15(d) of the Exchange Act from the date of this prospectus to the completion of the offering of the securities registered pursuant to this prospectus including all such documents we may file with the SEC after the date of the initial registration statement and prior to the effectiveness of the registration statement. These documents may include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

We will provide without charge to each person, including any beneficial owner, to whom this prospectus is delivered, upon written or oral request, a copy of any or all documents that are incorporated by reference into this prospectus, but not delivered with the prospectus, other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the documents that this prospectus incorporates. You should direct written requests to: President, IronClad Encryption Corporation, 777 South Post Oak Lane, Suite 1700, Houston, Texas 77056, or you may call us at (888) 362-7972.

 

  45  

 

 

FINANCIAL STATEMENTS

 

IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY

 

Condensed and Consolidated Financial Statements

As of and for the Three and Six Month Periods Ended June 30, 2017

 

Financial Statements  
   
Condensed Consolidated Balance Sheets F-2
   
Condensed Consolidated Statements of Operations F-3
   
Condensed Consolidated Statements of Cash Flows F-4
   
Notes to Condensed Consolidated Financial Statements F-5

 

  F- 1  

 

 

IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY

(Previously named Butte Highlands Mining Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    June 30,     December 31,  
    2017     2016  
    (Unaudited)          
Assets                
Current assets                
Cash and cash equivalents   $ 250,000     $ 50,682  
Prepaid expenses and deposits     25,000       -  
Total current assets     275,000       50,682  
                 
Other assets                
Patents, net     79,786       68  
                 
Total assets   $ 354,786     $ 50,750  
                 
Liabilities and Stockholders' Equity (Deficit)                
Current liabilities                
Accounts payable   $ 60,284     $ -  
Accrued interest     103       4,142  
Accrued liabilities     177,367       12,539  
Advances payable to related party     -       10,662  
Total current liabilities     237,754       27,343  
                 
Other liabilities                
Convertible debt     -       210,000  
Total  liabilities     237,754       237,343  
                 
Commitments and contingencies     -       -  
                 
Stockholders' equity (deficit)                
Preferred stock, $0.001 par value, 20,000,000 shares authorized; none issued and outstanding     -       -  
Common stock, Class A, $0.001 par value, 500,000,000 shares authorized; 66,008,195 and 56,655,891 shares issued and outstanding, respectively     66,008       56,656  
Common stock, Class B, $0.001 par value, 1,707,093 shares authorized; 1,538,872 and 0 shares issued and outstanding, respectively     1,539       -  
Additional paid-in capital     4,604,676       31,900  
Subscriptions receivable     -       (81,481 )
Accumulated deficit     (4,555,191 )     (193,668 )
Total stockholders' equity (deficit)     117,032       (186,593 )
                 
Total liabilities and stockholders' equity (deficit)   $ 354,786     $ 50,750  

 

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

 

  F- 2  

 

 

IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY

(Previously named Butte Highlands Mining Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
                         
Revenues   $ -     $ -     $ -     $ -  
                                 
Operating expenses                                
Product development costs     327,749       -       332,842       -  
General and administrative     294,856       6,690       1,579,661       9,234  
Officer and director fees     901,684       -       1,569,730       -  
Investor relations     519,409       -       759,050       -  
Professional fees     79,573       -       118,261       -  
Amortization     7       8       15       15  
Total operating expenses     2,123,278       6,698       4,359,559       9,249  
                                 
Loss from operations     (2,123,278 )     (6,698 )     (4,359,559 )     (9,249 )
                                 
Other income (expense)                                
Interest income     232       -       112       -  
Interest expense     -       -       (2,076 )     -  
Total other income (expense)     232       -       (1,964 )     -  
                                 
Loss before taxes     (2,123,046 )     (6,698 )     (4,361,523 )     (9,249 )
                                 
Income taxes                                
Income tax benefit     -       -       -       -  
Income tax expense     -       -       -       -  
Total income tax     -       -       -       -  
                                 
Net loss   $ (2,123,046 )   $ (6,698 )   $ (4,361,523 )   $ (9,249 )
                                 
Net loss per commons share, basic and diluted   $ (0.03 )   $ (6.70 )   $ (0.07 )   $ (9.25 )
                                 
Weighted average number of common stock shares (in 2017) or member units (in 2016) outstanding, basic and diluted     67,488,739       1,000       65,682,253       1,000  

 

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

 

  F- 3  

 

 

IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY

(Previously named Butte Highlands Mining Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Six Months Ended  
    June 30,  
    2017     2016  
    (Unaudited)     (Unaudited)  
Cash flows from operating activities                
Net loss   $ (4,361,523 )   $ (9,249 )
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:                
Amortization expense     15       15  
Common stock issued for services, investor relations     236,250       -  
Stock options issued for services, development     65,092       -  
Stock options issued for services, general and administrative     1,258,648       -  
Stock options issued for officers and directors     1,458,730       -  
Stock options issued for services, investor relations     390,170       -  
Changes in assets and liabilities:                
Increase in prepaid expenses and deposits     (25,000 )     -  
Increase in accounts payable     60,284       8,592  
Increase in accrued liabilities     164,828       -  
Decrease in accrued interest     (4,039 )     -  
Net cash used by operating activities     (756,545 )     (642 )
                 
Cash flows from investing activities                
Patent applications     (79,733 )     -  
Net cash used by investing activities     (79,733 )     -  
                 
Cash flows from financing activities                
Advances payable to related party     (227 )     700  
Proceeds from issuances of common stock     983,693       -  
Conversion of options     3,750       -  
Cash received from merger     48,380       -  
Net cash provided by financing activities     1,035,596       700  
                 
Increase in cash and cash equivalents     199,318       58  
                 
Cash, beginning of period     50,682       -  
Cash, end of period   $ 250,000     $ 58  
                 
                 
Supplemental Cash Flow Information                
Interest paid   $ 6,115     $ -  
Income taxes paid   $ -     $ -  
Common stock issued to retire convertible debt   $ 210,000     $ -  

 

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

 

  F- 4  

 

 

IRONCLAD ENCRYPTION CORPORATION AND SUBSIDIARY

(Previously named Butte Highlands Mining Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

History and Recent Transaction

 

The “Company” is the term used in these statements and notes to refer to the entity originally incorporated in the State of Delaware back in 1929 and recently reincorporated to the State of Nevada.  The registered name of the Company until early in 2017 was Butte Highlands Mining Company (“Butte”).  The name of the Company has been changed to IronClad Encryption Corporation (“IronClad”).

 

Butte was formed to explore and mine primarily for gold in the Butte Highlands’ “Only Chance” mine, south of Butte, Montana.  The Company was reorganized in October 1996 for the purpose of acquiring and developing additional mineral properties.  At the time of the 1996 reorganization, stockholders representing approximately 76% of the outstanding capital stock could not be located.  In order to obtain the quorum necessary for the special meetings of stockholders to authorize the reorganization, Butte obtained an order from the Superior Court of Spokane County, Washington appointing a trustee for the benefit of those stockholders who could not be located.

 

By May 17, 2007, eleven years after the reorganization and very limited results from its mining activities, the Company had disposed of all of its historical mineral properties or claims and eventually became a “shell company” under the rules of the Securities and Exchange Commission (“SEC”).

 

Now, following ten years of being a shell company with only nominal activity and limited cash or other assets, the business focus of Butte changed early in 2017.  Most notably the Company raised significant capital to implement its new business and financial plans to further develop the licensing and commercial use of its patented encryption software.  The change caused Butte to lose its previous shell company status.

 

The Company also changed its legal name of registration and state of incorporation to more appropriately reflect the fundamental change of its business to developing cyber encryption technology and away from its historical mining activities.  The terms “Company”, “IronClad” and “Butte” all refer to the same individual corporate entity, but the uses of the IronClad and Butte names are used to refer to different eras of the Company’s long history.  The historical eras generally coincide with the changes in business focus before and after the first weeks of 2017.

 

The business changes are a result of a common stock exchange transaction, accounted for as a “reverse merger”, between Butte and the owners of InterLok Key Management, Inc. (“InterLok”; at the time an independent and privately-held Texas corporation) whereby InterLok became a wholly-owned subsidiary of Butte.  Butte issued shares of its common stock in exchange for acquiring all of the common stock of InterLok.  At present, InterLok is the one and only subsidiary of the Company and InterLok’s patents and line of business now become the main basis of the business of the Company on a consolidated basis.

 

Along with the Company’s change of business came the Company’s adoption of IronClad Encryption Corporation (and the discontinuance of using the Butte name) as the name of what is now the parent corporation and the change of the state of incorporation to Nevada from Delaware.  The Company also has changed its stock market ticker symbol to “IRNC” from “BTHI” on one of the OTC Markets Group over-the-counter markets, OTC QB, where the Company’s shares have been and continue to be traded.

 

Description of Businesses—Present and Past

 

InterLok Key Management, Inc. (formerly InterLok Key Management, LLC) is a company in the business of developing and licensing the use of cyber software technology that encrypts data files and electronic communications.   Electronic file information and data transmissions are safeguarded from unauthorized access and their use is securely protected by perpetual authentication through the use of a single-key, dynamic synchronization of authentications keys.  InterLok was formed in Texas on June 12, 2006 and incorporated ten years later on June 16, 2016.

 

  F- 5  

 

 

On January 6, 2017 InterLok entered into a Share Exchange Agreement ("Share Exchange") with Butte Highlands Mining Company.  Under the terms of the agreement, the stockholders of InterLok Key Management, Inc. exchanged all 56,655,891 outstanding shares of InterLok’s common stock for 56,655,891 shares of Class “A” common stock of Butte Highlands Mining Company.

 

The Share Exchange was treated as a “reverse merger” with InterLok Key Management, Inc. which is deemed—for accounting recognition purposes—as the accounting acquirer and Butte Highlands Mining Company deemed the accounting acquiree under the acquisition method of accounting. The reverse merger is deemed a recapitalization and the consolidated financial statements represent the substantive continuation of the operations and thus the financial statements of its subsidiary InterLok Key Management, Inc., while the capital structure (in terms of authorized preferred and common stock) of Butte Highlands Mining Company remains intact.

 

Principles of consolidation

The accompanying unaudited consolidated financial statements include the accounts of IronClad and its one subsidiary which is wholly-owned.  All intercompany accounts and transactions have been eliminated in consolidation.  The above unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.

 

Accordingly, these unaudited interim consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements and the rules of the SEC.  These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2016.

 

In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.  Operating results for the six month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

Note 2 – Summary of Significant Accounting Policies

 

This summary of significant accounting policies is presented to assist in understanding the Company’s interim consolidated financial statements. The financial statements and notes are representations of the Company’s management which is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.

 

Going Concern

As shown in the accompanying financial statements, the Company has incurred cumulative operating losses since inception. As of June 30, 2017, the Company has limited financial resources with which to achieve its objectives and attain profitability and positive cash flows from operations. As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $4,555,191.  The Company's working capital (current assets minus current liabilities) is $37,246.

 

Achievement of the Company's objectives will depend on its ability to obtain additional financing, to generate revenue from current and planned business operations, and to effectively manage product and software development, operating and capital costs. The Company is in a development stage and has generated no operating revenue, profits or positive cash flows from operations.

 

The Company plans to fund its future operations by potential sales of its common stock or by issuing debt securities.  However, there is no assurance that IronClad will be able to achieve these objectives, therefore substantial doubt about its ability to continue as a going concern exists. The financial statements do not include adjustments relating to the recoverability of recorded assets nor the implication of associated bankruptcy costs should IronClad be unable to continue as a going concern.

 

Fair Value Measures

The Company's financial instruments, as defined by the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 825-10-50 Financial Instruments—Overall (and subtopics) , include cash, receivables, accounts payable and accrued expenses.  All instruments are accounted for on an historical cost basis, which, due to the short maturity of these financial instruments, approximates their fair values at June 30, 2017 and at December 31, 2016.

 

  F- 6  

 

 

The standards under ASC 820 Fair Value Measurement define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements.  ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

 

· Level 1.  Observable inputs such as quoted prices in active markets;
     
· Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
     
· Level 3.  Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The Company did not have any assets measured at fair value other than cash and deposits at June 30, 2017 and at December 31, 2016.

 

Provision for Income Taxes

Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25 Income Taxes – Recognition .  Under the approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis amounts of assets and liabilities and their financial reporting amounts at each period-end.  A valuation allowance is recorded against deferred tax asset amounts if management does not believe the Company has met the “more likely than not” standard imposed by ASC 740-10-25-5 to allow recognition of such an asset.  See Note 8.

 

Capitalization of Patent and Trademark Costs

The Company capitalizes its legal, patent agent and related filing fees and costs associated with the patents it holds and is developing.  The amounts are carried as an intangible asset in the financial statements.  The costs of the patents or trademarks are written off ratably (expensed) over the expected useful technological or economic life of the individual assets.  The legal life of a patent is typically about 17 years.  See Note 3.

 

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified to provide greater line item detail for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.  This change in classification has no effect on previously reported cash flows in the Condensed Consolidated Statement of Cash Flows, and had no effect on the previously reported Condensed Consolidated Statement of Operation for any period.

 

New Accounting Requirements and Disclosures

Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

Note 3 – Patents

 

Patents and trademarks are as follows:

 

    June 30, 2017     June 30, 2016  
Patents and trademarks under development   $ 79,733     $ -  
                 
Patents issued     398       398  
Less accumulated amortization     (345 )     (315 )
      53       83  
                 
Patents, net   $ 79,786     $ 83  

 

Amortization expense for intangible assets during the six month periods ended June 30, 2017 and 2016 was $7 and $8, respectively.  Three patents expire in 2017, 2018 and 2021, respectively. Costs totaling $79,733 for new patents and trademarks under development (but as yet not awarded) are capitalized at June 30, 2017.  The patents and trademarks under development will not be amortized until formally issued.

 

  F- 7  

 

 

Note 4 – Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At June 30, 2017 and 2016, the Company had no amounts on deposit in excess of the FDIC insured limit.

 

Note 5 – Related Party Transactions

 

The Company paid $15,249 in consulting fees during 2016 to Eagle Mountain 21, LLC, an entity owned by an officer of the Company.  At December 31, 2016 the Company owed an additional $10,662 amount to that same officer for operating costs incurred and submitted for reimbursement during 2016.  Reimbursement to the officer was made at the start of the quarter ended June 30, 2017.

 

Note 6 – Convertible Notes Payable

 

On June 26, 2017 IronClad entered into a Securities Purchase Agreement to issue a 12% convertible note payable for an aggregate principal amount of $78,500 with the intent of meeting certain conditions precedent to closing and funding on or before July 7, 2017.  The closing conditions were met prior to that date and the convertible note payable was closed and funded on July 6, 2017.  The Company received cash proceeds of $75,000 net of transaction costs of $3,500.  See also Note 11.

 

On August 8, 2016, InterLok issued two 5% convertible senior promissory notes for a principal amount of $30,000 each and, on August 16, 2016, issued one 5% convertible senior promissory note for $150,000 for an aggregate principal amount of $210,000.  Interest costs accrued on the unpaid principal balances at five percent (5%) annually until the principal amount and all interest accrued thereon was paid at the earlier of 1) the maturity date two years later on August 8, 2018 or August 16, 2018, respectively, or 2) on the conversion of the notes into shares of common stock at a price equal to a conversion price of $0.15 per share.

 

The notes automatically converted into shares of common stock at a conversion price of $0.15 per share, subject to adjustment under certain circumstances in the event of an acquisition transaction or a public offering event.  The Company could not enter into an acquisition or public offering event without the prior written approval of any of the note holders.  If any holder declined to provide approval for an acquisition transaction or public offering, the Company could have immediately prepaid the entire outstanding principal amounts and accrued interest amounts on the notes.  Two of the notes contained the option to purchase additional shares of common stock.

 

During the period ended March 31, 2017, the principal balances of all three 5% convertible senior promissory notes were converted into 1,400,000 shares of IronClad Class A common stock.  Accrued interest of $6,115 on the notes was paid in cash during the quarter ended June 30, 2017.

 

Note 7 – Common Stock

 

During the three month period ended March 31, 2017, i) the Company issued 5,843,954 shares of its Class A common stock at $0.15 per share for cash in the amount of $876,597 ($35,343 of which was only subscribed and still receivable at December 31, 2016), and ii) 75,000 shares at $0.15 per share for investment banking services in the amount of $11,250.

 

Additionally, i) the three convertible note holders converted $210,000 into 1,400,000 shares of Class A common stock, and ii) 250,000 shares were issued pursuant to the Share Exchange Agreement at $0.03 per share.  Also, iii) subscriptions receivable that were outstanding at December 31, 2016 in the amount of $81,481 were collected.

 

During the three month period ended June 30, 2017, the Company issued i) 240,333 shares of Class A common stock at $0.15 per share for cash in the amount of $36,050 pursuant to a Section 4(a)2 private placement offering, ii) 25,000 shares at $0.15 per share for the conversion of stock options (see Note 10), and iii) 75,000 shares at $2.90 per share for investment banking services valued at $217,500.

 

  F- 8  

 

 

Note 8 – Income Taxes

 

Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25  Income Taxes – Recognition.   Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard required by ASC 740-10-25-5.

 

Deferred income tax amounts reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes.

 

Significant components of the deferred tax asset amounts at an anticipated tax rate of 35% for the periods ended June 30, 2017 and December 31, 2016 are as follows:

 

    June 30,
2017
    December 31,
2016
 
Net operating loss carryforwards   $ 1,397,919     $ 193,668  
                 
Deferred tax asset   $ 489,271     $ 67,780  
Valuation allowance for deferred asset     (489,271 )     (67,780 )
Net deferred tax asset   $ -     $ -  

 

At June 30, 2017, the Company has net operating loss carryforwards of approximately $1,397,919 which will begin to expire in the year 2033.  The increase in the allowance account amount (and also in the deferred tax asset amount) from December 31, 2016 to June 30, 2017 was $421,491.

 

IronClad is subject to federal level income taxes under the jurisdiction of the US, but is not subject to income taxes at any state level.  Tax periods that may still be subject to review by the Internal Revenue Service are the years 2014, 2015, and 2016.  The Company has not identified any aggressive tax positions.

 

Note 9 – Share Exchange Agreement

 

On January 6, 2017, the Company entered into a Share Exchange Agreement with InterLok Key Management, Inc. wherein Butte agreed to issue 56,655,891 restricted shares of Butte’s common stock in exchange for 100% of the outstanding shares of InterLok Key Management, Inc. common stock.  InterLok Key Management, Inc. is engaged in the business of developing and licensing its patented key-based encryption methods.

 

On January 6, 2017, Butte completed its Share Exchange Agreement with the owners of InterLok, and issued 56,655,891 restricted shares of Butte’s common stock to 29 persons and entities in exchange for all of the outstanding shares of InterLok Key Management, Inc.’s common stock.  Immediately following completion of the share exchange agreement the Company’s new Board of Directors elected, through a series of board resolutions and regulatory filings, to change the Company’s name to IronClad Encryption Corporation from Butte, to move the Company to Nevada from Delaware, and to change its stock trading symbol to IRNC from BTHI.

 

The Share Exchange was treated as a reverse merger with InterLok Key Management, Inc. deemed, for accounting recognition purposes, the accounting acquirer and Butte Highlands Mining Company deemed the accounting acquiree under the acquisition method of accounting.  The reverse merger is deemed a recapitalization and the unaudited pro forma consolidated financial statements represent the substantive continuation of the operations and thus the financial statements of InterLok Key Management, Inc., while the capital structure (with respect to authorized, issued and outstanding shares of preferred and common stock) of Butte Highlands Mining Company—now using the name IronClad—remains intact.

 

Note 10 – Stock Options

 

During the three month period ended March 31, 2017, the Company awarded 1,145,000 stock options 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 awarded, 1,045,000 vested immediately and received full expense recognition in the three month period ended March 31, 2017.  The remaining 9,883,470 options vest periodically over the subsequent three years and will be expensed as they periodically vest.

 

  F- 9  

 

 

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

 

During the three month period ended June 30, 2017, the Company awarded 2,945,000 stock options for services valued at $4,657,850 (using the Black-Scholes option pricing model) and 500,000 stock options to an officer of IronClad valued at $731,659 (using the Black-Scholes option pricing model).  Of the total 3,445,000 options awarded during the period 85,000 vested immediately and received full expense recognition during the three month period ended June 30, 2017.  The remaining 3,360,000 options vest periodically over the next two to four years and will be expensed as they periodically vest.

