UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-53862
IGAMBIT INC.
(Exact name of registrant 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)
(631) 670-6777
(Registrant’s telephone number)
(Registrant’s former telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class: NONE
Name of Each Exchange on Which Registered:
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (Section 232.405 of the chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
Accelerated
Non-accelerated filer o
Smaller
filer o
filer o
reporting
company þ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the act):
Yes o No þ
There is not currently a market for the Registrant’s common stock.
As of April 14, 2016 there were 39,683,990 shares of the Registrant’s $0.001 par value common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
iGambit Inc.
FORM 10-K — FOR THE YEAR ENDED DECEMBER 31, 2015
TABLE OF CONTENTS
Page No.
PART I
Business
1
Risk Factors
10
Unresolved Staff Comments
10
Properties
10
Legal Proceedings
10
(Removed and Reserved)
11
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
11
Selected Financial Data
12
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
12
Quantitative and Qualitative Disclosure About Market Risk
23
Financial Statements and Supplementary Data
23
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
23
Controls and Procedures
24
Other Information
25
PART III
Directors, Executive Officers and Corporate Governance
25
Executive Compensation
29
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
32
Certain Relationships, Related Transactions and Director
Independence
33
Principal Accountant Fees and Services
33
PART IV
Exhibits and Financial Statement Schedules
34
i
This annual report on Form 10-K is for the year ended December 31, 2015. The
Securities and Exchange Commission (“SEC”) allows us to “incorporate by reference”
information that we file with the SEC, which means that we can disclose important
information to you by referring you directly to those documents. Information
incorporated by reference is considered to be part of this annual report. In addition,
information that we file with the SEC in the future will automatically update and
supersede information contained in this annual report. In this annual report, “Company,”
“we,” “us” and “our” refer to iGambit Inc. and its subsidiaries.
ii
PART I
This Annual Report on Form 10-K 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. The Company has based these forward-
looking statements on the Company’s current expectations and projections about future
events. These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions about us and the Company’s subsidiaries that may cause
the Company’s actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In many cases,
you can identify forward-looking statements by terminology such as “anticipate,”
“estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,”
“predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,”
“guidance,” “outlook,” “effort,” “target” and other similar words. However, the
absence of these words does not mean that the statements are not forward-looking.
Factors that might cause or contribute to a material difference include, but are not
limited to, those discussed elsewhere in this Annual Report, including the section entitled
“Risk Factors” and the risks discussed in the Company’s other Securities and Exchange
Commission filings. The following discussion should be read in conjunction with the
Company’s audited Consolidated Financial Statements and related Notes thereto
included elsewhere in this report.
ITEM 1. BUSINESS
HISTORY
We were incorporated in the State of Delaware under the name BigVault.com Inc.
on April 13, 2000. On April 18, 2000, we merged with BigVault.com, Inc., a New York
corporation with which we were affiliated. We survived the merger, and on December 19,
2000 changed our name to bigVAULT Storage Technologies, Inc. At that time we were
in the business of providing remote, internet-based storage vaulting services and related
ancillary services to end users and resellers (the “Vault Business”).
On February 28, 2006 we sold all of our assets to Digi-Data Corporation
(“DDC”), an unrelated third party, pursuant to the terms of an Asset Purchase Agreement
dated December 21, 2005 (the “APA”), a copy of which is filed herewith as an exhibit.
As consideration for our transfer of assets under the APA, DDC paid certain of our
liabilities and agreed to make certain quarterly and annual revenue sharing payments to
us, as is further described below. Mr. Salerno and Ms. Luqman accepted employment
with DDC in senior management positions post closing, and continued to work for DDC
until February 2009. As of March 1, 2009 Mr. Salerno and Ms. Luqman returned to their
full time management roles with the Company.
On April 5, 2006, we changed our name to iGambit Inc.
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On October 1, 2009, we acquired the assets of Jekyll Island Ventures, Inc., a New
York corporation doing business as Gotham Photo Company (“Jekyll”) through our
wholly owned subsidiary Gotham Innovation Lab, Inc., a New York corporation
(“Gotham”).
On December 28, 2012, we entered into an Asset and Stock Purchase Agreement
(the “Purchase Agreement”) to acquire substantially all of the assets of IGX Global Inc. a
Connecticut corporation (“IGXUS”), and all of the issued and outstanding shares of IGX
Global UK Limited a UK Private Limited company (“IGXUK”) through our wholly
owned subsidiary IGXGLOBAL CORP., a Delaware corporation (“IGXGLOBAL”), and
thereby acquired the business operated by IGSUS and IGSUK (the “Acquired Business”).
Thomas Duffy is the sole shareholder of both IGXUK and IGXUS (the “Shareholder”).
The Purchase Agreement was disclosed on the Company’s current report on Form 8-K
filed on January 7, 2013.
On April 8, 2013, iGambit Inc. (“iGambit”) and its’ wholly owned subsidiary,
IGXGLOBAL, CORP. (“IGXGLOBAL”, and collectively, the "Company"), entered
into, and became obligated under, a transaction to rescind the Company’s Purchase
Agreement dated December 28, 2012 with IGX Global Inc. (“IGXUS”), IGX Global
UK Limited (“IGXUK”, and collectively, “IGXNJ”) and Tomas Duffy (“Duffy”) the sole
shareholder of both IGXUK and IGXUS (the “Shareholder”). The Rescission Agreement
was disclosed on the Company’s current report on Form 8-K filed on April 12, 2013.
On April 25, 2013 the conditions to closing the Rescission Agreement were
completed.
On November 4, 2015, we consummated the acquisition of Wala, Inc. doing
business as ArcMail Technology (ArcMail) in accordance with a Stock Purchase
Agreement (the “ArcMail Purchase Agreement”) by and among Wala, Inc. doing
business as ArcMail Technologies (“ArcMail”), Rory T. Welch (the “Seller”) and the
Company. Pursuant to the Stock Purchase, the total consideration to be paid for the outstanding
capital stock of ArcMail is 11,500,000 shares of the Company’s Common stock. 10,500,000
shares of iGambit’s Common stock to the Seller, and/or Seller’s designees at Closing and
the Holdback Amount of 1,000,000 shares of the iGambit’s Common stock to be held in
Escrow and paid to the Seller on later of (i) the first (1st) anniversary of completion of the
first audit of Purchaser after the Closing, or (ii) that date which is twelve (12) months
from the Closing, provided that in the event iGambit or the Purchaser has any claims for
indemnification against the Seller under the Purchase Agreement, Purchaser shall
continue to withhold the portion of the Holdback Amount subject to such claims until the
parties fully and finally resolve such claims.
The ArcMail Purchase Agreement was disclosed on the Company’s current report
on Form 8-K filed on November 10, 2015.
On November 5, 2015, through our wholly owned subsidiary Gotham Innovation
Lab, Inc. (“Gotham”), we completed the sale of certain assets of Gotham to VHT Inc.
(“VHT”) in accordance with an Asset Purchase Agreement (the “VHT Purchase
2
Agreement”) by and between Gotham and VHT. Pursuant to the Purchase Agreement
the Company received $600,000 in consideration, $400,000 of the consideration was
received at closing and the remaining $200,000 portion of the consideration is subject to
twelve (12) equal monthly payments beginning January 2016. The sale included certain
of the assets of the Gotham, including the Elliman customer agreement, all customer
accounts, all vendor agreements and all the intellectual property.
The VHT Purchase Agreement was disclosed on the Company’s current report on
Form 8-K filed on November 11, 2015.
OUR COMPANY
Introduction
We are a company focused on the technology markets. Presently we have one
operating subsidiary, of Wala, Inc. doing business as ArcMail Technology (ArcMail)
which was purchased on November 4, 2015. . ArcMail is in the business of providing
simple, secure and cost-effective email and enterprise archiving and management
solutions to businesses of all sizes across a wide range of vertical markets Revenues
consist entirely of revenues from the operation of our ArcMail subsidiary ($474,679
during the period November 4, 2015 through the year ended December 31, 2015). In
addition to ArcMail’s operations, we had income from discontinued operations of
$627,384.
Our primary focus is the acquisition of additional technology companies. We
believe that the background of our management and of our Board of Directors in the
technology markets is a valuable resource that makes us a desirable business partner to
the companies that we are seeking to acquire. When we acquire a company, we work to
assume an active role in the development and growth of the company, providing both
strategic guidance and operational support. We provide strategic guidance to our partner
companies relating to, among other things, market positioning, business model and
product development, strategic capital expenditures, mergers and acquisitions and exit
opportunities. Additionally, we provide operational support to help our partner companies
manage day-to-day business and operational issues and implement best practices in the
areas of finance, sales and marketing, business development, human resources and legal
services. Once a company joins our partner company network, our collective expertise is
leveraged to help position that company to produce high-margin, recurring and
predictable earnings and generate long-term value for our stockholders.
Our current intention is to fund the purchase price of acquisitions through a
combination of the issuance of our common stock at closing and the issuance of common
stock purchase or common-stock warrants that would become exercisable only in the
event certain earn-out conditions are satisfied by the acquired company. In addition to
acquiring entire companies, we would also consider entering into joint ventures and
acquiring less than 100 percent of a target company.
3
Our Strategy to Grow the Company
General
We have an overall corporate business plan as a holding company to seek out and
acquire operating companies. Phase one of our strategy is complete. We established new
corporate headquarters and a website, expanded our board to include 3 outside
independent directors, set up periodic board meetings, engaged a sophisticated full
service law firm, engaged a new PCAOB registered auditing firm, engaged an investment
banking firm as advisors to assist in the analysis of target acquisitions, and become an
SEC reporting company. In addition, we are working on a daily basis towards our
strategy, identifying further acquisitions that will expand and or complement our existing
subsidiary.
Sources of Target Businesses
We anticipate that target business candidates will be brought to our attention from
various sources, including our management team, investment bankers, venture capital
funds, private equity funds, leveraged buyout funds, management buyout funds,
consulting firms and other members of the financial community who will become aware
that we are seeking business partners via public relations and marketing efforts, direct
contact by management or other similar efforts, who may present solicited or unsolicited
proposals. Any finder or broker would only be paid a fee upon the completion of a
business combination. While we do not presently anticipate engaging the services of
professional firms that specialize in acquisitions on any formal basis, we may decide to
engage such firms in the future or we may be approached on an unsolicited basis. Our
officers and directors, as well as their affiliates, may also bring to our attention target
business candidates that they become aware of through their business contacts. While our
officers and directors make no commitment as to the amount of time they will spend
trying to identify or investigate potential target businesses, they believe that the various
relationships they have developed over their careers together with their direct inquiry,
will generate a number of potential target businesses that will warrant further
investigation. In no event will we pay any of our existing officers, directors, special
advisors or stockholders or any entity with which they are affiliated any finder’s fee or
other compensation for services rendered to us prior to or in connection with the
completion of a business combination. In addition, none of our officers, directors, special
advisors or existing stockholders will receive any finder’s fee, consulting fees or any
similar fees from any person or entity in connection with any business combination
involving us other than any compensation or fees that may be received for any services
provided following such business combination.
Selecting Acquisition Targets
Our management has virtually unrestricted flexibility in identifying prospective
target business and diligently reviews all of the proposals we receive.
4
The criteria we look for in a potential acquisition include, but are not limited to,
the following:
Company Characteristics
§ Established Company with proven track record
o Company with history of strong operating and financial performance, or
o Company undergoing a turnaround that demonstrates strong prospects for
future growth
§ Strong Cash Flow Characteristics.
o Cash flow neutral or positive,
o Predictable recurring revenue stream,
o High gross margins and
o Low working capital and capital expenditure needs
§ Strong Competitive Industry Position
o Leading or niche market position, and/or
o Strong channel relationships that promote barriers to entry
§ Strong Management Team
o Experienced, proven track record in delivering revenue and ability to
execute, or
o A management team that can be complemented with our contacts and
team
§ Diversified Customer and Supplier base
§ Proprietary products or marketing position
Industry Characteristics
§ Non-cyclical
§ Services Consumer or niche market
§ Fragmented with potential for consolidation or growth
§ Emerging markets
Industries of Interest
§ Real Estate Services
§ Managed Security Services Providers (MSSP)
§ IT Solutions Providers specializing in security and network technology
products, services, and support
§ Internet
o Cloud Computing
o Security focused applications
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Investment Criteria
§ Sales Volumes: $500 thousand to $30 million
§ Cash Flow: Neutral or positive
§ Structure: Controlled ownership. Closely held private company
§ Geography: North America Investment size: $1 million to $5 Million
§ Involvement: Board oversight
§ Controlling Interest: Acquire 100% of controlling interest in target
§ Marketing:
o Target captures a particular segment of the market
o Target has a focused strategic marketing plan.
