Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - iGambit, Inc.igambitexh32151611.htm
EX-31.2 - EXHIBIT 31.2 - iGambit, Inc.igambitexh31251611.htm
EX-32.2 - EXHIBIT 32.2 - iGambit, Inc.igambitexh32251611.htm
EX-31.1 - EXHIBIT 31.1 - iGambit, Inc.igambitexihit31151611.htm




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
     
þ
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2011
     
o
 
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from                       to

Commission file number 000-53862

iGambit, Inc.
(Exact name of small business issuer as specified in its charter)
     
Delaware
 
11-3363609
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1600 Calebs Path Extension, Suite 114
Hauppauge, New York 11788
(Address of Principal Executive Offices)(Zip Code)

(631) 780-7055
(Issuer’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No 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 filer o
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller 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 12b-2 of the Exchange Act). Yes o     No þ

The Registrant had 23,954,056 shares of its common stock outstanding as of May 16, 2011.

 
 

 

iGambit, Inc.
Form 10-Q

       
Page No.
Part I — Financial Information
   
         
Item 1.
 
Financial Statements:
 
1
   
Consolidated Balance Sheets
 
1
   
Consolidated Statements of Income
 
2
   
Consolidated Statements of Cash Flows
 
3
   
Notes to Consolidated Financial Statements
 
4
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
8
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
10
         
Item 4.
 
Controls and Procedures
 
10
         
Part II — Other Information
   
         
Item 1.
 
Legal Proceedings
 
10
         
Item 1A.
 
Risk Factors
 
10
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
10
         
Item 3.
 
Defaults upon Senior Securities
 
11
         
Item 4.
 
Removed and Reserved
 
11
         
Item 5.
 
Other Information
 
11
         
Item 6.
 
Exhibits
 
11
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 
 
 

 
 

 

PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements

IGAMBIT INC.
 
CONSOLIDATED BALANCE SHEETS
 
             
   
MARCH 31,
   
DECEMBER 31,
 
   
2011
   
2010
 
             
ASSETS
 
             
Current assets
           
    Cash
  $ 356,930     $ 465,549  
    Accounts receivable
    238,267       124,651  
    Prepaid expenses
    185,880       326,245  
    Notes receivable
    472,000       472,000  
    Notes receivable - stockholder
    17,000       17,000  
Assets from discontinued operations
    904,829       812,730  
                 
Total current assets
    2,174,906       2,218,175  
                 
Property and equipment, net
    7,657       5,087  
                 
Other assets
               
    Goodwill
    111,026       111,026  
    Deposits
    2,500       2,500  
                 
Total other assets
    113,526       113,526  
                 
    $ 2,296,089     $ 2,336,788  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
Current liabilities
               
    Accounts payable
  $ 240,008     $ 326,227  
    Note payable - related party
    25,390       25,390  
                 
Total current liabilities
    265,398       351,617  
                 
Stockholders' equity
               
    Common stock, $.001 par value; authorized - 75,000,000 shares;
               
        issued and outstanding - 23,954,056 shares, respectively
    23,954       23,954  
    Additional paid-in capital
    2,402,275       2,402,275  
    Accumulated deficit
    (395,538 )     (441,058 )
                 
Total stockholders' equity
    2,030,691       1,985,171  
                 
    $ 2,296,089     $ 2,336,788  
                 


 
1

 


IGAMBIT INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
THREE MONTHS ENDED MARCH 31,
 
             
   
2011
   
2010
 
         
Restated
 
             
Sales
  $ 411,903     $ 167,342  
                 
Cost of sales
    130,221       47,872  
                 
Gross profit
    281,682       119,470  
                 
Operating expenses
               
    General and administrative expenses
    452,399       429,567  
                 
Loss from operations
    (170,717 )     (310,097 )
                 
Other income
               
    Interest income
    7,235       484  
                 
Loss from continuing operations before income tax benefit
    (163,482 )     (309,613 )
                 
Income tax benefit
    (49,217 )     (120,806 )
                 
Loss from continuing operations
    (114,265 )     (188,807 )
                 
