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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2016
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from
to
Commission file number 000-53862
iGambit Inc.
(Exact name of small business issuer as specified in its charter)
Delaware
11-3363609
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1050 W. Jericho Turnpike, Suite A
Smithtown, New York 11787
(Address of Principal Executive Offices) (Zip Code)
(631) 670-6777
(Issuer’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Accelerated filer
Non-accelerated filer
Smaller reporting
filer
company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No
The Registrant had 39,683,990 shares of its common stock outstanding as of May 23, 2016.
iGambit Inc.
Form 10-Q
Page
No.
Part I — Financial Information
Financial Statements:
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Income
4
Condensed Consolidated Statements of Cash Flows
5
Notes to Condensed Consolidated Financial Statements
6
Item 2 .
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
21
Quantitative and Qualitative Disclosures About Market Risk
30
Controls and Procedures
30
Part II — Other Information
Item 1 .
Legal Proceedings
31
Risk Factors
31
Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 3 .
Defaults upon Senior Securities
31
Removed and Reserved
31
Other Information
31
Item 6 .
Exhibits
31
1
IGAMBIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31,
2016
DECEMBER 31,
(Unaudited)
2015
ASSETS
Current assets
Cash
$
24,375
$
131,987
Accounts receivable, net
329,682
230,182
Inventories
21,160
21,160
Employee advances
1,600
--
Prepaid expenses
194,180
244,592
Assets from discontinued operations, net
154,075
262,765
Total current assets
725,072
890,686
Property and equipment, net
34,143
40,433
Other assets
Goodwill
6,705,157
6,705,157
Deposits
1,720
1,720
Total other assets
6,706,877
6,706,877
$
7,466,092
$
7,637,996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses
$
634,161
$
636,633
Accrued interest on notes payable
345,690
291,107
Accrued interest on notes payable - related party
20,565
11,171
Amounts due to related parties
82,648
74,871
Deferred revenue, current portion
736,604
811,227
2
Notes payable, current portion
784,849
779,750
Note payable - related party, current portion
156,566
156,566
Notes payable - other
164,781
--
Liabilities from discontinued operations
23,769
127,353
Total current liabilities
2,949,633
2,888,678
Long-term liabilities
Deferred revenue, net of current portion
385,063
379,052
Notes payable
2,339,251
2,339,251
Note payable - related party
469,699
469,699
Total long-term liabilities
3,194,013
3,188,002
Total liabilities
6,143,646
6,076,680
Stockholders' equity
Preferred stock, $.001 par value; authorized - 100,000,000 shares;
issued and outstanding - 0 shares in 2016 and 2015, respectively
--
--
Common stock, $.001 par value; authorized - 200,000,000 shares;
issued and outstanding - 39,683,990 shares in 2016 and
2015, respectively
39,684
39,684
Additional paid-in capital
4,320,022
4,320,022
Accumulated deficit
(3,037,260)
(2,798,390)
Total stockholders' equity
1,322,446
1,561,316
$
7,466,092
$
7,637,996
See accompanying notes to the condensed consolidated financial statements.
3
IGAMBIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2016
2015
Sales:
Hardware and software
$
72,806
$
300,347
Support and maintenance
330,944
--
Total sales
403,750
300,347
Cost of sales
3,191
135,622
Gross profit
400,559
164,725
Operating expenses
General and administrative expenses
558,653
307,919
Loss from operations
(158,094)
(143,194)
Other income (expenses)
Interest expense
(84,334)
(1,703)
Loss from continuing operations
(242,428)
(144,897)
Income from discontinued operations
3,558
--
Net loss
$ (238,870)
$ (144,897)
Basic and fully diluted earnings (loss) per common share:
Continuing operations
$
(.01)
$
(.01)
Discontinued operations
$
.00
$
.00
Net earnings per common share
$
(.01)
$
(.01)
Weighted average common shares outstanding - basic
39,683,990
26,583,900
See accompanying notes to the condensed consolidated financial statements.
4
IGAMBIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(238,870)
$
(144,897)
Adjustments to reconcile net loss to net
cash used in operating activities
Income from discontinued operations
(3,558)
--
Depreciation
6,290
1,306
Stock-based compensation expense
--
11,998
Increase (Decrease) in cash flows as a result of
changes in asset and liability account balances:
Accounts receivable
(99,500)
(29,858)
Employee advances
(1,600)
--
Prepaid expenses
50,412
25,675
Accounts payable and accrued expenses
(2,472)
15,920
Accrued interest on notes payable
63,977
--
Deferred revenue
(68,612)
--
Net cash used in continuing operating activities
(293,933)
(119,856)
Net cash provided by discontinued operating activities
8,664
--
NET CASH USED IN OPERATING ACTIVITIES
(285,269)
(119,856)
NET CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment
--
(5,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholders' loans
--
30,180
Proceeds from notes payable
169,880
--
Increase in amounts due to related parties
7,777
--
NET CASH PROVIDED BY FINANCING ACTIVITIES
177,657
30,180
NET DECREASE IN CASH
(107,612)
(94,702)
CASH - BEGINNING OF PERIOD
131,987
133,436
CASH - END OF PERIOD
$
24,375
$
38,734
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
2,927
$
1,703
See accompanying notes to the condensed consolidated financial statements.
5
IGAMBIT INC.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2016 and 2015
The consolidated financial statements presented are those of iGambit Inc., (the
“Company”) and its wholly-owned subsidiaries, Wala, Inc. doing business as Arcmail
Technology (“ArcMail”) and Gotham Innovation Lab Inc. (“Gotham”). The Company
was incorporated under the laws of the State of Delaware on April 13, 2000. The
Company was originally incorporated as Compusations Inc. under the laws of the State of
New York on October 2, 1996. The Company changed its name to BigVault.com Inc.
upon changing its state of domicile on April 13, 2000. The Company changed its name
again to bigVault Storage Technologies Inc. on December 21, 2000 before changing to
iGambit Inc. on April 5, 2006. Gotham was incorporated under the laws of the state of
New York on September 23, 2009. The Company is a holding company which seeks out
acquisitions of operating companies in technology markets. ArcMail provides email
archive solutions to domestic and international businesses through hardware and software
sales, support, and maintenance. Gotham is in the business of providing media
technology services to real estate agents and brokers in the New York metropolitan area.