These criteria are not intended to be exhaustive. Any evaluation relating to the
merits of a particular business combination will be based, to the extent relevant, on the
above factors as well as other considerations deemed relevant by our management in
effecting a business combination consistent with our business objective.
Diligence Process
Upon receipt of a business plan, the procedure is for management to review the
business plan and determine if it satisfies the Company’s acquisition criteria, and whether
the business plan should be rejected or pursued further. If the plan satisfies the
requirements, then Management meets with the target’s management to determine if there
is a synergy that can work and to explore the business plan in greater detail. Generally
this occurs over several meetings and can take some time. Depending on the nature of the
business, management may enlist certain technical or industry consultants to meet with
the target and provide feedback and analysis. Management will also review the target’s
financials. If the analysis suggests the target should be explored further Management will
present the opportunity to the BOD for approval to pursue the opportunity further. One or
two outside directors may meet with the target to make an independent assessment. If the
opportunity is approved for further exploration management will discuss potential
purchase structure with target’s management to be sure that a meeting of the minds exists
for a potential deal. At this point management will request that our investment banking
advisors give their opinion of the industry, the market and potential financing options of
the deal. Often, the investment bankers will meet with target’s management. The
investment banker’s feedback is presented to the board and, if positive, the Board
analyzes the proposed financing structure, discusses effects of a transaction on the
Company as they relate to taxes, capitalization, stock value etc., engaging the necessary
outside consultants. If all appears positive a letter of intent is negotiated and executed,
additional diligence is conducted, and definitive transaction documents are negotiated
and executed.
6
Evaluation of the Target’s Management
We would condition any acquisition on the commitment of management of the
target business to remain in place post-closing. Following a business combination, we
may seek to recruit additional managers to supplement the incumbent management of the
target business. We cannot assure you that we will have the ability to recruit additional
managers, or that any such additional managers will have the requisite skills, knowledge
or experience necessary to enhance the incumbent management. Although we intend to
closely scrutinize the management of a prospective target business when evaluating the
desirability of effecting a business combination, we cannot assure you that our
assessment of the target business’s management will prove to be correct.
Competition
In identifying, evaluating and selecting a target business, we may encounter
intense competition from other entities having a business objective similar to ours. Many
of these entities are well established and have extensive experience identifying and
effecting business combinations directly or through affiliates. Many of these competitors
possess greater technical, human and other resources than us and our financial resources
will be relatively limited when contrasted with those of many of these competitors, which
may limit our ability to compete in acquiring certain target businesses. This inherent
competitive limitation gives others an advantage in pursuing the acquisition of a target
business.
Companies Currently Under Review
We are constantly in the process of reviewing potential target companies.
Currently, we are not under contract to acquire any companies.
Our Partner Company
Wala Inc. dba ArcMail Technology
Products and Services
ArcMail is a provider of enterprise information archiving solutions for businesses
of all sizes across a wide range of vertical markets. ArcMail offers a full array of email
and data archiving solutions with broad deployment options that support a wide range of
content types from various sources.
ArcMail’s products and services are offered in a variety of deployment options
that include a turnkey appliance, a virtual machine (VM) software (VMware or MS
Hyper-V), a cloud/premise-based hybrid gateway (which can store information to a SAN,
NAS, or any cloud-based storage provider), and fully-hosted services in the cloud. Each
deployment option can support multiple data types from: most commercially available
mail servers, including all versions of MS Exchange, Linux variants, IBM Lotus Notes,
IBM Domino, and GroupWise among others; most cloud-based systems, including
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Google Gmail, MS Office365, Google Apps, and Google Docs among others; and
Microsoft SharePoint, enterprise social media such as your corporate Twitter; and
Microsoft and Linux-based file systems.
Whether a customer wants their archive to reside behind the firewall, in the
cloud, or anywhere else, ArcMail offers products and services to fit that deployment
strategy. Whatever deployment option ArcMail’s customers elect, their data is properly
organized and maintained, for e-Discovery, compliance, disaster recovery and for finding
that file that a CEO needs immediately. Customers discoverable information is being
archived using a compliant and secure solution that is scalable, dependable, and easy to
install, deploy, use, and maintain.
In addition to being an archiving solutions provider, ArcMail has created a sales
and support organization to help companies in search of expertise, information, and
supporting resources as they investigate their need and develop strategies for enterprise
information archiving. ArcMail recognizes that customers' needs are not met through a
"cookie cutter/one size fits all" approach. As an expert in the enterprise information
archiving market, ArcMail works in partnership with customers to ensure their archiving
solution is tailored to meet their unique situation and environment.
Competitive Comparison
ArcMail’s archiving solution is built on a simple and flexible design that gives
customers ownership and control over their data and offers a single comprehensive
solution for regulatory compliance, data retention and eDiscovery. ArcMail’s primary
competitors include Barracuda Networks, Inc., MS Office365, and Google Vault.
ArcMail rarely encounters other competitors such as EMC, Symantec and Smarsh, as
they primarily focus on Fortune 500 and SME markets.
ArcMail competes effectively against its primary competitors by providing a simple and
scalable architecture, and world-class customer support. ArcMail’s primary competitive
differentiation includes:
§ Simplest User Interface
MS Outlook client or a simple Web-based UI
§ Fastest Search and Retrieval
Proprietary algorithms with granular indexing
§ Most Data Source Types
We archive email, hosted email, SharePoint, system files, social media,
Google Drive, and other data sources
§ Most Deployment Options
We offer appliances, VM software, a cloud/premise-based hybrid
gateway, and a fully-hosted solution
8
§ Leading Storage-Saving Performance
Single-instance storage, granular retention rules and one of the highest
Data compression rates
§ Best Customer Service
Support is provided at our U.S. headquarters by an experienced technical
team
Future Products and Services
ArcMail’s product strategy is to provide architectures and deployment capabilities
that address the widest possible segment of the archiving market. While ArcMail is not
attempting to be “all things to all people” per se, ArcMail, as a result of its differentiated
capabilities, is able to address a majority segment. We see the ArcMail platform
including appliance, hosted and virtual products and services as viable in both the near
and long term. Enterprise class customers will continue to see the appliance model as
preferential to a hosted platform in most cases. The SMB market, which is transitioning
to the cloud in significant numbers, will help our virtualized and hosted solutions
continue to gain ground.
Customers
ArcMail currently has approximately 1,500 client accounts ranging from 50 active
email accounts to 5,000 active email accounts. Most of ArcMail’s customers are in the
Northeast, South, and Central region of the country. The typical profile of our customers
are 100-5,000 email mailboxes/employees. ArcMail’s customers are usually in regulated
industries or have e-discovery legal requests, H.R. audits, and/or regulatory compliance
issues. Their pain points will vary depending on the prospect you are speaking with. No
one Customer constitutes more than 5% of ArcMail’s sales and the loss of any customer
will not have a material adverse effect on the Company’s financial condition.
Expansion Summary
ArcMail’s objective is to be a market leader in the Enterprise Information
archiving industry. ArcMail currently has significant market share in the education and
local/County/State government industry sector. ArcMail is currently expanding its sales
and marketing initiatives to further penetrate the health care, financial services, insurance,
manufacturing, and transportation industry sectors. ArcMail has expanded its sales
channel overseas to such areas as New Zealand, Australia, Canada, Mexico and other
Latin American countries. ArcMail is also actively working to expand by providing
services to larger accounts in the SME enterprises with 5,000+ end users. ArcMail is also
planning to expand its products and services portfolio and customer channels through
acquisition.
Employees
We presently have 14 total employees all of which are full-time.
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OUR CORPORATE INFORMATION
Our principal offices are located at 1050 W. Jericho Turnpike, Suite A,
Smithtown, New York, 11787. Our telephone number is (631) 670-6777 and our fax
number is (631) 670-6780. We currently operate two corporate websites that can be
found at www.igambit.com, and www.arcmail.com (the information on the foregoing
websites does not form a part of this report).
ITEM 1A. RISK FACTORS
Not Required.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate executive office is located in Smithtown, New York, where we
lease approximately 1000 square feet of office space. Monthly lease payments are
approximately $1,620. The lease is for a term of five (5) years commencing on March 1,
2012 and ending on February 28, 2017. The lease contains annual escalations of 2% of
the annual rent.
Our ArcMail operations are located in Shreveport, Louisiana, where we lease
approximately 2,989 rentable square feet to used as office space and 178 rentable square
feet to used as storage space, for a total of 3,167 rentable square feet. space. The lease is
for a term of forty five (35) months beginning February 1, 2015 and ending October 31,
2018 payable monthly in the following manner:
02-01-15 through 04-30-15
$ 0.00/mth.
05-01-15 through 04-30-16
$ 3,404.19/mth. ($13.25/s.f/yr.-office; $7.00/s.f.Iyr.-storage)
05-01-16 through 04-30-17
$ 3,528.73/mth. ($13.75/s.f/yr.--office; $7.00/s.f./yr.-storage)
05-01-17 through 10-31-18
$ 3,653.27/mth. ($14.25/s.f/yr.--office; $7.00/s.f./yr.-storage)
Our leased properties are suitable for their respective uses and are, in general,
adequate for our present needs. Our properties are subject to various federal, state, and
local statutes and ordinances regulating their operations. Management does not believe
that compliance with such statutes and ordinances will materially affect our business,
financial condition, or results of operations.
ITEM 3. LEGAL PROCEEDINGS
Digi-Data Corporation
On October 1, 2012, we filed a lawsuit in the United States District Court for the
District of Maryland, Baltimore Division, asserting claims against DigiData Corp.
10
("Defendant") for monetary damages arising from the Defendant's breach of contract
regarding that certain Asset Purchase Agreement dated February 26, 2006 among the
parties, and to enforce payment of outstanding contingency payments due to the
Company pursuant to said agreement.
On December 13, 2013 the Court Granted Summary Judgment in iGambit’s favor
against Digi-Data in the amount of $570,590, plus interest at the Maryland legal rate of
6% per annum from August 31, 2012, and post judgment interest at the Federal statutory
Rate. Furthermore, Digi-Data’s Counterclaim was dismissed.
On February 24, 2014 we entered into a Forbearance Agreement with Digi-Data
pursuant to which Digi-Data shall pay to iGambit Six Hundred Forty-Six Thousand, Six
Hundred Sixty-Eight Dollars and Sixty-Seven Cents ($646,668.67) (the “Settlement
Amount”) in full satisfaction of the Judgment based upon certain terms, which included
the following:
Digi-Data Sale: In the event of a Digi-Data Sale, iGambit shall be paid the
Remaining Balance at closing of any such Digi-Data Sale as provided in
paragraph 2, below. iGambit acknowledges that, if the Digi-Data Sale is a sale or
sales of the Digi-Data Assets, there may be insufficient proceeds to pay the
Remaining Balance in full. If the Digi-Data Sale is a sale or sales of the stock of
Digi-Data and there are insufficient proceeds at closing to pay the Remaining
Balance in full, iGambit shall continue to receive the Subsequent Monthly
Payment until the full Remaining Balance is paid.
On May 12, 2014, Digi-Data paid the full balance due on the judgment plus all
accrued interest upon the sale of Digi-Data.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
MARKET INFORMATION
Effective March 19, 2011 the Company’s common stock is quoted on the Over
the Counter Bulletin Board, a service maintained by the Financial Industry Regulatory
Authority, under the ticker symbol “IGMB”.
HOLDERS
As of April 14, 2016, there are 39,683,990 shares of our common stock
outstanding, held of record by approximately 181 persons. We have 275,000 common
stock warrants outstanding and 1,718,900 common stock options outstanding.
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As of April 14, 2016, approximately 26,583,990 shares of our common stock are
eligible to be sold under Rule 144.