Income from discontinued operations (net of taxes of $82,314
               
  and $220,164)
    159,785       344,993  
                 
Net income
  $ 45,520     $ 156,186  
                 
                 
Basic and fully diluted earnings (loss) per common share:
               
  Continuing operations
  $ (.01 )   $ (.01 )
  Discontinued operations, net of tax
  $ .01     $ .02  
Net earnings per common share
  $ .00     $ .01  
                 
Weighted average common shares outstanding
    23,954,056       23,954,056  




 
2

 

IGAMBIT INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
THREE MONTHS ENDED MARCH 31,
 
   
2011
   
2010
 
         
Restated
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
    Net income
  $ 45,520     $ 156,186  
    Adjustments to reconcile net income to net
               
         cash used by operating activities
               
         Income from discontinued operations
    (159,785 )     (344,993 )
         Depreciation
    672       89  
         Increase (Decrease) in cash flows as a result of
               
         changes in asset and liability account balances:
               
            Accounts receivable
    (113,616 )     (40,210 )
            Prepaid expenses
    140,365       (112,240 )
            Accounts payable
    (86,219 )     42,094  
                 
    Net cash used by continuing operating activities
    (173,063 )     (299,074 )
    Net cash used by discontinued operating activities
    (82,314 )     (220,415 )
                 
              NET CASH USED BY OPERATING ACTIVITIES
    (255,377 )     (519,489 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
    Purchases of property and equipment
    (3,242 )     --  
                 
    Net cash used by continuing investing activities
    (3,242 )     --  
    Net cash provided by discontinued investing activities
    150,000       414,618  
                 
              NET CASH PROVIDED BY INVESTING ACTIVITIES
    146,758       414,618  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES:
               
    Increase in loans payable to related party
    --       37,079  
                 
NET DECREASE IN CASH
    (108,619 )     (104,871 )
                 
CASH - BEGINNING OF PERIOD
    465,549       857,074  
                 
CASH - END OF PERIOD
  $ 356,930     $ 752,203  
                 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
    Cash paid during the period for:
               
      Interest
  $ 848     $ 116  
      Income taxes
    13,940       202,101  

 
3

 



 



IGAMBIT INC.
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2011 and 2010

Note 1 - Organization and Basis of Presentation

The consolidated financial statements presented are those of iGambit Inc., (the “Company”) and its wholly-owned subsidiary, 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 22, 2000 before changing to iGambit Inc. on July 18, 2006.  Gotham was incorporated under the laws of the state of New York on September 23, 2009.

In the opinion of management, the accompanying interim financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for these interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

Note 2 – Discontinued Operations

Sale of Business

On February 28, 2006, the Company entered into an asset purchase agreement with Digi-Data Corporation (“Digi-Data”), whereby Digi-Data acquired the Company’s assets and its online digital vaulting business operations in exchange for $1,500,000, which was deposited into an escrow account for payment of the Company’s outstanding liabilities.  In addition, as part of the sales agreement, the Company receives payments from Digi-Data based on 10% of the net vaulting revenue payable quarterly over five years.  The Company is also entitled to an additional 5% of the increase in net vaulting revenue over the prior year’s revenue.  These adjustments to the sales price are included in the discontinued operations line of the statements of income.

The assets of the discontinued operations are presented in the balance sheets under the captions “Assets of discontinued operations”.  The underlying assets of the discontinued operations for the years ended December 31 are as follows:

   
2010
   
2009
 
ASSETS
               
Current:
               
Accounts receivable
 
 $
1,062,730
   
$
713,732
 
Noncurrent:
               
Restricted cash
   
--
     
150,985
 
Assets of discontinued operations
 
 $
1,062,730
   
 $
864,717
 

Accounts Receivable
 
Accounts receivable includes 50% of contingency payments earned for the previous quarter.  Reserve for bad debts of $250,000 was charged to operations for the year ended December 31, 2010.  No reserve for bad debts was charged to operations for the three months ended March 31, 2011.

Note 3 – Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Gotham Innovation Lab, Inc.  All significant 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 reporting amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 and cash equivalents, accounts receivable, accounts payable, and amounts due to related parties, the carrying amounts approximate fair value due to their short maturities.