Interim Financial Statements
The following (a) condensed consolidated balance sheet as of December 31, 2015, which
has been derived from audited financial statements, and (b) the unaudited condensed
consolidated interim financial statements of the Company have been prepared in
accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 2016 are not
necessarily indicative of results that may be expected for the year ending December 31,
2016. These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for the year ended
December 31, 2015 included in the Company’s Annual Report on Form 10-K, filed with
the Securities and Exchange Commission (“SEC”) on April 14, 2016.
Business Acquisition
On November 4, 2015, the Company acquired Wala, Inc. doing business as ArcMail
Technology in accordance with a stock purchase agreement. Pursuant to the stock
purchase agreement, the total consideration paid for the outstanding capital stock of Wala
was 11,500,000 shares of iGambit common stock, valued at $.10 per share.
The
following table presents the allocation of the value of the common shares issued for
ArcMail to the acquired identifiable assets, liabilities assumed and goodwill:
6
Common shares issued, valued at $.10 per share
$ 1,150,000
Cash
$
10,198
Accounts receivable, net
205,208
Inventories
21,160
Prepaid expenses
276
Fixed assets
41,235
Total identifiable assets
6278,077
Accounts payable and accrued expenses
(442,300)
Accrued interest
(254,718)
Deferred revenue
(1,254,865)
Note payable
(3,881,351)
Total liabilities assumed
(5,833,234)
Excess of liabilities assumed over identifiable assets
5,555,157
Total goodwill
$ 6,705,157
The results of operations of ArcMail have been included in the consolidated statements of
operations for the three months ended March 31, 2016. The following table presents pro
forma results of operations of the Company and ArcMail as if the companies had been
combined as of January 1, 2014. The pro forma condensed combined financial
information is presented for informational purposes only. The unaudited pro forma results
of operations are not necessarily indicative of results that would have occurred had the
acquisition taken place at the beginning of the earliest period presented, or of future
results.
December 31,
December 31,
2015
2014
Pro forma revenue
$
1,876,313
$
3,423,954
Pro forma gross profit
$
1,791,518
$
2,579,661
Pro forma loss from operations
$
(703,699)
$
(1,381,581)
Pro forma net loss
$
(496,347)
$
(1,828,332)
Sale of Business
On November 5, 2015, pursuant to an asset purchase agreement Gotham sold assets
consisting of fixed assets, client and supplier lists, trade names, software, social media
accounts and websites, and domain names to VHT, Inc., a Delaware corporation for a
purchase price of $600,000. Gotham received $400,000 and commencing on January 29,
2016, VHT, Inc. shall pay twelve equal monthly installments of $16,667 on the last
7
business day of each month (the “Installment Payments” and each, an “Installment
Payment”), each Installment Payment to consist of (1) an earn-out payment of $10,000
(the “Earn-Out Payments” and each, an “Earn-Out Payment”), and (2) an additional
payment of $6,667 (the “Additional Payments” and each, an “Additional Payment”);
provided that VHT, Inc. shall only be required to make the Earn-Out Payments for as
long as it maintains its relationship with Gotham’s major client, unless it is dissatisfied
with VHT, Inc.
The assets and liabilities of the discontinued operations are presented in the consolidated
balance sheets under the captions “Assets from discontinued operations” and “Liabilities
from discontinued operations”, respectively. The underlying assets and liabilities of the
discontinued operations as of March 31, 2016 and December 31, 2015 are presented as
follows:
2016
2015
Assets:
Cash
$
56
$
13,893
Accounts receivable, net
152,519
247,372
Prepaid expenses
1,500
1,500
Total assets
$
154,075
$
262,765
Liabilities:
Accounts payable and accrued expenses
19,333
117,417
Note payable - related party
4,436
9,936
$
23,769
$
127,353
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Wala, Inc. and Gotham Innovation Lab, Inc. All
intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
8
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash, accounts receivable,
prepaid expenses, accounts payable, accrued interest, deferred revenue, and amounts due
to related parties, the carrying amounts approximate fair value due to their short
maturities. Additionally, there are no assets or liabilities for which fair value is
remeasured on a recurring basis.
Revenue Recognition
The Company recognizes revenue from product sales when the following four revenue
recognition criteria are met: persuasive evidence of an arrangement exists, an equipment
order has been placed with the vendor, the selling price is fixed or determinable, and
collectability is reasonably assured. Revenues from maintenance contracts covering
multiple future periods are recognized during the current periods and deferred revenue is
recorded for future periods and classified as current or noncurrent, depending on the
terms of the contracts.
Gotham’s revenues were derived primarily from the sale of products and services
rendered to real estate brokers. Gotham recognized revenues when the services or
products have been provided or delivered, the fees charged are fixed or determinable,
Gotham and its customers understood the specific nature and terms of the agreed upon
transactions, and collectability was reasonably assured.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the three
months ended March 31, 2016 and 2015 were $27,323 and $1,325, respectively.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking and
money market accounts and any highly liquid debt instruments purchased with a maturity
of three months or less.
Accounts Receivable
The Company analyzes the collectability of accounts receivable from continuing
operations each accounting period and adjusts its allowance for doubtful accounts
accordingly. A considerable amount of judgment is required in assessing the realization
of accounts receivables, including the creditworthiness of each customer, current and
historical collection history and the related aging of past due balances. The Company
evaluates specific accounts when it becomes aware of information indicating that a
customer may not be able to meet its financial obligations due to deterioration of its
financial condition, lower credit ratings, bankruptcy or other factors affecting the ability
to render payment. Allowance for doubtful accounts was $8,345 at March 31, 2016 and
9
December 31, 2015, respectively. There was no bad debt expense charged to operations
for the three months ended March 31, 2016 and 2015, respectively.
Inventories
Inventories consisting of finished products are stated at the lower of cost or market. Cost
is determined on an average cost basis.