 

The fair value of stock options is estimated on the date of each award using the Black-Scholes option pricing model to value the stock option based on its terms and conditions.   The table below summarizes the assumptions used to estimate the fair values of the options:

 

Number of
Options
    Date Issued     Exercise Price     Risk-free
Interest Rate
    Volatility     Life of Option
in years
 
  75,000       01/16/17       $0.75       1.54%       226.01%       3.00  
  6,000,000       01/20/17       $0.15       1.54%       220.00%       3.00  
  3,000,000       01/20/17       $0.15       1.54%       220.00%       4.00  
  350,000       01/31/17       $0.15       1.19%       132.84%       1.93  
  100,000       02/01/17       $0.15       1.22%       134.90%       2.00  
  100,000       03/13/17       $0.15       1.40%       144.84%       2.00  
  500,000       03/15/17       $0.15       1.02%       114.94%       1.40  
  20,000       03/21/17       $0.15       1.54%       233.07%       3.00  
  1,700,000       05/05/17       $1.47       1.71%       565.34%       4.00  
  1,000,000       05/05/17       $1.47       1.32%       202.99%       2.00  
  80,000       05/31/17       $0.75       1.44%       196.06%       3.00  
  660,000       06/12/17       $2.50       1.64%       589.85%       4.00  
  5,000       06/30/17       $3.49       1.55%       197.13%       3.00  
  13,590,000                                          

 

Note 11 – Subsequent Events

 

On July 6, 2017 IronClad closed and funded on an agreement to issue a 12% convertible note payable.  IronClad entered into the Securities Purchase Agreement on June 26, 2017 to issue the note payable for an aggregate principal amount of $78,500 with the intent of subsequently meeting certain conditions precedent to closing and funding on or before July 7, 2017.  The closing conditions precedent were met prior to that date and the convertible note payable was closed, issued and funded on July 6, 2017.  The Company received cash proceeds of $75,000 net of transaction costs of $3,500.

 

The note matures on March 30, 2018 and interest costs accrue on the unpaid principal balance at 12% annually until March 30, 2018, and after that interest accrues annually at 22% until the principal amount and all interest accrued and unpaid are paid.

 

The holder of the note, at his sole election, may convert the note into shares of common stock of the Company at any time during the period beginning on the date which is one hundred and eighty days following the date of the note (dated June 26, 2017) and ending on the later of i) the maturity date, or ii) the date of payment of a default amount, if any.

 

The shares to be issued are a function of a variable conversion price which is 65% of a market price defined to be the lowest one 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 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.

 

  F- 10  

 

 

IRONCLAD ENCRYPTION CORPORATION

 

Financial Statements
For the Year Ended December 31, 2016

 

Contents

 

Financial Statements  
   
Report of independent registered public accounting firm F-12
   
Balance Sheet F-13
   
Statements of Operations F-14
   
Statements of Stockholders’ Equity (Deficit) F-15
   
Statements of Cash Flows F-16
   
Notes to Financial Statements F-17

 

  F- 11  

 

 

802 N. Washington St.

Spokane, WA 99201

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of IronClad Encryption Corporation

(f/k/a Butte Highlands Mining Co.)

 

We have audited the accompanying balance sheet of IronClad Encryption Corporation as of December 31, 2016 and 2015 and the related statements of operations, stockholder’s equity, and cash flows for each of the years in the two-year period ended December 31, 2016. IronClad Encryption Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IronClad Encryption Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and would be dependent upon outside funding, which raises substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

 

Fruci & Associates II, PLLC

 

Spokane, WA

 

March 31, 2017

 

  F- 12  

 

 

IRONCLAD ENCRYPTION CORPORATION
(fka BUTTE HIGHLANDS MINING COMPANY)
BALANCE SHEETS (Audited)

 

    December 31,     December 31,  
    2016     2015  
             
Assets                
                 
Current assets                
Cash and cash equivalents   $ 60,125     $ 102,819  
Prepaid expense     110       173  
Total current assets     60,235       102,992  
                 
                 
Total assets   $ 60,235     $ 102,992  
                 
Liabilities and Stockholders’ Equity                
                 
Current liabilities                
Accounts payable   $ 1,365     $ 4,389  
Total current liabilities     1,365       4,389  
                 
Commitments and contingencies     -       -  
                 
Stockholders’ equity                
Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued and outstanding     -       -  
Common stock, Class A, $0.001 par value  500,000,000 shares authorized; 1,443,017 shares issued and outstanding     1,443       1,443  
Common stock, Class B, $0.001 par value 1,707,093 shares authorized; 1,538,872 shares issued and outstanding     1,539       1,539  
Additional paid-in capital     269,469       269,469  
Accumulated deficit     (213,581 )     (173,848 )
Total stockholders' equity     58,870       98,603  
                 
Total liabilities and stockholders’ equity   $ 60,235     $ 102,992  

 

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

 

  F- 13  

 

 

IRONCLAD ENCRYPTION CORPORATION
(fka BUTTE HIGHLANDS MINING COMPANY)

STATEMENTS OF OPERATIONS 

 

    Year Ended  
    December 31,  
    2016     2015  
             
Revenues   $ -     $ -  
                 
Operating expenses                
Professional fees     27,813       27,045  
Depreciation     -       -  
Officers & directors fees     -       -  
General and administrative     11,920       5,696  
Total operating expenses     39,733       32,741  
                 
Loss from operations     (39,733 )     (32,741 )
                 
Other income (expenses)                
Interest income     -       1  
Interest expense     -       (10 )
Total other income (expenses), net     -       (9 )
                 
Loss before taxes     (39,733 )     (32,750 )
                 
Income taxes                
Income tax benefit     -       -  
Tax expense     -       -  
      -       -  
                 
Net loss   $ (39,733 )   $ (32,750 )
                 
Net loss per common share, basic and diluted   $ (0.01 )   $ (0.01 )
                 
Weighted average number of common stock shares outstanding, basic and diluted     2,981,889       2,981,889  

 

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

 

  F- 14  

 

 

IRONCLAD ENCRYPTION CORPORATION
(fka BUTTE HIGHLANDS MINING COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (Audited)

 

    Common Stock     Additional           Other     Total  
    Class A     Class B     Paid-in     Accumulated     Comprehensive     Stockholders'  
    Shares     Amount     Shares     Amount     Capital     Deficit     Income     Equity  
                                                 
Balance, December 31, 2013     1,327,698     $ 1,328       1,654,191     $ 1,654     $ 269,469     $ (101,098 )   $ -     $ 171,353  
                                                                 
Net income for period ending December 31, 2014     -       -       -       -       -       (40,000 )     -       (40,000 )
                                                                 
Balance, December 31, 2014     1,327,698     $ 1,328       1,654,191     $ 1,654     $ 269,469     $ (141,098 )   $ -     $ 131,353  
                                                                 
Shares converted from Class B to Class A     115,319       115       (115,319 )     (115 )                             -  
                                                                 
Net income for period ending December 31, 2015     -       -       -       -       -       (32,750 )     -       (32,750 )
                                                                 
Balance, December 31, 2015     1,443,017     $ 1,443       1,538,872     $ 1,539     $ 269,469     $ (173,848 )   $ -     $ 98,603  
                                                                 
Net income for period ending December 31, 2016     -       -       -       -       -       (39,733 )     -       (39,733 )
                                                                 
Balance, December 31, 2016     1,443,017     $ 1,443       1,538,872     $ 1,539     $ 269,469     $ (213,581 )   $ -     $ 58,870  

 

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

 

  F- 15  

 

 

IRONCLAD ENCRYPTION CORPORATION
(fka BUTTE HIGHLANDS MINING COMPANY)
STATEMENTS OF CASH FLOWS

 

    Year Ended  
    December 31,  
    2016     2015  
             
Cash flow from operating activities:                
Net loss   $ (39,733 )   $ (32,750 )
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:                
Changes in assets and liabilities:                
Decrease (increase) in prepaid expense     63       (173 )
Increase (decrease) in accounts payable     (3,024 )     4,389  
Increase (decrease) in income tax payable     -       -  
Net cash used by operating activities     (42,694 )     (28,534 )
                 
Cash flows from investing activities:     -       -  
                 
Cash flows from financing activities:     -       -  
                 
Increase (decrease) in cash and cash equivalents     (42,694 )     (28,534 )
                 
Cash, beginning of period     102,819       131,353  
                 
Cash, end of period   $ 60,125     $ 102,819  
                 
Supplemental cash flow information:                
Interest paid   $ -     $ -  
Income taxes paid   $ -     $ -  

 

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

 

  F- 16  

 

 

IRONCLAD ENCRYPTION CORPORATION

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2016

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

IronClad Encryption Corporation, formerly Butte Highlands Mining Company (hereinafter “Butte” or “the Company”) was incorporated in May 1929 under the laws of the State of Delaware for the purpose of exploring and mining the Butte Highland’s (Only Chance) Mine, south of Butte, Montana.  The Company was reorganized in October 1996 for the purpose of acquiring and developing mineral properties.  As of the date of reorganization, stockholders representing approximately 76% of the outstanding capital stock could not be located.  In order to obtain the quorum necessary for the special meetings, the Company obtained an order from the Superior Court of Spokane County, Washington appointing a trustee for the benefit of those stockholders which could not be located.

 

As of May 17, 2007 the Company had disposed of all of its historical mineral properties or claims, and reentered the development stage. On January 6, 2017, we changed the focus of our business when we acquired all of the ownership interests of InterLok Key Management, Inc., a Texas corporation engaged in the business of developing and licensing its patented key based encryption methods.

 

Attempts to safeguard information from unauthorized use have met with limited success. The increasing number of data thefts and security breaches, as well as new and pending legislation is driving many businesses to shift their focus and make data security a top priority.

 

Stronger encryption is a key component to the overall solution to this problem. InterLok was formed to develop and license a new approach that enhances the strength of today’s key-based encryption methods. Through its patented Dynamic Synchronous Key Management technology, InterLok brings innovation to data encryption security. Its solutions increase the effectiveness of current encryption products. InterLok’s unique design also prevents hacker attacks by providing perpetual authentication for communication sessions. As the next generation data security leader, InterLok technology addresses current market perception of encryption: cost, implementation and human interaction. As of March 28, 2017 InterLok is a wholly owned subsidiary of IronClad Encryption Corporation.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of significant accounting policies of Butte Highlands Mining Company is presented to assist in understanding the Company’s financial statements.  The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.

 

Accounting Method

The Company’s financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

 

Earnings (Losses) Per Share

Basic net income/loss per share was computed by dividing the net income/loss by the weighted average number of shares outstanding during the year.  The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding.  The Company presents EPS on a combined basis because Class B common stock has all of the rights and privileges of Class A common stock, except for voting rights. See Note 1 and 3. Additionally, if the two class method were used the EPS would be identical.

 

Cash Equivalents

The Company considers cash, certificates of deposit, and debt instruments with a maturity of three months or less when purchased to be cash equivalents.

 

Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period.  Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of the Company’s financial position and results of operations.

 

  F- 17  

 

 

Fair Value of Financial Instruments

The Company's financial instruments as defined by ASC 825-10-50, include cash, receivables, accounts payable and accrued expenses.  All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at December 31, 2016.

 

The standards under ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.  FASB ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

 

Level 1.  Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3.  Unobservable inputs in which there is little of no market data, which require the reporting entity to develop its own assumptions.

 

The Company did not have any assets measured at fair value at December 31, 2016.

 

Going Concern

As shown in the accompanying financial statements, the Company has incurred operating losses since inception. As of December 31, 2016, the Company has no financial resources with which to achieve its objectives and obtain profitability and positive cash flows. As shown in the accompanying balance sheets and statements of operations, the Company has an accumulated deficit of $213,581 and the Company's working capital is $58,870. Achievement of the Company's objectives will be dependent upon the ability to obtain additional financing, and generate revenue from current and planned business operations, and control costs. The Company is in the development stage and has generated no operating income.

 

The Company plans to fund its future operations by joint venturing or obtaining additional financing from investors and/or lenders. However there is no assurance that the Company will be able to achieve these objectives, therefore substantial doubt about its ability to continue as a going concern exists. The financial statements do not include adjustments relating to the recoverability of recorded assets nor the implication of associated bankruptcy costs should the Company be unable to continue as a going concern.

 

Provision for Taxes

Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25 Income Taxes – Recognition .  Under the 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 imposed by ASC 740-10-25-5 to allow recognition of such an asset. See Note 5.

 

New Accounting Pronouncements

The Company has evaluated the authoritative guidance issued during the year ended December 31, 2016 and does not expect the adoption of these standards to have a material effect on its financial position or results of operations.

 

Reclassification

 

Certain amounts in prior period financial statements have been reclassified to conform to the presentation in the current period financial statements.  The reclassification had no effect on reported net losses, total assets or total equity.

 

NOTE 3 – COMMON STOCK

 

Upon formation in 1929, the Company issued 1,500,000 shares of its common stock in exchange for mineral claims.  During 1937, the Company’s total authorized common stock was increased to 2,500,000 under a reorganization plan.

 

During 1996, due to a long period of inactivity, stockholders representing approximately 76% of the outstanding common stock of the Company could not be located.  The Company obtained an order from the Superior Court of Spokane County, Washington appointing a “trustee for the benefit of those stockholders who cannot be located”.  After obtaining this order, the Company adopted a plan of reorganization.  Under this plan of reorganization, the Company increased authorized common stock to 25,000,000 shares of which 23,292,907 were designated as Class A voting common stock and 1,707,093 were designated as Class B nonvoting common stock.  All of the Company’s locatable stockholders received share-for-share Class A voting common stock.  All of the Company’s unlocated stockholders received share-for-share Class B nonvoting common stock, which is held in trust for missing stockholders pending knowledge of their location.

 

  F- 18  

 

 

If a previously unlocated recorded owner or beneficiary of a record owner is subsequently located, they must present satisfactory evidence and presentation of a share certificate or an “Affidavit of Loss” with an agreement to indemnify the Company for any future damage as a result of the certificate having been sold or transferred but not lost.  Upon satisfaction of these requirements, Class A voting common stock will be issued share-for-share in exchange for the Class B nonvoting common stock.  The relevant shares of Class B nonvoting common stock will then be cancelled.

 

During the year ended December 31, 2007, the Company issued 500,000 shares of Class A common stock to two directors for $35,000 in cash, according to the Company’s stock option plan.

 

During the years ended December 31, 2008 through December 31, 2011, the Company did not issue any shares of Class A common stock.

 

During the year ended December 31, 2012, the Company increased its authorized capital to 521,707,093 shares and changed its par value to $0.001 per share, of which 500,000,000 shares are designated as Class A common stock, 1,707,093 shares are designated as Class B common stock and 20,000,000 designated as Preferred Stock.  All amounts in the foregoing financials reflect this change.

 

During the period ending March 31, 2016 the Company identified 115,319 Class B shares that had previously been cancelled and re-issued as Class A shares. The shares have been reclassified and all affected periods have been updated to reflect this change.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

The Company utilized office facilities provided by its president.  The value of the office facilities provided by the Company’s president is nominal and immaterial to the financial statements, additionally the value of the services provided by the Company’s president are nominal and immaterial to the financial statements.

 

NOTE 5 – INCOME TAXES

 

Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25 Income Taxes – Recognition.  Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by ASC 740-10-25-5.

 

Topic 740 in the Accounting Standards Codification (ASC 740) prescribes recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  At December 31, 2016, the Company had taken no tax positions that would require disclosure under ASC 740.

 

The Company files income tax returns in the U.S. federal jurisdiction.  The federal jurisdiction has a statute of limitations of three years.  Federal income tax returns prior to year ending December 31, 2011 are closed.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

 

Significant components of the deferred tax assets at an anticipated tax rate of 35% for the periods ended December 31, 2016 and December 31, 2015 are as follows:

 

    December 31, 2016     December 31, 2015  
Net operating loss carryforwards     215,479       175,750  
Deferred tax asset     75,418       61,500  
Valuation allowance for deferred asset     (75,418 )     (61,500 )
Net deferred tax asset     -       -  

 

At December 31, 2016, the Company has net operating loss carryforwards of approximately $215,480 which will begin to expire in the year 2032. The change in the allowance account from December 31, 2015 to December 31, 2016 was $13,920.

 

  F- 19  

 

 

NOTE 6 – SUBSEQUENT EVENTS

 

On January 6, 2017, we entered into a Share Exchange Agreement with owners of InterLok Key Management, Inc., a Texas corporation wherein we agreed to issue 56,655,891 restricted shares of our Class A common stock in exchange for 100% of the outstanding shares of InterLok Key Management, Inc. common stock.  InterLok Key Management, Inc. is engaged in the business of developing and licensing its patented key based encryption methods. On January 6, 2017, we completed our Share Exchange Agreement with the owners of InterLok, and issued 56,655,891 restricted shares of our Class A common stock to 29 persons and/or entities in exchange for all of the outstanding shares of InterLok Key Management, Inc. common stock. Immediately following completion of the share exchange agreement, the new Board changed the Company name to IronClad Encryption Corporation, moved the Company from Delaware to Nevada, and changed the stock symbol to IRNC from BTHI.

 

On January 16, 2017, the Delaney Equity Group, LLC received 75,000 shares of restricted Class A common stock at a base value of $0.15 per share, and options to purchase 75,000 shares of Class A common stock at $0.75 per share over a three year period, as part of a compensation package for brokerage services.

 

On January 20, 2017 as previously reported on Form 3A these IronClad Officers received the following Class A common stock options at a purchase price of $0.15 per share that vest on January 6, 2018:

 

James D. McGraw, President: 1,000,000 shares per year over four years, for a total of 4,000,000 shares. And, a performance based option to purchase 10,000,000 shares at $0.15 per share if the stock price reaches $15 per share.

 

Daniel M. Lerner, Chief Technology: 1,000,000 per year over three year, for a total of 3,000,000 shares.

 

Jeff B. Barrett, Vice President of Planning: 250,000 per year over four years, for a total of 1,000,000 shares.

 

Len E. Walker, General Council: 250,000 shares per year over four years, for a total of 1,000,000 shares.

 

On January 31, 2017, IronClad issued a Private Placement Memorandum (PPM) to accredited investors to sell up to 9,333,334 shares of the Company’s $0.001 par value restricted Class A common stock at a price of $0.15 per share and raise up to $1,400,000. As of March 27, 2017, 8,317,671 the shares have been sold to 31 investors. The PPM is expected to close on March 31, 2017.

 

On January 31, 2017, per the terms of the Share Exchange Agreement on January 6, 2017, Paul A. Hatfield received 250,000 shares of restricted Class A common stock at a base value of $0.03 per share, options to purchase 350,000 shares of Class A common stock at $0.15 per share over a two year period, and $25,000 in cash.

 

On February 1, 2017, Halliburton Investor Relations received options to purchase 100,000 shares of Class A common stock at $0.15 per share over a three year period, as part of a compensation package for investor relations services.

 

On March 13, 2017, Lisa Morgan, an IronClad writing consultant, received options to purchase 100,000 shares of Class A common stock at $0.15 per share over a four year period at 25,000 shares per year, with an option period of twenty-four months.

 

On March 15, 2017, two convertible notes, each in the amount of $30,000 were converted to 200,000 shares of restricted Class A common stock at $0.15 per share. The total 400,000 shares are accounted for in the above mentioned PPM offering. As well, the two owners of the convertible notes were each awarded options to purchase 250,000 shares of Class A common stock at a purchase price of $0.15 until August 9, 2018.

 

On March 21, 2017, Mendy Ouzillou, an IronClad marketing consultant received options to purchase 20,000 shares of Class A common stock at $0.15 per share over a three year period.

 

All related financial information for the year ended December 31, 2016 for the private company, InterLok Key Management, Inc. is contained in a corresponding amended Form 8-K dated March 29, 2017.

 

  F- 20  

 

 

PART II

 

Item 13. Other expenses of Issuance and Distribution

 

The following table sets forth the Company’s expenses in connection with this registration statement. All of the listed expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission.

 

Registration Fees   $ 4,175  
Edgarizing fees   $ 2,000  
Transfer agent fees   $ 2,000  
Accounting fee   $ 3,000  
Legal fees   $ 70,000  

 

Item 14. Indemnification of Directors and Officers

 

The Company’s Bylaws provide for indemnification of its officers, directors, agents, fiduciaries and employees. These provisions allow the Company to pay for the expenses of these persons in connection with legal proceedings brought because of the person’s position with the Company, if the person is not ultimately adjudged liable to the Company for misconduct in the action. Generally, no indemnification may be made where the person has been determined to have intentionally, fraudulently or knowingly violated the law. The Company does not believe that such indemnification affects the capacity of such person acting as officer, director or control person of the Company.

 

Item 15. Recent Sales of Unregistered Securities

 

On January 6, 2017, we entered into a Share Exchange Agreement with owners of InterLok Key Management, Inc., a Texas corporation wherein we agreed to issue 56,655,891 shares of our Class A common stock in exchange for 100% of the outstanding shares of InterLok Key Management, Inc. common stock.  InterLok Key Management, Inc. is engaged in the business of developing and licensing its patented key based encryption methods. On January 6, 2017, we completed our Share Exchange Agreement with the owners of InterLok, and issued 56,655,891 shares of our Class A common stock to 29 persons and/or entities in exchange for all of the outstanding shares of InterLok Key Management, Inc. common stock. Immediately following completion of the share exchange agreement, the new Board of Directors changed the Company name to IronClad Encryption Corporation, moved the Company from Delaware to Nevada, and changed the stock symbol to IRNC from BTHI.