DIVIDENDS
We have never declared or paid any dividends on our common stock. Any
determination to pay dividends in the future will be at the discretion of our Board of
Directors and will be dependent upon our results of operations, financial condition,
capital requirements, contractual restrictions and other factors deemed relevant by the
Board of Directors. The Board of Directors is not expected to declare dividends or make
any other distributions in the foreseeable future, but instead intends to retain earnings, if
any, for use in business operations.
EQUITY COMPENSATION PLAN INFORMATION
We currently do not have an equity compensation plan. In 2006, we adopted the
2006 Long-Term Incentive Plan (the "2006 Plan"). The Plan expired on December 31,
2009. 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.
In addition to the 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.
RECENT SALES OF UNREGISTERED SECURITIES
During 2015 we did not sell securities in transactions not registered under the
Securities Act of 1933, as amended (the “Securities Act”).
ITEM 6. SELECTED FINANCIAL DATA
Not Required
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
12
CRITICAL ACCOUNTING ESTIMATES
Our management’s discussion and analysis of our financial condition and results
of operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of financial statements may require us to make estimates and
assumptions that may affect the reported amounts of assets and liabilities and the related
disclosures at the date of the financial statements. We do not currently have any estimates
or assumptions where the nature of the estimates or assumptions is material due to the
levels of subjectivity and judgment necessary to account for highly uncertain matters or
the susceptibility of such matters to change or the impact of the estimates and
assumptions on financial condition or operating performance is material, except as
described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Wala, Inc. and Gotham Innovation Lab, Inc. All
intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of our financial instruments, including cash, accounts receivable,
prepaid expenses, accounts payable, accrued interest, deferred revenue, and amounts due
to related parties, the carrying amounts approximate fair value due to their short
maturities. Additionally, there are no assets or liabilities for which fair value is
remeasured on a recurring basis.
Long-Lived Assets
We assess the valuation of components of its property and equipment and other
long-lived assets whenever events or circumstances dictate that the carrying value might
not be recoverable. We base our evaluation on indicators such as the nature of the assets,
the future economic benefit of the assets, any historical or future profitability
measurements and other external market conditions or factors that may be present. If such
factors indicate that the carrying amount of an asset or asset group may not be
recoverable, we determine whether an impairment has occurred by analyzing an estimate
of undiscounted future cash flows at the lowest level for which identifiable cash flows
exist. If the estimate of undiscounted cash flows during the estimated useful life of the
asset is less than the carrying value of the asset, we recognize a loss for the difference
13
between the carrying value of the asset and its estimated fair value, generally measured
by the present value of the estimated cash flows.
Revenue Recognition
We recognize revenue from product sales when the following four revenue
recognition criteria are met: persuasive evidence of an arrangement exists, an equipment
order has been placed with the vendor, the selling price is fixed or determinable, and
collectability is reasonably assured. Revenues from maintenance contracts covering
multiple future periods are recognized during the current periods and deferred revenue is
recorded for future periods and classified as current or noncurrent, depending on the
terms of the contracts.
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 have received deposits from various customers that
have been recorded as deferred revenue in the amount of $1,190,279 and $0 as of the
years ended December 31, 2015 and 2014, respectively.
Deferred revenue at December 31, 2015 will be realized in the following years
ended December 31,
2016
$
811,227
2017
78,307
2018
298,446
2019
1,200
2020
1,099
$ 1,190,279
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.
14
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking
and money market accounts and any highly liquid debt instruments purchased with a
maturity of three months or less.
Accounts Receivable
We analyze the collectability of accounts receivable from continuing operations
each accounting period and adjust our allowance for doubtful accounts accordingly. A
considerable amount of judgment is required in assessing the realization of accounts
receivables, including the creditworthiness of each customer, current and historical
collection history and the related aging of past due balances. We evaluate specific
accounts when we become aware of information indicating that a customer may not be
able to meet its financial obligations due to deterioration of its financial condition, lower
credit ratings, bankruptcy or other factors affecting the ability to render payment.
Allowance for doubtful accounts was $8,344 and $0 at December 31, 2015 and 2014,
respectively. Bad debt expense of $5,971 and $4,295 was charged to operations for the
years ended December 31, 2015 and 2014, respectively.
Property and equipment and depreciation
Property and equipment are stated at cost. Maintenance and repairs are charged to
expense when incurred. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the respective
accounts and any gain or loss is credited or charged to income. Depreciation for both
financial reporting and income tax purposes is computed using combinations of the
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 $4,917 and $4,766 was charged to operations for the
years ended December 31, 2015 and 2014, respectively.
Goodwill
Goodwill represents the excess of liabilities assumed over assets acquired of
ArcMail and the fair market value of the common shares issued by the Company for the
acquisition of ArcMail. In accordance with ASC Topic No. 350 “Intangibles – Goodwill
and Other”), the goodwill is not being amortized, but instead will be subject to an annual
assessment of impairment by applying a fair-value based test, and will be reviewed more
frequently if current events and circumstances indicate a possible impairment. An
impairment loss is charged to expense in the period identified. If indicators of impairment
are present and future cash flows are not expected to be sufficient to recover the asset’s
15
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 year ended December 31, 2015.
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 December 31,
2015, there was no unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the 2006 plan.
The 2006 Plan provided for the granting of options to purchase up to 10,000,000
shares of common stock. 8,146,900 options have been issued under the plan to date of
which 7,157,038 have been exercised and 692,962 have expired to date. There were
296,900 options outstanding under the 2006 Plan on its expiration date of December 31,
2009. All options issued subsequent to this date were not issued pursuant to any plan.
Stock option activity during the years ended December 31, 2015 and 2014 follows:
16
Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Options
Grant-Date
Life
Outstanding
Exercise Price
Fair Value
(Years)
Options outstanding at
December 31, 2013
668,900
$
0.06
$
0.10
4.69
Options granted
850,000
0.04
0.10
Options outstanding at
December 31, 2014
1,518,900
0.03
0.10
4.76
Options granted
200,000
0.01
0.10
Options outstanding at
December 31, 2015
1,718,900
$
0.03
$
0.13
3.82
Options outstanding at December 31, 2015 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
50,000
50,000
$0.01
May 1, 2016
May 1, 2006
46.900
46,900
$0.01
May 1, 2016
June 9, 2014
213,000
213,000
$0.03
June 9, 2024
June 9, 2014
159,000
159,000
$0.03
June 9, 2024
June 9, 2014
600,000
600,000
$0.03
June 9, 2024
June 6, 2014
250,000
250,000
$0.05
June 6, 2019
March 24, 2015
200,000
200,000
$0.01
March 24, 2020
Total
1,718,900
1,718,900
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 years ended December 31, 2015 and 2014 follows:
17
Weighted
(1)Weighted
Weighted
Average Grant-
Average
Date
Remaining
Warrants
Average
Contractual
Outstanding
Exercise Price
Fair Value
Life (Years)
Warrants outstanding
at December 31, 2013
275,000
$
0.94
$
0.10
5.42
No warrant activity
--
--
--
Warrants outstanding
at December 31, 2014
275,000
$
0.94
$
0.10
4.42
No warrant activity
--
--
--
Warrants outstanding
at December 31, 2015
275,000
$
0.94
$
0.10
3.42
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at December 31, 2015 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
Convertible Note
On September 16, 2013, we issued an 8% convertible note in the aggregate
principal amount of $103,500, convertible into shares of tour common stock. The Note,
including accrued interest was due June 18, 2014 and was convertible any time after 180
days at the option of the holder into shares of the our common stock at 55% of the
average stock price of the lowest 3 closing bid prices during the 10 trading day period
ending on the latest complete trading day prior to the conversion date. Interest expense
on the convertible note of $3,242 was recorded for the year ended December 31, 2014.
Initially we anticipated repaying the obligation prior to the effective date of the
holder electing to convert. Since the effective date of the election to convert has passed
we recorded a debt discount related to identified embedded derivatives relating to
conversion features and a reset provisions (see Note 7) based fair values as of the
inception date of the Note. The calculated debt discount equaled the face of the note and
was amortized over the term of the note. During the year ended December 31, 2014, the
note holder converted $49,000 of the principal balance to 1,539,934 shares of common
stock, and we repaid the remaining note balance of $54,500 and accrued interest of
$5,646 on June 18, 2014.
18
Derivative Liability
Convertible Note
During the year ended December 31, 2013, we issued a convertible note.
The note is convertible into common stock, at the holders’ option, at a discount to
the market price of our common stock. We have identified embedded derivatives
included in these notes as a result of certain anti-dilutive (reset) provisions, related to
certain conversion features. The accounting treatment of derivative financial instruments
requires that we record the fair value of the derivatives as of the inception date of the
convertible note and debt discount amortization to fair value as of each subsequent
reporting date. This resulted in a fair value of derivative liability of $152,076 in which to
the extent of the face value of convertible note was treated as debt discount with the
remainder treated as interest expense.
The fair value of the embedded derivatives at December 31, 2013, in the amount
of $152,076, was determined using the Binomial Option Pricing Model based on the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of 243.00%, (3)
weighted average risk-free interest rate of 0.09%, (4) expected lives of 0.72 to 0.75 years,
and (5) estimated fair value of the Company’s common stock of $0.51 per share. The
Company recorded interest expense from the excess of the derivative liability over the
convertible note of $48,576 during the year ended December 31, 2013. A gain on
derivative liability of $152,076 was recorded during the year ended December 31, 2014
for the satisfaction of the convertible note.
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has
adopted a sequencing approach regarding the application of ASC 815-40 to its
outstanding convertible note. Pursuant to the sequencing approach, the Company
evaluates its contracts based upon earliest issuance date.
Stock Transactions
On September 25, 2014, the Board unanimously approved an amendment to the
Company’s Articles of Incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue from seventy five million (75,000,000) to
Three Hundred Million (300,000,000) shares of Common Stock, $0.001 par value per
share, and to create a new class of stock entitled “preferred stock” (together, the
“Capitalization Amendments”). The Capitalization Amendments create provisions in the
Company’s Articles of Incorporation, which allows the voting powers, designations,
preferences and other special rights, and qualifications, limitations and restrictions of
each series of preferred stock to be established from time to time by the Board without
approval of the stockholders. No dividend, voting, conversion, liquidation or redemptions
rights as well as redemption or sinking fund provisions are yet established with respect to
the Company’s preferred stock. On October 3, 2014, the Majority Stockholders executed
and delivered to the Company a written consent approving the Capitalization
Amendments.
19
Common Stock Issued
In connection with the acquisition of Wala, Inc. we issued 11,500,000 common
shares valued at $.10 per share to the president and CEO of Wala, Inc. on November 4,
2015.
We issued 1,000,000 and 600,000 common shares for services, valued at $.20 per
share on August 3, 2015 and May 18, 2015, respectively.
In connection with the convertible note payable the note holder converted $49,000
of the principal balance to 1,539,934 shares of common stock during the year ended
December 31, 2014. The stock issued was determined based on the terms of the
convertible note.
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’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, of Wala, Inc. doing business as ArcMail Technology (ArcMail) is in the
business of providing simple, secure and cost-effective We are focused on expanding the
operations of ArcMail by marketing the company to existing and potential new clients.
Year Ended December 31, 2015 as Compared to Year Ended December 31, 2014
Assets. At December 31, 2015, we had $890,686 in current assets and $7,637,996
in total assets, compared to $276,398 in current assets and $280,786 in total assets as of
December 31, 2014. The increase in total assets was primarily due to an increase in
goodwill, inventories, accounts receivable and prepaid expenses from the purchase of the
ArcMail business, and an increase in assets from discontinued operations as a result of
the sale of Gotham in 2015.
20
Liabilities. At December 31, 2015, we had total liabilities of $6,076,680
compared to $285,277 at December 31, 2014. Our total liabilities at December 31, 2015
consisted of current liabilities including accounts payable and accrued expenses of
$636,633, accrued interest on notes payable of $302,278, Notes payable of $779,750,
Notes Payable to a related party of $156,566, liabilities from discontinued operations of
$127,353 and deferred revenue of $811,227, and long-term liabilities including notes
payable of $2,339,251, notes payable to a related party of $469,699 and deferred revenue
of $379,052, whereas our total liabilities at December 31, 2014 consisted of current
liabilities including accounts payable of $91,177 and liabilities from discontinued
operations of $194,100. We had no long term liabilities for the year ended December 31,
2014. The increase in liabilities was primarily due to the liabilities assumed in the
purchase of the ArcMail business.