Property and equipment and depreciation
Property and equipment are stated at cost. Maintenance and repairs are charged to
expense when incurred. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the respective
accounts and any gain or loss is credited or charged to income. Depreciation for both
financial reporting and income tax purposes is computed using combinations of the
straight line and accelerated methods over the estimated lives of the respective assets as
follows:
Office equipment and fixtures
5 - 7 years
Computer hardware
5 years
Computer software
3 years
Development equipment
5 years
Goodwill
Goodwill represents the excess of liabilities assumed over assets acquired of ArcMail and
the fair market value of the common shares issued by the Company for the acquisition of
ArcMail. In accordance with ASC Topic No. 350 “Intangibles – Goodwill and Other”),
the goodwill is not being amortized, but instead will be subject to an annual assessment
of impairment by applying a fair-value based test, and will be reviewed more frequently
if current events and circumstances indicate a possible impairment. An impairment loss is
charged to expense in the period identified. If indicators of impairment are present and
future cash flows are not expected to be sufficient to recover the asset’s carrying amount,
an impairment loss is charged to expense in the period identified. A lack of projected
future operating results from ArcMail’s operations may cause impairment. As the
acquisition of ArcMail occurred on November 4, 2015, it is too early for management to
evaluate whether goodwill has been impaired. No impairment was recorded during the
three months ended March 31, 2016.
Long-Lived Assets
The Company assesses the valuation of components of its property and equipment and
other long-lived assets whenever events or circumstances dictate that the carrying value
might not be recoverable. The Company bases its evaluation on indicators such as the
nature of the assets, the future economic benefit of the assets, any historical or future
profitability measurements and other external market conditions or factors that may be
10
present. If such factors indicate that the carrying amount of an asset or asset group may
not be recoverable, the Company determines whether an impairment has occurred by
analyzing an estimate of undiscounted future cash flows at the lowest level for which
identifiable cash flows exist. If the estimate of undiscounted cash flows during the
estimated useful life of the asset is less than the carrying value of the asset, the Company
recognizes a loss for the difference between the carrying value of the asset and its
estimated fair value, generally measured by the present value of the estimated cash flows.
Deferred Revenue
Deposits from customers are not recognized as revenues, but as liabilities, until the
following conditions are met: revenues are realized when cash or claims to cash
(receivable) are received in exchange for goods or services or when assets received in
such exchange are readily convertible to cash or claim to cash or when such
goods/services are transferred. When such income item is earned, the related revenue
item is recognized, and the deferred revenue is reduced. To the extent revenues are
generated from the Company’s support and maintenance services, the Company
recognizes such revenues when services are completed and billed. The Company has
received deposits from its various customers that have been recorded as deferred revenue
in the amount of $1,121,667 and $1,190,279 as of March 31, 2016 and December 31,
2015, respectively.
Stock-Based Compensation
The Company accounts for its stock-based awards granted under its employee
compensation plan in accordance with ASC Topic No. 718-20, Awards Classified as
Equity, which requires the measurement of compensation expense for all share-based
compensation granted to employees and non-employee directors at fair value on the date
of grant and recognition of compensation expense over the related service period for
awards expected to vest. The Company uses the Black-Scholes option pricing model to
estimate the fair value of its stock options and warrants. The Black-Scholes option
pricing model requires the input of highly subjective assumptions including the expected
stock price volatility of the Company’s common stock, the risk free interest rate at the
date of grant, the expected vesting term of the grant, expected dividends, and an
assumption related to forfeitures of such grants. Changes in these subjective input
assumptions can materially affect the fair value estimate of the Company’s stock options
and warrants.
Income Taxes
The Company accounts for income taxes using the asset and liability method in
accordance with ASC Topic No. 740, Income Taxes . Under this method, deferred tax
assets and liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
11
The Company applies the provisions of ASC Topic No. 740 for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in the
Company’s financial statements . In accordance with this provision, tax positions must
meet a more-likely-than-not recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position.
Recent Accounting Pronouncements
FASB ASC 606 ASU 2014-09 - Revenue from contracts with customers:
In May 2014, the FASB issued amended guidance on contracts with customers to transfer
goods or services or contracts for the transfer of nonfinancial assets, unless those
contracts are within the scope of other standards (e.g., insurance contracts or lease
contracts). The guidance requires an entity to recognize revenue on contracts with
customers to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. The guidance requires that an entity depict the consideration by
applying the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The amendments in this ASU are effective for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. Early
application is not permitted. This amendment is to be either retrospectively adopted to
each prior reporting period presented or retrospectively with the cumulative effect of
initially applying this ASU recognized at the date of initial application. Adoption of this
guidance is not expected to have a material impact on the Company's consolidated
financial statements.
FASB ASC 718 ASU 2014-12 – Compensation – Stock Compensation:
In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation
(Topic 718): Accounting for Share-Based Payments When the Terms of an Award
Provide that a Performance Target Could be Achieved after the Requisite Service
Period," ("ASU 2014-12"). The amendments in ASU 2014-12 require that a
performance target that affects vesting and that could be achieved after the requisite
service period be treated as a performance condition. A reporting entity should apply
existing guidance in ASC Topic No. 718, "Compensation - Stock Compensation" as it
relates to awards with performance conditions that affect vesting to account for such
awards. The amendments in ASU 2014-12 are effective for annual periods and interim
periods within those annual periods beginning after December 15, 2015. Early adoption
is permitted. Entities may apply the amendments in ASU 2014-12 either: (a)
12
prospectively to all awards granted or modified after the effective date; or (b)
retrospectively to all awards with performance targets that are outstanding as of the
beginning of the earliest annual period presented in the financial statements and to all
new or modified awards thereafter. The Company does not anticipate that the adoption of
ASU 2014-12 will have a material impact on its consolidated financial statements.
FASB ASC 740 ASU 2015-17 - Balance Sheet Classification of Deferred Taxes:
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The FASB issued
this ASU as part of its ongoing Simplification Initiative, with the objective of reducing
complexity in accounting standards. The amendments in ASU 2015-17 require entities
that present a classified balance sheet to classify all deferred tax liabilities and assets as a
noncurrent amount. This guidance does not change the offsetting requirements for
deferred tax liabilities and assets, which results in the presentation of one amount on the
balance sheet. Additionally, the amendments in this ASU align the deferred income tax
presentation with the requirements in International Accounting Standards (IAS) 1,
Presentation of Financial Statements. The amendments in ASU 2015-17 are effective for
financial statements issued for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. The Company does not anticipate that the
adoption of this standard will have a material impact on its consolidated financial
statements.
