UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 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 x 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 x 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 filer Accelerated filer
Non-accelerated filer
Smaller reporting 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 x
The Registrant had 39,683,990 shares of its common stock outstanding as of November 21, 2016.
iGambit Inc.
Form 10-Q
Part I — Financial Information
Item 1.
Consolidated Balance Sheets
1
Consolidated Statements of Income
3
Consolidated Statements of Cash Flows
4
Notes to Consolidated Financial Statements
5
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
18
Quantitative and Qualitative Disclosures About Market Risk
27
Controls and Procedures
27
Part II — Other Information
28
Legal Proceedings
28
Risk Factors
28
Unregistered Sales of Equity Securities and Use of Proceeds
28
Defaults upon Senior Securities
28
Removed and Reserved
28
Other Information
28
Exhibits
28
EX-31.1
EX-31.2
EX-32.1
EX-32.2
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements
IGAMBIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30,
2016
DECEMBER 31,
(Unaudited)
2015
ASSETS
Current assets
Cash
$
21,829
$
131,987
Accounts receivable, net
545,873
230,182
Inventories
1,160
21,160
Prepaid expenses
141,995
244,592
Assets from discontinued operations, net
53,389
262,765
Total current assets
764,246
890,686
Property and equipment, net
24,432
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
$
7,495,555
$
7,637,996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses
$
745,725
$
636,633
Accrued interest on notes payable
454,854
291,107
Accrued interest on notes payable - related party
39,353
11,171
Amounts due to related parties
82,923
74,871
Deferred revenue, current portion
385,396
811,227
Notes payable, current portion
786,624
779,750
Note payable - related party, current portion
156,566
156,566
1
Notes payable - other
79,459
--
Liabilities from discontinued operations
15,557
127,353
Total current liabilities
2,746,457
2,888,678
Long-term liabilities
Deferred revenue, net of current portion
497,088
379,052
Notes payable
2,339,251
2,339,251
Note payable - related party
469,699
469,699
Total long-term liabilities
3,306,038
3,188,002
Total liabilities
6,052,495
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
(2,916,646)
(2,798,390)
Total stockholders' equity
1,443,060
1,561,316
$
7,495,555
$
7,637,996
See accompanying notes to the condensed consolidated financial statements.
2
IGAMBIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
NINE MONTHS
ENDED
ENDED
SEPTEMBER 30,
SEPTEMBER 30,
2016
2015
2016
2015
Sales:
Hardware and software
$
200,506
$
--
$
442,800
$
--
Support and maintenance
597,311
--
1,348,718
--
Total sales
797,817
--
1,791,518
--
Cost of sales
7,667
--
36,121
--
Gross profit
790,150
--
1,755,397
--
Operating expenses
General and administrative expenses
458,686
121,833
1,598,461
348,840
Income (loss) from operations
331,464
(121,833)
156,936
(348,840)
Other income (expenses)
Interest expense
(115,348)
(635)
(279,060)
(2,136)
Total other income (expenses)
(115,348)
(635)
(279,060)
(2,136)
Income (loss) from continuing operations
216,116
(122,468)
(122,124)
(350,976)
Income from discontinued operations
550
47,619
3,868
79,584
Net income (loss)
$
216,666
$
(74,849)
$
(118,256)
$
(271,392)
Basic and fully diluted loss per common
share:
Continuing operations
$
.01
$
(.00)
$
(.00)
$
(.01)
Discontinued operations
$
.00
$
.00
$
.00
$
.00
Net loss per common share
$
.01
$
(.00)
$
(.00)
$
(.01)
Weighted average common shares
outstanding - basic
39,683,990
27,825,294
39,683,990
27,099,008
See accompanying notes to the condensed consolidated financial statements.