Stockholders’ Equity (Deficiency). Our Stockholders’ Equity was $1,561,316 at
December 31, 2015 compared to Stockholders’ Deficiency of $(4,491) at December 31,
2014. This increase was due to the common shares issued in the purchase of the ArcMail
business and a decrease in accumulated deficit from $(2,882,199) at December 31, 2014
to $(2,798,390) at December 31, 2015 resulting from net income of $83,809 for the year
ended December 31, 2015 compared to net loss of $684,342 for the year ended December
31, 2014
Revenue and Net Income. We had revenue of $474,679 for the year ended
December 31, 2015, compared to revenue of $1,068,617 for the year ended December 31,
2014. The decrease in revenue was due primarily to the sale of the Gotham business and
purchase of the ArcMail business in November 2015. We had no other income for the
year ended December 31, 2015 compared to other income of $84,701 for the year ended
December 31, 2014 primarily due to the gain on derivative liability of $152,076. In
addition to ArcMail’s operations, we had income from discontinued operations of
$627,384 and $17,531 for the year ended December 31, 2015 and December 31, 2014,
respectively.
General and Administrative Expenses. General and Administrative Expenses
decreased to $965,609 for the year ended December 31, 2015 from $1,383,646 for the
year ended December 31, 2014. For the year ended December 31, 2015 our General and
Administrative Expenses consisted of corporate administrative expenses of $73,308, legal
and accounting fees of $165,041, payroll expenses of $330,671, Directors and Officers
Insurance of $42,206, employee benefits expenses of $22,385 (medical, dental,
retirement plan, and life insurance) and $331,998 in stock based compensation expense.
For the year ended December 31, 2014 our General and Administrative Expenses
consisted of corporate administrative expenses of $292,096, legal and accounting fees of
$111,477, payroll expenses of $731,606, Directors and Officers Insurance of $43,754,
employee benefits expenses of $74,975 (medical, dental, retirement plan, and life
insurance), $74,664 in stock based compensation expense, and a bad debt write off of
$55,074. Therefore the decreases from the year ended December 31, 2014 to the year
ended December 31, 2015 relate primarily to a decrease in payroll and employee benefits
expenses. In the event the company effectuates an acquisition in 2016 we anticipate
additional professional fees associated with the acquisition.
21
LIQUIDITY AND CAPITAL RESOURCES
General
As reflected in the accompanying consolidated financial statements, at December
31, 2015, we had $131,987 of cash and stockholders’ equity of $1,561,316. At December
31, 2014, we had $126,833 of cash and stockholders’ deficit of $(4,491).
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.
We believe we will continue to increase our cash position and liquidity for the
foreseeable future. We believe we have enough capital to fund our present operations.
Cash Flow Activity
Net cash provided by operating activities was $44,907 for the year ended
December 31, 2015, compared to $159,202 for the year ended December 31, 2014. Net
cash used by continuing operating activities was $451,023 for the year ended December
31, 2015, compared to $491,127 for the year ended December 31, 2014. Our primary
source of operating cash flows from continuing operating activities for the year ended
December 31, 2015 was from our ArcMail subsidiary’s revenues of $466,628 and for the
year ended December 31, 2014 our primary source of operating cash flows from
continuing operating activities was from revenues of $1,068,617 from our Gotham
subsidiary that was sold in November 2015. Additional contributing factors to the
change were from a decrease in accounts receivable of $56,697, an increase in prepaid
expenses of $199,207, a decrease in accounts payable and accrued expenses of $90,944,
an increase in accrued interest of $47,559 and a decrease in deferred revenue of $64,586,
Net cash provided by discontinued operating activities was $495,930 for the year ended
December 31, 2015 and $650,329 for the year ended December 31, 2014. Cash provided
by discontinued operations for the year ended December 31, 2015 consisted of $495,930
in cash payments received from VHT Inc. pursuant to the VHT Purchase Agreement.
22
Cash provided by investing activities was $11,524 for the year ended December 31,
2015 and cash used by investing activities was $4,739 for the year ended December 31,
2014. For the year ended December 31, 2015 the primary source of cash from investing
activities was cash from the subsidiary acquisitions and a decrease in deposits. For the
year ended December 31, 2014 the primary source of cash used by investing activities
was from purchases of property and equipment of $2,026 and an increase in deposits of
$2,713.
Cash used by financing activities was $(51,277) for the year ended December 31,
2015 compared to cash used by financing activities of $(54,500) for the year ended
December 31, 2014. The cash flows used by financing activities for the year ended
December 31, 2015 was primarily from repayment of stockholders loans and a note
payable. The cash flows used by financing activities for the year ended December 31,
2014 was primarily from repayment of the convertible note payable.
Supplemental Cash Flow Activity
In the year ended December 31, 2015 the company paid interest of $3,146
compared to interest of $10,033 in the year ended December 31, 2014.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance-sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not Required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this Item 8 are included in this Report beginning
on page F-1, as follows:
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheet as of December 31, 2014 and 2013
F-3
Consolidated Statement of Income for the years ended December 31, 2014 and
F-4
2013
Consolidated Statement of Changes in Stockholder’s Equity for the years ended
F-5
December 31, 2014 and 2013
Consolidated Statement of Cash Flows for the years ended December 31, 2014
F-6
and 2013
Notes to Financial Statements
F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
23
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, as required by paragraph (b) of Rule 13a-15 and
15d-15 of the Exchange Act under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act as of December 31, 2015. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of December 31, 2015.
Management’s Annual Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rule 13a-
15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by,
or under the supervision of, our Chief Executive Officer (our principal executive officer)
and Chief Financial Officer (our principal accounting and financial officer), and effected
by our board of directors, management and other personnel, 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. Our internal control over financial reporting includes those policies and
procedures that:
§ Pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets;
§ Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management
and our directors; and
§ Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Our internal control system was designed to provide reasonable assurance to our
management and board of directors regarding the preparation and fair presentation of
published financial statements. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
24
Our management assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2015. In making this assessment,
management used the criteria set forth in the Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on management’s assessment, we concluded that, as of December 31,
2015, our internal control over financial reporting was effective.
Change in Internal Controls
During the quarter ended December 31, 2015, there were no changes in our
internal control over financial reporting that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors manages our business and affairs. Under our Articles of
Incorporation and Bylaws, the Board will consist of not less than one, nor more than
seven directors. Currently, our Board consists of five directors.
The names, ages, positions and dates appointed of our current directors and
executive officers are set forth below.
Name
Age
Position
Appointed
John Salerno
77 Chief Executive Officer, President, March 2009
Chairman of the Board, and
(appointed Chairman
Director
and Director in
April 2000)
Elisa Luqman
51 Chief Financial Officer, Executive March 2009
Vice President, General Counsel,
(appointed Director
and Director
in August 2009)
James J. Charles
73 Director
March 2006
George G. Dempster
76 Director
January 2001
John Keefe
73 Director
July 2013
John Salerno, Chief Executive Officer, President, Chairman of the Board,
and Director. Mr. Salerno is a seasoned hands-on executive with over 40 years of
experience with public and private computer software and service companies.
25
Mr. Salerno built a multi-million dollar business from a start up, servicing the real estate
industry. The business was sold in 1984 and Mr. Salerno provided consulting services to
a wide range of clients through 1995. In 1996, along with his daughter and a small group
of private accredited investors, he co-founded the Company. Mr. Salerno was President
and CEO of the Company from April 1, 2000 until February 28, 2006. After signing
contracts with Verizon and Cablevision, the Company sold its assets in 2006 to Digi-Data
Corporation. From March 1, 2006 thru February 2009 Mr. Salerno served as President of
the Vault Services Division of Digi-Data Corporation. Upon the expiration of his 3 year
contract the Vault Services Division was at a revenue run rate of $12 million annually. As
of March 1, 2009, Mr. Salerno returned to his full time management roll at the Company.
Mr. Salerno is an ex — US Marine Corps, Crypto/ Communications Officer and has a BS
in Mathematics from Fordham University. Mr. Salerno is Elisa Luqman’s father.
Mr. Salerno was nominated as a Director because if his intimate knowledge of the
Company and its history as a founder. Additionally, Mr. Salerno’s mathematical and
technical background as a data center manager early in his professional career and later as
a software developer offers the board hand’s on technical experience in both operations
and software analysis. Mr. Salerno utilized his experience and contacts to secure the
major customers driving the sales that generate the Company’s payment stream from
DDC. Moreover, Mr. Salerno adds value to Gotham through his 40 plus years serving
the New York Real Estate industry. He is thoroughly familiar with the unique workings
of the New York real estate industry and has many contacts within that community that
are a benefit to Gotham.
Elisa Luqman, Chief Financial Officer, Executive Vice President, General
Counsel, and Director. Ms. Luqman is a computer literate attorney with over 18 years
experience with intellectual property and computer software. Prior to co-founding the
Company, Ms. Luqman was president of University Software Corp., a software
development company focused on a wide range of student educational and intellectual
applications. Ms. Luqman was Chief Operating Officer of the Company, from April 1,
2000 until February 28, 2006. From March 1, 2006 through February 28, 2009
Ms. Luqman was employed as Chief Operating Officer of the Vault Services Division of
Digi-Data Corporation, the company that acquired the Company’s assets in 2006, and
subsequently during her tenure with Digi-Data Corporation she became the in-house
general counsel for the entire corporation. In that capacity she was responsible for
acquisitions, mergers, patents, and employee contracts, and worked very closely with
Digi-Data’s outside counsel firms, DLA-Piper, the Law Offices of Sandra T. Carr and the
patent firm of Jordan and Hamburg. As of March 1, 2009, Ms. Luqman rejoined the
Company in her current capacities. Ms Luqman received a BA degree in Marketing, a JD
in Law, and a MBA Degree in Finance from Hofstra University. Ms. Luqman is a
member of the bar in New York and New Jersey. Ms. Luqman is John Salerno’s
daughter.
Ms. Luqman was nominated as a Director because of her intimate knowledge of
the Company and its history as a founder. Additionally, as an attorney, Ms. Luqman’s
legal background enables her to provide counsel to the Company. Her experience as
general counsel to the Company provides her with a unique insight into the Company’s
26
contracts with customers and vendors, intellectual property assets and issues, financing
transactions and shareholder transactions. Moreover, having been through the merger
and acquisition process on both sides of the table, Ms. Luqman offers the Company in-
house guidance throughout the acquisition process. That combined with Ms. Luqman’s
MBA in Finance aids in providing the Board with more efficient analysis of input from
outside auditors and legal advisors.
James J. Charles, Director. Mr. Charles is a high profile financial executive
with a broad base of experience with firms ranging in size from $24MM to $180MM in
annual revenue. He worked closely with management and Boards of Directors on matters
ranging from mergers and acquisitions to stock restructurings and spin-offs. Mr. Charles
has been a self employed Certified Public Accountant from 1999 to present. From 1994
to 1999 Mr. Charles was the chief financial officer of Interpharm Holdings, Inc.
Interpharm Holdings, Inc., through its subsidiary, Interpharm, Inc., engaged in the
development, manufacture, and marketing of generic prescription strength and over-the-
counter pharmaceuticals in the United States. It also focused on the development of
products in the areas of female hormone, scheduled narcotic, soft gelatin capsule, oral
liquid, products coming off patent, and other products. From 1966 to 1994 Mr. Charles
was a Senior Managing Partner with Ernst & Young. Mr. Charles’ education includes
studies and management programs at Harvard University and Williams College.
Mr. Charles received his BBA in Accounting at Manhattan College.
Mr. Charles was nominated as a Director because of his financial expertise. He
has been involved in the practice of public accounting for over forty years. During his
tenure as a Senior Managing Partner at Ernst & Young he spent considerable years
analyzing potential acquisition targets for corporate clients and has particular experience
and skills on matter such as mergers and acquisitions, stock restructuring and spin-offs.
He has also been a Chief Financial Officer of a public company.