FASB ASC 842 ASU 2016-02 – Leases:
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU
2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from
a lease for both financing and operating leases. The ASU will also require new qualitative
and quantitative disclosures to help investors and other financial statement users better
understand the amount, timing, and uncertainty of cash flows arising from leases. ASU
2016-02 is effective for fiscal years beginning after December 15, 2018, with early
adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on
its consolidated financial statements.
Property and equipment are carried at cost and consist of the following at March 31, 2016
and December 31, 2015:
2016
2015
Office equipment and fixtures
$
139,006
$
139,006
Computer hardware
90,943
90,943
Computer software
77,700
77,700
Development equipment
35,318
35,318
13
342,967
342,967
Less: Accumulated depreciation
308,824
302,534
$
34,143
$
40,433
Depreciation expense of $6,290 and $1,306 was charged to operations for the three
months ended March 31, 2016 and 2015, respectively.
The Company calculates net earnings (loss) per common share in accordance with ASC
260 “ Earnings Per Share ” (“ASC 260”). Basic and diluted net earnings (loss) per
common share was determined by dividing net earnings (loss) applicable to common
stockholders by the weighted average number of common shares outstanding during the
period. The Company’s potentially dilutive shares, which include outstanding common
stock options and common stock warrants, have not been included in the computation of
diluted net earnings (loss) per share for all periods as the result would be anti-dilutive.
Three Months Ended
Mar ch 31,
2016
2015
Stock options
1,718,900
1,718,900
Stock warrants
275,000
275,000
Total shares excluded from calculation
1,993,900
1,993,900
Stock-based compensation expense for all stock-based award programs, including grants
of stock options and warrants, is recorded in accordance with " Compensation—Stock
Compensation ", Topic 718 of the FASB ASC. Stock-based compensation expense, which
is calculated net of estimated forfeitures, is computed using the grant date fair-value and
amortized over the requisite service period for all stock awards that are expected to vest.
The grant date fair value for stock options and warrants is calculated using the Black-
Scholes option pricing model. Determining the fair value of options at the grant date
requires judgment, including estimating the expected term that stock options will be
outstanding prior to exercise, the associated volatility of the Company’s common stock,
expected dividends, and a risk-free interest rate. Stock-based compensation expense is
reported under general and administrative expenses in the accompanying consolidated
statements of operations.
Options
In 2006, the Company adopted the 2006 Long-Term Incentive Plan (the "2006 Plan").
Awards granted under the 2006 Plan have a ten-year term and may be incentive stock
14
options, non-qualified stock options or warrants. The awards are granted at an exercise
price equal to the fair market value on the date of grant and generally vest over a three or
four year period. The Plan expired on December 31, 2009, therefore as of March 31,
2016, there was no unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the 2006 plan.
The 2006 Plan provided for the granting of options to purchase up to 10,000,000 shares
of common stock. 8,146,900 options have been issued under the plan to date of which
7,157,038 have been exercised and 692,962 have expired to date. There were 296,900
options outstanding under the 2006 Plan on its expiration date of December 31, 2009. All
options issued subsequent to this date were not issued pursuant to any plan.
Stock option activity during the three months ended March 31, 2016 and 2015 follows:
Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Options
Grant-Date
Life
Outstanding
Exercise Price
Fair Value
(Years)
Options outstanding at
December 31, 2014
1,518,900
$
0.03
$
0.10
4.76
Options granted
200,000
0.01
0.40
4.98
Options outstanding at
March 31, 2015
1,718,900
$
0.03
0.13
4.57
Options outstanding at
December 31, 2015
1,718,900
$
0.03
0.13
3.82
No option activity
--
--
--
Options outstanding at
March 31, 2016
1,718,900
$
0.03
$
0.13
3.57
Options outstanding at March 31, 2016 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
50,000
50,000
$0.01
May 1, 2016
May 1, 2006
46.900
46,900
$0.01
May 1, 2016
June 9, 2014
213,000
213,000
$0.03
June 9, 2024
June 9, 2014
159,000
159,000
$0.03
June 9, 2024
June 9, 2014
600,000
600,000
$0.03
June 9, 2024
June 6, 2014
250,000
250,000
$0.05
June 6, 2019
15
March 24, 2015
200,000
200,000
$0.01
March 24, 2020
Total
1,718,900
1,718,900
Warrants
In addition to our 2006 Long Term Incentive Plan, we have issued and outstanding
compensatory warrants to two consultants entitling the holders to purchase a total of
275,000 shares of our common stock at an average exercise price of $0.94 per share.
Warrants to purchase 25,000 shares of common stock vest upon 6 months after the
Company engages in an IPO, have an exercise price of $3.00 per share, and expire 2
years after the Company engages in an IPO. Warrants to purchase 250,000 shares of
common stock vest 100,000 shares on issuance (June 1, 2009), and 50,000 shares on each
of the following three anniversaries of the date of issuance, have exercise prices ranging
from $0.50 per share to $1.15 per share, and expire on June 1, 2019. The issuance of the
compensatory warrants was not submitted to our shareholders for their approval.
Warrant activity during the three months ended March 31, 2016 and 2015 follows:
Weighted
(1)Weighted
Weighted
Average Grant-
Average
Date
Remaining
Warrants
Average
Contractual
Outstanding
Exercise Price
Fair Value
Life (Years)
Warrants outstanding
at December 31, 2014
275,000
$
0.94
$
0.10
4.42
No warrant activity
--
--
--
Warrants outstanding
at March 31, 2015
275,000
$
0.94
$
0.10
4.17
Warrants outstanding
at December 31, 2015
275,000
$
0.94
$
0.10
3.42
No warrant activity
--
--
--
Warrants outstanding
at March 31, 2016
275,000
$
0.94
$
0.10
3.17
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at March 31, 2016 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
April 1, 2000
25,000
25,000
$3.00
2 years after IPO
June 1, 2009
100,000
100,000
$0.50
June 1, 2019
June 1, 2009
50,000
50,000
$0.65
June 1, 2019
June 1, 2009
50,000
50,000
$0.85
June 1, 2019
June 1, 2009
50,000
50,000
$1.15
June 1, 2019
Total
275,000
275,000
16
Deferred revenue represents sales of maintenance contracts that extend to and will be
realized in future periods. Deferred revenue at March 31, 2016 will be realized in the
following years ended December 31,
2016
$ 1,022,688
2017
33,405
2018
29,399
2019
29,400
2020
5,807
2021
968
$ 1,121,667
Notes payable at March 31, 2016 consist of various notes payable in annual installments
totaling $779,750 through September 2019. The notes include interest at 7% and are
secured by the assets of ArcMail.