 

On January 16, 2017, the Company entered into an Advisor Consulting Agreement with Delaney Equity Group, LLC (“Delaney”), which agreement was subsequently terminated and replaced with a new Advisor Consulting Agreement dated as of July 12, 2017. Pursuant to the Advisor Consulting Agreements, as compensation for brokerage services, the Company issued to Delaney an aggregate of 187,500 shares of Class A Common Stock and granted to Delaney options to purchase 150,000 shares of Class A Common Stock and a warrant to purchase 37,500 shares of Class A Common Stock. The options and warrants are exercisable over a three year period at an exercise price of $0.75 per share.

 

On January 31, 2017, per the terms of the Share Exchange Agreement on January 6, 2017, Paul A. Hatfield received 250,000 shares of Class A common stock.

 

  II- 1  

 

 

On March 15, 2017, two convertible notes, each in the amount of $30,000 were converted to 200,000 shares of Class A common stock at $0.15 per share.

 

On April 11, 2017, Lisa Morgan, an IronClad writing consultant,exercised options to purchase 25,000 shares of Class A common stock at $0.15 per share for a total exercise price of $3,750.

 

During the period beginning January 30, 2017 to April 25, 2017, the Company sold 7,484,287 shares of Class A common stock for $912,643 in cash and the conversion of $210,000 of convertible notes.

 

On August 10, 2017, the Company issued 100,000 shares of Class A common stock to Hybrid Titan Management, LLC as compensation for management services.

 

The private placement, sale and issuance of the units and common shares were not registered under the Securities Act of 1933, as amended (“Securities Act”), or the securities laws of any state, and are subject to resale restrictions and may not be offered or sold in the United States absent registration under the Securities Act or an applicable exemption from such the registration requirements in accordance with all applicable state securities laws. The issuances of securities have been determined to be exempt from registration in reliance on Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering, in which the investors are accredited and have acquired the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

  II- 2  

 

 

Item 16. Exhibits and Financial Statement Schedules.

 

EXHIBITS

 

Certain exhibits listed below are incorporated by reference as so marked with the date and filing with which such exhibits were filed with the Securities and Exchange Commission):

 

        Incorporated by reference    
Exhibit    Document Description   Form   Date Filed   Exhibit
Number
 

Filed

herewith

                     
2.1   Share Exchange Agreement between Butte Highlands Mining Company and InterLok Key Management, Inc.   8-K   1/06/17   10.1    
                     
3.1   Certificate of Incorporation of IronClad Encryption Corporation, dated October 16, 2017   8-K   10/17/17   3.4    
                     
3.2   Bylaws of IronClad Encryption Corporation, dated October 16, 2017   8-K   10/17/17   3.5    
                     
4.1   Form of Common Stock Certificate (Class A) of IronClad Encryption Corporation   10-Q   8/21/17   4.1    
                     
4.2   Common Stock Purchase Warrant by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017               X
                     
4.3   Registration Rights Agreement by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017.               X
                     
5.1   Opinion of Counsel               X
                     
10.1   Amended & Restated IronClad Encryption Corporation 2017 Equity Incentive Plan   8-K   10/17/17   10.1    
                     
10.2   Form of Stock Option Agreement (Incentive and Non-Qualified Stock Options) under Amended & Restated IronClad Encryption Corporation 2017 Equity Incentive Plan   10-Q   8/21/17   10.02    
                     
10.3   Securities Purchase Agreement by and between IronClad Encryption Corporation and PowerUp Lending Group, Ltd. dated June 26, 2017   10-Q   8/21/17   10.03    
                     
10.4   Convertible Promissory Note (principal amount of $78,500) pursuant to Securities Purchase Agreement by and between IronClad Encryption Corporation and PowerUp Lending Group, Ltd. dated June 26, 2017   10-Q   8/21/17   10.04    
                     
10.5   Employment Agreement by and between IronClad Encryption Corporation and Jeff B. Barrett effective as of January 6, 2017   10-Q   8/21/17   10.05    
                     
10.6   Employment Agreement by and between IronClad Encryption Corporation and Daniel M. Lerner effective as of January 6, 2017   10-Q   8/21/17   10.06    
                     
10.7   Employment Agreement by and between IronClad Encryption Corporation and James D. McGraw effective as of January 6, 2017   10-Q   8/21/17   10.07    
                     
10.8   Employment Agreement by and between IronClad Encryption Corporation and Len E. Walker effective as of January 6, 2017   10-Q   8/21/17   10.08    
                     
10.9   Employment Agreement by and between IronClad Encryption Corporation and David G. Gullickson effective as of May 1, 2017   10-Q   8/21/17   10.09    
                     
10.10   Employment Agreement by and between IronClad Encryption Corporation and Monty R. Points effective as of May 1, 2017   10-Q   8/21/17   10.10    
                     
10.11   Employment Agreement by and between IronClad Encryption Corporation and Randall W. Rice effective as of June 1, 2017   10-Q   8/21/17   10.11    
                     
10.12   Investment Agreement by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017               X
                     
10.13   Convertible Promissory Note by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017               X
                     
10.14   Convertible Promissory Note by and between IronClad Encryption Corporation and Tangiers Global, LLC dated August 24, 2017               X
                     
23.1   Consent of Accountants for IronClad Encryption Corporation.               X
                     
24.1   Power of Attorney (see page II-5 to this Registration Statement on Form S-1).               X

 

  II- 3  

 

 

Item 17. Undertakings

 

The undersigned registrant hereby undertakes:

 

(1)         To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement;

 

(i)          To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

(ii)         To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

 

(iii)        To include any additional material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

(2)         That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time to be the initial bona fide offering thereof.

 

(3)         To remove from registration by means of a post-effective amendment any of the securities that remain unsold at the termination of the offering.

 

(4)         That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to this offering, other than registration statements relying on Rule 403B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

(5)         Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

(6)         That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

  II- 4  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Houston on October 17, 2017.

 

  IRONCLAD ENCRYPTION CORPORATION
   
  /s/ James D. McGraw
  President, Chief Executive Officer, Vice Chairman of the Board and Principal Executive Officer

 

  /s/ David G. Gullickson
  Vice President of Finance, Treasurer, and Principal Accounting and Financial Officer

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints James D. McGraw, Len E. Walker and David G. Gullickson, and each of them, as his true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him and in his name, place or stead, in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.

 

Signature   Capacity   Date
         
/s/ James D. McGraw   Director   October 17, 2017
James D. McGraw        
         
/s/ Gregory B. Lipsker   Director   October 17, 2017
Gregory B. Lipsker        
         
/s/ John S. Reiland   Director   October 17, 2017
John S. Reiland        

 

  II- 5  

 

Exhibit 4.2

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

COMMON STOCK PURCHASE WARRANT

 

Ironclad Encryption Corporation

 

Warrant Shares: 82,500 Initial Exercise Date: August 24, 2017

 

THIS COMMON STOCK PURCHASE WARRANT (the “ Warrant ”) certifies that, for value received, Tangiers Global, LLC, a Wyoming corporation, or its assigns (the “ Holder ”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “ Initial Exercise Date ”) and on or prior to 5 PM New York City Time on August 24, 2021 (the “ Termination Date ”) but not thereafter, to subscribe for and purchase from Ironclad Encryption Corporation, a Nevada corporation (the “ Company ”), up to 82,500 shares (as subject to adjustment hereunder, the “ Warrant Shares ”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 1.00(b).

 

Section 1.00         Exercise .

 

a)           Exercise of Warrant . Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise in the form annexed hereto and within five (5) Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank or, if available, pursuant to the cashless exercise procedure specified in Section 1.00(c) below. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within five (5) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

 

 

 

b)           Exercise Price . The exercise price per share of the Common Stock under this Warrant shall initially be $3.00, subject to adjustment hereunder (the “ Exercise Price ”).

 

c)           Cashless Exercise . If at any time after the six month anniversary of the Initial Exercise Date, there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may only be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 

(A) =  the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise;

 

(B) =  the Exercise Price of this Warrant, as adjusted hereunder; and

 

(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3.00(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares.  The Company agrees not to take any position contrary to this Section 2.00(c).

 

“Trading Day” shall mean a day on which there is trading or quoting for any security on the Principal Market.

 

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

 

 

 

Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 1.00(c).

 

d)           Mechanics of Exercise .

 

i.           Delivery of Warrant Shares Upon Exercise . Warrant Shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“ DWAC ”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is five (5) Trading Days after the delivery to the Company of the Notice of Exercise (such date, the “ Warrant Share Delivery Date ”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 1.00(d)(vi) prior to the issuance of such shares, having been paid.

 

ii.           Delivery of New Warrants Upon Exercise . If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

iii.         Rescission Rights . If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 1.00(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

 

iv.         No Fractional Shares or Scrip . No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

 

 

 

 

v.          Charges, Taxes and Expenses . Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided , however , that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

 

vi.         Closing of Books . The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

 

e)           Holder’s Exercise Limitations . The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2.00 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 1.00(e), beneficial ownership shall be calculated in accordance with Section 1.003(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 1.003(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 1.00(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 1.003(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 1.00(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “ Beneficial Ownership Limitation ” shall be 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2.00(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 1.00(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61 st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1.00(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

 

 

 

 

Section 2.00         Certain Adjustments .

 

a)           Stock Dividends and Splits . If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 2.00(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

b)           Subsequent Rights Offerings . In addition to any adjustments pursuant to Section 2.00(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “ Purchase Rights ”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

 

c)           Pro Rata Distributions . During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a " Distribution "), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution ( provided , however , to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

 

 

 

 

d)           Fundamental Transaction . If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “ Fundamental Transaction ”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 1.00(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “ Alternate Consideration ”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 1.00(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “ Black Scholes Value ” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“ Bloomberg ”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “ Successor Entity ”) to assume in writing all of the obligations of the Company under this Warrant and the other Transaction Documents in accordance with the provisions of this Section 3.00(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.

 

 

 

 

e)           Calculations . All calculations under this Section 2.00 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 2.00, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

f)           Notice to Holder .

 

i.           Adjustment to Exercise Price . Whenever the Exercise Price is adjusted pursuant to any provision of this Section 2.00, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

 

ii.           Notice to Allow Exercise by Holder . If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

 

 

 

Section 3.00         Transfer of Warrant .

 

a)           Transferability . Subject to compliance with any applicable securities laws and the conditions set forth in Section 3.00(d) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

b)           New Warrants . This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 3.00(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the original Issue Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

c)           Warrant Register . The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “ Warrant Register ”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

d)           Transfer Restrictions . If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current public information requirements pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the Holder or transferee of this Warrant, as the case may be, make usual and customary representations as to investment intent to the Company.

 

 

 

 

e)           Representation by the Holder . The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.

 

Section 4.00         Miscellaneous .

 

a)           No Rights as Stockholder Until Exercise . This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 1.00(d)(i), except as expressly set forth in Section 2.00.

 

b)           Loss, Theft, Destruction or Mutilation of Warrant . The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

c)           Saturdays, Sundays, Holidays, etc . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

 

d)           Authorized Shares .

 

The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

 

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

 

 

 

 

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

 

e)           Jurisdiction . All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the laws of the state of Puerto Rico as they are applied to contracts executed, delivered and to be wholly performed within the state of Puerto Rico.

 

f)           Restrictions . The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered and if the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

 

g)           Nonwaiver and Expenses . No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

h)           Notices . Any notice, request or other document required or permitted to be given or delivered to the either party to the other shall be delivered in by recognized overnight courier, facsimile or email as follows:

 

 

If to the Investor: Tangiers Global, LLC
  Caribe Plaza Office Building 6th Floor
  Palmeras St. #53
  San Juan, PR 00901
  Email: admin@tangierscapital.com

 

 

 

 

If to the Company: Ironclad Encryption Corporation
  777 S. Post Oak Lane, Suite 1700
  Houston, TX 77056
  Attn:  Len Walker
  Email: len.walker@ironcladencryption.com

 

i)           Limitation of Liability . No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

j)           Successors and Assigns . Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

k)          Amendment . This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

 

l)           Severability . Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

m)         Headings . The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

********************

 

[Signature Page to Follow.]

 

 

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

  Ironclad Encryption Corporation
   
  By: /s/ J.D. McGraw
  Name: J.D. McGraw
  Title: President / CEO

 

 

 

Exhibit 4.3

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (the “ Agreement ”), dated as of August 24, 2017 (the “ Execution Date ”), is entered into by and between Ironclad Encryption Corporation (the “ Company ”), a Nevada corporation, with its principal executive offices at 777 S. Post Oak Lane, Suite 1700, Houston, TX 77056, and Tangiers Global, LLC (the “ Investor ”), a Wyoming limited liability company, with its principal executive offices at Caribe Plaza Office Building 6th Floor, Palmeras St. #53, San Juan, PR 00901.

 

RECITALS:

 

Whereas , pursuant to the Investment Agreement entered into by and between the Company and the Investor of this even date (the “ Investment Agreement ”), the Company has agreed to issue and sell to the Investor an indeterminate number of shares of the Company’s common stock, par value of $0.001 per share (the “ Common Stock ”), up to an aggregate purchase price of Five Million Dollars ($5,000,000);

 

Whereas , as an inducement to the Investor to execute and deliver the Investment Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “ 1933 Act ”), and applicable state securities laws, with respect to the shares of Common Stock issuable pursuant to the Investment Agreement.

 

Now therefore , in consideration of the foregoing promises and the mutual covenants contained hereinafter and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows:

 

SECTION I
DEFINITIONS

 

As used in this Agreement, the following terms shall have the following meanings:

 

1933 Act ” shall have the meaning set forth in the recitals.

 

1934 Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, or any similar successor statute.

 

Agreement ” shall have the meaning set forth in the preamble.

 

Claims ” shall have the meaning set forth in Section 6.1 .

 

Common Stock ” shall have the meaning set forth in the recitals.

 

Company ” shall have the meaning set forth in the preamble.

 

Execution Date ” shall have the meaning set forth in the preamble.

 

Indemnified Damages ” shall have the meaning set forth in Section 6.1 .

 

Indemnified Party ” shall have the meaning set forth in Section 6.1 .

 

 

 

 

Indemnified Person ” shall have the meaning set forth in Section 6.1 .

 

Investment Agreement ” shall have the meaning set forth in the recitals.

 

Investor ” shall have the meaning set forth in the preamble.

 

Investor’s Delay ” shall have the meaning set forth in Section 3.5 .

 

New Registration Statement ” shall have the meaning set forth in Section 2.3 .

 

Person ” means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency.

 

Register ,” “ Registered ,” and “ Registration ” refer to the Registration effected by preparing and filing one (1) or more Registration Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis, and the declaration or ordering of effectiveness of such Registration Statement(s) by the SEC.

 

Registration Period ” shall have the meaning set forth in Section 3.1 .

 

Registrable Securities ” means (i) the shares of Common Stock issuable pursuant to the Investment Agreement, and (ii) any shares of capital stock issuable with respect to such shares of Common Stock, if any, as a result of any stock splits, stock dividends, or similar transactions, which have not been (x) included in the Registration Statement that has been declared effective by the SEC, or (y) sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the 1933 Act.

 

Registration Default ” shall have the meaning set forth in Section 3.3 .

 

Registration Statement ” means the registration statement of the Company filed under the 1933 Act covering the Registrable Securities.

 

Rule 144 ” means Rule 144 promulgated under the 1933 Act or any successor rule of the SEC.

 

SEC ” shall mean the U.S. Securities and Exchange Commission.

 

Staff ” shall have the meaning set forth in Section 2.3 .

 

Violations ” shall have the meaning set forth in Section 6.1 .

 

All capitalized terms used in this Agreement and not otherwise defined herein shall have the same meaning ascribed to them as in the Investment Agreement.

 

  - 2 -  

 

 

SECTION II
REGISTRATION

 

2.1           The Company shall use its best efforts to, within sixty (60) days of the Execution Date, file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form S-1 (or, if such form is unavailable for such a registration, on such other form as is available for such registration), covering the resale of 1,000,000 shares of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon stock splits, stock dividends or similar transactions. The Company shall initially register for resale 1,000,000 shares of Registrable Securities except to the extent that the SEC requires the share amount to be reduced as a condition of effectiveness.

 

2.2           The Company shall use commercially reasonable efforts to have the Registration Statement(s) declared effective by the SEC within seventy-five (75) days but no more than one hundred twenty (120) days after the Company has filed the Registration Statement(s).

 

2.3           Notwithstanding the registration obligations set forth in Section 2.1 , if the staff of the SEC (the “ Staff ”) or the SEC informs the Company that all of the unregistered Registrable Securities cannot, as a result of the application of Rule 415, be registered for resale as a secondary offering on a single Registration Statement, the Company agrees to promptly (i) inform the Investor and use its commercially reasonable efforts to file amendments to the Registration Statement as required by the SEC and/or (ii) withdraw the Registration Statement and file a new registration statement (the “ New Registration Statement ”), in either case covering the maximum number of Registrable Securities permitted to be registered by the SEC, on Form S-1 to register for resale the Registrable Securities as a secondary offering. If the Company amends the Registration Statement or files a New Registration Statement, as the case may be, under clauses (i) or (ii) above, the Company shall use its commercially reasonable efforts to file with the SEC, as promptly as allowed by the Staff or SEC, one or more registration statements on Form S-1 to register for resale those Registrable Securities that were not registered for resale on the Registration Statement, as amended, or the New Registration Statement. Additionally, the Company shall have the ability to file one or more New Registration Statements to cover the Registrable Securities once the Shares under the initial Registration Statement referenced in Section 2.1 have been sold.

 

SECTION III
RELATED OBLIGATIONS

 

At such time as the Company is obligated to prepare and file the Registration Statement with the SEC pursuant to Section 2 , the Company shall effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, with respect thereto, the Company shall have the following obligations:

 

3.1           Upon the effectiveness of such Registration Statement relating to the Registrable Securities, the Company shall keep such Registration Statement effective until the earlier to occur of the date on which (A) the Investor shall have sold all the Registrable Securities actually issued or that the Company has an obligation to issue under the Investment Agreement; or (B) the Investor has no right to acquire any additional shares of Common Stock under the Investment Agreement; or (C) the Investor may sell the Registrable Securities without volume limitations under Rule 144 (the “ Registration Period ”). The Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Investor agrees to provide all information which it is required by law to provide to the Company, including the intended method of disposition of the Registrable Securities, and the Company’s obligations set forth in this Agreement shall be conditioned on the receipt of such information.

 

  - 3 -  

 

 

3.2           The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the Investor thereof as set forth in such Registration Statement. In the event the number of shares of Common Stock covered by the Registration Statement filed pursuant to this Agreement is at any time insufficient to cover all of the Registrable Securities, the Company shall amend such Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within thirty (30) calendar days after the necessity therefor arises (based on the then Purchase Price of the Common Stock and other relevant factors on which the Company reasonably elects to rely), assuming the Company has sufficient authorized shares at that time, and if it does not, within thirty (30) calendar days after such shares are authorized. The Company shall use commercially reasonable efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof.

 

3.3           As promptly as practicable after becoming aware of such event, the Company shall notify Investor in writing of the happening of any event as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (“ Registration Default ”) and use all diligent efforts to promptly prepare a supplement or amendment to such Registration Statement and take any other necessary steps to cure the Registration Default (which, if such Registration Statement is on Form S-3, may consist of a document to be filed by the Company with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act and to be incorporated by reference in the prospectus) to correct such untrue statement or omission, and make available copies of such supplement or amendment to the Investor. The Company shall also promptly notify the Investor (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when the Registration Statement or any post-effective amendment has become effective; (ii) of any request by the SEC for amendments or supplements to the Registration Statement or related prospectus or related information, (iii) of the Company’s reasonable determination that a post-effective amendment to the Registration Statement would be appropriate, (iv) in the event the Registration Statement is no longer effective, or (v) if the Registration Statement is stale as a result of the Company’s failure to timely file its financials or otherwise.

 

3.4           The Company shall use all commercially reasonable efforts to prevent the issuance of any stop order or other suspension of effectiveness of the Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor holding Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding concerning the effectiveness of the Registration Statement.

 

3.5           The Company shall permit the Investor and one (1) legal counsel, designated by the Investor, to review and comment upon the Registration Statement and all amendments and supplements thereto at least one (1) calendar day prior to their filing with the SEC. However, any postponement of a filing of a Registration Statement or any postponement of a request for acceleration or any postponement of the effective date or effectiveness of a Registration Statement by written request of the Investor (collectively, the " Investor's Delay ") shall not act to trigger any penalty of any kind, or any cash amount due or any in-kind amount due the Investor from the Company under any and all agreements of any nature or kind between the Company and the Investor. The event(s) of an Investor's Delay shall act to suspend all obligations of any kind or nature of the Company under any and all agreements of any nature or kind between the Company and the Investor.

 

  - 4 -  

 

 

3.6           The Company shall hold in confidence and not make any disclosure of information concerning the Investor unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning the Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to the Investor and allow the Investor, at the Investor’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order covering such information.

 

3.7           The Company shall use all commercially reasonable efforts to maintain designation and quotation of all the Registrable Securities covered by any Registration Statement on the Principal Market. If, despite the Company’s commercially reasonable efforts, the Company is unsuccessful in satisfying the preceding sentence, it shall use commercially reasonable efforts to cause all the Registrable Securities covered by any Registration Statement to be listed on each other national securities exchange and automated quotation system, if any, on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or system. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3.7 .