George G. Dempster, Director. Mr. Dempster was Commissioner of Commerce
for the State of New York from 1979 to 1983. He served as the Chairman of the Finance
Committee for Hofstra University for 25 years from 1976 through 2001, and is currently
Chairman Emeritus of the Board of Trustees. Mr. Dempster has been the Chairman of
Tran-Leisure Corp. since 1983, and was its CEO from 1983-2002. Tran -Leisure Corp is
a diversified holding company with interests ranging from helicopter services to
manufacturing. From 1969 to 1973 Mr. Dempster served as the CEO of Cybernetics, a
major computer software developer. Mr. Dempster served as a marketing manager for
IBM from 1961 to 1968. Mr. Dempster has a BA in business administration from Hofstra
University.
Mr. Dempster was nominated as a Director because of his strong administrative,
financial and economic background. Having served as Commissioner of Commerce for
the State of New York for 4 years and on the Board of Hofstra University for over 25
years, Mr. Dempster provides the Company with extensive experience in commerce and
administration in both the private and public sectors. Moreover, during his tenure at
Hofstra University Mr. Dempster was intimately involved in several financing
transactions to maintain the University in a solvent and profitable manner. Additionally,
27
having been CEO of a diversified holding company, Mr. Dempster is thoroughly familiar
with the merger and acquisition process. He offers years of experience analyzing
business, their models and economics, and identifying the appropriate financing vehicles.
John Keefe, Director. Mr. Keefe is an investment banker, venture capitalist, founder
of three businesses, and a turnaround consultant to businesses in trouble. Since 2011 to
Present, Mr. Keefe is the Founder and Chief Development Officer of Security Capital
Advisors LLC, located in Jersey City, NJ. Security Capital Advisors LLC is a firm
providing indirect financing to local governments in the US. From 2007 to 2011 Mr.
Keefe was Managing Director of Nachman Hays Brownstein, located in New York, NY.
Nachman Hays Brownstein is a national turnaround management firm, assisting
underperforming and troubled companies, maximizing value for owners, investors,
creditors and employees. Mr. Keefe was also a founding General Partner of a venture
capital firm, a founder and CFO of a computer software company, a Senior Vice
President of an investment banking firm, and emergency CFO and Chief Restructuring
Officer of several distressed businesses. He is a graduate of Harvard College and Harvard
Business School.
Mr. Keefe’ was nominated as a Director because of his financial expertise
combined with his strong technical background. He started his career as a computer
software engineer and designer for IBM, General Electric, and Litton Industries. He
evolved into the financial arena serving many years a corporate Chief Financial Officer.
He is now involved in the practice of venture capital and investment banking He has
particular skills acting as a turnaround consultant to businesses in trouble being a
‘Certified Turnaround Professional’ by the Turnaround Management Association. He
offers years of experience analyzing business, their revenue models, and identifying
appropriate financing vehicles.
COMMITTEES OF THE BOARD
The Board has established an Audit Committee and a Compensation Committee.
The Board does not currently have a Nominating Committee. The work typically
conducted by a Nominating Committee is conducted by the full Board.
Audit Committee
The Audit Committee presently consists of Messrs. Charles, Keefe and
Dempster, with Mr. Charles serving as chairman. Our Board has determined that
Mr. Charles qualifies as an “audit committee financial expert” as defined under the
federal securities laws. The Audit Committee is responsible for monitoring and reviewing
our financial statements and internal controls over financial reporting. In addition, they
recommend the selection of the independent auditors and consult with management and
our independent auditors prior to the presentation of financial statements to stockholders
and the filing of our forms 10-Q and 10-K. The Audit Committee has adopted a charter
and it is posted on our web site at www.igambit.com.
28
Compensation Committee
The Compensation Committee presently consists of Messrs. Charles, Keefe and
Dempster, with Mr. Keefe serving as chairman. The Compensation Committee is
responsible for reviewing and recommending to the Board the compensation and over-all
benefits of our executive officers, including administering the Company’s 2006 Long
Term Incentive Plan. The Compensation Committee may, but is not required to, consult
with outside compensation consultants. The Compensation Committee has adopted a
charter and the charter is posted on our web site at www.igambit.com.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
to the Company under Rule 16a-3(e) under the Exchange Act during its most recent fiscal
year and Forms 5 and amendments thereto furnished to the Company with respect to its
most recent fiscal year, and any written representation to the Company from the reporting
person that no Form 5 is required, no person who, at any time during the fiscal year, was
a director, officer, beneficial owner of more than ten percent of the Company’s Common
Stock, or any other person known to the Company to be subject to section 16 of the
Exchange Act with respect to the Company, failed to file on a timely basis, as disclosed
in the above Forms, reports required by section 16(a) of the Exchange Act during the
most recent fiscal year or prior fiscal years, except as described below:
Name
No. of Late Reports
No. of transactions
Failure to file a
that were not
required Form
reported on a timely
basis
Rory T Welch
1
1
0
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. A copy of the Code of Ethics is attached as an exhibit to
this report. A copy of the Code of Ethics is available on the Company’s website at
www.igambit.com. Any amendments to, or waivers from, the Code of Ethics will be
disclosed on the Company’s website at www.igambit.com.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation received by our executive
officers, for their service, during the year ended December 31, 2015.
29
Current
Nonqualified
Officers
Non-equity
Deferred
Name &
Option Incentive Plan Compensation
All Other
Principal
Salary
Bonus Stock Awards Compensation
Earnings
Compensation
Total
Position
Year
($)
($)
($)
($)
($)
($)
($)
($)
John
Salerno
2015
46,635
0
0
0
0
0
20,790 (1)
67,425
CEO,
President 2014 131,250
0
0
0
0
0
13,206(2)
144,456
Chairman
&
2013 200,000
0
0
0
0
0
10,237(3)
210,237
Director
Elisa
Luqman
2015
60,577
0
0
0
0
0
0
60,577
Acting
CFO,
2014 143,746
0
0
0
0
0
36,514(4)
180,260
EVP, GC
and
2013 200,000
0
0
0
0
0
30,125(5)
230,125
Director
Rory T
Welch
2015 37,500(6)
0
0
0
0
0
1831(7)
39,331
(1) Includes $5,220 in health insurance premiums and $15,670 in life insurance
premiums.
(2) Includes $6,264 in health insurance premiums and $6,942 in life insurance
premiums.
(3) Includes $6,168 in health insurance premiums and $4,069 in life insurance
premiums.
(4) Includes $36,514 in health and dental insurance premiums.
(5) Includes $30,125 in health and dental insurance premiums.
(7) Includes $1,831 in health, dental and life insurance premiums.
Employment Arrangements with Named Executive Officers
Effective November 4, 2015, along with the acquisition ArcMail, we entered into an
employment agreement with Rory T. Welch (the Welch Employment Agreement). Under the
five-year agreement, Mr. Welch is entitled to (a) a base salary of $180,000 per year, (b) an annual
bonus of $45,000, and (c) participation in all benefit programs generally made available to
ArcMail employees. The Welch Employment Agreement also contains provisions designed to
protect the confidentiality of the Company’s confidential information and restricting Mr. Welch
from engaging in certain competitive activities for the greater of 60 months from the date of the
agreement or two years following the termination of his employment.
Mr. Welch has diverse management experience in growing international businesses
across multiple industries, Rory Welch is ushering ArcMail into the next phase of the Company’s
lifecycle with emphasis on expanding global sales, marketing and distribution strategies. A senior
executive with more than 20 years of experience in strategy, supply chain, sourcing, distribution,
logistics, marketing and sales management, he has success in expanding profits through both
revenue growth and cost savings.
30
Prior to joining ArcMail, he managed his own consulting firm, and then before that held
leadership positions at Movado Group, Inc., including COO for the boutique division and Senior
Vice President of wholesale operations. Earlier in his career, Welch served as VP of strategic
planning and analysis at Arrow Electronics, where he was responsible for building performance
models across all aspects of the organization. While at Arrow, Welch also held positions as VP of
product management for Asia-Pacific, with responsibility for overseeing all aspects of product
management for the $1 billion division; as well as general manager of aerospace/military program
accounts; product manager; and asset and logistics manager.
A graduate of Indiana University’s Kelley School of Business with a master’s degree in
business administration, Welch holds a bachelor’s degree in economics from Furman University.
We do not currently have any other employment agreements with our executive officers.
Compensation of the Board of Directors
| OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | |||||||||
| OPTION AWARDS | STOCK AWARDS | ||||||||
| Name (a) | Number of Securities Underlying Unexercised Options | Number of Securities Underlying Unexercised Options | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Option Exercise Price | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested |
| James Charles | 59,000 | 0 | 0 | $0.03 | 06/09/2024 | 0 | 0 | 0 | 0 |
| James Charles | 100,000 | 0 | 0 | $0.03 | 06/09/2024 | 0 | 0 | 0 | 0 |
| George Dempster | 113,000 | 0 | 0 | $0.03 | 06/09/2024 | 0 | 0 | 0 | 0 |
| George Dempster | 100,000 | 0 | 0 | $0.03 | 06/09/2024 | 0 | 0 | 0 | 0 |
| John Keefe | 600,000 | 0 | 0 | $0.03 | 06/09/2024 | 0 | 0 | 0 | 0 |
The following table sets forth the compensation received by our directors, for their
service as directors, during the year ended December 31, 2014.
31
Nonqualified
Fees
Non-equity
deferred
earned or
Stock
Option
incentive plan
compensation
All other
paid in
awards
awards
compensation
earnings
compensation
Total
Name
cash ($)
($)
($)
($)
($)
($)
($)
John Salerno (1)
-
-
-
-
-
-
0
Elisa Luqman (1)
-
-
-
-
-
-
0
James J. Charles
$4,000
-
-
-
-
$4,000
George G. Dempster
$4,000
-
-
-
-
$4,000
John Keefe
$4,000
-
-
-
-
$4,000
(1) These individuals serve as executive officers of the Company, and do not
receive any compensation for the services they provide as directors of the
Company.
Members of our Board receive $1,000 per quarter for their service to the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information known to us, as of April 14, 2016,
relating to the beneficial ownership of shares of common stock by: (i) each person who is
known by us to be the beneficial owner of more than 5% of the Company’s outstanding
common stock; (ii) each director; (iii) each executive officer; and (iv) all executive
officers and directors as a group. Under securities laws, a person is considered to be the
beneficial owner of securities owned by him (or certain persons whose ownership is
attributed to him) or securities that can be acquired by him within 60 days, including
upon the exercise of options, warrants or convertible securities. The Company determines
a beneficial owner’s percentage ownership by assuming that options, warrants and
convertible securities that are held by the beneficial owner and which are exercisable
within 60 days, have been exercised or converted. The Company believes that all persons
named in the table have sole voting and investment power with respect to all shares of
common stock shown as being owned by them. Unless otherwise indicated, the address
of each beneficial owner in the table set forth below is care of iGambit Inc., 1050 W.
Jericho Turnpike, New York, 11787. The percentages in the following table are based
upon 25,044,056 shares outstanding as of April 14, 2016.
Amount and Nature
of Beneficial
Name of Beneficial Owner
Ownership
Percent of Class
John Salerno, C.E.O., President, Chairman
of the Board, and Director
5,146,900(1)
%
Elisa Luqman, C.F.O., Executive Vice
President, General Counsel and Director
5,685,000,(2)
%
James J. Charles, Director
600,000(3)
%
George G. Dempster, Director
605,000(4)
%
Rory T. Welch, CEO & President ArcMail
10,000,000
Executive Officers and Directors as Group:
20,036,900 (4)
%
32
1. Includes: options to purchase 46,900 shares of common stock at $0.01 per share held by John L.
Salerno, Mr. Salerno’s son; and options to purchase 100,000 shares of common stock at $0.01 per
share held by Dean T. Salerno, Mr. Salerno’s son.
2. Includes 685,000 shares of common stock held by Muhammad Luqman, Ms. Luqman’s husband.
3. Includes options to purchase 159,000 shares of the common stock at $0.03 per share.
4. Includes options to purchase 213,000 shares of the common stock at $0.03 per share.
5. Includes the disclosures in footnotes 1 through 4 above.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
RELATED PARTY TRANSACTIONS
None.
BOARD INDEPENDENCE
The Company has elected to use the independence standards of the NYSE AMEX
Equities Exchange in its determination of whether the members of its Board are
independent. Based on the foregoing, the Company has concluded that Mr. Charles and
Mr. Dempster are independent. The Board has established an Audit Committee and a
Compensation Committee. The Board does not currently have a Nominating Committee.