Principal amounts due on notes payable for the years ended December 31, are as follows:
2016
$
784,849
2017
779,750
2018
779,750
2019
779,751
$ 3,124,100
During the three months ended March 31, 2016, Arcmail entered into merchant financing
agreements with two lenders for proceeds totaling $210,000 payable in daily amounts
based on various percentages of future collections of accounts receivable, which were
assigned to the lenders. The obligations will be satisfied upon total payments of
$287,400 and will mature in January 2017. The outstanding balance of notes payable - other was $164,781 at March 31,
2016.
Common Stock Issued
In connection with the acquisition of ArcMail the Company issued 11,500,000 common
shares valued at $.10 per share to the president and CEO of Wala, Inc. on November 4,
2015.
17
The Company issued 1,000,000 and 600,000 common shares for services, valued at $.20
per share on August 3, 2015 and May 18, 2015, respectively.
Quarter Ended March 31,
2016
2015
Effective tax rate
0.0 %
0.0 %
A full valuation allowance was recorded against the Company’s net deferred tax assets. A
valuation allowance must be established if it is more likely than not that the deferred tax
assets will not be realized. This assessment is based upon consideration of available
positive and negative evidence, which includes, among other things, the Company’s most
recent results of operations and expected future profitability. Based on the Company’s
cumulative losses in recent years, a full valuation allowance against the Company’s
deferred tax assets has been established as Management believes that the Company will
not realize the benefit of those deferred tax assets.
ArcMail has a defined contribution 401(k) plan, which covers substantially all
employees. Under the terms of the Plan, Arcmail is currently not required to match
employee contributions. The Company did not make any employer contributions to the
Plan during the three months ended March 31, 2016.
Sales and Accounts Receivable
No customer accounted for more than 10% of sales for the three months ended March 31,
2016 and 2015, respectively.
Cash
Cash is maintained at a major financial institution. Accounts held at U.S. financial
institutions are insured by the FDIC up to $250,000. Cash balances could exceed insured
amounts at any given time, however, the Company has not experienced any such losses.
The Company did not have any interest-bearing accounts at March 31, 2016 and
December 31, 2015, respectively.
The Company adopted the provisions of Accounting Standards Codification subtopic
825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines
fair value as the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
18
When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of
inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.
All items required to be recorded or measured on a recurring basis consist of derivative
liabilities and are based upon level 3 inputs.
To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment. In
certain cases, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, for disclosure purposes, the level is the fair value
hierarchy within which the fair value measurement is disclosed and is determined based
on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning
accumulated deficit and no impact on the consolidated financial statements.
As of March 31, 2016 and December 31, 2015, the Company did not have any items that
would be classified as level 1, 2 or 3 disclosures.
Fluctuations in the Company’s stock price are a primary driver for the changes in the
derivative valuations during each reporting period. As the stock price decreases for each
of the related derivative instruments, the value to the holder of the instrument generally
decreases, therefore decreasing the liability on the Company’s balance sheet.
Additionally, stock price volatility is one of the significant unobservable inputs used in
the fair value measurement of each of the Company’s derivative instruments. The
simulated fair value of these liabilities is sensitive to changes in the Company’s expected
volatility. A 10% change in pricing inputs and changes in volatilities and correlation
factors would currently not result in a material change in value for the level 3 financial
liability.
19
Note Payable – Related Party
ArcMail issued a promissory note to the president of ArcMail on June 30, 2015 for funds
advanced. The note is payable in annual installments of $155,566 through December
2019. The notes include interest at 6% and are subordinated to the notes payable (see
Note 8).
Principal amounts due on notes payable for the years ended December 31, are as follows:
2016
$
155,566
2017
155,566
2018
155,566
2019
155,567
$
626,265
Lease Commitment
The Company is obligated under two operating leases for its premises that expire at
various times through October 31, 2018.
Total future minimum annual lease payments under the leases for the years ending
December 31 are as follows:
2016
$ 47,851
2017
46,581
2018
36,533
$130,965
Rent expense of $13,435 and $17,273 was charged to operations for the three months
ended March 31, 2016 and 2015, respectively.
Contingencies
The Company provides accruals for costs associated with the estimated resolution of
contingencies at the earliest date at which it is deemed probable that a liability has been
incurred and the amount of such liability can be reasonably estimated.
20
of Operations
FORWARD LOOKING STATEMENTS
This Form 10-Q includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of historical
facts, included or incorporated by reference in this Form 10-Q which address activities,
events or developments that the Company expects or anticipates will or may occur in the
future, including such things as future capital expenditures (including the amount and
nature thereof), finding suitable merger or acquisition candidates, expansion and growth
of the Company’s business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it believes are
appropriate in the circumstances.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements. Factors that could adversely affect actual results and performance include,
among others, potential fluctuations in quarterly operating results and expenses,
government regulation, technology change and competition. Consequently, all of the
forward-looking statements made in this Form 10-Q are qualified by these cautionary
statements and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized, that they
will have the expected consequence to or effects on the Company or its business or
operations. The Company assumes no obligations to update any such forward-looking
statements.
CRITICAL ACCOUNTING ESTIMATES
Our management’s discussion and analysis of our financial condition and results
of operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of financial statements may require us to make estimates and
assumptions that may affect the reported amounts of assets and liabilities and the related
disclosures at the date of the financial statements. We do not currently have any estimates
or assumptions where the nature of the estimates or assumptions is material due to the
levels of subjectivity and judgment necessary to account for highly uncertain matters or
the susceptibility of such matters to change or the impact of the estimates and
assumptions on financial condition or operating performance is material, except as
described below.
21
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Wala, Inc. and Gotham Innovation Lab, Inc. All
intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of our financial instruments, including cash, accounts receivable,
prepaid expenses, accounts payable, accrued interest, deferred revenue, and amounts due
to related parties, the carrying amounts approximate fair value due to their short
maturities. Additionally, there are no assets or liabilities for which fair value is
remeasured on a recurring basis.