3
IGAMBIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(118,256)
$
(271,392)
Adjustments to reconcile net loss to net
cash used in operating activities
Income from discontinued operations
(3,868)
(79,584)
Depreciation
17,196
496
Stock-based compensation expense
--
331,998
Increase (Decrease) in cash flows as a result of
changes in asset and liability account balances:
Accounts receivable
(315,691)
--
Inventories
20,000
--
Prepaid expenses
102,597
(187,434)
Accounts payable and accrued expenses
109,092
34,004
Accrued interest on notes payable
191,929
--
Deferred revenue
(307,795)
--
Net cash used in continuing operating activities
(304,796)
(171,912)
Net cash provided by discontinued operating activities
106,947
23,920
NET CASH USED IN OPERATING ACTIVITIES
(197,849)
(147,992)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
(1,194)
--
Net cash used in continuing investing activities
(1,194)
--
Net cash used in discontinued investing activities
--
(5,026)
NET CASH USED IN INVESTING ACTIVITIES
(1,194)
(5,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholders' loans
--
28,700
Repayments of stockholders' loans
--
(7,300)
Proceeds from notes payable
125,083
--
Repayments of notes payable
(38,750)
--
Increase in amounts due to related parties
8,052
--
Net cash provided by continuing financing activities
94,385
21,400
Net cash provided by (used in) discontinued financing activities
(5,500)
16,936
NET CASH PROVIDED BY FINANCING ACTIVITIES
88,885
38,336
NET DECREASE IN CASH
(110,158)
(114,682)
CASH - BEGINNING OF PERIOD
131,987
133,436
CASH - END OF PERIOD
$
21,829
$
18,754
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
13,427
$
7,147
See accompanying notes to the condensed consolidated financial statements.
4
IGAMBIT INC.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2016 and 2015
Note 1 - Organization and Basis of Presentation
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 nine months ended September 30, 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:
5
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
278,077
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
Note 2 – Discontinued Operations
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
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 September 30, 2016 and December 31, 2015 are presented
as follows:
2016
2015
Assets:
Cash
$
--
$
13,893
Accounts receivable, net
51,889
247,372
Prepaid expenses
1,500
1,500
Total assets
$
53,389
$
262,765
6
Liabilities:
Accounts payable and accrued expenses
11,121
117,417
Note payable - related party
4,436
9,936
$
15,557
$
127,353
Note 3 – Summary of Significant Accounting Policies
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 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.
7
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the nine
months ended September 30, 2016 and 2015 were $208,662 and $3,352, respectively.
Advertising costs for the three months ended September 30, 2016 and 2015 were $45,079
and $33,333, respectively.
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 September 30, 2016 and
December 31, 2015, respectively. There was no bad debt expense charged to operations
for the nine months ended September 30, 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
8
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 nine months ended
September 30, 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
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 $882,484 and $1,190,279 as
of September 30, 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
9
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.
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.
10
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) 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.
11
Note 4 – Property and Equipment
Property and equipment are carried at cost and consist of the following at September 30,
2016 and December 31, 2015:
2016
2015
Office equipment and fixtures
$
139,006
$
139,006
Computer hardware
92,138
90,943
Computer software
77,700
77,700
Development equipment
35,318
35,318
344,162
342,967
Less: Accumulated depreciation
319,730
302,534
$
24,432
$
40,433
Depreciation expense of $17,196 and $496 was charged to operations for the nine months
ended September 30, 2016 and 2015, respectively.
Note 5 - Earnings (Loss) Per Common Share
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
Nine Months Ended
September 30,
September 30,
2016
2015
2016
2015
Stock options
1,422,000
1,718,900
1,422,000
1,718,900
Stock warrants
275,000
275,000
275,000
275,000
Total shares excluded from calculation
1,697,000
1,993,900
1,697,000
1,993,900
Note 6 – 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.
12
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 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
September 30, 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 and vested
upon issuance.
Stock option activity during the nine months ended September 30, 2016 and 2015 follows:
Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Options
Grant-Date
Outstanding
Exercise Price
Fair Value
Life (Years)
Options outstanding at
December 31, 2014
1,518,900
$
0.03
$
0.10
4.51
Options granted
200,000
0.01
0.40
4.48
Options outstanding at
September 30, 2015
1,718,900
$
0.03
0.13
4.07
Options outstanding at
December 31, 2015
1,718,900
$
0.03
0.13
3.82
Options expired
(296,900)
0.01
--
Options outstanding at
September 30, 2016
1,422,000
$
0.03
$
0.13
5.85
13
Options outstanding at September 30, 2016 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
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
1,422,000
1,422,000
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 nine months ended September 30, 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
4.17
No warrant activity
--
--
--
Warrants outstanding
at September 30, 2015
275,000
$
0.94
$
0.10
3.67
Warrants outstanding
at December 31, 2015
275,000
$
0.94
$
0.10
3.42
No warrant activity
--
--
--
Warrants outstanding
at September 30, 2016
275,000
$
0.94
$
0.10
2.67
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
14
Warrants outstanding at September 30, 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
Note 7 – Deferred Revenue
Deferred revenue represents sales of maintenance contracts that extend to and will be
realized in future periods. Deferred revenue at September 30, 2016 will be realized in the
following years ended December 31,
2016
$
385,396
2017
243,139
2018
119,890
2019
111,956
2020
20,403
2021
1,700
$
882,484
Note 8 – Notes Payable
Notes payable at September 30, 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
$
786,624
2017
779,750
2018
779,750
2019
779,751
$ 3,125,875
During the nine months ended September 30, 2016, Arcmail entered into merchant
financing agreements with two lenders for proceeds totaling $281,000 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
$358,400 and will mature in January 2017. The outstanding balance of notes payable -
other was $79,459 at September 30, 2016.