 

3.8           If requested by the Investor, the Company shall (i) as soon as reasonably practical incorporate in a prospectus supplement or post-effective amendment such information as the Investor reasonably determines should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as reasonably possible after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if reasonably requested by the Investor.

 

3.9           The Company shall use all commercially reasonable efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to facilitate the disposition of such Registrable Securities.

 

3.10         The Company shall otherwise use all commercially reasonable efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

 

3.11         The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of Registrable Securities pursuant to the Registration Statement.

 

  - 5 -  

 

 

SECTION IV
OBLIGATIONS OF THE INVESTOR

4.1           At least five (5) calendar days prior to the first anticipated filing date of the Registration Statement, the Company shall notify the Investor in writing of the information the Company requires from the Investor for the Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities and the Investor agrees to furnish to the Company that information regarding itself, the Registrable Securities and the intended method of disposition of the Registrable Securities as shall reasonably be required to effect the registration of such Registrable Securities and the Investor shall execute such documents in connection with such registration as the Company may reasonably request. The Investor covenants and agrees that, in connection with any sale of Registrable Securities by it pursuant to the Registration Statement, it shall comply with the “Plan of Distribution” section of the then current prospectus relating to such Registration Statement.

 

4.2           The Investor, by its acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless the Investor has notified the Company in writing of an election to exclude all of the Investor’s Registrable Securities from such Registration Statement.

 

4.3           The Investor agrees that, upon receipt of written notice from the Company of the happening of any event of the kind described in Section 3.4 or the first sentence of Section 3.3 , the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until the Investor’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 3.4 or the first sentence of Section 3.3 .

 

SECTION V
EXPENSES OF REGISTRATION

 

All legal expenses of the Company incurred in connection with registrations shall be paid by the Company.

 

  - 6 -  

 

 

SECTION VI
INDEMNIFICATION

 

In the event any Registrable Securities are included in the Registration Statement under this Agreement:

 

6.1           To the fullest extent permitted by law, the Company, under this Agreement, will, and hereby does, indemnify, hold harmless and defend the Investor who holds Registrable Securities, the directors, officers, partners, employees, counsel, agents, representatives of, and each Person, if any, who controls, any Investor within the meaning of the 1933 Act or the 1934 Act (each, an “ Indemnified Person ”), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys’ fees, amounts paid in settlement or expenses, joint or several (collectively, “ Claims ”), incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto (“ Indemnified Damages ”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in the Registration Statement or any post-effective amendment thereto, or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the statements therein were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to the Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, “ Violations ”). Subject to the restrictions set forth in Section 6.3 the Company shall reimburse the Investor and each such controlling person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6.1 : (i) shall not apply to a Claim arising out of or based upon a Violation which is due to the inclusion in the Registration Statement of the information furnished to the Company by any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (ii) shall not be available to the extent such Claim is based on (a) a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company or (b) the Indemnified Person’s use of an incorrect prospectus despite being promptly advised in advance by the Company in writing not to use such incorrect prospectus; (iii) any claims based on the manner of sale of the Registrable Securities by the Investor or of the Investor’s failure to register as a dealer under applicable securities laws; (iv) any omission of the Investor to notify the Company of any material fact that should be stated in the Registration Statement or prospectus relating to the Investor or the manner of sale; and (v) any amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the resale of the Registrable Securities by the Investor pursuant to the Registration Statement.

 

6.2           In connection with any Registration Statement in which Investor is participating, the Investor agrees to indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6.1 , the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act and the Company’s agents (collectively and together with an Indemnified Person, an “ Indemnified Party ”), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation is due to the inclusion in the Registration Statement of the written information furnished to the Company by the Investor expressly for use in connection with such Registration Statement; and, subject to Section 6.3 , the Investor shall reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however , that the indemnity agreement contained in this Section 6.2 and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall only be liable under this Section 6.2 for that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the resale of the Registrable Securities by the Investor pursuant to the Registration Statement. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6.2 with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus were corrected on a timely basis in the prospectus, as then amended or supplemented.

 

  - 7 -  

 

 

6.3           Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6 , deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the Indemnified Person or Indemnified Party, the representation by counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one (1) separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such counsel shall be selected by the Investor, if the Investor is entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding affected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6 , except to the extent that the indemnifying party is prejudiced in its ability to defend such action.

 

6.4           The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

 

SECTION VII

CONTRIBUTION

 

7.1           To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6 ; (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities, or, if Registrable Securities are unsold, the value of such Registrable Securities.

 

  - 8 -  

 

 

SECTION VIII

REPORTS UNDER THE 1934 ACT

 

8.1           After the Execution Date of the Registration Statement and with a view to making available to the Investor the benefits of Rule 144 that may at any time permit the Investor to sell securities of the Company to the public without registration, provided that the Investor holds any Registrable Securities that are eligible for resale under Rule 144, the Company agrees to:

 

a. make and keep public information available, as those terms are understood and defined in Rule 144;

 

b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

 

c. furnish to the Investor, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, as applicable, and (ii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration.

 

SECTION IX

MISCELLANEOUS

 

9.1            NOTICES. Any notices or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by electronic mail (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and email addresses for such communications shall be:

 

If to the Company:

 

Ironclad Encryption Corporation

777 S. Post Oak Lane, Suite 1700
Houston, TX 77056

Attn: Len Walker

Email: len.walker@ironcladencryption.com

     
If to the Investor:  

Tangiers Global, LLC

Caribe Plaza Office Building 6th Floor

Palmeras St. #53

San Juan, PR 00901

Email: admin@tangierscapital.com

 

  - 9 -  

 

 

Each party shall provide five (5) business days prior written notice to the other party of any change in address or email address.

 

9.2            NO WAIVERS . Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

 

9.3            NO ASSIGNMENTS . The rights and obligations under this Agreement shall not be assignable.

 

9.4            ENTIRE AGREEMENT/AMENDMENT . This Agreement and the Registered Offering Transaction Documents constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Registered Offering Transaction Documents supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. The provisions of this Agreement may be amended only with the written consent of the Company and Investor.

 

9.5            HEADINGS . The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if all the parties had prepared the same.

 

9.6            COUNTERPARTS . This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile transmission, PDF, electronic signature or other similar electronic means with the same force and effect as if such signature page were an original thereof.

 

9.7            FURTHER ASSURANCES . Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

9.8            SEVERABILITY . In case any provision of this Agreement is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby.

 

  - 10 -  

 

 

9.9            Law Governing this Agreement . This Agreement shall be governed by , and construed and interpreted in accordance with , the substantive laws of the state of California without giving effect to any conflict of laws rule or principle that might require the application of the laws of another jurisdiction. Any dispute, claim, suit, action or other legal proceeding arising out of the transactions contemplated by this Agreement or the rights and obligations of each of the parties shall be brought only in a competent court in San Diego, California or in the federal courts of the United States of America located in San Diego, California . The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens . The parties executing this Agreement and other agreements referred to herein or delivered in connection herewith agree to submit to the in personam jurisdiction of such courts. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Documents by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

 

9.10          NO THIRD PARTY BENEFICIARIES . This Agreement is intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

 

[Signature Page to Follow.]

 

  - 11 -  

 

 

Your signature on this Signature Page evidences your agreement to be bound by the terms and conditions of the Registration Rights Agreement as of the date first written above. The undersigned signatory hereby certifies that he has read and understands the Registration Rights Agreement, and the representations made by the undersigned in this Registration Rights Agreement are true and accurate, and agrees to be bound by its terms.

  

  TANGIERS GLOBAL, LLC
     
  By: /s/ Michael Sobeck
  Name: Michael Sobeck
  Title: Managing Member
     
  IRONCLAD ENCRYPTION CORPORATION
     
  By: /s/ J.D. McGraw
  Name: J.D. McGraw
  Title: President/CEO

 

[SIGNATURE PAGE OF REGISTRATION RIGHTS AGREEMENT]

 

  - 12 -  

   

Baker & McKenzie LLP
2300 Trammell Crow Center

2001 Ross Avenue

Dallas, Texas 75201

 

Tel: +1 214 978 3000
Fax: +1 214 978 3099
www.bakermckenzie.com

     
    EXHIBIT 5.1
     

Asia Pacific

Bangkok

Beijing

Hanoi

Ho Chi Minh City

Hong Kong

Jakarta

Kuala Lumpur

Manila

Melbourne

Shanghai

Singapore

Sydney

Taipei

Tokyo

 

Europe &
Middle East

Abu Dhabi

Almaty

Amsterdam

Antwerp

Bahrain

Baku

Barcelona

Berlin

Brussels

Budapest

Cairo

Dusseldorf

Frankfurt / Main

Geneva

Kyiv

London

Luxembourg

Madrid

Milan

Moscow

Munich

Paris

Prague

Riyadh

Rome

St. Petersburg

Stockholm

Vienna

Warsaw

Zurich

 

North & South America

Bogota

Brasilia

Buenos Aires

Caracas

Chicago

Dallas

Guadalajara

Houston

Juarez

Mexico City

Miami

Monterrey

New York

Palo Alto

Porto Alegre

Rio de Janeiro

San Diego

San Francisco

Santiago

Sao Paulo

Tijuana

Toronto

Valencia

Washington, DC

October 17, 2017

 

 

IronClad Encryption Corporation

One Riverway, 777 South Post Oak Lane, Suite 1700

Houston, Texas 77056

 

 

Re:           Registration Statement on Form S-1 for IronClad Encryption Corporation

 

Ladies and Gentlemen:

 

We are acting as special securities counsel to IronClad Encryption Corporation, a corporation organized under the laws of Delaware (the “ Company ”), in connection with the preparation and filing of the Company’s Registration Statement on Form S-1 (as amended or supplemented, the “ Registration Statement ”) to be filed under the U.S. Securities Act of 1933, as amended (the “ Securities Act ”), with the U.S. Securities and Exchange Commission (the “ SEC ”). The Registration Statement relates to the registration of 5,407,500 shares of Class A common stock, par value $0.001 of the Company (the “ Shares ”), all of which are being offered by certain stockholders of the Company (the “ Selling Stockholders ”).

 

In connection therewith, we have examined such documents, records, certificates, resolutions and other instruments deemed necessary as a basis for this opinion, and we have assumed the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies and the authenticity of the originals of all documents submitted to us as copies.

 

Based upon and subject to the foregoing qualifications, assumptions and limitations and the further limitations set forth below, we are of the opinion that as of the date hereof, the issuance of the Shares has been duly authorized and the Shares are validly issued, fully paid and nonassessable.

 

Our opinion expressed above is subject to the qualifications that we express no opinion as to the applicability of, compliance with, or effect of any laws except the General Corporation Law of the State of Delaware.

 

We do not find it necessary for the purposes of this opinion, and accordingly we do not purport to cover herein, the application of the securities or “Blue Sky” laws of the various states to the offering of the Shares by the Selling Stockholders.

 

We consent to the use of this opinion as an exhibit to the Registration Statement , and further consent to the use of our name wherever appearing in the Registration Statement and any amendments thereto. In providing this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the SEC promulgated thereunder.

 

   
 

Baker & McKenzie LLP is a member of Baker & McKenzie International, a Swiss Verein.

 

 

 

 

     
 

This opinion is limited to the specific issues addressed herein, and no opinion may be inferred or implied beyond that expressly stated herein. We assume no obligation to revise or supplement this opinion should the General Corporation Law of the State of Delaware be changed by legislative action, judicial decision or otherwise.

 

This opinion is furnished to you in connection with the filing of the Registration Statement, and is not to be used, circulated, quoted or otherwise relied upon for any other purposes.

 

 

Very truly yours,

 

/s/ Baker & McKenzie LLP

 

BAKER & McKENZIE LLP

     
     
     
 

IronClad Encryption Corporation

October 17, 2017

Page 2

 

 

 

 

 

Exhibit 10.12

 

INVESTMENT AGREEMENT

 

This INVESTMENT AGREEMENT (the “ Agreement ”), dated as of August 24, 2017 (the “ Execution Date ”), is entered into by and between Ironclad Encryption Corporation (the “ Company ”), a Nevada corporation, with its principal executive offices at 777 S. Post Oak Lane, Suite 1700, Houston, TX 77056, and Tangiers Global, LLC (the “ Investor ”), a Wyoming limited liability company, with its principal executive offices at Caribe Plaza Office Building 6th Floor, Palmeras St. #53, San Juan, PR 00901.

 

RECITALS:

 

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Investor shall invest up to Five Million Dollars ($5,000,000) (the “Commitment Amount”) to purchase the Company’s common stock, par value of $0.001 per share (the “ Common Stock ”);

 

WHEREAS, such investments will be made in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “ 1933 Act ”), Rule 506 of Regulation D promulgated by the SEC under the 1933 Act, and/or upon such other exemption from the registration requirements of the 1933 Act as may be available with respect to any or all of the investments in Common Stock to be made hereunder; and

 

WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as Exhibit A (the “ Registration Rights Agreement ”) pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act, and the rules and regulations promulgated thereunder, and applicable state securities laws.

 

NOW THEREFORE, in consideration of the foregoing recitals, which shall be considered an integral part of this Agreement, the covenants and agreements set forth hereafter, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Investor hereby agree as follows:

 

SECTION I.

DEFINITIONS

 

For all purposes of and under this Agreement, the following terms shall have the respective meanings below, and such meanings shall be equally applicable to the singular and plural forms of such defined terms.

 

1933 Act ” shall have the meaning set forth in the recitals.

 

1934 Act ” shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the SEC thereunder, all as the same will then be in effect.

 

Affiliate ” shall mean any individual or entity that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with another individual or entity as such terms are used in and construed under Rule 405 under the 1933 Act.

 

     

 

 

Agreement ” shall have the meaning set forth in the preamble.

 

Articles of Incorporation ” shall have the meaning set forth in Section 4.3 .

 

By-laws ” shall have the meaning set forth in Section 4.3 .

 

Certificate ” shall have the meaning set forth in Section 2.5 .

 

Closing ” shall have the meaning set forth in Section 2.5 .

 

Closing Date ” shall have the meaning set forth in Section 2.5 .

 

“Commitment Fee Note” shall have the meaning set forth in Section 10.17

 

Commitment Amount ” shall have the meaning set forth in the recitals.

 

Common Stock ” shall have the meaning set forth in the recitals.

 

Company ” shall have the meaning set forth in the preamble.

 

DTC ” shall have the meaning set forth in Section 2.5 .

 

“DWAC” shall mean Deposit and Withdrawal at Custodian service provided by the Depository Trust Company.

 

Effective Date ” shall mean the date the SEC declares effective under the 1933 Act the Registration Statement covering the Securities.

 

Environmental Laws ” shall have the meaning set forth in Section 4.13 .

 

Execution Date ” shall have the meaning set forth in the preamble.

 

FAST ” shall have the meaning set forth in Section 2.5 .

 

Investor ” shall have the meaning set forth in the preamble.

 

Material Adverse Effect ” shall have the meaning set forth in Section 4.1 .

 

Maximum Common Stock Issuance ” shall have the meaning set forth in Section 2.6 .

 

Open Period ” shall mean the period beginning on and including the Trading Day immediately following the Effective Date and ending on the earlier to occur of (i) the date which is thirty-six (36) months from the Effective Date; or (ii) termination of the Agreement in accordance with Section 8 .

 

PCAOB ” shall have the meaning set forth in Section 4.6 .

 

Pricing Period ” shall mean, with respect to a particular Put Notice, the five (5) consecutive Trading Days including and immediately following the applicable Put Notice Date.

 

     

 

 

Principal Market ” shall mean the New York Stock Exchange, the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the OTC Bulletin Board or the OTC Markets Group, whichever is the principal market on which the Common Stock is traded.

 

Purchase Amount ” shall mean the total amount being paid by the Investor on a particular Closing Date to purchase the Securities, calculated by multiplying the Purchase Price by the Put Amount.

 

Purchase Price ” shall mean the 80% of the lowest VWAP, as defined below, of the Common Stock during the Pricing Period applicable to the Put Notice. In the event there is no VWAP for any specific dates during the Pricing Period, the Purchase Price shall mean the lowest closing bid price of the Common Stock during the Pricing Period applicable to the Put Notice. In any case, however, an additional 10% will be added to the discount of each Put if (i) the Company is not DWAC eligible within 90 days following the Execution Date of this Agreement and (ii) an additional 15% will be added to the discount of each Put if the Company is under DTC “chill” status on the applicable Put Notice Date.

 

Put ” shall have the meaning set forth in Section 2.2 .

 

Put Amount ” shall have the meaning set forth in Section 2.3 .

 

Put Notice ” shall mean a written notice sent to the Investor by the Company stating the Put Amount in U.S. dollars that the Company intends to sell to the Investor pursuant to the terms of the Agreement and stating the current number of Shares issued and outstanding on such date.

 

Put Notice Date ” shall mean the Trading Day on which the Investor receives a Put Notice, determined as follows: a Put Notice shall be deemed delivered on (a) the Trading Day it is received by electronic mail or otherwise by the Investor if such notice is received prior to 9:30 a.m. (Pacific time), or (b) the immediately succeeding Trading Day if it is received by electronic mail or otherwise after 9:30 a.m. (Pacific time) on a Trading Day. No Put Notice may be deemed delivered on a day that is not a Trading Day.

 

“Put Settlement Sheet” shall mean a written letter to the Company by the Investor, evidencing acceptance of the Put and providing instructions for delivery of the Securities to the Investor.

 

“Put Shares Due” shall mean the Shares to be sold to the Investor pursuant to the Put.

 

Registered Offering Transaction Documents ” shall mean this Agreement and the Registration Rights Agreement between the Company and the Investor as of the date herewith.

 

Registration Rights Agreement ” shall have the meaning set forth in the recitals.

 

Registration Statement ” means the registration statement of the Company filed under the 1933 Act covering the resale of the Securities issuable hereunder by the Investor, in the manner described in such Registration Statement.

 

Resolutions ” shall have the meaning set forth in Section 7.5 .

 

SEC ” shall mean the U.S. Securities and Exchange Commission.

 

     

 

 

SEC Documents ” shall have the meaning set forth in Section 4.6 .

 

Securities ” shall mean the shares of Common Stock issued pursuant to the terms of the Agreement.

 

Shares ” shall mean the shares of the Company’s Common Stock.

 

Subsidiaries ” shall have the meaning set forth in Section 4.1 .

 

Trading Day ” shall mean any day on which the Principal Market for the Common Stock is open for trading, from the hours of 9:30 am until 4:00 pm.

 

“VWAP” shall mean, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted for trading as reported by (i) Bloomberg Financial L.P. or (ii) Stock Charts/Quote Media if the Investor does not promptly provide the Company the Bloomberg quote/pricing charts for the days involved upon the Company’s request (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)) and (b) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Investor and to the Company.

 

Waiting Period ” shall have the meaning set forth in Section 2.3 .

 

SECTION II

PURCHASE AND SALE OF COMMON STOCK

 

2.1          PURCHASE AND SALE OF COMMON STOCK . Subject to the terms and conditions set forth herein, the Company shall issue and sell to the Investor, and the Investor shall purchase from the Company, up to that number of Shares having an aggregate Purchase Price of Five Million Dollars ($5,000,000).

 

2.2          DELIVERY OF PUT NOTICES . Subject to the terms and conditions of the Registered Offering Transaction Documents, and from time to time during the Open Period, the Company may, in its sole discretion, deliver a Put Notice to the Investor which states the share amount (designated in whole shares of the Company’s Common Stock), which the Company intends to sell to the Investor on a Closing Date (the “ Put ”). The Put Notice shall be in the form attached hereto as Exhibit B and incorporated herein by reference. Upon receipt of the Put Notice, the Investor shall deliver to the Company a Put Settlement Sheet on the Put Notice Date. The Put Settlement Sheet shall be in the form attached hereto as Exhibit C and incorporated herein by reference.

 

2.3          PUT FORMULA . The maximum amount that the Company shall be entitled to Put to the Investor per any applicable Put Notice an amount of shares of Common Stock up to or equal to two hundred percent (200%) of the average of the daily trading volume (U.S. market only) (the “ Volume Restriction ”) of the Common Stock for the ten (10) consecutive Trading Days immediately prior to the applicable Put Notice Date (the “ Put Amount ”) so long as such amount is at least Five Thousand Dollars ($5,000) and does not exceed Five Hundred Thousand Dollars ($500,000), as calculated by multiplying the Put Amount by the average daily VWAP for the ten (10) consecutive Trading Days immediately prior to the applicable Put Notice Date. Upon written confirmation from both the Company and Investor, the Volume Restriction can be waived or amended for a specific Put provided the Put Amount does not exceed the limitation on amount of ownership, as described in Section 2.7. During the Open Period, the Company shall not be entitled to submit a Put Notice until after the previous Closing has been completed. Notwithstanding the foregoing, the Company may not deliver a Put Notice on or earlier of the tenth (10th) Trading Day immediately following the preceding Put Notice Date (the “ Waiting Period ”).