Long-Lived Assets
We assess the valuation of components of its property and equipment and other
long-lived assets whenever events or circumstances dictate that the carrying value might
not be recoverable. We base our evaluation on indicators such as the nature of the assets,
the future economic benefit of the assets, any historical or future profitability
measurements and other external market conditions or factors that may be present. If such
factors indicate that the carrying amount of an asset or asset group may not be
recoverable, we determine whether an impairment has occurred by analyzing an estimate
of undiscounted future cash flows at the lowest level for which identifiable cash flows
exist. If the estimate of undiscounted cash flows during the estimated useful life of the
asset is less than the carrying value of the asset, we recognize a loss for the difference
between the carrying value of the asset and its estimated fair value, generally measured
by the present value of the estimated cash flows.
Revenue Recognition
We recognize revenue from product sales when the following four revenue
recognition criteria are met: persuasive evidence of an arrangement exists, an equipment
order has been placed with the vendor, the selling price is fixed or determinable, and
collectability is reasonably assured. Revenues from maintenance contracts covering
multiple future periods are recognized during the current periods and deferred revenue is
recorded for future periods and classified as current or noncurrent, depending on the
terms of the contracts.
22
Deferred Revenue
Deposits from customers are not recognized as revenues, but as liabilities, until
the following conditions are met: revenues are realized when cash or claims to cash
(receivable) are received in exchange for goods or services or when assets received in
such exchange are readily convertible to cash or claim to cash or when such
goods/services are transferred. When such income item is earned, the related revenue
item is recognized, and the deferred revenue is reduced. To the extent revenues are
generated from our support and maintenance services, we recognize such revenues when
services are completed and billed. We received deposits from its various customers that
have been recorded as deferred revenue in the amount of $1,121,667 and $1,190,279 as
of March 31, 2016 and December 31, 2015, respectively.
Gotham’s revenues were derived primarily from the sale of products and services
rendered to real estate brokers. Gotham recognized revenues when the services or
products have been provided or delivered, the fees charged are fixed or determinable,
Gotham and its customers understood the specific nature and terms of the agreed upon
transactions, and collectability was reasonably assured.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking
and money market accounts and any highly liquid debt instruments purchased with a
maturity of three months or less.
Accounts Receivable
We analyze the collectability of accounts receivable from continuing operations
each accounting period and adjust our allowance for doubtful accounts accordingly. A
considerable amount of judgment is required in assessing the realization of accounts
receivables, including the creditworthiness of each customer, current and historical
collection history and the related aging of past due balances. We evaluate specific
accounts when we become aware of information indicating that a customer may not be
able to meet its financial obligations due to deterioration of its financial condition, lower
credit ratings, bankruptcy or other factors affecting the ability to render payment.
Allowance for doubtful accounts was $8,345 at March 31, 2016 and December 31, 2015,
respectively. There was no bad debt expense charged to operations for the three months
ended March 31, 2016 and 2015, respectively.
Property and equipment and depreciation
Property and equipment are stated at cost. Maintenance and repairs are charged to
expense when incurred. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the respective
accounts and any gain or loss is credited or charged to income. Depreciation for both
financial reporting and income tax purposes is computed using combinations of the
23
straight line and accelerated methods over the estimated lives of the respective assets as
follows:
Office equipment and fixtures
5 - 7 years
Computer hardware
5 years
Computer software
3 years
Development equipment
5 years
Depreciation expense of $6,290 and $1,306 was charged to operations for the
three months ended March 31, 2016 and 2015, respectively.
Goodwill
Goodwill represents the excess of liabilities assumed over assets acquired of
ArcMail and the fair market value of the common shares issued by the Company for the
acquisition of ArcMail. In accordance with ASC Topic No. 350 “Intangibles – Goodwill
and Other”), the goodwill is not being amortized, but instead will be subject to an annual
assessment of impairment by applying a fair-value based test, and will be reviewed more
frequently if current events and circumstances indicate a possible impairment. An
impairment loss is charged to expense in the period identified. If indicators of impairment
are present and future cash flows are not expected to be sufficient to recover the asset’s
carrying amount, an impairment loss is charged to expense in the period identified. A
lack of projected future operating results from ArcMail’s operations may cause
impairment. As the acquisition of ArcMail occurred on November 4, 2015, it is too early
for management to evaluate whether goodwill has been impaired. No impairment was
recorded during the three months ended March 31, 2016.
Stock-Based Compensation
Stock-based compensation expense for all stock-based award programs, including
grants of stock options and warrants, is recorded in accordance with " Compensation—
Stock Compensation ", Topic 718 of the FASB ASC. Stock-based compensation expense,
which is calculated net of estimated forfeitures, is computed using the grant date fair-
value and amortized over the requisite service period for all stock awards that are
expected to vest. The grant date fair value for stock options and warrants is calculated
using the Black-Scholes option pricing model. Determining the fair value of options at
the grant date requires judgment, including estimating the expected term that stock
options will be outstanding prior to exercise, the associated volatility of the Company’s
common stock, expected dividends, and a risk-free interest rate. Stock-based
compensation expense is reported under general and administrative expenses in the
accompanying consolidated statements of operations.
Options
In 2006, we adopted the 2006 Long-Term Incentive Plan (the "2006 Plan").
Awards granted under the 2006 Plan have a ten-year term and may be incentive stock
options, non-qualified stock options or warrants. The awards are granted at an exercise
24
price equal to the fair market value on the date of grant and generally vest over a three or
four year period. The Plan expired on December 31, 2009, therefore as of December 31,
2015, there was no unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the 2006 plan.