15
Note 9 – Stock Transactions
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.
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.
Note 10 - Income Taxes
Quarter Ended September 30,
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.
Note 11 - Retirement Plan
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 nine months ended September 30, 2016.
Note 12 – Concentrations and Credit Risk
Sales and Accounts Receivable
No customer accounted for more than 10% of sales or accounts receivable for the nine
months ended September 30, 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 September 30, 2016 and
December 31, 2015, respectively.
16
Note 13 - Related Party Transactions
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 $156,566 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
$
156,566
2017
156,566
2018
156,566
2019
156,567
$
626,265
Amounts Due to Related Parties
Amounts due to related parties with balances of $82,923 and $74,871 at September 30,
2016 and December 31, 2015, respectively, consist of cash advances from two
stockholders/officers. These advances do not bear interest and are payable on demand.
Note 14 – Commitments and Contingencies
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
$ 15,446
2017
46,581
2018
36,533
$ 98,560
Rent expense of $47,559 and $50,963 was charged to operations for the nine months ended
September 30, 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.
17
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results
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.
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.
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.
18
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 our various customers that have been recorded as deferred
revenue in the amount of $882,484 and $1,190,279 as of September 30, 2016 and
December 31, 2015, respectively
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 September 30, 2016 and December 31, 2015, respectively. There
was no bad debt expense charged to operations for the nine months ended September 30,
2016 and 2015, respectively.
Property and Equipment
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
Depreciation expense of $17,196 and $496 was charged to operations for the nine
months ended September 30, 2016 and 2015, respectively.
19
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
nine months ended September 30, 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 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 June 30,
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.
20
All options issued subsequent to this date were not issued pursuant to any plan.
Stock option activity during the nine months ended September 30, 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
4.51
Options granted
200,000
0.01
0.40
4.48
Options outstanding at
September 30, 2015
1,718,900
$
0.03
0.13
4.07
Options outstanding at
December 31, 2015
1,718,900
$
0.03
0.13
3.82
Options expired
(296,900)
0.01
--
Options outstanding at
September 30, 2016
1,422,000
$
0.03
$
0.13
5.85
Options outstanding at September 30, 2016 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
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
1,422,000
1,422,000
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
21
$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 nine months ended September 30, 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
4.17
No warrant activity
--
--
--
Warrants outstanding
at September 30, 2015
275,000
$
0.94
$
0.10
3.67
Warrants outstanding
at December 31, 2015
275,000
$
0.94
$
0.10
3.42
No warrant activity
--
--
--
Warrants outstanding
at September 30, 2016
275,000
$
0.94
$
0.10
2.67
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at September 30, 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
Stock Transactions
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.
22
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. Management has determined that
the Company has no significant uncertain tax positions requiring recognition and
measurement under ASC 740-10.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
iGambit is a company focused on the technology markets. Our sole operating
subsidiary, Wala, Inc. doing business as ArcMail Technology (ArcMail) is in the business
of providing simple, secure and cost-effective enterprise information and email archiving
solutions for businesses of all sizes across a range of vertical markets. We are focused on
expanding the operations of ArcMail by marketing the company to existing and potential
new clients.
Assets. At September 30, 2016, we had $7,495,555 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 September 30, 2016, our total liabilities were $6,052,495 compared
to $6,076,680 at December 31, 2015. Our current liabilities at September 30, 2016
consisted of accounts payable and accrued expenses of $745,725, accrued interest on notes
payable of $494,207 amounts due to related parties of $82,923, notes payable of
$1,022,649, liabilities from discontinued operations of $15,557 and deferred revenue
current portion of $385,396, 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 $936,316, amounts due to 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 September 30, 2016 consisted of Notes payable of
23
$2,808,950 and deferred revenue non-current portion of $497,088, whereas our long term
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 $1,443,060 at
September 30, 2016 from $1,561,316 at December 31, 2015. This decrease was a result of
a net loss of $(118,256) for the nine months ended September 30, 2016.