 

     

 

 

2.4          CONDITIONS TO INVESTOR’S OBLIGATION TO PURCHASE SHARES . Notwithstanding anything to the contrary in this Agreement, the Company shall not be entitled to deliver a Put Notice and the Investor shall not be obligated to purchase any Shares at a Closing unless each of the following conditions are satisfied:

 

i. a Registration Statement shall have been declared effective and shall remain effective and usable and available for the resale of all the Put Shares Due at all times until the Closing with respect to the applicable Put Notice;

 

ii. at all times during the period beginning on the related Put Notice Date and ending on and including the related Closing Date, the Common Stock shall have been listed or quoted for trading on the Principal Market and shall not have been suspended from trading thereon during the Pricing Period;

 

iii. the Company has complied with its obligations and is otherwise not in material breach of or in material default under, this Agreement, the Registration Rights Agreement or any other agreement executed in connection herewith which has not been cured prior to delivery to the Investor of the applicable Put Notice;

 

iv. no injunction shall have been issued and remain in force, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Securities; and

 

v. the issuance of the Securities will not violate any shareholder approval requirements of the Principal Market.

 

If any of the events described in clauses (i) through (v) above occurs during a Pricing Period, then the Investor shall have no obligation to purchase the Put Amount of Common Stock set forth in the applicable Put Notice.

 

2.5          MECHANICS OF PURCHASE OF SHARES BY INVESTOR. Subject to the satisfaction of the conditions set forth in Sections 2.6 and 7 of this Agreement, the closing of the purchase by the Investor of Securities (a “ Closing ”) shall occur on the date which is no earlier than five (5) Trading Days following and no later than seven (7) Trading Days following the applicable Put Notice Date (each a “ Closing Date ”). On each such Closing Date, if the Company’s transfer agent is participating in The Depository Trust Company (“ DTC ”) Fast Automated Securities Transfer (“ FAST ”) program and that the Securities are eligible for inclusion in the FAST program, the Company shall use all commercially reasonable efforts to cause its transfer agent to electronically transmit the Securities to be issued to the Investor on such date by crediting the account of the Investor’s prime broker (as specified by the Investor in a Put Settlement Sheet) with DTC through its DWAC service. If the Company is not DWAC eligible or the Company is under DTC “chill” on such Closing Date, the Company shall deliver to the Investor pursuant to this Agreement, certificates representing the Securities to be issued to the Investor on such date and registered in the name of the Investor (the “ Certificate ”). On such Closing Date, after receipt of confirmation of delivery of such Securities to the Investor, the Investor shall disburse the funds constituting the Purchase Amount to the Company’s designated account by wire transfer of (i) immediately available funds if the Investor receives the Securities by 9:30 a.m. (Pacific time) or (ii) next day available funds if the Investor receives the Securities thereafter.

 

     

 

 

2.6          OVERALL LIMIT ON COMMON STOCK ISSUABLE . Notwithstanding anything contained herein to the contrary, if during the Open Period the Company becomes listed on an exchange that limits the number of shares of Common Stock that may be issued without shareholder approval, then the number of Shares issuable by the Company and purchasable by the Investor, shall not exceed that number of the shares of Common Stock that may be issuable without shareholder approval (the “ Maximum Common Stock Issuance ”). If such issuance of shares of Common Stock could cause a delisting on the Principal Market, then the Maximum Common Stock Issuance shall first be approved by the Company’s shareholders in accordance with applicable law and the By-laws and the Articles of Incorporation of the Company, if such issuance of shares of Common Stock could cause a delisting on the Principal Market. The parties understand and agree that the Company’s failure to seek or obtain such shareholder approval shall in no way adversely affect the validity and due authorization of the issuance and sale of Securities or the Investor’s obligation in accordance with the terms and conditions hereof to purchase a number of Shares in the aggregate up to the Maximum Common Stock Issuance limitation, and that such approval pertains only to the applicability of the Maximum Common Stock Issuance limitation provided in this Section 2.6 .

 

2.7         LIMITATION ON AMOUNT OF OWNERSHIP. Notwithstanding anything to the contrary in this Agreement, in no event shall the Investor be entitled to purchase that number of Shares, which when added to the sum of the number of shares of Common Stock beneficially owned (as such term is defined under Section 13(d) and Rule 13d-3 of the 1934 Act), by the Investor, would exceed 9.99% of the number of shares of Common Stock outstanding on the Closing Date, as determined in accordance with Rule 13d-1(j) of the 1934 Act.

 

SECTION III

INVESTOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS

 

The Investor represents and warrants to the Company, and covenants, that:

 

3.1          SOPHISTICATED INVESTOR . The Investor has, by reason of its business and financial experience, such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that it is capable of (i) evaluating the merits and risks of an investment in the Securities and making an informed investment decision; (ii) protecting its own interest; and (iii) bearing the economic risk of such investment for an indefinite period of time.

 

3.2          AUTHORIZATION; ENFORCEMENT . This Agreement has been duly and validly authorized, executed and delivered on behalf of the Investor and is a valid and binding agreement of the Investor enforceable against the Investor in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

 

3.3          SECTION 9 OF THE 1934 ACT . During the term of this Agreement, the Investor will comply with the provisions of Section 9 of the 1934 Act, and the rules promulgated thereunder, with respect to transactions involving the Common Stock. The Investor agrees not to short sell the Company’s stock either directly or indirectly through its affiliates, principals or advisors, the Common Stock during the term of this Agreement. The Investor will only sell Company stock that it has in its possession.

 

     

 

 

3.4          ACCREDITED INVESTOR . The Investor is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D of the 1933 Act.

 

3.5          NO CONFLICTS . The execution, delivery and performance of the Registered Offering Transaction Documents by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby will not result in a violation of limited liability company agreement or other organizational documents of the Investor.

 

3.6          OPPORTUNITY TO DISCUSS . The Investor has received all materials relating to the Company’s business, finance and operations which it has requested. The Investor has had an opportunity to discuss the business, management and financial affairs of the Company with the Company’s management.

 

3.7          INVESTMENT PURPOSES . The Investor is purchasing the Securities for its own account for investment purposes and not with a view towards distribution and agrees to resell or otherwise dispose of the Securities solely in accordance with the registration provisions of the 1933 Act (or pursuant to an exemption from such registration provisions).

 

3.8          NO REGISTRATION AS A DEALER . The Investor is not and will not be required to be registered as a “dealer” under the 1934 Act, either as a result of its execution and performance of its obligations under this Agreement or otherwise.

 

3.9          GOOD STANDING . The Investor is a limited liability company, duly organized, validly existing and in good standing in the State of Wyoming.

 

3.10        TAX LIABILITIES . The Investor understands that it is liable for its own tax liabilities.

 

3.11        REGULATION M . The Investor will comply with Regulation M under the 1934 Act, if applicable.

 

3.12        General Solicitation . The Investor is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

 

3.13        TRANSFER RESTRICTIONS . The Securities may only be disposed of in compliance with federal and state securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an affiliate of the Investor, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the 1933 Act; provided, however, that in connection with any transfer of Securities pursuant to Rule 144, the Company may require the transferor to provide a customary Rule 144 sellers representation letter. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of the Investor under this Agreement and the Registration Rights Agreement, as to issued Securities only.

 

     

 

 

SECTION IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

Except as set forth in the Schedules attached hereto, or as disclosed on the Company’s SEC Documents, the Company represents and warrants to the Investor that:

 

4.1          ORGANIZATION AND QUALIFICATION . The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Nevada, and has the requisite corporate power and authorization to own its properties and to carry on its business as now being conducted. Both the Company and the companies it owns or controls (“ Subsidiaries ”) are duly qualified to do business and are in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, “ Material Adverse Effect ” means a change, event, circumstance, effect or state of facts that has had or is reasonably likely to have, a material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith, or on the authority or ability of the Company to perform its obligations under the Registered Offering Transaction Documents.

 

4.2          AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS .

 

i. The Company has the requisite corporate power and authority to enter into and perform the Registered Offering Transaction Documents, and to issue the Securities in accordance with the terms hereof and thereof.

 

ii. The execution and delivery of the Registered Offering Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the issuance of the Securities pursuant to this Agreement, have been duly and validly authorized by the Company’s board of directors and no further consent or authorization is required by the Company, its board of directors, or its shareholders.

 

iii. The Registered Offering Transaction Documents have been duly and validly executed and delivered by the Company.

 

iv. The Registered Offering Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors’ rights and remedies.

 

4.3          CAPITALIZATION . As of the date hereof, the authorized capital stock of the Company consists of 500,000,000 shares of the Common Stock, par value $0.001 per share, of which 66,008,195 were issued and outstanding as of August 24, 2017. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and non-assessable.

 

Except as disclosed in the Company’s publicly available filings with the SEC or as otherwise set forth on Schedule 4.3:

 

     

 

 

i. no shares of the Company’s capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company;

 

ii. there are no outstanding debt securities;

 

iii. there are no outstanding shares of capital stock, options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries;

 

iv. there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except the Registration Rights Agreement);

 

v. there are no outstanding securities of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries;

 

vi. there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in this Agreement;

 

vii. the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and

 

viii. there is no dispute as to the classification of any shares of the Company’s capital stock.

 

The Company has furnished to the Investor, or the Investor has had access through EDGAR to, true and correct copies of the Company’s Articles of Incorporation, as in effect on the date hereof (the “ Articles of Incorporation ”), and the Company’s By-laws, as in effect on the date hereof (the “ By-laws ”), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto.

 

4.4          ISSUANCE OF SHARES . As of the Effective Date, the Company will have reserved the amount of Shares included in the Registration Statement for issuance pursuant to the Registered Offering Transaction Documents, which will have been duly authorized and reserved (subject to adjustment pursuant to the Company’s covenant set forth in Section 5.5 below) pursuant to this Agreement. Upon issuance in accordance with this Agreement, the Securities will be validly issued, fully paid for and non-assessable and free from all taxes, liens and charges with respect to the issuance thereof. In the event the Company cannot reserve a sufficient number of Shares for issuance pursuant to this Agreement, the Company will use its best efforts to authorize and reserve for issuance the number of Shares required for the Company to perform its obligations hereunder as soon as reasonably practicable.

 

     

 

 

4.5          NO CONFLICTS . The execution, delivery and performance of the Registered Offering Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby will not (i) result in a violation of the Articles of Incorporation or the By-laws; or (ii) conflict with, or constitute a material default (or an event which with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, contract, indenture mortgage, indebtedness or instrument to which the Company or any of its Subsidiaries is a party, or to the Company’s knowledge result in a violation of any law, rule, regulation, order, judgment or decree (including United States federal and state securities laws and regulations and the rules and regulations of the Principal Market or principal securities exchange or trading market on which the Common Stock is traded or listed) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected. Neither the Company nor its Subsidiaries is in violation of any term of, or in default under, the Articles of Incorporation or the By-laws or their organizational charter or by-laws, respectively, or any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, except for possible conflicts, defaults, terminations, amendments, accelerations, cancellations and violations that would not individually or in the aggregate have or constitute a Material Adverse Effect. The business of the Company and its Subsidiaries is not being conducted, and shall not be conducted, in violation of any law, statute, ordinance, rule, order or regulation of any governmental authority or agency, regulatory or self-regulatory agency, or court, except for possible violations the sanctions for which either individually or in the aggregate would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act or any securities laws of any states, to the Company’s knowledge, the Company is not required to obtain any consent, authorization, permit or order of, or make any filing or registration (except the filing of a registration statement as outlined in the Registration Rights Agreement between the parties) with, any court, governmental authority or agency, regulatory or self-regulatory agency or other third party in order for it to execute, deliver or perform any of its obligations under, or contemplated by, the Registered Offering Transaction Documents in accordance with the terms hereof or thereof. All consents, authorizations, permits, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof and are in full force and effect as of the date hereof. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company is not, and will not be, in violation of the listing requirements of the Principal Market as in effect on the date hereof and on each of the Closing Dates and is not aware of any facts which would reasonably lead to delisting of the Common Stock by the Principal Market in the foreseeable future.

 

4.6          SEC DOCUMENTS; FINANCIAL STATEMENTS . As of the date hereof, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, and amendments thereto, being hereinafter referred to as the “ SEC Documents ”). The Company has delivered to the Investor or its representatives, or they have had access through EDGAR to, true and complete copies of the SEC Documents. As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC or the time they were amended, if amended, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, by a firm that is a member of the Public Companies Accounting Oversight Board (“ PCAOB ”) consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other written information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents, including, without limitation, information referred to in Section 4.3 of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. The Company’s knowledge, neither the Company nor any of its Subsidiaries or any of their officers, directors, employees or agents have provided the Investor with any material, nonpublic information which was not publicly disclosed prior to the date hereof and any material, nonpublic information provided to the Investor by the Company or its Subsidiaries or any of their officers, directors, employees or agents prior to any Closing Date shall be publicly disclosed by the Company prior to such Closing Date.

 

     

 

 

4.7          ABSENCE OF CERTAIN CHANGES . Except as otherwise set forth in the SEC Documents, the Company does not intend to change the business operations of the Company in any material way. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings.

 

4.8          ABSENCE OF LITIGATION AND/OR REGULATORY PROCEEDINGS . Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of Company or any of its Subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company’s Subsidiaries or any of the Company’s or the Company’s Subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a Material Adverse Effect.

 

4.9          ACKNOWLEDGMENT REGARDING INVESTOR’S PURCHASE OF SHARES . The Company acknowledges and agrees that the Investor is acting solely in the capacity of an arm’s length purchaser with respect to the Registered Offering Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Registered Offering Transaction Documents and the transactions contemplated hereby and thereby and any advice given by the Investor or any of its respective representatives or agents in connection with the Registered Offering Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investor’s purchase of the Securities, and is not being relied on by the Company. The Company further represents to the Investor that the Company’s decision to enter into the Registered Offering Transaction Documents has been based solely on the independent evaluation by the Company and its representatives.

 

4.10        NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR CIRCUMSTANCES . Except as set forth in the SEC Documents or required with respect to the Registered Offering Transaction Documents, as of the date hereof, no event, liability, development or circumstance has occurred or exists, or to the Company’s knowledge is contemplated to occur, with respect to the Company or its Subsidiaries or their respective business, properties, assets, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced.

 

     

 

 

4.11        EMPLOYEE RELATIONS . Neither the Company nor any of its Subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute threatened. Neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that relations with their employees are good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has notified the Company that such officer intends to leave the Company’s employ or otherwise terminate such officer’s employment with the Company.

 

4.12        INTELLECTUAL PROPERTY RIGHTS . The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. Except as set forth in the SEC Documents, none of the Company’s trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights necessary to conduct its business as now or as proposed to be conducted have expired or terminated, or are expected to expire or terminate within two (2) years from the date of this Agreement. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, except as set forth in the SEC Documents, there is no claim, action or proceeding being made or brought against, or to the Company’s knowledge, being threatened against, the Company or its Subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and its Subsidiaries have taken commercially reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties.

 

4.13        ENVIRONMENTAL LAWS . The Company and its Subsidiaries (i) are, to the knowledge of the management and directors of the Company and its Subsidiaries, in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“ Environmental Laws ”); (ii) have, to the knowledge of the management and directors of the Company, received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses as currently conducted; and (iii) are in compliance, to the knowledge of the management and directors of the Company, with all terms and conditions of any such permit, license or approval where, in each of the three (3) foregoing cases, the failure to so comply would have, individually or in the aggregate, a Material Adverse Effect.

 

4.14        TITLE . The Company and its Subsidiaries have good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the SEC Documents or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its Subsidiaries. Any real property and facilities held under lease by the Company or any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries.

 

     

 

 

4.15        INSURANCE . Each of the Company’s Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company reasonably believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any of its Subsidiaries has been refused any insurance coverage sought or applied for and neither the Company nor its Subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.

 

4.16        REGULATORY PERMITS . The Company and its Subsidiaries have in full force and effect all certificates, approvals, authorizations and permits from the appropriate federal, state, local or foreign regulatory authorities and comparable foreign regulatory agencies, necessary to own, lease or operate their respective properties and assets and conduct their respective businesses in the manner currently being conducted, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, approval, authorization or permit, except for such certificates, approvals, authorizations or permits which if not obtained, or such revocations or modifications which, would not have a Material Adverse Effect.

 

4.17        INTERNAL ACCOUNTING CONTROLS . Except as otherwise set forth in the SEC Documents, the Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles by a firm with membership to the PCAOB and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company’s management has determined that the Company’s internal accounting controls were not effective as of the date of this Agreement as further described in the SEC Documents.

 

4.18        NO MATERIALLY ADVERSE CONTRACTS, ETC . Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company’s officers has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company’s officers has or is expected to have a Material Adverse Effect.

 

4.19        TAX STATUS . The Company and each of its Subsidiaries has made or filed all United States federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

 

     

 

 

4.20        CERTAIN TRANSACTIONS . Except as set forth in the SEC Documents and except for transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from disinterested third parties and other than the grant of stock options disclosed in the SEC Documents, none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, consultants, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, such that disclosure would be required in the SEC Documents.

 

4.21        DILUTIVE EFFECT . The Company understands and acknowledges that the number of shares of Common Stock issuable upon purchases pursuant to this Agreement will increase in certain circumstances including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines during the period between the Effective Date and the end of the Open Period. The Company’s executive officers and directors have studied and fully understand the nature of the transactions contemplated by this Agreement and recognize that they have a potential dilutive effect on the shareholders of the Company. The board of directors of the Company has concluded, in its good faith business judgment, and with full understanding of the implications, that such issuance is in the best interests of the Company. The Company specifically acknowledges that, subject to such limitations as are expressly set forth in the Registered Offering Transaction Documents, its obligation to issue shares of Common Stock upon purchases pursuant to this Agreement is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company. 

 

4.22        LOCK-UP . The Company shall cause its officers, insiders, directors, and affiliates or other related parties under control of the Company, to refrain from selling Common Stock during each Pricing Period.

 

4.23        NO GENERAL SOLICITATION . Neither the Company, nor any of its affiliates, nor any person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Common Stock to be offered as set forth in this Agreement.

 

4.24        NO BROKERS, FINDERS OR FINANCIAL ADVISORY FEES OR COMMISSIONS . No brokers, finders or financial advisory fees or commissions will be payable by the Company, its agents or Subsidiaries, with respect to the transactions contemplated by this Agreement.

 

SECTION V

COVENANTS OF THE COMPANY

 

5.1          BEST EFFORTS . The Company shall use all commercially reasonable efforts to timely satisfy each of the conditions set forth in Section 7 of this Agreement.

 

5.2          REPORTING STATUS . During the Open Period and until one of the following occurs, the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status, or take an action or fail to take any action, which would terminate its status as a reporting company under the 1934 Act: (i) this Agreement terminates pursuant to Section 8 and the Investor has the right to sell all of the Securities without volume restrictions pursuant to Rule 144 promulgated under the 1933 Act, or such other exemption, or (ii) the date on which the Investor has sold all the Securities and this Agreement has been terminated pursuant to Section 8 .

 

     

 

 

5.3          USE OF PROCEEDS . The Company will use the proceeds from the sale of the Securities (excluding amounts paid or to be paid by the Company for fees as set forth in the Registered Offering Transaction Documents, if any) for general corporate and working capital purposes and acquisitions or assets, businesses or operations or for other purposes that the board of directors of the Company, in its good faith deem to be in the best interest of the Company.

 

5.4          FINANCIAL INFORMATION . During the Open Period, the Company agrees to make available to the Investor via EDGAR or other electronic means the following documents and information on the forms set forth: (i) within five (5) Trading Days after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any Registration Statements or amendments filed pursuant to the 1933 Act; (ii) copies of any notices and other information made available or given to the shareholders of the Company generally, contemporaneously with the making available or giving thereof to the shareholders; and (iii) within two (2) calendar days of filing or delivery thereof, copies of all documents filed with, and all correspondence sent to, the Principal Market, any securities exchange or market, or the Financial Industry Regulatory Association, unless such information is material nonpublic information.

 

5.5          RESERVATION OF SHARES . The Company shall take all action necessary to at all times have authorized, and reserved the amount of Shares included in the Registration Statement for issuance pursuant to the Registered Offering Transaction Documents. In the event that the Company determines that it does not have a sufficient number of authorized shares of Common Stock to reserve and keep available for issuance as described in this Section 5.5 , the Company shall use all commercially reasonable efforts to increase the number of authorized shares of Common Stock by seeking shareholder approval for the authorization of such additional shares.

 

5.6          LISTING . The Company shall use all commercially reasonable efforts to promptly secure and maintain the listing of all of the Registrable Securities (as defined in the Registration Rights Agreement) on the Principal Market and each other national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, such listing of all Registrable Securities from time to time issuable under the terms of the Registered Offering Transaction Documents. Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market (excluding suspensions of not more than one (1) Trading Day resulting from business announcements by the Company). The Company shall promptly provide to the Investor copies of any notices it receives from the Principal Market regarding the continued eligibility of the Common Stock for listing on such automated quotation system or securities exchange. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 5.6 .