Revenue Recognition

Contingency payment income is recognized quarterly from a percentage of Digi-Data’s vaulting service revenue, and is included in discontinued operations.

The Company’s revenues from continuing operations consist of revenues primarily from sales of products and services rendered to real estate brokers.  Revenues are recognized upon delivery of the products or services.

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.
 
4

 

Accounts Receivable

The Company analyzes the collectability of accounts receivable 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 current 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.  There was no bad debt expense charged to operations for the three months ended March 31, 2011 and 2010.
 
Prepaid Expenses

Prepaid expenses consist of the following:
 
    March 31,     December 31,  
    2011     2010  
             
 Prepaid federal income taxes   $ 159,316     $ 249,558  
 Prepaid state income taxes      23,677       72,264  
 Prepaid insurance       2,887        4,423  
    $ 185,880     $ 326,245  
 
Property and equipment and depreciation
 

Property and equipment are stated at cost.  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. During the three months ended March 31, 2011, the Company purchased computer equipment totaling $3,242. Computer equipment is depreciated over 5 years.  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 expense of $672 and $89 was charged to operations for the three months ended March 31, 2011 and 2010, respectively.
 
Goodwill

Goodwill represents the fair market value of the common shares issued and common stock options granted by the Company for the acquisition of Jekyll by the Company’s subsidiary, Gotham.  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 Gotham’s operations may cause impairment.  At December 31, 2010, the Company performed an impairment study and determined that there is no indication that present and future cash flows are not expected to be sufficient to recover the carrying amount of goodwill.  The Company has not performed an impairment study during the three months ended March 31, 2011.  Based on the Company’s evaluation of goodwill, no impairment was recorded during the three months ended March 31, 2011.

Stock-Based Compensation

The Company accounts for its stock-based 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 valuation model to estimate the fair value of its stock options and warrants. The Black-Scholes option valuation model requires the input of highly subjective assumptions including the expected stock price volatility of the Company’s common stock.  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.

Note 4 – Restatement to Prior Consolidated Financial Statements
 
On October 26, 2010, the Company’s Audit/Corporate Governance Committee determined that the previously issued audited consolidated financial statements for the year ended December 31, 2009 (contained in the Company’s Annual Report on Form 10-K filed June 15, 2010, and subsequently amended by Amendment No. 1 to the Annual Report on Form 10-K filed on September 13, 2010) and the previously issued unaudited consolidated financial statements for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010 (contained in the Company’s Quarterly Reports on Form 10-Q filed, respectively, on June 17, 2010 (Amendment No. 1 to The Quarterly Report for March 31, 2010 on Form 10-Q filed on September 13, 2010) and August 16, 2010, and November 22, 2010) should be revised. The restatements to these consolidated financial statements reflect the appropriate income tax provision, goodwill, compensation from vested warrants, and reclassifications in the statements of cash flows.

For the year ended December 31, 2009, the Company determined that a schedule M-1 deduction for payments of deferred compensation was not claimed on the 2009 corporate tax return, resulting in an overstated income tax accrual aggregating $107,559.  The December 31, 2009 Form 10-K/A properly reflects this item. The net impact on this item increased net income by $107,559. This item also increased prepaid expenses for the overpaid taxes by $107,559 for the three months ended March 31, 2010 and for the six months ended June 30, 2010.  The Company also determined that its reporting of the Gotham acquisition resulted in an overstatement of goodwill and additional paid-in capital of $73,974.  The net impact of this item decreased goodwill, and additional paid-in capital by $73,974.  The March 31, 2010 and June 30, 2010 goodwill and additional paid-in capital balances were restated accordingly.

For the year ended December 31, 2009, the Company determined that compensation expense for 2,250,000 stock warrants granted on May 26, 2009 was overstated as a result of overvaluing the warrants.  The December 31, 2009 Form 10-K/A properly reflects this item. The net impact on this item increased net income and decreased additional paid-in capital by $51,970.