The 2006 Plan provided for the granting of options to purchase up to 10,000,000
shares of common stock. 8,146,900 options have been issued under the plan to date of
which 7,157,038 have been exercised and 692,962 have expired to date. There were
296,900 options outstanding under the 2006 Plan on its expiration date of December 31,
2009. All options issued subsequent to this date were not issued pursuant to any plan.
Stock option activity during the three months ended March 31, 2016 and 2015 follows:
Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Options
Grant-Date
Life
Outstanding
Exercise Price
Fair Value
(Years)
Options outstanding at
December 31, 2014
1,518,900
$
0.03
$
0.10
4.76
Options granted
200,000
0.01
0.40
4.98
Options outstanding at
March 31, 2015
1,718,900
$
0.03
0.13
4.57
Options outstanding at
December 31, 2015
1,718,900
$
0.03
0.13
3.82
No option activity
--
--
--
Options outstanding at
March 31, 2016
1,718,900
$
0.03
$
0.13
3.57
Options outstanding at March 31, 2016 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
50,000
50,000
$0.01
May 1, 2016
May 1, 2006
46.900
46,900
$0.01
May 1, 2016
June 9, 2014
213,000
213,000
$0.03
June 9, 2024
June 9, 2014
159,000
159,000
$0.03
June 9, 2024
June 9, 2014
600,000
600,000
$0.03
June 9, 2024
June 6, 2014
250,000
250,000
$0.05
June 6, 2019
March 24, 2015
200,000
200,000
$0.01
March 24, 2020
Total
1,718,900
1,718,900
25
Warrants
In addition to our 2006 Long Term Incentive Plan, we have issued and outstanding
compensatory warrants to two consultants entitling the holders to purchase a total of
275,000 shares of our common stock at an average exercise price of $0.94 per share.
Warrants to purchase 25,000 shares of common stock vest upon 6 months after the
Company engages in an IPO, have an exercise price of $3.00 per share, and expire 2
years after the Company engages in an IPO. Warrants to purchase 250,000 shares of
common stock vest 100,000 shares on issuance (June 1, 2009), and 50,000 shares on each
of the following three anniversaries of the date of issuance, have exercise prices ranging
from $0.50 per share to $1.15 per share, and expire on June 1, 2019. The issuance of the
compensatory warrants was not submitted to our shareholders for their approval.
Warrant activity during the three months ended March 31, 2016 and 2015 follows:
Weighted
(1)Weighted
Weighted
Average Grant-
Average
Date
Remaining
Warrants
Average
Contractual
Outstanding
Exercise Price
Fair Value
Life (Years)
Warrants outstanding
at December 31, 2014
275,000
$
0.94
$
0.10
4.42
No warrant activity
--
--
--
Warrants outstanding
at March 31, 2015
275,000
$
0.94
$
0.10
4.17
Warrants outstanding
at December 31, 2015
275,000
$
0.94
$
0.10
3.42
No warrant activity
--
--
--
Warrants outstanding
at March 31, 2016
275,000
$
0.94
$
0.10
3.17
(2) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at March 31, 2016 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
April 1, 2000
25,000
25,000
$3.00
2 years after IPO
June 1, 2009
100,000
100,000
$0.50
June 1, 2019
June 1, 2009
50,000
50,000
$0.65
June 1, 2019
June 1, 2009
50,000
50,000
$0.85
June 1, 2019
June 1, 2009
50,000
50,000
$1.15
June 1, 2019
Total
275,000
275,000
26
Stock Transactions
On September 25, 2014, the Board unanimously approved an amendment to the
Company’s Articles of Incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue from seventy five million (75,000,000) to
Three Hundred Million (300,000,000) shares of Common Stock, $0.001 par value per
share, and to create a new class of stock entitled “preferred stock” (together, the
“Capitalization Amendments”). The Capitalization Amendments create provisions in the
Company’s Articles of Incorporation, which allows the voting powers, designations,
preferences and other special rights, and qualifications, limitations and restrictions of
each series of preferred stock to be established from time to time by the Board without
approval of the stockholders. No dividend, voting, conversion, liquidation or redemptions
rights as well as redemption or sinking fund provisions are yet established with respect to
the Company’s preferred stock. On October 3, 2014, the Majority Stockholders executed
and delivered to the Company a written consent approving the Capitalization
Amendments.
Common Stock Issued
In connection with the acquisition of Wala, Inc. we issued 11,500,000 common
shares valued at $.10 per share to the president and CEO of Wala, Inc. on November 4,
2015.
We issued 1,000,000 and 600,000 common shares for services, valued at $.20 per
share on August 3, 2015 and May 18, 2015, respectively.
Income Taxes
We account for income taxes using the asset and liability method in accordance
with ASC Topic No. 740, Income Taxes . Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and tax bases
of assets and liabilities, and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
We apply the provisions of ASC Topic No. 740 for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in the
Company’s financial statements . In accordance with this provision, tax positions must
meet a more-likely-than-not recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position.
INTRODUCTION
iGambit is a company focused on the technology markets. Our sole operating
subsidiary, of Wala, Inc. doing business as ArcMail Technology (ArcMail) is in the
business of providing simple, secure and cost-effective We are focused on expanding the
operations of ArcMail by marketing the company to existing and potential new clients.
27
Assets. At March 31, 2016, we had $7,466,092 in total assets, compared to
$7,637,996 at December 31, 2015. The decrease in total assets was primarily due to the
decrease in cash, the decrease in prepaid expenses, and the decrease in assets from
discontinued operations.
Liabilities. At March 31, 2016, our total liabilities were $6,143,646 compared to
$6,076,680 at December 31, 2015. Our current liabilities at March 31, 2016 consisted of
accounts payable and accrued expenses of $634,161, accrued interest on notes payable of
$366,255, amounts due to related parties of $82,648, notes payable of $1,106,196,
liabilities from discontinued operations of $23,769 and deferred revenue current portion
of $736,604, whereas our current liabilities as of December 31, 2015 consisted of
accounts payable and accrued expenses of $636,633, accrued interest on notes payable of
$302,278, notes payable of $936,566, amounts due to a related parties of $74,871,
liabilities from discontinued operations of $127,353 and deferred revenue current portion
of $811,227. Our long term liabilities at March 31, 2016 consisted of Notes payable of
$2,808,950 and deferred revenue non-current portion of $385,063, whereas our total
liabilities as of December 31, 2015 consisted of Notes payable of $2,808,950 and
deferred revenue non-current portion of $379,052.
Stockholders’ Equity. Our stockholders’ equity decreased to $1,322,446 at March
31, 2016 from $1,561,316 at December 31, 2015. This decrease was primarily due to an
increase in accumulated deficit from $(2,798,390) at December 31, 2015 to $(3,037,260)
at March 31, 2016, resulting from a net loss of $(238,870) for the three months ended
March 31, 2016.