 

5.7          FILING OF FORM 8-K . On or before the date which is four (4) Trading Days after the Execution Date, the Company shall file a Current Report on Form 8-K with the SEC describing the terms of the transaction contemplated by the Registered Offering Transaction Documents in the form required by the 1934 Act, if such filing is required.

 

5.8          CORPORATE EXISTENCE . The Company shall use all commercially reasonable efforts to preserve and continue the corporate existence of the Company.

 

     

 

 

5.9          NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION; SUSPENSION OF RIGHT TO MAKE A PUT . The Company shall promptly notify the Investor upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of the Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Securities for sale in any jurisdiction or the initiation or notice of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of a Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company’s reasonable determination that a post-effective amendment or supplement to the Registration Statement would be appropriate, and the Company shall promptly make available to Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to Investor any Put Notice during the continuation of any of the foregoing events in this Section 5.9 .

 

5.10        TRANSFER AGENT . Upon effectiveness of the Registration Statement, and for so long as the Registration Statement is effective, following delivery of a Put Notice, the Company shall deliver instructions to its transfer agent to issue Shares to the Investor that are covered for resale by the Registration Statement free of restrictive legends.

 

5.11        ACKNOWLEDGEMENT OF TERMS . The Company hereby represents and warrants to the Investor that: (i) it is voluntarily entering into this Agreement of its own freewill, (ii) it is not entering this Agreement under economic duress, (iii) the terms of this Agreement are reasonable and fair to the Company, and (iv) the Company has had independent legal counsel of its own choosing review this Agreement, advise the Company with respect to this Agreement, and represent the Company in connection with this Agreement.

 

SECTION VI

CONDITIONS OF THE COMPANY’S ELECTION TO SELL

 

There is no obligation hereunder of the Company to issue and sell the Securities to the Investor. However, an election by the Company to issue and sell the Securities hereunder, from time to time as permitted hereunder, is further subject to the satisfaction, at or before each Closing Date, of each of the following conditions set forth below. These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion.

 

6.1         The Investor shall have executed this Agreement and the Registration Rights Agreement and delivered the same to the Company.

 

6.2         The Investor shall have delivered to the Company a Put Settlement Sheet in the form attached here to as Exhibit C on the Put Notice Date.

 

6.3         No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

     

 

 

SECTION VII

FURTHER CONDITIONS OF THE INVESTOR’S OBLIGATION TO PURCHASE

 

The obligation of the Investor hereunder to purchase Securities is subject to the satisfaction, on or before each Closing Date, of each of the following conditions set forth below.

 

7.1           The Company shall have executed the Registered Offering Transaction Documents and delivered the same to the Investor.

 

7.2           The Common Stock shall be authorized for quotation on the Principal Market and trading in the Common Stock shall not have been suspended by the Principal Market or the SEC, at any time beginning on the date hereof and through and including the respective Closing Date (excluding suspensions of not more than one (1) Trading Day resulting from business announcements by the Company, provided that such suspensions occur prior to the Company’s delivery of the Put Notice related to such Closing).

 

7.3           The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the applicable Closing Date as though made at that time and the Company shall have materially performed, satisfied and complied with the covenants, agreements and conditions required by the Registered Offering Transaction Documents to be performed, satisfied or complied with by the Company on or before such Closing Date. The Investor may request an update as of such Closing Date regarding the representation contained in Section 4.3 .

 

7.4           The Company shall have executed and delivered to the Investor the certificates representing, or have executed electronic book-entry transfer of, the Securities (in such denominations as the Investor shall request) being purchased by the Investor at such Closing.

 

7.5           The board of directors of the Company shall have adopted resolutions consistent with Section 4.2(ii) (the “ Resolutions ”) and such Resolutions shall not have been materially amended or rescinded prior to such Closing Date.

 

7.6           No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

7.7           The Registration Statement shall be effective on each Closing Date and no stop order suspending the effectiveness of the Registration statement shall be in effect or to the Company’s knowledge shall be pending or threatened. Furthermore, on each Closing Date (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to such Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of such Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC’s concerns have been addressed), and (ii) no other suspension of the use or withdrawal of the effectiveness of such Registration Statement or related prospectus shall exist.

 

     

 

 

7.8           At the time of each Closing, the Registration Statement (including information or documents incorporated by reference therein) and any amendments or supplements thereto shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or which would require public disclosure or an update supplement to the prospectus.

 

7.9           If applicable, the shareholders of the Company shall have approved the issuance of any Shares in excess of the Maximum Common Stock Issuance in accordance with Section 2.6 or the Company shall have obtained appropriate approval pursuant to the requirements of Company State law and the Company’s Articles of Incorporation and By-laws.

 

7.10         The conditions to such Closing set forth in Section 2.4 shall have been satisfied on or before such Closing Date.

 

7.11         The Company shall have certified to the Investor the number of Shares of Common Stock outstanding when a Put Notice is given to the Investor. The Company’s delivery of a Put Notice to the Investor constitutes the Company’s certification of the existence of the necessary number of shares of Common Stock reserved for issuance.

 

SECTION VIII

TERMINATION

 

This Agreement shall terminate upon any of the following events:

 

i. when the Investor has purchased an aggregate of Five Million Dollars ($5,000,000) in the Common Stock of the Company pursuant to this Agreement;

 

ii. on the date which is thirty-six (36) months after the Effective Date; or

 

iii. at such time that the Registration Statement is no longer in effect; or

 

iv. at any time at the election of the Company upon 15 days written notice.

 

Any and all shares, or penalties, if any, due under this Agreement shall be immediately payable and due upon termination of this Agreement.

 

SECTION IX

SUSPENSION

 

This Agreement shall be suspended upon any of the following events, and shall remain suspended until such event is rectified:

 

i. The trading of the Common Stock is suspended by the SEC, the Principal Market or FINRA for a period of two (2) consecutive Trading Days during the Open Period; or,

 

ii. During the Open Period the Common Stock ceases to be registered under the 1934 Act or listed or traded on the Principal Market or the Registration Statement is no longer effective (except as permitted hereunder).

 

Immediately upon the occurrence of one of the above-described events, the Company shall send written notice of such event to the Investor.

 

     

 

 

SECTION X

MISCELLANEOUS

 

10.1        Law Governing this Agreement . This Agreement shall be governed by , and construed and interpreted in accordance with , the substantive laws of the state of California without giving effect to any conflict of laws rule or principle that might require the application of the laws of another jurisdiction. Any dispute, claim, suit, action or other legal proceeding arising out of the transactions contemplated by this Agreement or the rights and obligations of each of the parties shall be brought only in a competent court in San Diego, California or in the federal courts of the United States of America located in San Diego, California . The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens . The parties executing this Agreement and other agreements referred to herein or delivered in connection herewith agree to submit to the in personam jurisdiction of such courts. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Documents by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

 

10.2        LEGAL FEES; AND MISCELLANEOUS FEES. Except as otherwise set forth in the Registered Offering Transaction Documents (including but not limited to Section 5 of the Registration Rights Agreement), each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. Any attorneys’ fees and expenses incurred by either the Company or the Investor in connection with the preparation, negotiation, execution and delivery of any amendments to this Agreement or relating to the enforcement of the rights of any party, after the occurrence of any breach of the terms of this Agreement by another party or any default by another party in respect of the transactions contemplated hereunder, shall be paid on demand by the party which breached the Agreement and/or defaulted, as the case may be. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of any Securities.

 

10.3        COUNTERPARTS . This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile transmission, PDF, electronic signature or other similar electronic means with the same force and effect as if such signature page were an original thereof.

 

10.4        HEADINGS; SINGULAR/PLURAL . The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine.

 

     

 

 

10.5        SEVERABILITY . If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

 

10.6        ENTIRE AGREEMENT; AMENDMENTS . This Agreement is the FINAL AGREEMENT between the Company and the Investor with respect to the terms and conditions set forth herein, and, the terms of this Agreement may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the Parties.

 

10.7        NOTICES . Any notices or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by electronic mail (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and email addresses for such communications shall be:

 

If to the Company:

 

Ironclad Encryption Corporation

777 S. Post Oak Lane, Suite 1700
Houston, TX 77056

Attn: Len Walker

Email: len.walker@ironcladencryption.com

     
If to the Investor:  

Tangiers Global, LLC

Caribe Plaza Office Building 6th Floor

Palmeras St. #53

San Juan, PR 00901
Email: admin@tangierscapital.com

 

Each party shall provide five (5) business days prior written notice to the other party of any change in address or email address.

 

10.8        NO ASSIGNMENT . This Agreement may not be assigned.

 

10.9        NO THIRD PARTY BENEFICIARIES . This Agreement is intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

 

10.10      SURVIVAL . The representations and warranties of the Company and the Investor contained in Sections 3 and 4 , the agreements and covenants set forth in Section 5 and this Section 11 , shall survive each of the Closings and the termination of this Agreement.

 

10.11      PUBLICITY . The Company and the Investor shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior consent of the other party, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, as determined solely by the Company in consultation with its counsel. The Investor acknowledges that this Agreement and all or part of the Registered Offering Transaction Documents may be deemed to be “material contracts” as that term is defined by Item 601(b)(10) of Regulation S-K, and that the Company may therefore be required to file such documents as exhibits to reports or registration statements filed under the 1933 Act or the 1934 Act. The Investor further agrees that the status of such documents and materials as material contracts shall be determined solely by the Company, in consultation with its counsel.

 

     

 

 

10.12      EXCLUSIVITY . The Company shall not pursue an equity line transaction similar to the transactions contemplated in this Agreement with any other person or entity until the earlier of (i) the Effective Date and (ii) termination of this Agreement in accordance with Section 8 .

 

10.13      FURTHER ASSURANCES . Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

10.14      NO STRICT CONSTRUCTION . The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party, as the parties mutually agree that each has had a full and fair opportunity to review this Agreement and seek the advice of counsel on it.

 

10.15      REMEDIES . The Investor shall have all rights and remedies set forth in this Agreement and the Registration Rights Agreement and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which the Investor has by law. Any person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any default or breach of any provision of this Agreement, including the recovery of reasonable attorney’s fees and costs, and to exercise all other rights granted by law.

 

10.16      PAYMENT SET ASIDE . To the extent that the Company makes a payment or payments to the Investor hereunder or under the Registration Rights Agreement or the Investor enforces or exercises its rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

 

10.17      COMMITMENT FEE . Upon the Execution Date of this Agreement, the Company shall be required to issue to the Purchaser a 10% $100,000 promissory note as a commitment fee (the “ Commitment Fee Note ”). The Commitment Fee Note will have a 7 month maturity. In the event that the S-1 is declared effective within 90 days following document execution, $35,000 will be automatically deducted from the balance of the Commitment Fee Note. In the event that the S-1 is declared effective within 135 days (but more than 90 days) following document execution, $17,500 will be automatically deducted from the balance of the Commitment Fee Note. The Company agrees that the issuance of the Commitment Fee Note is a material obligation and that the Commitment Fee Note is considered fully earned as of the Execution Date of this Agreement, regardless of whether or not the Company files the S-1 or is successful in having it deemed effective by the SEC.

 

     

 

 

SECTION XI

NON-DISCLOSURE OF NON-PUBLIC INFORMATION

 

The Company shall not disclose non-public information to the Investor, its advisors, or its representatives.

 

Nothing in the Registered Offering Transaction Documents shall require or be deemed to require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money Managing Members or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 12 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading.

 

SECTION XII

ACKNOWLEDGEMENTS OF THE PARTIES

 

Notwithstanding anything in this Agreement to the contrary, the parties hereto hereby acknowledge and agree to the following: (i) the Investor makes no representations or covenants that it will not engage in trading in the securities of the Company, other than the Investor will not short or pre-sell, either directly or indirectly through its affiliates, principals or advisors, the Common Stock at any time during the Open Period; (ii) the Company shall comply with its obligations under Section 5.8 in a timely manner; (iii) the Company has not and shall not provide material non-public information to the Investor unless prior thereto the Investor shall have executed a written agreement regarding the confidentiality and use of such information; and (iv) the Company understands and confirms that the Investor will be relying on the acknowledgements set forth in clauses (i) through (iii) above if the Investor effects any transactions in the securities of the Company.

 

[Signature Page to Follow.]

 

     

 

 

Your signature on this Signature Page evidences your agreement to be bound by the terms and conditions of the Investment Agreement as of the date first written above. The undersigned signatory hereby certifies that he has read and understands the Investment Agreement, and the representations made by the undersigned in this Investment Agreement are true and accurate, and agrees to be bound by its terms.

 

  TANGIERS GLOBAL, LLC
     
  By: /s/ Michael Sobeck
  Name: Michael Sobeck
  Title:  Managing Member
   
  IRONCLAD ENCRYPTION CORPORATION
     
  By: /s/ J.D. McGraw
  Name: J.D. McGraw
  Title: President/CEO

 

     

 

Exhibit 10.13

 

Note: August 24, 2017

 

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN THE EVENT OF A PARTIAL REDEMPTION OR CONVERSION.  AS A RESULT, FOLLOWING ANY REDEMPTION OR CONVERSION OF ANY PORTION OF THIS NOTE, THE OUTSTANDING PRINCIPAL SUM REPRESENTED BY THIS NOTE MAY BE LESS THAN THE PRINCIPAL SUM AND ACCRUED INTEREST SET FORTH BELOW.

 

10% FIXED CONVERTIBLE PROMISSORY NOTE

 

OF

 

IRONCLAD ENCRYPTION CORPORATION

 

Issuance Date:  August 24, 2017

Total Face Value of Note: $330,000

Initial Consideration: $150,000

Initial Original Issue Discount: $15,000

Initial Principal Sum Due: $165,000

 

This Note is a duly authorized Fixed Convertible Promissory Note of Ironclad Encryption Corporation a corporation duly organized and existing under the laws of the State of Nevada ( the “ Company ”), designated as the Company's 10% Fixed Convertible Promissory Note in the principal amount of $330,000 (the “ Note” ). This Note will become effective only upon execution by both parties and delivery of the first payment of consideration by the Holder (the “ Effective Date ”).

 

For Value Received , the Company hereby promises to pay to the order of Tangiers Global, LLC or its registered assigns or successors-in-interest (the “Holder” ) the Principal Sum of $330,000 (the “ Principal Sum ”) and to pay “guaranteed” interest on the principal balance hereof at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest and any other interest, fees, liquidated damages and/or items due to Holder herein have not been repaid or converted into the Company's Common Stock (the “Common Stock” ), in accordance with the terms hereof.  The sum of $150,000 shall be remitted and delivered to the Company, and $15,000 shall be retained by the Holder through an original issue discount (the “ OID ”) for due diligence and legal bills related to this transaction.  The OID is set at 10% of any consideration paid. The Holder may pay additional consideration (each, a “ Consideration ”) to the Company in such amounts and at such dates (each, an “Additional Consideration Date” ) as Holder may choose in its sole discretion. The Principal Sum due to Holder shall be prorated based on the Consideration actually paid by Holder (plus the “guaranteed” interest and 10% OID, both which are prorated based on the Consideration actually paid by the Holder, as well as any other interest or fees) such that the Company is only required to repay the amount funded and the Company is not required to repay any unfunded portion of this Note. The Maturity Date is seven months from the Effective Date of each payment (the “Maturity Date” ) and is the date upon which the Principal Amount of this Note, as well as any unpaid interest and other fees, shall be due and payable.

 

 

 

 

In addition to the “guaranteed” interest referenced above, and in the Event of Default pursuant to Section 2.00(a), additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate permitted by law (the “ Default Rate ”).  

 

This Note will become effective only upon the execution by both parties, including the execution of Exhibits B, C, D, E and the Irrevocable Transfer Agent Instructions (the “ Date of Execution ”) and delivery of the initial payment of consideration by the Holder (the “ Effective Date ”).

 

As an investment incentive, the Company will issue 82,500 four (4) year cashless warrants, exercisable at $3.00.

 

This Note may be prepaid by the Company, in whole or in part, according to the following schedule:

 

Days Since Effective Date   Prepayment Amount
     
0-90   120% of Principal Amount
     
91-135   130% of Principal Amount
     
136-180   140% of Principal Amount

 

After 180 days from the Effective Date this Note may not be prepaid without written consent from Holder, which consent may be withheld, delayed or denied in Holder’s sole and absolute discretion.  Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day (as defined below), the same shall instead be due on the next succeeding day which is a Business Day.  If the Note is in default, per Section 2.00(a) below, the Company may not prepay the Note without written consent of the Holder.

 

For purposes hereof the following terms shall have the meanings ascribed to them below:

 

“Business Day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the City of New York are authorized or required by law or executive order to remain closed.

 

“Conversion Price” shall be equal to $1.00.

 

 

 

 

Principal Amount ” shall refer to the sum of (i) the original principal amount of this Note (including the original issue discount, prorated if the Note has not been funded in full), (ii) all guaranteed and other accrued but unpaid interest hereunder, (iii) any fees due hereunder, (iv) liquidated damages, and (v) any default payments owing under the Note, in each case previously paid or added to the Principal Amount.

 

Principal Market ” shall refer to the primary exchange on which the Company’s common stock is traded or quoted.

 

“Trading Day” shall mean a day on which there is trading or quoting for any security on the Principal Market.

 

“Underlying Shares” means the shares of common stock into which the Note is convertible (including interest, fees, liquidated damages and/or principal payments in common stock as set forth herein) in accordance with the terms hereof.

 

The following terms and conditions shall apply to this Note:

 

Section 1.00          Conversion .

 

(a)           Conversion Right .  Subject to the terms hereof and restrictions and limitations contained herein, the Holder shall have the right, at the Holder's sole option, at any time and from time to time to convert in whole or in part the outstanding and unpaid Principal Amount under this Note into shares of Common Stock as per the Conversion Price, but not to exceed the Restricted Ownership Percentage, as defined in Section 1.00(f).  The date of any conversion notice (“ Conversion Notice ”) hereunder shall be referred to herein as the “Conversion Date” .  The Conversion Price shall be equitably adjusted in the event of a forward split, stock dividend, or the like, but shall not be adjusted in the event of a reverse split, recombination, or the like.

 

(b)           Stock Certificates or DWAC .  The Company will deliver to the Holder, or Holder’s authorized designee, no later than 2 Trading Days after the Conversion Date, a certificate or certificates (which certificate(s) shall be free of restrictive legends and trading restrictions if the shares of Common Stock underlying the portion of the Note being converted are eligible under a resale exemption pursuant to Rule 144(b)(1)(ii) and Rule 144(d)(1)(ii) of the Securities Act of 1933, as amended) representing the number of shares of Common Stock being acquired upon the conversion of this Note.  In lieu of delivering physical certificates representing the shares of Common Stock issuable upon conversion of this Note, provided the Company's transfer agent is participating in Depository Trust Company’s (“ DTC ”) Fast Automated Securities Transfer (“ FAST ”) program, the Company shall instead use commercially reasonable efforts to cause its transfer agent to electronically transmit such shares issuable upon conversion to the Holder (or its designee), by crediting the account of the Holder’s (or such designee’s) broker with DTC through its Deposits and Withdrawal at Custodian (“ DWAC ”) program (provided that the same time periods herein as for stock certificates shall apply).  

 

(c)       Charges and Expenses .  Issuance of Common Stock to Holder, or any of its assignees, upon the conversion of this Note shall be made without charge to the Holder for any issuance fee, transfer tax, legal opinion and related charges, postage/mailing charge or any other expense with respect to the issuance of such Common Stock.  Company shall pay all Transfer Agent fees incurred from the issuance of the Common Stock to Holder, as well as any and all other fees and charges required by the Transfer Agent as a condition to effectuate such issuance.  Any such fees or charges, as noted in this Section that are paid by the Holder (whether from the Company’s delays, outright refusal to pay, or otherwise), will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144.      

 

 

 

 

(d)           Delivery Timeline .  If the Company fails to deliver to the Holder such certificate or certificates (or shares through the DWAC program) pursuant to this Section (free of any restrictions on transfer or legends, if eligible) prior to 3 Trading Days after the Conversion Date, the Company shall pay to the Holder as liquidated damages an amount equal to $2,000 per day, until such certificate or certificates are delivered.  The Company acknowledges that it would be extremely difficult or impracticable to determine the Holder’s actual damages and costs resulting from a failure to deliver the Common Stock and the inclusion herein of any such additional amounts are the agreed upon liquidated damages representing a reasonable estimate of those damages and costs.  Such liquidated damages will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144.  

 

(e)           Reservation of Underlying Securities .  The Company covenants that it will at all times reserve and keep available for Holder, out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of this Note, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder, five times the number of shares of Common Stock as shall be issuable (taking into account the adjustments under this Section 1.00, but without regard to any ownership limitations contained herein) upon the conversion of this Note (consisting of the Principal Amount), under the formula in Section Section 2.00(c) below, to Common Stock (the “ Required Reserve ”).  The Company covenants that all shares of Common Stock that shall be issuable will, upon issue, be duly authorized, validly issued, fully-paid, non-assessable and freely-tradable (if eligible).  If the amount of shares on reserve in Holder’s name at the Company’s transfer agent for this Note shall drop below the Required Reserve, the Company will, within 2 Trading Days of notification from Holder, instruct the transfer agent to increase the number of shares so that the Required Reserve is met. In the event that the Company does not instruct the transfer agent to increase the number of shares so that the Required Reserve is met, the Holder will be allowed, if applicable, to provide this instruction as per the terms of the Irrevocable Transfer Agent Instructions attached to this Note. The Company agrees that the maintenance of the Required Reserve is a material term of this Note and any breach of this Section 1.00(e) will result in a default of the Note.