THREE MONTHS ENDED SEPTEMBER 30, 2016 AS COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2015
Revenues and Net Loss. We had $797,817 of revenue from our ArcMail
subsidiary and net income of $216,666 during the three months ended September 30, 2016,
compared to revenue of $0 and net loss of $74,849 for the three months ended September
30, 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 $550 compared to income from
discontinued operations of $47,619 for the three months ended September 30, 2016 and
September 30, 2015, respectively.
General and Administrative Expenses. General and Administrative Expenses
increased to $458,686 for the three months ended September 30, 2016 from $121,833 for
the three months ended September 30, 2015. For the three months ended September 30,
2016 our General and Administrative Expenses consisted of corporate administrative
expenses of $66,705, legal and accounting fees of $22,307, health insurance expenses of
$18,992, general business insurance expense of $8,142, payroll expenses of $288,457,
marketing expense of $45,079, computer and internet expense of $6,748, and exchange
filing fees of $2,256. For the three months ended September 30, 2015 our General and
Administrative Expenses consisted of corporate administrative expenses of $29,778, legal
and accounting fees of $16,222, finder’s fees and commissions of $17,500, marketing
expense of $33,333, and investor relations expenses of $25,000. The increases from the
three months ended September 30, 2015 to the three months ended September 30, 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 acquired in
November 2015. 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) and Taxes. We had interest expense of $115,348 for the
three months ended September 30, 2016 compared to $635 for the three months ended
September 30, 2015.
24
Nine Months Ended September 30, 2016 as Compared to Six Months Ended
September 30, 2015
Revenues and Net Loss. We had $1,791,518 of revenue and net loss of $118,256
during the nine months ended September 30, 2016, compared to revenue of $0 and net loss
of $271,392 for the nine months ended September 30, 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 $3,868 and $79,584 for the nine months ended September 30, 2016 and
September 30, 2015, respectively.
General and Administrative Expenses. General and Administrative Expenses
increased to $1,598,461 for the nine months ended September 30, 2016 from $348,840 for
the nine months ended September 30, 2015. For the nine months ended September 30, 2016
our General and Administrative Expenses consisted of corporate administrative expenses
of $198,233 legal and accounting fees of $83,562, health insurance expenses of $56,438,
directors and officers insurance expense of $10,053, general business insurance expense of
$19,797 payroll expenses of $953,386, finders fees and commissions of $26,250,
marketing expense of $208,662, computer and internet expense of $31,246 and exchange
filing fees of $10,834. For the nine months ended September 30, 2015 our General and
Administrative Expenses consisted of corporate administrative expenses of $69,185, legal
and accounting fees of $80,870, director’s and officers’ insurance expense of $27,249,
general business insurance expense of $4,496, consulting fees of $14,498, finder’s fees and
commissions of $35,000, marketing expense of $33,333, investor relations expenses of
$34,649, filing fees of $10,993, and payroll expenses of $38,567. The increases from the
nine months ended September 30, 2015 to the nine months ended September 30, 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 acquired in
November 2915. 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) and Taxes. We had interest expense of $279,060 for the
nine months ended September 30, 2016 compared to $2,136 for the nine months ended
September 30, 2015.
LIQUIDITY AND CAPITAL RESOURCES
As reflected in the accompanying consolidated financial statements, at September
30, 2016, we had $21,829 of cash and stockholders’ equity of $1,443,060 as compared to
$131,987 and $1,561,316, respectively at December 31, 2015. At September 30, 2016 we
had $7,495,555 in total assets, compared to $7,637,996 at December 31, 2015.