The Company determined that payment for unpaid compensation was incorrectly classified as a financing activity.  The December 31, 2009 and September 30, 2009 statements of cash flows were restated to reflect the proper classification of the payment for unpaid compensation as an operating activity.  The Company determined that part of the cash received from discontinued operations of Digi-Data classified as operating activities should have been classified as investing activities.  The December 31, 2009 and 2008 and the September 30, 2010 and 2009 statements of cash flows were restated to reflect the proper classification of cash received from discontinued operations of Digi-Data.
 
5

The following table presents the previously reported and the restated amounts included in the restatements:

   
Previously
       
Restated as
 
   
Reported as of
       
of
 
   
March 31,
 
Effect of
   
March 31,
 
   
2010
 
Restatement
   
2010
 
                   
Changes to Consolidated Balance Sheet
                 
Goodwill
  $ 185,000     $ (73,974 )   $ 111,026  
Prepaid expenses
  $ 13,519     $ 107,559     $ 121,078  
Additional paid-in capital
  $ 2,522,387     $ (125,944 )   $ 2,396,443  
Accumulated deficit
  $ (602,538 )   $ 159,529     $ (443,009 )

Changes to Consolidated Statement of Cash Flows
                 
Net cash used by discontinued operating activities
  $ (150,557 )   $ (69,858 )   $ (220,415 )
Net cash provided by discontinued investing activities
  $ 344,760     $ 69,858     $ 414,618  

Note 5 – Notes Receivable

In connection with a letter of intent the Company entered into with Allied Airbus, Inc. (“Allied”) on July 20, 2010 to which both parties were unable to reach a mutually acceptable definitive agreement, the Company provided various loans to Allied totaling $472,000 at March 31, 2011, for which promissory notes were issued.  The notes are personally guaranteed by the officers of Allied, bear interest at a rate of 6% and are due in one year.

Accrued interest on the notes was $6,983 for the three months ended March 31, 2011.
Note 6 - Earnings Per Common Share

The Company calculates net earnings (loss) per common share in accordance with ASC 260 “Earnings Per Share” (“ASC 260”). Basic and diluted net earnings (loss) per common share was determined by dividing net earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period. The Company’s potentially dilutive shares, which include outstanding common stock options and common stock warrants, have not been included in the computation of diluted net earnings (loss) per share for all periods as the result would be anti-dilutive.  

   
  Three Months Ended
  March 31,
 
   
2011
   
2010
 
                      Stock options
   
2,468,900
     
1,046,900
 
                      Common stock warrants
   
3,085,000
     
835,000
 
                 
                     Total shares excluded from calculation
   
5,553,900
     
1,881,900
 

Note 7 – 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 method on a straight-line basis over the requisite service period for all stock awards that vest during the period. The grant date fair value for stock options is calculated using the Black-Scholes option valuation 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 and the expected dividends. Stock-based compensation expense is reported under general and administrative expenses on the accompanying consolidated statements of income.

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. Effective January 1, 2006, we recognized compensation expense ratably over the vesting period, net of estimated forfeitures. As of March 31, 2011, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 plan.
The 2006 Plan provides for the granting of options to purchase up to 5,510,000 shares of common stock.  5,213,100 options have been exercised to date.  There are 2,468,900 options outstanding under the 2006 Plan.

Warrant activity during the three months ended March 31, 2011 follows:

                   
Weighted
                   
Average
             
Weighted
 
Remaining
       
Average
 
Average
 
Contractual
   
Warrants
 
Exercise Price
 
Grant-Date  Fair Value
 
Life (Years)
Warrants outstanding at January 1, 2011
    3,085,000     $ 0.83     $ 0.10    
No warrant activity
    --       --       --    
Warrants outstanding at March 31, 2011
    3,085,000     $ 0.83     $ 0.10  
2.23

Stock Option Plan activity during the three months ended March 31, 2011 follows:

                   
Weighted
                   
Average
             
Weighted
 
Remaining
       
Average
 
Average
 
Contractual
   
Options
 
Exercise Price
 
Grant-Date  Fair Value
 
Life (Years)
Options outstanding at January 1, 2011
    2,468,900     $ 0.03     $ 0.10    
No option activity
    --       --       --    
Options outstanding at March 31, 2011
    2,468,900     $ 0.03     $ 0.10  
6.60

The fair value of warrants and options granted is estimated on the date of grant based on the weighted-average assumptions in the table below.  The assumption for the expected life is based on evaluations of historical and expected exercise behavior.  The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date.  The calculated value method using the historical volatility of the Computer Services industry is used as the basis for the volatility assumption.
 