 

(f)           Conversion Limitation .  The Holder will not submit a conversion to the Company that would result in the Holder beneficially owning more than 9.99% of the then total outstanding shares of the Company (“ Restricted Ownership Percentage ”).

 

(g)           Conversion Delays .  If the Company fails to deliver shares in accordance with the timeframe stated in Section 1.00(b), the Holder, at any time prior to selling all of those shares, may rescind any portion, in whole or in part, of that particular conversion attributable to the unsold shares.  The rescinded conversion amount will be returned to the Principal Sum with the rescinded conversion shares returned to the Company, under the expectation that any returned conversion amounts will tack back to the Effective Date.

 

(h)           Shorting and Hedging .  Holder may not engage in any “shorting” or “hedging” transaction(s) in the Common Stock of the Company prior to conversion.

 

(i)           Conversion Right Unconditional .  If the Holder shall provide a Conversion Notice as provided herein, the Company's obligations to deliver Common Stock shall be absolute and unconditional, irrespective of any claim of setoff, counterclaim, recoupment, or alleged breach by the Holder of any obligation to the Company.

 

 

 

 

Section 2.00          Defaults and Remedies .

 

(a)           Events of Default .  An “ Event of Default ” is:  (i) a default in payment of any amount due hereunder which default continues for more than 5 Trading Days after the due date; (ii) a default in the timely issuance of underlying shares upon and in accordance with terms of Section 1.00, which default continues for 2 Trading Days after the Company has failed to issue shares or deliver stock certificates within the 3rd Trading Day following the Conversion Date; (iii) if the Company does not issue the press release or file the Current Report on Form 8-K, in each case in accordance with the provisions and the deadlines referenced Section 4.00(i); (iv) failure by the Company for 3 days after notice has been received by the Company to comply with any material provision of this Note; (v) failure of the Company to remain compliant with DTC, thus incurring a “chilled” status with DTC; (vi) any default of any mortgage, indenture or instrument which may be issued, or by which there may be secured or evidenced any indebtedness, for money borrowed by the Company or for money borrowed the repayment of which is guaranteed by the Company, whether such indebtedness or guarantee now exists or shall be created hereafter; (vii) if the Company is subject to any Bankruptcy Event; (viii) any failure of the Company to satisfy its “filing” obligations under Securities Exchange Act of 1934, as amended (the “ 1934 Act ”) and the rules and guidelines issued by OTC Markets News Service, OTCMarkets.com and their affiliates; (ix) failure of the Company to remain in good standing under the laws of its state of domicile; (x) any failure of the Company to provide the Holder with information related to its corporate structure including, but not limited to, the number of authorized and outstanding shares, public float, etc. within 1 Trading Day of request by Holder; (xi) failure by the Company to maintain the Required Reserve in accordance with the terms of Section 1.00(e); (xii) failure of Company’s Common Stock to maintain a closing bid price in its Principal Market for more than 3 consecutive Trading Days; (xiii) any delisting from a Principal Market for any reason; (xiv) failure by Company to pay any of its Transfer Agent fees in excess of $2,000 or to maintain a Transfer Agent of record; (xv) failure by Company to notify Holder of a change in Transfer Agent within 24 hours of such change; (xvi) any trading suspension imposed by the United States Securities and Exchange Commission (the “ SEC ”) under Sections 12(j) or 12(k) of the 1934 Act; (xvii) failure by the Company to meet all requirements necessary to satisfy the availability of Rule 144 to the Holder or its assigns, including but not limited to the timely fulfillment of its filing requirements as a fully-reporting issuer registered with the SEC, requirements for XBRL filings, and requirements for disclosure of financial statements on its website; or (xviii) failure of the Company to abide by the terms of the right of first refusal contained in Section 4.00(k).

 

(b)           Remedies .  If an Event of Default occurs, the outstanding Principal Amount of this Note owing in respect thereof through the date of acceleration, shall become, at the Holder's election, immediately due and payable in cash at the “ Mandatory Default Amount ”.  The Mandatory Default Amount means 140% of the outstanding Principal Amount of this Note, will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144.  Commencing 5 days after the occurrence of any Event of Default that results in the eventual acceleration of this Note, this Note shall accrue additional interest, in addition to the Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or the maximum rate permitted under applicable law.  In connection with such acceleration described herein, the Holder need not provide, and the Issuer hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law.  Such acceleration may be rescinded and annulled by the Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the note until such time, if any, as the Holder receives full payment pursuant to this Section 2.00(b).  No such rescission or annulment shall affect any subsequent event of default or impair any right consequent thereon.  Nothing herein shall limit the Holder's right to pursue any other remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer's failure to timely deliver certificates representing shares of Common Stock upon conversion of the Note as required pursuant to the terms hereof.

 

 

 

 

(c)           Conversion Right .  At any time and from time to time after a default occurs solely due to the fact the Note is not retired on or before the Maturity Date (“ Maturity Default ”), subject to the terms hereof and restrictions and limitations contained herein, the Holder shall have the right, at the Holder's sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under this Note into shares of Common Stock at the Maturity Default Conversion Price. The Maturity Default Conversion Price shall be equal to the lower of: (a) the Conversion Price or (b) 65% of the average of the two lowest trading prices of the Company’s common stock during the 20 consecutive Trading Days prior to the date on which Holder elects to convert all or part of the Note.  For the purpose of calculating the Maturity Default Conversion Price only, any time after 4:00 pm Eastern Time (the closing time of the Principal Market) shall be considered to be the beginning of the next Business Day.  If the Company is placed on “chilled” status with the DTC, the discount shall be increased by 10%, i . e ., from 35% to 45%, until such chill is remedied.  If the Company is not DWAC eligible through their Transfer Agent and DTC’s FAST system, the discount will be increased by 5%, i . e ., from 35% to 40%.  In the case of both, the discount shall be a cumulative increase of 15%, i . e ., from 35% to 50%.  The Company shall have 90 days following the Effective Date of this Note to become DWAC eligible without penalty.

 

Section 3.00          Representations and Warranties of Holder .

 

Holder hereby represents and warrants to the Company that:

 

(a)          Holder is an “accredited investor,” as such term is defined in Regulation D of the Securities Act of 1933, as amended (the “ 1933 Act ”), and will acquire this Note and the Underlying Shares (collectively, the “ Securities ”) for its own account and not with a view to a sale or distribution thereof as that term is used in Section 2(a)(11) of the 1933 Act, in a manner which would require registration under the 1933 Act or any state securities laws. Holder has such knowledge and experience in financial and business matters that such Holder is capable of evaluating the merits and risks of the Securities. Holder can bear the economic risk of the Securities, has knowledge and experience in financial business matters and is capable of bearing and managing the risk of investment in the Securities. Holder recognizes that the Securities have not been registered under the 1933 Act, nor under the securities laws of any state and, therefore, cannot be resold unless the resale of the Securities is registered under the 1933 Act or unless an exemption from registration is available. Holder has carefully considered and has, to the extent Holder believes such discussion necessary, discussed with its professional, legal, tax and financial advisors, the suitability of an investment in the Securities for its particular tax and financial situation and its advisers, if such advisors were deemed necessary, and has determined that the Securities are a suitable investment for it. Holder has not been offered the Securities by any form of general solicitation or advertising, including, but not limited to, advertisements, articles, notices or other communications published in any newspaper, magazine, or other similar media or television or radio broadcast or any seminar or meeting where, to Holders’ knowledge, those individuals that have attended have been invited by any such or similar means of general solicitation or advertising. Holder has had an opportunity to ask questions of and receive satisfactory answers from the Company, or any person or persons acting on behalf of the Company, concerning the terms and conditions of the Securities and the Company, and all such questions have been answered to the full satisfaction of Holder. The Company has not supplied Holder any information regarding the Securities or an investment in the Securities other than as contained in this Agreement, and Holder is relying on its own investigation and evaluation of the Company and the Securities and not on any other information.

 

 

 

 

(b)          The Holder is a limited liability company duly organized, validly existing and in good standing under the laws of the state of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted. The Holder is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties.

 

(c)          All corporate action has been taken on the part of the Holder, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Note. The Holder has taken all corporate action required to make all of the obligations of the Holder reflected in the provisions of this Note, valid and enforceable obligations.

 

(d)          Each certificate or instrument representing Securities will be endorsed with the following legend (or a substantially similar legend), unless or until registered under the 1933 Act or exempt from registration:

 

THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES WHICH IS REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.

 

Section 4.00          General .

 

(a)           Payment of Expenses .  The Company agrees to pay all reasonable charges and expenses, including attorneys' fees and expenses, which may be incurred by the Holder in successfully enforcing this Note and/or collecting any amount due under this Note.

 

(b)           Assignment, Etc.   The Holder may assign or transfer this Note to any transferee at its sole discretion.  This Note shall be binding upon the Company and its successors and shall inure to the benefit of the Holder and its successors and permitted assigns.

 

(c)           Amendments .  This Note may not be modified or amended, or any of the provisions of this Note waived, except by written agreement of the Company and the Holder.

 

 

 

 

(d)           Funding Window .  The Company agrees that it will not enter into a convertible debt financing transaction, including 3(a)9 and 3(a)10 transactions, with any party other than the Holder for a period of 30 Trading Days following the Effective Date and each Additional Consideration Date, as relevant. The Company agrees that this is a material term of this Note and any breach of this Section 4.00(d) will result in a default of the Note.

 

(e)           Terms of Future Financings .  So long as this Note is outstanding, upon any issuance by the Company or any of its subsidiaries of any convertible debt security (whether such debt begins with a convertible feature or such feature is added at a later date) with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note, then the Company shall notify the Holder of such additional or more favorable term and such term, at the Holder's option, shall become a part of this Note and its supporting documentation.. The types of terms contained in the other security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, conversion look back periods, interest rates, original issue discount percentages and warrant coverage.

 

(f)           Governing Law; Jurisdiction .

 

(i)          Governing Law.   This Note will be governed by, and construed and interpreted in accordance with, the laws of the state of California without regard to any conflicts of laws or provisions thereof that would otherwise require the application of the law of any other jurisdiction.

 

(ii)         Jurisdiction and Venue .  Any dispute, claim, suit, action or other legal proceeding arising out of or relating to this Note or the rights and obligations of each of the parties shall be brought only in San Diego, California or in the federal courts of the United States of America located in San Diego, California.

 

(iii)        No Jury Trial .  The Company hereto knowingly and voluntarily waives any and all rights it may have to a trial by jury with respect to any litigation based on, or arising out of, under, or in connection with, this Note.

 

(iv)        Delivery of Process by the Holder to the Company .  In the event of an action or proceeding by the Holder against the Company, and only by the Holder against the Company, service of copies of summons and/or complaint and/or any other process that may be served in any such action or proceeding may be made by the Holder via U.S. Mail, overnight delivery service such as FedEx or UPS, email, fax, or process server, or by mailing or otherwise delivering a copy of such process to the Company at its last known attorney as set forth in its most recent SEC filing.

 

(v)         Notices .  Any notice required or permitted hereunder (including Conversion Notices) must be in writing and either personally served, sent by facsimile or email transmission, or sent by overnight courier.  Notices will be deemed effectively delivered at the time of transmission if by facsimile or email, and if by overnight courier the business day after such notice is deposited with the courier service for delivery.

 

(g)           No Bad Actor .  No officer or director of the Company would be disqualified under Rule 506(d) of the Securities Act of 1933, as amended, on the basis of being a “bad actor” as that term is established in the September 13, 2013 Small Entity Compliance Guide published by the SEC.

 

 

 

 

(h)          Usury .  If it shall be found that any interest or other amount deemed interest due hereunder violates any applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law.  The Company covenants (to the extent that it may lawfully do so) that it will not seek to claim or take advantage of any law that would prohibit or forgive the Company from paying all or a portion of the principal, fees, liquidated damages or interest on this Note.

 

(i)           Securities Laws Disclosure; Publicity .  The Company shall (a) by 9:30 a.m. Eastern Time on the Trading Day immediately following the Date of Execution, issue a press release disclosing the material terms of the transactions contemplated hereby, and (b) file a Current Report on Form 8-K, including a copy of this Note as an exhibit thereto, with the SEC within the time required by the 1934 Act.  From and after the filing of such press release, the Company represents to the Holder that it shall have publicly disclosed all material, non-public information delivered to the Holder by the Company, or any of its officers, directors, employees, or agents in connection with the transactions contemplated by this Note.  The Company and the Holder shall consult with each other in issuing any other press releases with respect to the transactions contemplated hereby, and neither the Company nor the Holder shall issue any such press release nor otherwise make any such public statement without the prior consent of the Company, with respect to any press release of the Holder, or without the prior consent of the Holder, with respect to any press release of the Company, none of which consents shall be unreasonably withheld, delayed, denied, or conditioned except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication.  Notwithstanding the foregoing, the Company shall not publicly disclose the name of the Holder, or include the name of the Holder in any filing with the SEC or any regulatory agency or Principal Market, without the prior written consent of the Holder, except to the extent such disclosure is required by law or Principal Market regulations, in which case the Company shall provide the Holder with prior notice of such disclosure permitted hereunder.

 

The Company agrees that this is a material term of this Note and any breach of this Section 4.00(i) will result in a default of the Note.

 

(j)           Attempted Below-par Issuance .  In the event that (i) any requested conversion hereunder shall be at a Conversion Price that is less than then-current par value of the Company’s Common Stock and that any or all of such requested conversion would be precluded by state law or otherwise and (ii) within three business days of the requested conversion, the Company shall not have reduced its par value such that all of the requested conversion may then be accomplished, then the Company and the Holder agree to the following conversion protocol:  the Holder shall generate and transmit to the Company (X) a “preliminary” Conversion Notice for the full number of shares of Common Stock of the above-referenced conversion at the Conversion Price without regard to any below-par value conversion issues; (Y) a “par value” Conversion Notice for the number of shares of Common Stock for the above-referenced conversion with the Conversion Price increased from the Conversion Price set forth in the “preliminary” Conversion Notice to a Conversion Price at par value; and (Z) a “liquidated damages” Conversion Notice for that number of shares of Common Stock that represents the difference between the number of shares of Common Stock in the “preliminary” Conversion Notice and the number of shares of Common Stock in the “par value” Conversion Notice and the Conversion Price of such “liquidated damages Common Shares” would be the par value of the Common Stock.  The Company acknowledges that any failure by it to provide the Holder with its full conversion rights under this Note (as a result of a proposed “below par” conversion) will cause the Holder to incur substantial economic damages and losses of types and in amounts that are impossible to compute and ascertain with certainty as a basis for recovery by the Holder of actual damages and that liquidated damages would represent a fair, reasonable, and appropriate estimate thereof.  Accordingly, in the event that the Holder is precluded from exercising any or all of its conversion rights hereunder as a result of a proposed “below par” conversion, the Company agrees that, in lieu of actual damages for such failure, liquidated damages may be assessed and recovered by the Holder without being required to present any evidence of the amount or character of actual damages sustained by reason thereof.  The amount of such liquidated damages shall be an amount equivalent to the trading price (without discount) utilized in the “preliminary” Conversion Notice multiplied by the number of shares calculated on the “liquidated damages” Conversion Notice.  Such amount shall be assessed and become immediately due and payable to the Holder (at its election) in the form of a cash payment, an addition to the Principal Sum of this Note, or the immediate issuance of that number of shares of Common Stock as calculated on the “liquidated damages” Conversion Notice.  Such liquidated damages are intended to represent estimated actual damages and are not intended to be a penalty, but, by virtue of their genesis and subject to the election of the Holder (as set forth in the immediately preceding sentence), will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144.

 

 

 

 

(k)           Right of First Refusal .  From and after the date of this Note and at all times hereafter while the Note is outstanding, the Parties agree that, in the event that the Company receives any written or oral proposal (the “ Proposal ”) containing one or more offers to provide additional capital or equity or debt financing (the “ Financing Amount ”), the Company agrees that it shall provide a copy of all documents received relating to the Proposal together with a complete and accurate description of the Proposal to the Holder and all amendments, revisions, and supplements thereto (the “ Proposal Documents ”) no later than 3 business days from the receipt of the Proposal Documents. Following receipt of the Proposal Documents from the Company, the Holder shall have the right (the “ Right of First Refusal ”), but not the obligation, for a period of 5 business days thereafter (the “ Exercise Period ”), to invest, at similar or better terms to the Company, an amount equal to or greater than the Financing Amount, upon written notice to the Company that the Holder is exercising the Right of First Refusal provided hereby.  In furtherance of the Right of First Refusal, the Company agrees that it will cooperate and assist the Holder in conducting a due diligence investigation of the Company and its corporate and financial affairs and promptly provide the Holder with information and documents that the Holder may reasonably request so as to allow the Holder to make an informed investment decision.  However, the Company and the Holder agree that the Holder shall have no more than 5 business days from and after the expiration of the Exercise Period to exercise its Right of First Refusal hereunder.  This Right of First Refusal shall extend to all purchases of debt held by, or assigned to or from, current stockholders, vendors, or creditors, all transactions under Sections 3(a)9 and/or 3(a)10 or the Securities Act of 1933, as amended, and all equity line-of-credit transactions.  In the event that the Company does enter into, or makes any issuance of Common Stock related to a 3(a)(9) Transaction or a 3(a)(10) Transaction while this note is outstanding, without giving Right of First Refusal to the Holder, a liquidated damages charge of 25% of the outstanding principal balance of this Note, but not less than $25,000, will be assessed and will become immediately due and payable to the Holder at its election in the form of cash payment or addition to the balance of this Note. Such liquidated damages will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144.

 

[Signature Page to Follow.]

 

 

 

 

IN WITNESS WHEREOF , the Company has caused this Fixed Convertible Promissory Note to be duly executed on the day and in the year first above written.

 

  IRONCLAD ENCRYPTION CORPORATION
   
  By: /s/ J.D. McGraw
     
  Name: J.D. McGraw
     
  Title: President / CEO
     
  Email: jd.mcgraw@ironcladencryption.com
     
  Address:   777 S. Post Oak Ln., Suite 1700
    Houston, Texas 77056

 

This Fixed Convertible Promissory Note of August 24, 2017 is accepted this 24 day of August, 2017 by

 

TANGIERS GLOBAL, LLC

 

By: /s/ Michael Sobeck  
  Name: Michael Sobeck  
  Title: Managing Member  

 

 

 

Exhibit 10.14

 

Note: August 24, 2017

 

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN THE EVENT OF A PARTIAL REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR CONVERSION OF ANY PORTION OF THIS NOTE, THE OUTSTANDING PRINCIPAL SUM REPRESENTED BY THIS NOTE MAY BE LESS THAN THE PRINCIPAL SUM AND ACCRUED INTEREST SET FORTH BELOW.

 

10% FIXED CONVERTIBLE PROMISSORY NOTE

 

OF

 

IRONCLAD ENCRYPTION CORPORATION

 

Issuance Date: August 24, 2017

Total Face Value of Note: $100,000

 

This Note is a duly authorized Fixed Convertible Promissory Note of Ironclad Encryption Corporation a corporation duly organized and existing under the laws of the State of Nevada ( the “ Company ”), designated as the Company's 10% Fixed Convertible Promissory Note due March 24, 2018 ( “Maturity Date” ) in the principal amount of $100,000 (the “ Commitment Fee” ).

 

For Value Received , the Company hereby promises to pay to the order of Tangiers Global, LLC or its registered assigns or successors-in-interest ( “Holder” ) the Principal Sum of $100,000 (the “ Principal Sum ”) and to pay “guaranteed” interest on the principal balance hereof at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest and any other interest, fees, liquidated damages and/or items due to Holder herein have not been repaid or converted into the Company's Common Stock (the “Common Stock” ), in accordance with the terms hereof.

 

In the event that the Company’s S-1 is declared effective within 90 days following document execution, $35,000 will be automatically deducted from the balance of this Commitment Fee Note, in the event that the S-1 is declared effective within 135 days (but more than 90 days) following document execution, $17,500 will be automatically deducted from the balance of this Commitment Fee Note.

 

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In addition to the “guaranteed” interest referenced above, and in the Event of Default pursuant to Section 2.00(a), additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate permitted by law (the “ Default Rate ”).

 

This Note will become effective only upon the execution by both parties, including the execution of Exhibits B, C, D, the Irrevocable Transfer Agent Instructions and the August 24, 2017 Investment Agreement (the “ Date of Execution ”) between the Company and Holder (the “ Effective Date ”).

 

This Note may not be prepaid by the Company, in whole or in part, at any time without approval by the Holder.

 

For purposes hereof the following terms shall have the meanings ascribed to them below:

 

“Business Day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the City of New York are authorized or required by law or executive order to remain closed.

 

“Conversion Price” shall be fixed at a price equal to $3.25 .