The work typically conducted by a Nominating Committee is conducted by the full
Board.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows what Michael F. Albanese, CPA billed for the audit
and other services for the year ended December 31, 2015 and December 31, 2014
respectively.
Year Ended Year Ended
12/31/ 2015 12/31/2014
Audit Fees
$
38,500 $
39,725
Audit-Related Fees
15,000-
---
All Tax Fees
---
—
Other Fees
---
—
Total
$
53,500 $
39,725
Audit Fees — This category includes the audit of the Company’s annual financial
statements, review of financial statements included in the Company’s Form 10-Q
Quarterly Reports and services that are normally provided by the independent auditors in
connection with engagements for those years.
33
Audit-Related Fees — This category includes assurance and related services by
the independent auditor that are reasonably related to the performance of the audit or
review of the Company’s financial statements and that are not reported under the caption
“Audit Fees.”
Tax Fees — This category includes services rendered by the independent auditor
for tax compliance, tax advice, and tax planning.
All Other Fees — This category includes products and services provided by the
independent auditor other than the services reported under the captions “Audit Fees,”
“Audit-Related Fees,” and “Tax Fees.”
Overview — The Company’s Audit Committee, reviews, and in its sole
discretion pre-approves, our independent auditors’ annual engagement letter including
proposed fees and all audit and non-audit services provided by the independent auditors.
Accordingly, all services described under “Audit Fees,” “Audit-Related Fees,” “Tax
Fees,” and “All Other Fees” were pre-approved by our Company’s Audit Committee. The
Audit Committee may not engage the independent auditors to perform the non-audit
services proscribed by law or regulation. The Company’s Audit Committee may delegate
pre-approval authority to a member of the Board of Directors, and authority delegated in
such manner must be reported at the next scheduled meeting of the Board of Directors.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheet as of December 31, 2015 and 2014
F-2
Consolidated Statement of Income for the years ended December 31, 2015 and
F-4
2014
Consolidated Statement of Changes in Stockholder’s Equity for the years
F-5
ended December 31, 2015 and 2014
Consolidated Statement of Cash Flows for the years ended December 31, 2015
F-6
and 2014
Notes to Financial Statements
F-8
(b) Exhibits
Exhibit No. Description
3.1(i) Certificate of Incorporation, filed with the Delaware Secretary of State on
April 13, 2000 (1)
3.1(ii)
Certificate of Merger, filed with the Delaware Secretary of State on
April 18, 2000 (1)
3.1(iii)
Certificate of Amendment Changing Name, filed with the Delaware
Secretary of State on December 19, 2000 (1)
34
3.1(iv)
Certificate of Merger filed with the Delaware Secretary of State on
February 17, 2006 (1)
3.1(v)
Certificate of Amendment Changing Name filed with the Delaware
Secretary of State on April 5, 2006 (1)
3.1(vi)
Certificate of Amendment Increasing Authorized Common Stock to 75
Million Shares, filed with the Delaware Secretary of State on
December 2, 2009 (1)
3.1(vii)
Certificate of Amendment Increasing Authorized Common Stock to300
Million shares of Common Stock and to create a new class of stock
entitled “Preferred Stock, filed with the Delaware Secretary of State on
November 24, 2014.
3.2
Bylaws (1)
4.1
Form of Stock Certificate (2)
4.2
Common Stock Purchase Warrant issued to Roetzel & Andress (3)
10.1
iGambit Inc. 2006 Long Term Incentive Plan, Amended 12/31/2006 (1)
10.2
Employment Agreement between Digi-Data Corporation and Mr. Salerno
(2)
10.3
Employment Agreement between Digi-Data Corporation and
Mrs. Luqman (2)
14
Code of Ethics (5)
21
Subsidiaries (1)
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 incorporated by reference into
any other filing under the Security Act of 1933, as amended, or by the
Security Exchange Act of 1934, as amended.)
32.2
Certification of the 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 incorporated by reference into any other
filing under the Security Act of 1933, as amended, or by the Security
Exchange Act of 1934, as amended.)
(1) Incorporated by reference to Form 10 filed on December 31, 2009.
(2) Incorporated by reference to Amendment No. 1 to Form 10 filed on June 11, 2010.
(3) Filed with initial Form 10-K on June 15, 2010.
(4) We hereby agree to furnish the SEC with any omitted schedule or exhibit upon
request.
(5) Filed with Form 10-K/A (Amendment No. 1) on September 13, 2010.
35
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Hauppauge, New York, on
April 14, 2016.
iGambit Inc.
April 14, 2016
By: /s/ John Salerno
John Salerno, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this
Annual Report on Form 10-K has been signed by the following persons in the capacities
indicated:
Signature
Title
Date
/s/ John Salerno
Chief Executive Officer and
Director
April 14, 2016
John Salerno
/s/ Elisa Luqman
Chief Financial Officer, Executive
April 14, 2016
Vice President, General Counsel,
Elisa Luqman
Principal Accounting Officer and
Director
/s/ James J. Charles
Director
April 14, 2016
James J. Charles
/s/ George G. Dempster
Director
April 14, 2016
George G. Dempster
/s/ John Keefe
Director
April 14, 2016
John Keefe
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of iGambit Inc.
We have audited the accompanying consolidated balance sheet of iGambit Inc. as of
December 31, 2015 and December 31, 2014, and the related consolidated statement of
operations, consolidated statement of changes in stockholders’ equity (deficiency), and
consolidated statement of cash flows for the two year period ended December 31, 2015.
iGambit Inc.’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. The company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of iGambit Inc. as of December 31, 2015 and 2014 and the
results of its operations and its cash flows for the year in the period ended December 31,
2015, in conformity with accounting principles generally accepted in the United States of
America.
/s/ Michael F. Albanese
Michael F. Albanese, CPA
Parsippany, New Jersey
April 14, 2016
F-1
IGAMBIT INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2015
2014
ASSETS
Current assets
Cash
$
131,987
$
126,833
Accounts receivable, net
230,182
--
Inventories
21,160
--
Prepaid expenses
244,592
34,529
Assets from discontinued operations, net
262,765
115,036
Total current assets
890,686
276,398
Property and equipment, net
40,433
2,318
Other assets
Goodwill
6,705,157
--
Deposits
1,720
2,070
Total other assets
6,706,877
2,070
$
7,637,996
$
280,786
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued expenses
$
636,633
$
91,177
Accrued interest on notes payable
291,107
--
Accrued interest on notes payable - related party
11,171
--
Amounts due to related parties
74,871
--
Deferred revenue, current portion
811,227
--
Notes payable, current portion
779,750
--
Note payable - related party, current portion
156,566
--
Liabilities from discontinued operations
127,353
194,100
Total current liabilities
2,888,678
285,277
Long-term liabilities
F-2
Deferred revenue, net of current portion
379,052
--
Notes payable
2,339,251
--
Note payable - related party
469,699
--
Total long-term liabilities
3,188,002
--
Total liabilities
6,076,680
285,277
Stockholders' equity (deficiency)
Preferred stock, $.001 par value; authorized - 100,000,000 shares;
issued and outstanding - 0 shares in 2015 and 2014, respectively
--
--
Common stock, $.001 par value; authorized - 200,000,000 shares;
issued and outstanding - 39,683,990 shares in 2015 and
26,583,990 shares in 2014
39,684
26,584
Additional paid-in capital
4,320,022
2,851,124
Accumulated deficit
(2,798,390)
(2,882,199)
Total stockholders' equity (deficiency)
1,561,316
(4,491)
$
7,637,996
$
280,786
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2015
2014
Sales:
Hardware and software
$
140,942
$
--
Support and maintenance
333,737
--
Total sales
474,679
--
Cost of sales
8,051
--
Gross profit
466,628
--
Operating expenses
General and administrative expenses
965,609
723,432
Loss from operations
(498,981)
(723,432)
Other income (expenses)
Gain on derivative liability
--
152,076
Interest expense
(44,598)
(4,719)
Amortization of debt discount
--
(63,250)
Interest income
4
--
Total other income (expenses)
(44,594)
84,107
Loss from continuing operations
(543,575)
(639,325)
Income (loss) from discontinued operations
627,384
(45,017)
Net income (loss)
$
83,809
$
(684,342)
Basic and fully diluted earnings (loss) per common share:
Continuing operations
$
(.02)
$
(.03)
Discontinued operations
$
.02
$
.00
Net earnings per common share
$
.00
$
(.03)
Weighted average common shares outstanding - basic
29,168,374
25,947,791
Weighted average common shares outstanding - fully
diluted
30,962,274
27,373,471
The accompanying notes are an integral part of these condensed consolidated financial
statements.
F-4
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Common stock
Paid-in
Accumulated
Shares
Amount
Capital
Deficit
Totals
Balances, December 31, 2013
25,044,056
$
25,044
$ 2,729,000
$
(2,197,857)
$
556,187
Note payable converted to
common stock
1,539,934
1,540
47,460
--
49,000
Compensation for vested stock
options
--
--
74,664
--
74,664
Net loss
(684,342)
(684,342)
Balances, December 31, 2014
26,583,990
26,584
2,851,124
(2,882,199)
(4,491)
Compensation for vested stock
options
--
--
11,998
--
11,998
Common stock issued for
services
1,600,000
1,600
318,400
--
320,000
Common stock issued in
business acquisition
11,500,000
11,500
1,138,500
--
1,150,000
Net income
83,809
83,809
Balances, December 31, 2015
39,683,990
$
39,684
$ 4,320,022
$
(2,798,390)
$ 1,561,316
The accompanying notes are an integral part of these condensed consolidated financial
statements.
F-5
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2015
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
83,809
$ (684,342)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Income from discontinued operations
(627,384)
45,017
Sale of discontinued property and equipment
6,118
--
Depreciation
4,917
4,766
Debt discount amortization
--
63,250
Stock-based compensation expense
331,998
74,664
Gain on derivative liability
--
(152,076)
Increase (Decrease) in cash flows as a result of
changes in asset and liability account balances:
Accounts receivable
56,697
--
Prepaid expenses
(199,207)
(26,021)
Due from rescission agreement
--
239,779
Accounts payable and accrued expenses
(90,944)
(56,164)
Accrued interest on notes payable
47,559
--
Deferred revenue
(64,586)
--
Net cash used by continuing operating activities
(451,023)
(491,127)
Net cash provided by discontinued operating activities
495,930
650,329
NET CASH PROVIDED BY OPERATING ACTIVITIES
44,907
159,202
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
(1,797)
--
Cash received from acquisition
10,198
--
(Increase) decrease in deposits
10,413
--
Net cash provided (used) by continuing investing activities
18,814
--
Net cash used by discontinued investing activities
(7,290)
(4,739)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
(4,739)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholders' loans
3,516
3,600
Repayments of stockholders' loans
(38,671)
(3,600)
F-6
Repayments of note payable
(26,058)
--
Repayments of convertible note payable
--
(54,500)
Net cash used by continuing financing activities
(61,213)
(54,500)
Net cash provided by discontinued financing activities
9,936
--
NET CASH USED BY FINANCING ACTIVITIES
(51,277)
(54,500)
NET INCREASE (DECREASE) IN CASH
5,154
99,963
CASH - BEGINNING OF YEAR
126,833
26,870
CASH - END OF YEAR
$
131,987
$
126,833
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
$
3,146
$
10,333
Non-cash investing and financing activities:
Note payable converted to common stock
$
--
$ (49,000)
Common stock issued in business acquisition
1,150,000
--
The accompanying notes are an integral part of these condensed consolidated financial
statements.
F-7
IGAMBIT INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2015 and 2014
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.
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:
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
F-8
The results of operations of ArcMail have been included in the consolidated statements of
operations from the acquisition date. The following table presents pro forma results of
operations of the Company and ArcMail as if the companies had been combined as of
January 1, 2014. The pro forma condensed combined financial information is presented
for informational purposes only. The unaudited pro forma results of operations are not
necessarily indicative of results that would have occurred had the acquisition taken place
at the beginning of the earliest period presented, or of future results.