6

 
 
Three months ended March 31,
 
 
2011
   
2010
 
Weighted average risk-free rate
    1.89 %     4.87 %
Average expected life in years
    4.6       6.4  
Expected dividends
None
   
None
 
Volatility
    36 %     36 %
Forfeiture rate
    0 %     0 %

Note 8 – Common Stock Issued

During the year ended December 31, 2009, the Company issued 500,000 common shares in exchange for the asset acquisition of Jekyll Island Ventures Inc. by its wholly-owned subsidiary, Gotham Innovation Labs Inc.  Also, during the year ended December 31, 2009, options were exercised for 735,000 shares of common stock, valued at $.01 per share.

On December 2, 2009, the Company amended its certificate of incorporation to increase the number of authorized common shares to 75,000,000.

Dividends may be paid on outstanding shares as declared by the Board of Directors from time to time. Each share of common stock is entitled to one vote.

Note 9 - Income Taxes

The tax provision at March 31 consists of the following:
 
    2011     2010  
 From operations:            
 Continuing operations:            
 Current tax expense (benefit):               
     Federal      $ (54,046   $ (100,482 )
     State and local       4,829       (20,324  )
      (49,217 )       (120,806 )
  Deferred tax expense (benefit)        --        --  
     Total from continuing operations       (49,217 )        (120,806  )
  Discontinued operations:                
 Current tax expense (benefit)                  
     Federal         82,314       180,603  
     State and local        --        39,561  
       82,314       220,164  
                 
 
Deferred tax expense (benefit):
               
     Federal       --       --  
     State and local       --        --  
       --        --  
                 
 Total from discontinued operations        82,314        220,164  
                 
 Total     $ 33,097     $ 99,358  
                 
 
A reconciliation of the statutory federal income tax rate and the effective tax rate follows:
 
  Three Months Ended  
    March 31,     2010  
    2011        
             
 Statutory tax rate              
     Effect of:     34.0 %       34.0 %
 State income taxes, net of                
 federal income tax benefit         6.1 %        5.5 %
 Tax effect of expenses that are not                
      deductible for income tax purposes        1.0     (0.5 )%
 Effective tax rate      42.1     39.0 %
                                                                                                                                                                                                                                                                                                                                                                                                                                                      
The Company recognizes deferred tax assets and liabilities based on the future tax consequences of events that have been included in the financial statements or tax returns.  The differences relate primarily to net operating loss carryovers and to deferred compensation. Deferred tax assets and liabilities are calculated based on the difference between the financial reporting and tax bases of assets and liabilities using the currently enacted tax rates in effect during the years 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 Company’s provision for income taxes differs from applying the statutory U.S. federal income tax rate to income before income taxes.  The primary differences result from providing for state income taxes and from deducting certain expenses for financial statement purposes but not for federal income tax purposes.

In accordance with ASC Topic No. 740, Income Taxes, a valuation allowance is established based on the future recoverability of deferred tax assets.  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.  Management has determined that no valuation allowance related to deferred tax assets is necessary at March 31, 2011 and December 31, 2010.

Note 10 - Retirement Plan

Gotham has adopted the Gotham Innovation Lab, Inc. SIMPLE IRA Plan, which covers substantially all employees. Participating employees may elect to contribute, on a tax-deferred basis, a portion of their compensation in accordance with Section 408 (a) of the Internal Revenue Code. The Company matches up to 3% of employee contributions.  The Company's contributions to the plan for the three months ended March 31, 2011 and 2010 were $2,591 and $3,304, respectively.
 
7

 

Note 11 – Significant Customers

Sales of Gotham to four customers amounted to approximately 74% of Gotham’s total sales for the three months ended March 31, 2011 at 27%, 24%, 13%, and 10%, respectively.