 

Principal Amount ” shall refer to the sum of (i) the original principal amount of this Note (including the original issue discount, prorated if the Note has not been funded in full), (ii) all guaranteed and other accrued but unpaid interest hereunder, (iii) any fees due hereunder, (iv) liquidated damages, and (v) any default payments owing under the Note, in each case previously paid or added to the Principal Amount.

 

Principal Market ” shall refer to the primary exchange on which the Company’s common stock is traded or quoted.

 

“Trading Day” shall mean a day on which there is trading or quoting for any security on the Principal Market.

 

“Underlying Shares” means the shares of common stock into which the Note is convertible (including interest, fees, liquidated damages and/or principal payments in common stock as set forth herein) in accordance with the terms hereof.

 

The following terms and conditions shall apply to this Note:

 

Section 1.00         Conversion .

 

(a)           Conversion Right . Subject to the terms hereof and restrictions and limitations contained herein, the Holder shall have the right, at the Holder's sole option, at any time and from time to time to convert in whole or in part the outstanding and unpaid Principal Amount under this Note into shares of Common Stock as per the Conversion Price, but not to exceed the Restricted Ownership Percentage, as defined in Section 1.00(f). The date of any conversion notice (“ Conversion Notice ”) hereunder shall be referred to herein as the “Conversion Date” . The Conversion Price shall be equitably adjusted in the event of a forward split, stock dividend, or the like, but shall not be adjusted in the event of a reverse split, recombination, or the like.

 

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(b)           Stock Certificates or DWAC . The Company will deliver to the Holder, or Holder’s authorized designee, no later than 2 Trading Days after the Conversion Date, a certificate or certificates (which certificate(s) shall be free of restrictive legends and trading restrictions if the shares of Common Stock underlying the portion of the Note being converted are eligible under a resale exemption pursuant to Rule 144(b)(1)(ii) and Rule 144(d)(1)(ii) of the Securities Act of 1933, as amended) representing the number of shares of Common Stock being acquired upon the conversion of this Note. In lieu of delivering physical certificates representing the shares of Common Stock issuable upon conversion of this Note, provided the Company's transfer agent is participating in DTC’s FAST program, the Company shall instead use commercially reasonable efforts to cause its transfer agent to electronically transmit such shares issuable upon conversion to the Holder (or its designee), by crediting the account of the Holder’s (or such designee’s) broker with DTC through its DWAC program (provided that the same time periods herein as for stock certificates shall apply).

 

(c)           Charges and Expenses . Issuance of Common Stock to Holder, or any of its assignees, upon the conversion of this Note shall be made without charge to the Holder for any issuance fee, transfer tax, legal opinion and related charges, postage/mailing charge or any other expense with respect to the issuance of such Common Stock. Company shall pay all Transfer Agent fees incurred from the issuance of the Common Stock to Holder, as well as any and all other fees and charges required by the Transfer Agent as a condition to effectuate such issuance. Any such fees or charges, as noted in this Section that are paid by the Holder (whether from the Company’s delays, outright refusal to pay, or otherwise), will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144.

 

(d)           Delivery Timeline . If the Company fails to deliver to the Holder such certificate or certificates (or shares through the DWAC program) pursuant to this Section (free of any restrictions on transfer or legends, if eligible) prior to 3 Trading Days after the Conversion Date, the Company shall pay to the Holder as liquidated damages an amount equal to $2,000 per day, until such certificate or certificates are delivered. The Company acknowledges that it would be extremely difficult or impracticable to determine the Holder’s actual damages and costs resulting from a failure to deliver the Common Stock and the inclusion herein of any such additional amounts are the agreed upon liquidated damages representing a reasonable estimate of those damages and costs. Such liquidated damages will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144.

 

(e)           Reservation of Underlying Securities . The Company covenants that it will at all times reserve and keep available for Holder, out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of this Note, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder, five times the number of shares of Common Stock as shall be issuable (taking into account the adjustments under this Section 1.00, but without regard to any ownership limitations contained herein) upon the conversion of this Note (consisting of the Principal Amount), under the formula in Section 2.00(c), to Common Stock (the “ Required Reserve ”). The Company covenants that all shares of Common Stock that shall be issuable will, upon issue, be duly authorized, validly issued, fully-paid, non-assessable and freely-tradable (if eligible). If the amount of shares on reserve in Holder’s name at the Company’s transfer agent for this Note shall drop below the Required Reserve, the Company will, within 2 Trading Days of notification from Holder, instruct the transfer agent to increase the number of shares so that the Required Reserve is met. In the event that the Company does not instruct the transfer agent to increase the number of shares so that the Required Reserve is met, the Holder will be allowed, if applicable, to provide this instruction as per the terms of the Irrevocable Transfer Agent Instructions attached to this Note. The Company agrees that the maintenance of the Required Reserve is a material term of this Note and any breach of this Section 1.00(e) will result in a default of the Note.

 

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The Company agrees that this is a material term of this Note and any breach of this Section 1.00(e) will result in a default of the Note.

 

(f)            Conversion Limitation . The Holder will not submit a conversion to the Company that would result in the Holder beneficially owning more than 9.99% of the then total outstanding shares of the Company (“ Restricted Ownership Percentage ”).

 

(g)           Conversion Delays . If the Company fails to deliver shares in accordance with the timeframe stated in Section 1.00(b), the Holder, at any time prior to selling all of those shares, may rescind any portion, in whole or in part, of that particular conversion attributable to the unsold shares. The rescinded conversion amount will be returned to the Principal Sum with the rescinded conversion shares returned to the Company, under the expectation that any returned conversion amounts will tack back to the Effective Date.

 

(h)           Shorting and Hedging . Holder may not engage in any “shorting” or “hedging” transaction(s) in the Common Stock prior to conversion.

 

(i)            Conversion Right Unconditional . If the Holder shall provide a Conversion Notice as provided herein, the Company's obligations to deliver Common Stock shall be absolute and unconditional, irrespective of any claim of setoff, counterclaim, recoupment, or alleged breach by the Holder of any obligation to the Company.

 

Section 2.00         Defaults and Remedies .

 

(a)           Events of Default . An “ Event of Default ” is: (i) a default in payment of any amount due hereunder which default continues for more than 5 Trading Days after the due date; (ii) a default in the timely issuance of underlying shares upon and in accordance with terms of Section 1.00, which default continues for 2 Trading Days after the Company has failed to issue shares or deliver stock certificates within the 3rd Trading Day following the Conversion Date; (iii) if the Company does not issue the press release or file the Current Report on Form 8-K, in each case in accordance with the provisions and the deadlines referenced Section 4.00(i); (iv) failure by the Company for 3 days after notice has been received by the Company to comply with any material provision of this Note; (v) failure of the Company to remain compliant with DTC, thus incurring a “chilled” status with DTC; (vi) any default of any mortgage, indenture or instrument which may be issued, or by which there may be secured or evidenced any indebtedness, for money borrowed by the Company or for money borrowed the repayment of which is guaranteed by the Company, whether such indebtedness or guarantee now exists or shall be created hereafter; (vii) if the Company is subject to any Bankruptcy Event; (viii) any failure of the Company to satisfy its “filing” obligations under Securities Exchange Act of 1934, as amended (the “ 1934 Act ”) and the rules and guidelines issued by OTC Markets News Service, OTCMarkets.com and their affiliates; (ix) failure of the Company to remain in good standing under the laws of its state of domicile; (x) any failure of the Company to provide the Holder with information related to its corporate structure including, but not limited to, the number of authorized and outstanding shares, public float, etc. within 1 Trading Day of request by Holder; (xi) failure by the Company to maintain the Required Reserve in accordance with the terms of Section 1.00(e); (xii) failure of Company’s Common Stock to maintain a closing bid price in its Principal Market for more than 3 consecutive Trading Days; (xiii) any delisting from a Principal Market for any reason; (xiv) failure by Company to pay any of its Transfer Agent fees in excess of $2,000 or to maintain a Transfer Agent of record; (xv) failure by Company to notify Holder of a change in Transfer Agent within 24 hours of such change; (xvi) any trading suspension imposed by the United States Securities and Exchange Commission (the “ SEC ”) under Sections 12(j) or 12(k) of the 1934 Act; or (xvii) failure by the Company to meet all requirements necessary to satisfy the availability of Rule 144 to the Holder or its assigns, including but not limited to the timely fulfillment of its filing requirements as a fully-reporting issuer registered with the SEC, requirements for XBRL filings, and requirements for disclosure of financial statements on its website.

 

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(b)           Remedies . If an Event of Default occurs, the outstanding Principal Amount of this Note owing in respect thereof through the date of acceleration, shall become, at the Holder's election, immediately due and payable in cash at the “ Mandatory Default Amount ”. The Mandatory Default Amount means 140% of the outstanding Principal Amount of this Note, will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144. Commencing 5 days after the occurrence of any Event of Default that results in the eventual acceleration of this Note, this Note shall accrue additional interest, in addition to the Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or the maximum rate permitted under applicable law. In connection with such acceleration described herein, the Holder need not provide, and the Issuer hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. No such rescission or annulment shall affect any subsequent event of default or impair any right consequent thereon. Nothing herein shall limit the Holder's right to pursue any other remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer's failure to timely deliver certificates representing shares of Common Stock upon conversion of the Note as required pursuant to the terms hereof.

 

(c)           Conversion Right . At any time and from time to time after a default occurs solely due to the fact the Note is not retired on or before the Maturity Date (“ Maturity Default ”), subject to the terms hereof and restrictions and limitations contained herein, the Holder shall have the right, at the Holder's sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under this Note into shares of Common Stock at the Maturity Default Conversion Price. The Maturity Default Conversion Price shall be equal to the lower of: (a) the Conversion Price or (b) 65% of the average of the two lowest trading prices of the Company’s common stock during the 20 consecutive Trading Days prior to the date on which the Holder elects to convert all or part of the Note. For the purpose of calculating the Maturity Default Conversion Price only, any time after 4:00 pm Eastern Time (the closing time of the Principal Market) shall be considered to be the beginning of the next Business Day. If the Company is placed on “chilled” status with the DTC, the discount shall be increased by 10%, i . e ., from 35% to 45%, until such chill is remedied. If the Company is not DWAC eligible through their Transfer Agent and DTC’s FAST system, the discount will be increased by 5%, i . e ., from 35% to 40%. In the case of both, the discount shall be a cumulative increase of 15%, i . e ., from 35% to 50%. The Company shall have 90 days following the Effective Date of this Note to become DWAC eligible without penalty.

 

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Section 3.00         Representations and Warranties of Holder .

 

Holder hereby represents and warrants to the Company that:

 

(a)          Holder is an “accredited investor,” as such term is defined in Regulation D of the Securities Act of 1933, as amended (the “ 1933 Act ”), and will acquire this Note and the Underlying Shares (collectively, the “ Securities ”) for its own account and not with a view to a sale or distribution thereof as that term is used in Section 2(a)(11) of the 1933 Act, in a manner which would require registration under the 1933 Act or any state securities laws. Holder has such knowledge and experience in financial and business matters that such Holder is capable of evaluating the merits and risks of the Securities. Holder can bear the economic risk of the Securities, has knowledge and experience in financial business matters and is capable of bearing and managing the risk of investment in the Securities. Holder recognizes that the Securities have not been registered under the 1933 Act, nor under the securities laws of any state and, therefore, cannot be resold unless the resale of the Securities is registered under the 1933 Act or unless an exemption from registration is available. Holder has carefully considered and has, to the extent Holder believes such discussion necessary, discussed with its professional, legal, tax and financial advisors, the suitability of an investment in the Securities for its particular tax and financial situation and its advisers, if such advisors were deemed necessary, and has determined that the Securities are a suitable investment for it. Holder has not been offered the Securities by any form of general solicitation or advertising, including, but not limited to, advertisements, articles, notices or other communications published in any newspaper, magazine, or other similar media or television or radio broadcast or any seminar or meeting where, to Holders’ knowledge, those individuals that have attended have been invited by any such or similar means of general solicitation or advertising. Holder has had an opportunity to ask questions of and receive satisfactory answers from the Company, or any person or persons acting on behalf of the Company, concerning the terms and conditions of the Securities and the Company, and all such questions have been answered to the full satisfaction of Holder. The Company has not supplied Holder any information regarding the Securities or an investment in the Securities other than as contained in this Agreement, and Holder is relying on its own investigation and evaluation of the Company and the Securities and not on any other information.

 

(b)          The Holder is a limited liability company duly organized, validly existing and in good standing under the laws of the state of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted. The Holder is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties.

 

(c)          All corporate action has been taken on the part of the Holder, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Note. The Holder has taken all corporate action required to make all of the obligations of the Holder reflected in the provisions of this Note, valid and enforceable obligations.

 

(d)          Each certificate or instrument representing Securities will be endorsed with the following legend (or a substantially similar legend), unless or until registered under the 1933 Act or exempt from registration:

 

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THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES WHICH IS REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.

 

Section 4.00         General .

 

(a)           Payment of Expenses . The Company agrees to pay all reasonable charges and expenses, including attorneys' fees and expenses, which may be incurred by the Holder in successfully enforcing this Note and/or collecting any amount due under this Note.

 

(b)           Assignment, Etc. The Holder may assign or transfer this Note to any transferee at its sole discretion. This Note shall be binding upon the Company and its successors and shall inure to the benefit of the Holder and its successors and permitted assigns.

 

(c)           Amendments . This Note may not be modified or amended, or any of the provisions of this Note waived, except by written agreement of the Company and the Holder.

 

(d)           Piggyback Registration Rights . Purposely withheld

 

(e)           Terms of Future Financings . So long as this Note is outstanding, upon any issuance by the Company or any of its subsidiaries of any convertible debt security (whether such debt begins with a convertible feature or such feature is added at a later date) with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note, then the Company shall notify the Holder of such additional or more favorable term and such term, at the Holder's option, shall become a part of this Note and its supporting documentation.. The types of terms contained in the other security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, conversion look back periods, interest rates, original issue discount percentages and warrant coverage.

 

(f)            Governing Law; Jurisdiction .

 

(i)          Governing Law. This Note will be governed by, and construed and interpreted in accordance with, the laws of the State of California without regard to any conflicts of laws or provisions thereof that would otherwise require the application of the law of any other jurisdiction.

 

(ii)         Jurisdiction and Venue . Any dispute, claim, suit, action or other legal proceeding arising out of or relating to this Note or the rights and obligations of each of the parties shall be brought only in San Diego, California or in the federal courts of the United States of America located in San Diego, California.

 

(iii)        No Jury Trial . The Company hereto knowingly and voluntarily waives any and all rights it may have to a trial by jury with respect to any litigation based on, or arising out of, under, or in connection with, this Note.

 

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(iv)        Delivery of Process by the Holder to the Company . In the event of an action or proceeding by the Holder against the Company, and only by the Holder against the Company, service of copies of summons and/or complaint and/or any other process that may be served in any such action or proceeding may be made by the Holder via U.S. Mail, overnight delivery service such as FedEx or UPS, email, fax, or process server, or by mailing or otherwise delivering a copy of such process to the Company at its last known attorney as set forth in its most recent SEC filing.

 

(v)         Notices . Any notice required or permitted hereunder (including Conversion Notices) must be in writing and either personally served, sent by facsimile or email transmission, or sent by overnight courier. Notices will be deemed effectively delivered at the time of transmission if by facsimile or email, and if by overnight courier the business day after such notice is deposited with the courier service for delivery.

 

(g)           No Bad Actor . No officer or director of the Company would be disqualified under Rule 506(d) of the Securities Act of 1933, as amended, on the basis of being a “bad actor” as that term is established in the September 13, 2013 Small Entity Compliance Guide published by the SEC.

 

(h)           Usury . If it shall be found that any interest or other amount deemed interest due hereunder violates any applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it will not seek to claim or take advantage of any law that would prohibit or forgive the Company from paying all or a portion of the principal, fees, liquidated damages or interest on this Note.

 

(i)            Securities Laws Disclosure; Publicity . The Company shall (a) by 9:30 a.m. Eastern Time on the Trading Day immediately following the Date of Execution, issue a press release disclosing the material terms of the transactions contemplated hereby, and (b) file a Current Report on Form 8-K, including a copy of this Note as an exhibit thereto, with the SEC within the time required by the 1934 Act. From and after the filing of such press release, the Company represents to the Holder that it shall have publicly disclosed all material, non-public information delivered to the Holder by the Company, or any of its officers, directors, employees, or agents in connection with the transactions contemplated by this Note. The Company and the Holder shall consult with each other in issuing any other press releases with respect to the transactions contemplated hereby, and neither the Company nor the Holder shall issue any such press release nor otherwise make any such public statement without the prior consent of the Company, with respect to any press release of the Holder, or without the prior consent of the Holder, with respect to any press release of the Company, none of which consents shall be unreasonably withheld, delayed, denied, or conditioned except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of the Holder, or include the name of the Holder in any filing with the SEC or any regulatory agency or Principal Market, without the prior written consent of the Holder, except to the extent such disclosure is required by law or Principal Market regulations, in which case the Company shall provide the Holder with prior notice of such disclosure permitted hereunder.

 

The Company agrees that this is a material term of this Note and any breach of this Section 4.00(i) will result in a default of the Note.

 

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(j)            Attempted Below-par Issuance . In the event that the Holder delivers a Conversion Notice to the Company and, if as of such date, (i) the Conversion Price would be less than par value of the Company’s Common Stock and (ii) within three business days of the delivery of the Conversion Notice, the Company shall not have reduced its par value such that all of the requested conversion transaction may then be accomplished, then the Company and the Holder shall utilize the following conversion protocol for Par Value Adjustment. The Holder shall transmit to the Company: (X) a “preliminary” Conversion Notice for the full number of shares of Common Stock that would be issued at the Conversion Price without regard to any below-par value conversion issues; followed by (Y) a “par value” Conversion Notice for the number of shares of Common Stock with the Conversion Price increased from the “preliminary” Conversion Price to a Conversion Price at par value; and, finally, (Z) a “liquidated damages” Conversion Notice for that number of shares of Common Stock that represents the difference between the “preliminary” Conversion Notice full number of shares and the “par value” Conversion Notice limited number of shares. The Conversion Price of such “liquidated damages Common Shares” would be the par value of the Common Stock. Accordingly, through this protocol, the Company would issue, in two transactions, an amount of shares of its Common Stock equivalent to the full number of shares of Common Stock that would have been issued in accordance with the “preliminary” Conversion Notice without regard to any below-par value conversion issues. In the event that the Holder is precluded from exercising any or all of its conversion rights hereunder as a result of a proposed “below par” conversion, the Company agrees that, in lieu of actual damages for such failure, liquidated damages may be assessed and recovered by the Holder without being required to present any evidence of the amount or character of actual damages sustained by reason thereof. The amount of such liquidated damages shall be an amount equivalent to the trading price utilized in the “preliminary” Conversion Notice multiplied by the number of shares calculated on the “liquidated damages” Conversion Notice. Such amount shall be assessed and become immediately due and payable to the Holder (at its election) in the form of a (i) cash payment, (ii) an addition to the Principal Sum of this Note, or (iii) the immediate issuance of that number of shares of Common Stock as calculated on the “liquidated damages” Conversion Notice. Such liquidated damages are intended to represent estimated actual damages and are not intended to be a penalty, but, by virtue of their genesis and subject to the election of the Holder (as set forth in the immediately preceding sentence), will be automatically added to the Principal Sum of the Note and tack back to the Effective Date for purposes of Rule 144, as the Company’s failure to maintain the par value of its Common Stock at an amount that would not result in a “below par” conversion failure is equivalent to a default as of the Issuance Date of the Note.

 

[Signature Page to Follow.]

 

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IN WITNESS WHEREOF , the Company has caused this Fixed Convertible Promissory Note to be duly executed on the day and in the year first above written.

 

  IRONCLAD ENCRYPTION CORPORATION
     
  By: /s/ J.D. McGraw
     
  Name: J.D. McGraw
     
  Title: President / CEO
  Email: jd.mcgraw@ironcladencryption.com
     
  Address: 777 S. Post Oak Ln, Suite 1700
    Houston, TX 77056

 

This Fixed Convertible Promissory Note of August 24, 2017 is accepted this 24 day of August, 2017 by

 

TANGIERS GLOBAL, LLC

 

By: /s/ Michael Sobeck  
  Name: Michael Sobeck  
  Title: Managing Member  

 

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Exhibit 23.1

 

 

802 N. Washington

Spokane, WA

 

 

Consent of Independent Registered Public Accounting Firm

 

We consent to the inclusion in this Registration Statement on Form S-1 of our audit report dated March 31, 2017, with respect to the balance sheets of Ironclad Encryption Corporation as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ equity, and cash flows for the periods then ended, appearing in the Annual Report on Form 10-K for the year ended December 31, 2016. Our report dated March 31, 2017, relating to aforementioned financial statements, includes an emphasis paragraph relating to an uncertainty as to the Company’s ability to continue as a going concern.

 

We also consent to the reference to us under the heading “Experts” in such registration statement.

 

 

 

Fruci & Associates II, PLLC

October 16, 2017