December 31,
December 31,
2015
2014
Pro forma revenue
$
1,876,313
$
3,423,954
Pro forma gross profit
$
1,791,518
$
2,579,661
Pro forma loss from operations
$
(703,699)
$
(1,381,581)
Pro forma net loss
$
(496,347)
$
(1,828,332)
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 for the years ended December 31, 2015 and 2014 are presented
as follows:
2015
2014
Assets:
Cash
$
13,893
$
6,603
Accounts receivable, net
247,372
81,671
Prepaid expenses
1,500
10,581
Deposits
--
10,063
F-9
Property and equipment
--
6,118
Total assets
$
262,765
$
115,036
Liabilities:
Accounts payable and accrued expenses
117,417
194,100
Note payable - related party
9,936
--
$
127,353
$
194,100
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,
F-10
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. There were no advertising costs
for the years ended December 31, 2015 and 2014, respectively.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking and
money market accounts and any highly liquid debt instruments purchased with a maturity
of three months or less.
Accounts Receivable
The Company analyzes the collectability of accounts receivable from continuing
operations each accounting period and adjusts its allowance for doubtful accounts
accordingly. A considerable amount of judgment is required in assessing the realization
of accounts receivables, including the creditworthiness of each customer, current and
historical collection history and the related aging of past due balances. The Company
evaluates specific accounts when it becomes aware of information indicating that a
customer may not be able to meet its financial obligations due to deterioration of its
financial condition, lower credit ratings, bankruptcy or other factors affecting the ability
to render payment. Allowance for doubtful accounts was $8,345 and $0 at December 31,
2015 and 2014, respectively. Bad debt expense of $5,971 and $0 was charged to
operations for the years ended December 31, 2015 and 2014, respectively.
Inventories
Inventories consisting of finished products are state 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
F-11
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
year ended December 31, 2015.
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 $1,190,279 and $0 as of the years ended December 31, 2015 and 2014,
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
F-12
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
F-13
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
F-14
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 4 – Property and Equipment
Property and equipment are carried at cost and consist of the following at December 31,
2015 and 2014:
2015
2014
Office equipment and fixtures
$
139,006
$
7,164
Computer hardware
90,943
--
Computer software
77,700
--
Development equipment
35,318
--
342,967
7,164
Less: Accumulated depreciation
302,534
4,846
$
40,433
$
2,318
Depreciation expense of $4,917 and $4,766 was charged to operations for the years ended
December 31, 2015 and 2014, 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.
Years Ended
December 31,
2015
2014
Stock options
1,718,900
1,518,900
Stock warrants
275,000
275,000
Total shares excluded from calculation
1,993,900
1,793,900
F-15
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 December 31,
2015, there was no unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the 2006 plan.
The 2006 Plan provided for the granting of options to purchase up to 10,000,000 shares
of common stock. 8,146,900 options have been issued under the plan to date of which
7,157,038 have been exercised and 692,962 have expired to date. There were 296,900
options outstanding under the 2006 Plan on its expiration date of December 31, 2009. All
options issued subsequent to this date were not issued pursuant to any plan.
F-16
Stock option activity during the years ended December 31, 2015 and 2014 follows:
Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Options
Grant-Date
Life
Outstanding
Exercise Price
Fair Value
(Years)
Options outstanding at
December 31, 2013
668,900
$
0.06
$
0.10
4.69
Options granted
850,000
0.04
0.10
Options outstanding at
December 31, 2014
1,518,900
0.03
0.10
4.76
Options granted
200,000
0.01
0.10
Options outstanding at
December 31, 2015
1,718,900
$
0.03
$
0.13
3.82
Options outstanding at December 31, 2015 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
50,000
50,000
$0.01
May 1, 2016
May 1, 2006
46.900
46,900
$0.01
May 1, 2016
June 9, 2014
213,000
213,000
$0.03
June 9, 2024
June 9, 2014
159,000
159,000
$0.03
June 9, 2024
June 9, 2014
600,000
600,000
$0.03
June 9, 2024
June 6, 2014
250,000
250,000
$0.05
June 6, 2019
March 24, 2015
200,000
200,000
$0.01
March 24, 2020
Total
1,718,900
1,718,900
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.
F-17
Warrant activity during the years ended December 31, 2015 and 2014 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, 2013
275,000
$
0.94
$
0.10
5.42
No warrant activity
--
--
--
Warrants outstanding
at December 31, 2014
275,000
$
0.94
$
0.10
4.42
No warrant activity
--
--
--
Warrants outstanding
at December 31, 2015
275,000
$
0.94
$
0.10
3.42
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at December 31, 2015 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 December 31, 2015 will be realized in the
following years ended December 31,
2016
$
811,227
2017
78,307
2018
298,446
2019
1,200
2020
1,099
$ 1,190,279
F-18
Note 8 – Convertible Note Payable
On September 16, 2013, the Company issued an 8% convertible note in the aggregate
principal amount of $103,500, convertible into shares of the Company’s common stock.
The Note, including accrued interest was due June 18, 2014 and was convertible any time
after 180 days at the option of the holder into shares of the Company’s common stock at
55% of the average stock price of the lowest 3 closing bid prices during the 10 trading
day period ending on the latest complete trading day prior to the conversion date. Interest
expense on the convertible note of $3,242 was recorded for the year ended December 31,
2014.
Initially the Company had anticipated repaying the obligation prior to the effective date
of the holder electing to convert. Since the effective date of the election to convert has
passed the Company recorded a debt discount related to identified embedded derivatives
relating to conversion features and a reset provisions (see Note 9) based fair values as of
the inception date of the Note. The calculated debt discount equaled the face of the note
and was amortized over the term of the note. During the year ended December 31, 2014,
the Company amortized $63,250 of debt discount. During the year ended December 31,
2014, the noteholder converted $49,000 of the principal balance to 1,539,934 shares of
common stock, and the Company repaid the remaining note balance of $54,500 and
accrued interest of $5,646 on June 18, 2014.
Note 9 - Derivative Liability
Convertible Note
During the year ended December 31, 2013, the Company issued a convertible note (see
Note 8 above).
The note is convertible into common stock, at the holders’ option, at a discount to the
market price of the Company’s common stock. The Company has identified embedded
derivatives included in these notes as a result of certain anti-dilutive (reset) provisions,
related to certain conversion features. The accounting treatment of derivative financial
instruments requires that the Company record the fair value of the derivatives as of the
inception date of the convertible note and debt discount amortization to fair value as of
each subsequent reporting date. This resulted in a fair value of derivative liability of
$152,076 in which to the extent of the face value of convertible note was treated as debt
discount with the remainder treated as interest expense.
The fair value of the embedded derivatives at December 31, 2013, in the amount of
$152,076, was determined using the Binomial Option Pricing Model based on the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of 243.00%, (3)
weighted average risk-free interest rate of 0.09%, (4) expected lives of 0.72 to 0.75 years,
and (5) estimated fair value of the Company’s common stock of $0.51 per share. The
Company recorded interest expense from the excess of the derivative liability over the
convertible note of $48,576 during the year ended December 31, 2013. A gain on
F-19
derivative liability of $152,076 was recorded during the year ended December 31, 2014
for the satisfaction of the convertible note.
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted
a sequencing approach regarding the application of ASC 815-40 to its outstanding
convertible note. Pursuant to the sequencing approach, the Company evaluates its
contracts based upon earliest issuance date.
Note 10 – Notes Payable
Notes payable at December 31, 2015 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
$
779,750
2017
779,750
2018
779,750
2019
779,751
$
3,119,001
Note 11 – Stock Transactions
On September 25, 2014, the Board unanimously approved an amendment to the
Company’s Articles of Incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue from seventy five million (75,000,000) to
Three Hundred Million (300,000,000) shares of Common Stock, $0.001 par value per
share, and to create a new class of stock entitled “preferred stock” (together, the
“Capitalization Amendments”). The Capitalization Amendments create provisions in the
Company’s Articles of Incorporation, which allows the voting powers, designations,
preferences and other special rights, and qualifications, limitations and restrictions of
each series of preferred stock to be established from time to time by the Board without
approval of the stockholders. No dividend, voting, conversion, liquidation or redemptions
rights as well as redemption or sinking fund provisions are yet established with respect to
the Company’s preferred stock. On October 3, 2014, the Majority Stockholders executed
and delivered to the Company a written consent approving the Current Action.
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.
F-20
In connection with the convertible note payable (see Note 8 above) the noteholder
converted $49,000 of the principal balance to 1,539,934 shares of common stock during
the year ended December 31, 2014. The stock issued was determined based on the terms
of the convertible note.
Note 12 - Income Taxes
The Company follows Accounting Standards Codification subtopic 740, Income Taxes
(“ASC 740”) which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the financial
statements or tax returns. Under such method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective
tax bases using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred taxes are classified as current or non-current, depending on
the classification of the assets and liabilities to which they relate.
The difference between income tax expense computed by applying the federal statutory
corporate tax rate and actual income tax expense is as follows:
Years Ended
December 31,
2015
2014
Statutory U.S. federal income tax rate
34.0%
34.0%
State income taxes, net of
federal income tax benefit
0.0%
0.1%
Tax effect of expenses that are not
deductible for income tax purposes
(11.2)%
(.8)%
Return to Provision Items
0.0%
0.0%
Other
0.0%
0.0%
Change in Valuation Allowance
(45.2)%
(33.3)%
Effective tax rate
(0.0)%
(0.0)%
At December 31, the significant components of the deferred tax assets (liabilities) are
summarized below:
2015
2014
Deferred Tax Assets:
Net Operating Losses
$412,750
$874,716
Other
184,646
36,744
Total deferred tax assets
597,397
911,460
Deferred Tax Liabilities:
--
--
Total deferred tax liabilities
--
--
F-21
Valuation Allowance
(597,397)
(911,460)
Net deferred tax assets
$
--
$
--
As of December 31, 2015, the Company had federal and state net operating loss
carryforwards of approximately $1.8 million and $2.5 million, respectively, which expire
at various dates from 2023 through 2034. These net operating loss carryforwards may be
used to offset future taxable income and thereby reduce the Company’s U.S. federal and
state income taxes.
In accordance with ASC 740, 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 as of December 31, 2015 and 2014
has been established as Management believes that the Company will not realize the
benefit of those deferred tax assets. Therefore, no tax provision has been recorded for the
years ended December 31, 2015 and 2014.
The Company complies with the provisions of ASC 740-10 in accounting for its
uncertain tax positions. ASC 740-10 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial
statements. Under ASC 740-10, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely that not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the
position. Management has determined that the Company has no significant uncertain tax
positions requiring recognition under ASC 740-10.
The Company is subject to income tax in the U.S., and certain state jurisdictions. The
Company has not been audited by the U.S. Internal Revenue Service, or any states in
connection with income taxes. The Company’s tax years generally remain open to
examination for all federal and state income tax matters until its net operating loss
carryforwards are utilized and the applicable statutes of limitation have expired. The
federal and state tax authorities can generally reduce a net operating loss (but not create
taxable income) for a period outside the statute of limitations in order to determine the
correct amount of net operating loss which may be allowed as a deduction against income
for a period within the statute of limitations.
The Company recognizes interest and penalties related to unrecognized tax benefits, if
incurred, as a component of income tax expense.
Note 13 - Retirement Plan
ArcMail has a defined contribution 401(k) plan, which covers substantially all
employees. Under the terms of the Plan, Wala is currently not required to match
F-22
employee contributions. The Company did not make any employer contributions to the
Plan in 2015.
Note 14 – Concentrations and Credit Risk
Sales and Accounts Receivable
No customer accounted for more than 10% of sales for the years ended December 31,
2015 and 2014, 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 December 31, 2015 and
2014, respectively.
Note 15 - Fair Value Measurement
The Company adopted the provisions of Accounting Standards Codification subtopic
825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines
fair value as the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of
inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.
All items required to be recorded or measured on a recurring basis consist of derivative
liabilities and are based upon level 3 inputs.
F-23
To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment. In
certain cases, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, for disclosure purposes, the level is the fair value
hierarchy within which the fair value measurement is disclosed and is determined based
on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning
retained earnings and no impact on the financial statements.
As of December 31, 2015 and 2014, the Company did not have any items that would be
classified as level 1 or 2 disclosures.
The Company recognizes its derivative liabilities as level 3 and values its derivatives
using the methods discussed in Note 8. While the Company believes that its valuation
methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value at the reporting
date. The primary assumptions that would significantly affect the fair values using the
methods discussed in Note 8 are that of volatility and market price of the underlying
common stock of the Company.
As of December 31, 2015 and 2014, the Company did not have any derivative
instruments that were designated as hedges.