Note 12 – Risks and Uncertainties

Uninsured Cash Balances

Substantially all amounts of cash accounts held at financial institutions are insured by the FDIC.

Note 13 - Related Party Transactions

Notes Receivable - Stockholders

The Company provided loans to a stockholder totaling $17,000 at March 31, 2011 and December 31, 2010.  The loans bear interest at a rate of 6% and are due on December 31, 2011.

Accrued interest on the note was $252 for each of the three months ended March 31, 2011 and 2010.

Note Payable – Related Party

Gotham was provided loans from an entity that is controlled by the officers of Gotham totaling $25,390 at March 31, 2011 and December 31, 2010.  The note bears interest at a rate of 5.5% and is due on July 1, 2011.

Interest expense of $118 and $116 was charged to operations for the three months ended March 31, 2011 and 2010, respectively.

Lease Commitment

iGambit Inc. entered into an operating lease for office space for a term of 12 months effective June 1, 2010.  Monthly rent under the lease is $2,600.

Gotham has an operating lease for office space renewable annually on October 16 at a monthly rent of $5,500.

Rent expense of $24,300 was charged to operations for each of the three months ended March 31, 2011 and 2010.

Note 14 – Commitments and Contingencies

The Company provides accruals for all direct 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.

Note 15 – Recent Accounting Pronouncements

In December 2010, the FASB issued authoritative guidance regarding when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  The guidance modifies Step 1 of the goodwill impairment test so that for those reporting units with zero or negative carrying amounts, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not based on an assessment of qualitative indicators that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010.  The Company adopted this standard beginning January 1, 2011, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-6, “Improving Disclosures About Fair Value Measurements”, which provides amendments to ASC 820 Fair Value Measurements and Disclosures, including requiring reporting entities to make more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements including information on purchases, sales, issuances, and settlements on a gross basis and (4) the transfers between Levels 1, 2, and 3. The standard is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures, which are effective for annual periods beginning after December 15, 2010. The Company adopted this standard beginning January 1, 2011, and the adoption did not have a material impact on the Company’s consolidated financial statements.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS
 
     This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included or incorporated by reference in this Form 10-Q which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), finding suitable merger or acquisition candidates, expansion and growth of the Company’s business and operations, and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances.
 
     Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. Factors that could adversely affect actual results and performance include, among others, potential fluctuations in quarterly operating results and expenses, government regulation, technology change and competition. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements.
 
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.
 
Fair Value of Financial Instruments
 
   For certain of the our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and amounts due to related parties, the carrying amounts approximate fair value due to their short maturities.
 
8

 
 
Revenue Recognition
 
     Contingency payment income is recognized quarterly from a percentage of Digi-Data’s vaulting service revenue, and is included in discontinued operations. Our revenues from continuing operations consist of revenues primarily from sales of products and services rendered to real estate brokers. Revenues are recognized upon delivery of the products or services.
 
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 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 current 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.
     
 As of December 31, 2010, accounts receivable included 50% of contingency payments earned for the previous quarter. Reserve for bad debt of $250,000 was charged to operations for the year ended December 31, 2010. No reserve for bad debts was charged to operations for the three months ended March 31, 2011.

 
Property and equipment and depreciation
 
     Property and equipment are stated at cost. 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. During the three months ended March 31, 2011, we purchased computer equipment totaling $3,242. Computer equipment is depreciated over 5 years. 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 expense of $672 and $89 was charged to operations for the three months ended March 31, 2011 and 2010, respectively.
 
Goodwill
 
     Goodwill represents the fair market value of the common shares issued and common stock options granted by the Company for the acquisition of Jekyll by the Company’s subsidiary, Gotham. 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 Gotham’s operations may cause impairment.  At December 31, 2010, the Company performed an impairment study and determined that there is no indication that present and future cash flows are not expected to be sufficient to recover the carrying amount of goodwill.  The Company has not performed an impairment study during the three months ended March 31, 2011.  Based on the Company’s evaluation of goodwill, no impairment was recorded during the three months ended March 31, 2011.