25
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 continuing operating activities was $304,796 for the nine months
ended September 30, 2016, compared to $171,912 for the nine months ended September
30, 2015. Our primary source of operating cash flows from continuing operating activities
for the nine months ended September 30, 2016 was from our ArcMail subsidiary’s
revenues of $1,791,518. Additional contributing factors to the change were from an
increase in accounts receivable of $315,691, a decrease in inventories of $20,000, a
decrease in prepaid expenses of $102,597, an increase in accounts payable and accrued
expenses of $109,092, an increase in accrued interest of $191,929, and a decrease in
deferred revenue of $307,795. Net cash provided by discontinued operating activities was
$106,947 for the nine months ended September 30, 2016 and $23,920 for the nine months
ended September 30, 2015. Cash provided by discontinued operations for the nine months
ended September 30, 2016 and September 30, 2015, respectively, 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 continuing investing activities was $1,194 for the nine months ended
September 30, 2016 and cash used in discontinued investing activities of $5,026 for the
nine months ended September 30, 2015 was from the purchase of property and equipment
Cash provided by financing activities was $88,885 for the nine months ended
September 30, 2016 compared to $38,336 for the nine months ended September 30, 2015.
The cash provided by financing activities for the nine months ended September 30, 2016
consisted of a net increase in notes payable of $86,333 and amounts due to related parties
of $8,052 whereas the cash provided by financing activities for the nine months ended
September 30, 2015 consisted of proceeds from loans from shareholders of $38,336.
26
Supplemental Cash Flow Activity
In the nine months ended September 30, 2016 the company paid interest of $13,427
compared to interest of $7,147 in the nine months ended September 30, 2015.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Required.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange
Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our chief executive officer and chief financial officer
concluded that, as of September 30, 2016, our disclosure controls and procedures are
designed at a reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2016 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives. In
addition, the design of disclosure controls and procedures must reflect the fact that there
are resource constraints and that management is required to apply its judgment in
evaluating the benefits of possible controls and procedures relative to their costs.
27
PART II — OTHER INFORMATION
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 September 30,
2016.
Item 1A. Risk Factors.
Not required
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On May 18, 2015, the Company issued 600,000 common shares for services, valued at $.20
per share.
Item 3. Defaults upon Senior Securities.
None
Item 4. Removed and Reserved.
Item 5. Other Information.
None
Item 6.
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 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.)
28
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
November 21, 2016.
iGambit Inc.
/s/ John Salerno
John Salerno
Chief Executive Officer
/s/ Elisa Luqman
Elisa Luqman
Chief Financial Officer
29
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.)
30
Exhibit 31.1
I, John Salerno, certify that:
1. I have reviewed this quarterly report on Form 10-Q of iGambit Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
November 21, 2016
/s/ John Salerno
Chief Executive Officer
Exhibit 31.2
I, Elisa Luqman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of iGambit Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
November 21, 2016
/s/ Elisa Luqman
Chief Financial Officer
Exhibit 32.1
WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350
As adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002
Solely for the purposes of complying with 18 U.S.C. s.1350 as adopted pursuant to section 906
of the Sarbanes-Oxley act of 2002, I, the undersigned Chief Executive Officer of iGambit Inc.
(the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-
Q of the Company for the quarter ended September 30, 2016, (the “Report”) fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information
contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
November 21, 2016
/s/ John Salerno
Chief Executive Officer
Exhibit 32.2
WRITTEN STATEMENT OF THE CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350
As adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002
Solely for the purposes of complying with 18 U.S.C. s.1350 as adopted pursuant to section 906
of the Sarbanes-Oxley act of 2002, I, the undersigned Chief Financial Officer of iGambit Inc.
(the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-
Q of the Company for the quarter ended September 30, 2016, (the “Report”) fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information
contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
November 21, 2016
/s/ Elisa Luqman
Chief Financial Officer
Document and Entity Information - USD ($) |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2016 |
Nov. 21, 2016 |
Jun. 30, 2015 |
|
| Document and Entity Information: | |||
| Entity Registrant Name | iGambit, Inc. | ||
| Document Type | 10-Q | ||
| Document Period End Date | Sep. 30, 2016 | ||
| Trading Symbol | igmb | ||
| Amendment Flag | false | ||
| Entity Central Index Key | 0001479681 | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Common Stock, Shares Outstanding | 39,683,990 | ||
| Entity Public Float | $ 0 | ||
| Entity Filer Category | Smaller Reporting Company | ||
| Entity Current Reporting Status | Yes | ||
| Entity Voluntary Filers | No | ||
| Entity Well-known Seasoned Issuer | No | ||
| Document Fiscal Year Focus | 2016 | ||
| Document Fiscal Period Focus | Q3 |
Note 1 - Organization and Basis of Presentation |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 1 - Organization and Basis of Presentation |
Note 1 - Organization and Basis of Presentation
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 nine months ended September 30, 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:
|
Note 3 - Summary of Significant Accounting Policies |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 3 - Summary of Significant Accounting Policies |
Note 3 – Summary of Significant Accounting Policies
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 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 nine months ended September 30, 2016 and 2015 were $208,662 and $3,352, respectively. Advertising costs for the three months ended September 30, 2016 and 2015 were $45,079 and $33,333, respectively.