Fluctuations in the Company’s stock price are a primary driver for the changes in the
derivative valuations during each reporting period. As the stock price decreases for each
of the related derivative instruments, the value to the holder of the instrument generally
decreases, therefore decreasing the liability on the Company’s balance sheet.
Additionally, stock price volatility is one of the significant unobservable inputs used in
the fair value measurement of each of the Company’s derivative instruments. The
simulated fair value of these liabilities is sensitive to changes in the Company’s expected
volatility. A 10% change in pricing inputs and changes in volatilities and correlation
factors would currently not result in a material change in value for the level 3 financial
liability.
Note 16 - 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 $155,566 through December
2019. The notes include interest at 6% and are subordinated to the notes payable (see
Note 10).
Principal amounts due on notes payable for the years ended December 31, are as follows:
F-24
2016
$
155,566
2017
155,566
2018
155,566
2019
155,567
$
626,265
Note 17 – 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
$ 61,286
2017
46,581
2018
36,533
$144,400
Rent expense of $68,564 and $74,988 was charged to operations for the years ended
December 31, 2014 and 2013, 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.
F-25
Exhibit 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 302
I, John Salerno, certify that:
1. I have reviewed this Annual Report on Form 10-K of iGambit Inc. (the
“Registrant”);
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 control 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 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 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.
Date: April 14, 2016 /s/ John Salerno
John Salerno
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 302
I, Elisa Luqman, certify that:
1. I have reviewed this Annual Report on Form 10-K of iGambit Inc. (the “Registrant”);
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 control 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
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 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.
Date: April 14, 2016
/s/ Elisa Luqman
Elisa Luqman
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report of iGambit Inc. (the “Company”) on
Form 10-K for the twelve months ended December 31, 2015, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, John Salerno, Principal Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fully presents, in all material respects, the
financial condition and results of operations of the Company.
By: /s/ John Salerno
John Salerno
Principal Executive Officer
April 14, 2016
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report of iGambit Inc. (the
“Company”) on Form 10-K for the twelve months ended December 31, 2015, as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I, Elisa
Luqman, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fully presents, in all material respects, the
financial condition and results of operations of the Company.
By: /s/ Elisa Luqman
Elisa Luqman
Principal Financial Officer
April 14, 2016
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2015 |
Apr. 14, 2016 |
Jun. 30, 2015 |
|
| Document and Entity Information: | |||
| Entity Registrant Name | iGambit, Inc. | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2015 | ||
| 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 | 2015 | ||
| Document Fiscal Period Focus | FY |
Statement of Financial Position - Parenthetical Igambit Inc December 31st 2015 and 2014 - USD ($) |
Dec. 31, 2015 |
Dec. 31, 2014 |
|---|---|---|
| Condensed Consolidated Balance Sheets Parenthetical | ||
| Preferred Stock, Par Value | $ 0.001 | |
| Preferred Stock, Shares Authorized | 100,000,000 | |
| Preferred Stock, Shares Issued | 0 | |
| Preferred Stock, Shares Outstanding | 0 | |
| Common Stock, Par Value | $ 0.001 | $ 0.001 |
| Common Stock, Shares Authorized | 200,000,000 | 200,000,000 |
| Common Stock, Shares Issued | 39,683,990 | 26,583,990 |
| Common Stock, Shares Outstanding | 39,683,990 | 26,583,990 |
| Common Stock, Value, Outstanding | $ 39,684 | $ 26,584 |
Note 1 - Organization and Basis of Presentation |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 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.
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:
The results of operations of ArcMail have been included in the consolidated statements of operations from the acquisition date. The following table presents pro forma results of operations of the Company and ArcMail as if the companies had been combined as of January 1, 2014. The pro forma condensed combined financial information is presented for informational purposes only. The unaudited pro forma results of operations are not necessarily indicative of results that would have occurred had the acquisition taken place at the beginning of the earliest period presented, or of future results.
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Note 3 - Summary of Significant Accounting Policies |
12 Months Ended |
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Dec. 31, 2015 | |
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| 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. There were no advertising costs for the years ended December 31, 2015 and 2014, respectively.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking and money market accounts and any highly liquid debt instruments purchased with a maturity of three months or less.
Accounts Receivable
The Company analyzes the collectability of accounts receivable from continuing operations each accounting period and adjusts its allowance for doubtful accounts accordingly. A considerable amount of judgment is required in assessing the realization of accounts receivables, including the creditworthiness of each customer, current and historical collection history and the related aging of past due balances. The Company evaluates specific accounts when it becomes aware of information indicating that a customer may not be able to meet its financial obligations due to deterioration of its financial condition, lower credit ratings, bankruptcy or other factors affecting the ability to render payment. Allowance for doubtful accounts was $8,345 and $0 at December 31, 2015 and 2014, respectively. Bad debt expense of $5,971 and $0 was charged to operations for the years ended December 31, 2015 and 2014, respectively.
Inventories
Inventories consisting of finished products are state 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 year ended December 31, 2015.
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 $1,190,279 and $0 as of the years ended December 31, 2015 and 2014, 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 ofASU 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 |
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| 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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| 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 December 31, 2015, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 plan.
The 2006 Plan provided for the granting of options to purchase up to 10,000,000 shares of common stock. 8,146,900 options have been issued under the plan to date of which 7,157,038 have been exercised and 692,962 have expired to date. There were 296,900 options outstanding under the 2006 Plan on its expiration date of December 31, 2009. All options issued subsequent to this date were not issued pursuant to any plan. Stock option activity during the years ended December 31, 2015 and 2014 follows:
Options outstanding at December 31, 2015 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 years ended December 31, 2015 and 2014 follows:
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at December 31, 2015 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 December 31, 2015 will be realized in the following years ended December 31,
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Note 8 - Convertible Note Payable |
12 Months Ended |
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Dec. 31, 2015 | |
| Notes | |
| Note 8 - Convertible Note Payable |
Note 8 – Convertible Note Payable
On September 16, 2013, the Company issued an 8% convertible note in the aggregate principal amount of $103,500, convertible into shares of the Company’s common stock. The Note, including accrued interest was due June 18, 2014 and was convertible any time after 180 days at the option of the holder into shares of the Company’s common stock at 55% of the average stock price of the lowest 3 closing bid prices during the 10 trading day period ending on the latest complete trading day prior to the conversion date. Interest expense on the convertible note of $3,242 was recorded for the year ended December 31, 2014.
Initially the Company had anticipated repaying the obligation prior to the effective date of the holder electing to convert. Since the effective date of the election to convert has passed the Company recorded a debt discount related to identified embedded derivatives relating to conversion features and a reset provisions (see Note 9) based fair values as of the inception date of the Note. The calculated debt discount equaled the face of the note and was amortized over the term of the note. During the year ended December 31, 2014, the Company amortized $63,250 of debt discount. During the year ended December 31, 2014, the noteholder converted $49,000 of the principal balance to 1,539,934 shares of common stock, and the Company repaid the remaining note balance of $54,500 and accrued interest of $5,646 on June 18, 2014. |
Note9 - Derivative Liability |
12 Months Ended |
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Dec. 31, 2015 | |
| Notes | |
| Note9 - Derivative Liability |
Note 9 - Derivative Liability
Convertible Note
During the year ended December 31, 2013, the Company issued a convertible note (see Note 8 above).
The note is convertible into common stock, at the holders’ option, at a discount to the market price of the Company’s common stock. The Company has identified embedded derivatives included in these notes as a result of certain anti-dilutive (reset) provisions, related to certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the convertible note and debt discount amortization to fair value as of each subsequent reporting date. This resulted in a fair value of derivative liability of $152,076 in which to the extent of the face value of convertible note was treated as debt discount with the remainder treated as interest expense.
The fair value of the embedded derivatives at December 31, 2013, in the amount of $152,076, was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 243.00%, (3) weighted average risk-free interest rate of 0.09%, (4) expected lives of 0.72 to 0.75 years, and (5) estimated fair value of the Company’s common stock of $0.51 per share. The Company recorded interest expense from the excess of the derivative liability over the convertible note of $48,576 during the year ended December 31, 2013. A gain on derivative liability of $152,076 was recorded during the year ended December 31, 2014 for the satisfaction of the convertible note.
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible note. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date. |
Note 13 - Retirement Plan |
12 Months Ended |
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Dec. 31, 2015 | |
| Notes | |
| Note 13 - Retirement Plan |
Note 13 - Retirement Plan
ArcMail has a defined contribution 401(k) plan, which covers substantially all employees. Under the terms of the Plan, Wala is currently not required to match employee contributions. The Company did not make any employer contributions to the Plan in 2015. |
Note 14 - Concentrations and Credit Risk |
12 Months Ended |
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Dec. 31, 2015 | |
| Notes | |
| Note 14 - Concentrations and Credit Risk |
Note 14 – Concentrations and Credit Risk
Sales and Accounts Receivable
No customer accounted for more than 10% of sales for the years ended December 31, 2015 and 2014, 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 December 31, 2015 and 2014, respectively. |
Fair Value Measurement, Policy |
12 Months Ended |
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Dec. 31, 2015 | |
| Notes | |
| Fair Value Measurement, Policy |
Note 15 - Fair Value Measurement
The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
All items required to be recorded or measured on a recurring basis consist of derivative liabilities and are based upon level 3 inputs.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level is the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements.
As of December 31, 2015 and 2014, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in Note 8. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Note 8 are that of volatility and market price of the underlying common stock of the Company.
As of December 31, 2015 and 2014, the Company did not have any derivative instruments that were designated as hedges.
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases, therefore decreasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. A 10% change in pricing inputs and changes in volatilities and correlation factors would currently not result in a material change in value for the level 3 financial liability. |
Note 16 - Related Party Transactions |
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| Note 16 - Related Party Transactions |
Note 16 - 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 $155,566 through December 2019. The notes include interest at 6% and are subordinated to the notes payable (see Note 10).
Principal amounts due on notes payable for the years ended December 31, are as follows:
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Note 3 - Summary of Significant Accounting Policies: Principles of Consolidation (Policies) |
12 Months Ended |
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Dec. 31, 2015 | |
| 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) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| 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) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| 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) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| 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) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Advertising Costs |
Advertising Costs
The Company expenses advertising costs as incurred. There were no advertising costs for the years ended December 31, 2015 and 2014, respectively. |
Note 3 - Summary of Significant Accounting Policies: Cash and Cash Equivalents (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| Policies | |
| Cash and Cash Equivalents |
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking and money market accounts and any highly liquid debt instruments purchased with a maturity of three months or less. |
Note 3 - Summary of Significant Accounting Policies: Property and Equipment and Depreciation (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| 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
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Note 3 - Summary of Significant Accounting Policies: Recent Accounting Pronouncements (Policies) |
12 Months Ended |
|---|---|
Dec. 31, 2015 | |
| 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 ofASU 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 December 31, 2015, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 plan.
The 2006 Plan provided for the granting of options to purchase up to 10,000,000 shares of common stock. 8,146,900 options have been issued under the plan to date of which 7,157,038 have been exercised and 692,962 have expired to date. There were 296,900 options outstanding under the 2006 Plan on its expiration date of December 31, 2009. All options issued subsequent to this date were not issued pursuant to any plan. Stock option activity during the years ended December 31, 2015 and 2014 follows:
Options outstanding at December 31, 2015 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 years ended December 31, 2015 and 2014 follows:
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at December 31, 2015 consist of:
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| Label | Element | Value |
|---|---|---|
| Shares, Outstanding | us-gaap_SharesOutstanding | 26,583,990 |
| Stockholders' Equity, before treasury stock | us-gaap_StockholdersEquityBeforeTreasuryStock | $ (4,491) |
| Accumulated Other Comprehensive Income | ||
| Stockholders' Equity, before treasury stock | us-gaap_StockholdersEquityBeforeTreasuryStock | (2,882,199) |
| Additional Paid-in Capital | ||
| Stockholders' Equity, before treasury stock | us-gaap_StockholdersEquityBeforeTreasuryStock | $ 2,851,124 |
| Common Stock | ||
| Shares, Outstanding | us-gaap_SharesOutstanding | 26,583,990 |
| Stockholders' Equity, before treasury stock | us-gaap_StockholdersEquityBeforeTreasuryStock | $ 26,584 |