THREE MONTHS ENDED MARCH 31, 2016 AS COMPARED TO THREE
MONTHS ENDED MARCH 31, 2015
Revenues and Cost of Sales . We had $403,750 of revenue during the three
months ended March 31, 2016 compared to revenue from our Gotham subsidiary of
$300,347 during the three months ended March 31, 2015. The increase in revenue was
due primarily to an increase in revenue generated by our ArcMail subsidiary acquired in
November 2015. In addition to ArcMail’s operations, we had income from discontinued
operations of $3,558 and $0 for the three months ended March 31, 2016 and March 31,
2015, respectively.
General and Administrative Expenses . General and Administrative Expenses
increased to $558,653 for the three months ended March 31, 2016 from $307,919 for the
three months ended March 31, 2015. For the three months ended March 31, 2016 our
General and Administrative Expenses consisted of corporate administrative expenses of
$67,686, legal and accounting fees of $39,618, health insurance expenses of $14,720,
directors and officers insurance expenses of $11,136, payroll expenses of $341,478,
consulting expenses of $17,500, marketing expense of $43,990, computer and internet
expense of $15,025 and exchange filing fees of $7,500. For the three months ended
28
March 31, 2015 our General and Administrative Expenses consisted of corporate
administrative expenses of $85,794, legal and accounting fees of $40,080, health
insurance expenses of $7,688, directors and officers insurance expenses of $10,600,
payroll expenses of $141,041, consulting expenses of $14,498 and exchange filing fees of
$8,218. The increases from the three months ended March 31, 2015 to the three months
ended March 31, 2016 relate primarily to: (i) an increase in payroll expenses; (ii) an
increase in consulting expenses; (iii) an increase in exchange filing fees; and (iv) an
increase in general and administrative costs associated with the operation of our ArcMail
subsidiary. Costs associated with our officers’ salaries and the operation of our ArcMail
subsidiary should remain level going forward, subject to a material expansion in the
business operations of ArcMail which would likely increase our corporate administrative
expenses.
Other Income (Expense) . There was interest expense of $84,334 and $1,703 for
the three months ended March 31, 2016 and March 31, 2015, respectively.
LIQUIDITY AND CAPITAL RESOURCES
General
As reflected in the accompanying consolidated financial statements, at March 31,
2016, we had $24,375 of cash and stockholders’ equity of $1,322,446 as compared to
$131,987 and $1,561,316 at December 31, 2015. At March 31, 2016 we had $7,466,092
in total assets, compared to $7,637,996 at December 31, 2015.
Our primary capital requirements in 2016 are likely to arise from the expansion of
our Arcmail operations, and, in the event we effectuate an acquisition, from: (i) the
amount of the purchase price payable in cash at closing, if any; (ii) professional fees
associated with the negotiation, structuring, and closing of the transaction; and (iii) post
closing costs. It is not possible to quantify those costs at this point in time, in that they
depend on Arcmail’s business opportunities, the state of the overall economy, the relative
size of any target company we identify and the complexity of the related acquisition
transaction(s). We anticipate raising capital in the private markets to cover any such
costs, though there can be no guaranty we will be able to do so on terms we deem to be
acceptable. We do not have any plans at this point in time to obtain a line of credit or
other loan facility from a commercial bank.
While we believe in the viability of our strategy to improve Arcmail’s sales
volume and to acquire companies, and in our ability to raise additional funds, there can
be no assurances that we will be able to fully effectuate our business plan.
Cash Flow Activity
Net cash used in operating activities was $285,269 for the three months ended
March 31, 2016, compared to $119,856 for the three months ended March 31, 2015. Our
primary source of operating cash flows from continuing operating activities for the three
29
months ended March 31, 2016 was from our ArcMail subsidiary’s revenues of $403,750
and from our Gotham subsidiary’s revenues $300,347 for the three months ended March
31, 2015. Additional contributing factors to the change were from an increase in
accounts receivable of $99,500, an increase in employee advances of $1,600, a decrease
in prepaid expenses of $50,412, a decrease in accounts payable and accrued expenses of
$2,472, an increase in accrued interest of $63,977, and a decrease in deferred revenue of
$68,612. Net cash provided by discontinued operating activities was $8,664 for the three
months ended March 31, 2016 and s $0 for the three months ended March 31, 2015. The
$8,644 cash provided by discontinued operations for the three months ended March 31,
2016, represents cash payments received from VHT which was offset by a decrease in
accounts receivable included in the Assets from Discontinued Operations.
Cash used in investing activities was $0 or the three months ended March 31, 2016
and $5,026 for the three months ended March 31, 2015. For the three months ended
March 31, 2015 the use of cash from investing activities was from the purchase of
property and equipment of $5,026.
Cash provided by financing activities was $177,657 for the three months ended
March 31, 2016 compared to $30,180 for the three months ended March 31, 2015. The
cash provided by financing activities for the three months ended March 31, 2016
consisted of an increase in notes payable of $169,880 and amounts due to related parties
of $7,777 whereas the cash provided by financing activities for the three months ended
March 31, 2015 consisted of proceeds from loans from shareholders of $30,180.
Supplemental Cash Flow Activity
In the three months ended March 31, 2016 the company paid interest of $2,927
compared to interest of $1,703 in the three months ended March 31, 2015.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Required.
Item 4. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, as required by paragraph (b) of Rule 13a-15 and
15d-15 of the Exchange Act under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act as of March 31, 2012. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of March 31, 2015.
30
Change in Internal Controls
During the quarter ended March 31, 2015, there were no changes in our internal control over
financial reporting that materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
.
Item 1. Legal Proceedings.
From time-to-time, the Company is involved in various civil actions as part of its normal course of
business. The Company is not a party to any litigation that is material to ongoing operations as defined in
Item 103 of Regulation S-K as of the period ended March 31, 2016.
Item 1A.
Risk Factors.
Not required
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults upon Senior Securities.
None
Item 4.
Removed and Reserved.
Item 5.
Other Information.
None
Item 6.
Exhibit No.
D escription
31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.)
32.2 Certification of the Interim Chief Financial Officer Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18
of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of
that section. Further, this exhibit shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.)
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on May
23, 2016.
iGambit Inc.
/s/ John Salerno
John Salerno
Chief Executive Officer
/s/ Elisa Luqman
Elisa Luqman
Chief Financial Officer and
Principal Accounting Officer
Exhibit Index
Exhibit No.
Description
31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2
Certification of the Interim Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for
the purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.)
32.2
Certification of the Interim Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be
deemed “filed” for the purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended.)
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|