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 September 30, 2016 and December 31, 2015, respectively. There was no bad debt expense charged to operations for the nine months ended September 30, 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 nine months ended September 30, 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 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 $882,484 and $1,190,279 as of September 30, 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.
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) 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. |
Note 5 - Earnings Per Common Share |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 5 - Earnings Per Common Share |
Note 5 - Earnings (Loss) Per Common Share
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.
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Note 6-stock Based Compensation |
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| Notes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Note 6-stock Based Compensation |
Note 6 – 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, 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 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 September 30, 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 and vested upon issuance.
Stock option activity during the nine months ended September 30, 2016 and 2015 follows:
Options outstanding at September 30, 2016 consist of:
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 nine months ended September 30, 2016 and 2015 follows:
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at September 30, 2016 consist of:
Note 7 – Deferred Revenue
Deferred revenue represents sales of maintenance contracts that extend to and will be realized in future periods. Deferred revenue at September 30, 2016 will be realized in the following years ended December 31,
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Note 8 - Convertible Note Payable |
9 Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2016 | ||||||||||||||||
| Notes | ||||||||||||||||
| Note 8 - Convertible Note Payable | Note 8 – Notes Payable
Notes payable at September 30, 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:
During the nine months ended September 30, 2016, Arcmail entered into merchant financing agreements with two lenders for proceeds totaling $281,000 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 $358,400 and will mature in January 2017. The outstanding balance of notes payable - other was $79,459 at September 30, 2016. |
Note 11 - Retirement Plan |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 11 - Retirement Plan |
Note 11 - Retirement Plan
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 nine months ended September 30, 2016. |
Note 12 - Concentrations and Credit Risk |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Notes | |
| Note 12 - Concentrations and Credit Risk |
Note 12 – Concentrations and Credit Risk
Sales and Accounts Receivable
No customer accounted for more than 10% of sales or accounts receivable for the nine months ended September 30, 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 September 30, 2016 and December 31, 2015, respectively. |
Note 13 - Related Party Transactions |
9 Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2016 | ||||||||||||||||
| Notes | ||||||||||||||||
| Note 13 - Related Party Transactions |
Note 13 - Related Party Transactions
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 $156,566 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:
Amounts Due to Related Parties
Amounts due to related parties with balances of $82,923 and $74,871 at September 30, 2016 and December 31, 2015, respectively, consist of cash advances from two stockholders/officers. These advances do not bear interest and are payable on demand. |
Note 3 - Summary of Significant Accounting Policies: Principles of Consolidation (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Principles of Consolidation |
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. |
Note 3 - Summary of Significant Accounting Policies: Use of Estimates in The Preparation of Financial Statements (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Use of Estimates in The Preparation of Financial Statements |
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. |
Note 3 - Summary of Significant Accounting Policies: Fair Value of Financial Instruments (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Fair Value of Financial Instruments |
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. |
Note 3 - Summary of Significant Accounting Policies: Revenue Recognition (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Revenue Recognition |
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. |
Note 3 - Summary of Significant Accounting Policies: Advertising Costs (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Advertising Costs |
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the nine months ended September 30, 2016 and 2015 were $208,662 and $3,352, respectively. Advertising costs for the three months ended September 30, 2016 and 2015 were $45,079 and $33,333, respectively. |
Note 3 - Summary of Significant Accounting Policies: Property and Equipment and Depreciation (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Property and Equipment and Depreciation |
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 |
Note 3 - Summary of Significant Accounting Policies: Recent Accounting Pronouncements (Policies) |
9 Months Ended |
|---|---|
Sep. 30, 2016 | |
| Policies | |
| Recent Accounting Pronouncements |
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) 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. |
Note 6-stock Based Compensation: Options (Policies) |
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| Options |
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 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 September 30, 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 and vested upon issuance.
Stock option activity during the nine months ended September 30, 2016 and 2015 follows:
Options outstanding at September 30, 2016 consist of:
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Note 6-stock Based Compensation: Warrants (Policies) |
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| Warrants |
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 nine months ended September 30, 2016 and 2015 follows:
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at September 30, 2016 consist of:
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