Stock-Based Compensation
 
    We account for our stock-based 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.  We use the Black-Scholes option valuation model to estimate the fair value of our stock options and warrants. The Black-Scholes option valuation model requires the input of highly subjective assumptions including the expected stock price volatility of the Company’s common stock.  Changes in these subjective input assumptions can materially affect the fair value estimate of our stock options and warrants.
 
Income Taxes

     We account for income taxes using the asset and liability method in accordance with ASC Topic No. 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

     We apply the provisions of ASC Topic No. 740 for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the Company’s financial statements. In accordance with this provision, tax positions must meet a more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position.
INTRODUCTION
     iGambit is a company focused on the technology markets. Our sole operating subsidiary, Gotham Innovation Lab, Inc., is in the business of providing media technology services to the real estate industry. During the year ended December 31, 2010 and during the three months ended March 31, 2011 Gotham produced approximately $850,222 and $411,903 of revenue, respectively. We are focused on expanding the operations of Gotham by marketing the company to existing and potential new clients. Currently Gotham has several proposals outstanding to franchisees of one of its main customers, as well as other potential new clients. In addition to Gotham’ s operations, we receive Quarterly Revenue Share Payments and Annual Increase Payments from Digi-Data Corporation, which are payable pursuant to the terms of an agreement under which we sold certain assets to DDC in 2006. We earned $1,898,435 and $242,099 of Contingency Payments from DDC in the year ended December 31, 2010, and the three months ended March 31, 2011, respectively.  We expect the balance of the amounts due to be paid during 2011.  The agreement with DDC ended on February 28, 2011. We are also focused on acquiring or partnering with additional technology companies.
     Assets. At March 31, 2011, we had $2,296,089in total assets, compared to $2,336,788 at December 31, 2010. The decrease in total assets was primarily due to the decrease in cash as a result of the receipt of decreased contingency payments from DDC.
     Liabilities. At March 31, 2011, our total liabilities were $265,398 compared to $351,617 at December 31, 2010. Liabilities consist of accounts payable and  a note payable to a related party. We do not have any long term liabilities.  The decrease in liabilities was due to a decrease in accounts payable.
     Stockholders’ Equity. Our stockholders’ equity increased to $2,030,691 at March 31, 2011 from $1,985,171 at December 31, 2010. This increase was solely attributable to net income during the period.

THREE MONTHS ENDED MARCH 31, 2011 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2010
     Revenues and Net Income. We had $411,903 of revenue during the three months ended March 31, 2011, as compared to  revenue of $167,342 during the three months ended March 31, 2010. The increase was due to revenue generated by our acquired subsidiary Gotham.  In addition, we had income (net of taxes) from discontinued operations of $159,785  for the three months ended March 31, 2011, compared to $344,993 for the three months ended March 31, 2010, and net income of $45,520 for the three months ended March 31, 2011, compared to $156,186 for the three months ended March 31, 2010. Our increase in revenue was offset by General and Administrative expenses as well as  a decrease in income from discontinued operations.  Our decrease in income from discontinued operations was due to the agreement with DCDC ending on February 28, 2011.
 
9

 
     General and Administrative Expenses. General and Administrative Expenses increased to $452,399 for the three months ended March 31, 2011 from $429,567 for the three months ended March 31, 2010. For the three months ended March 31, 2011 our General and Administrative Expenses consisted of corporate administrative expenses of $124,321, legal and accounting fees of $62,822, and payroll expenses of $265,256. The increases from the three months ended March 31, 2010 to the three months ended March 31, 2011 relate primarily to: (i) professional costs associated with the preparation and filing of a registration statement with the SEC; and (ii) costs associated with the operation of our Gotham subsidiary. Costs associated with our officers’ salaries and the operation of our Gotham subsidiary should remain level going forward, subject to a material expansion in the business operations of Gotham which would likely increase our corporate administrative expenses. Further, whereas the additional professional fees associated with the acquisition of Jekyll Island Ventures, Inc. will not carry over into future periods unless we engage in other acquisitions, we do anticipate an increase in legal and accounting fees in 2011 now that we have become a reporting company under the Securities Exchange Act of 1934.
LIQUIDITY AND CAPITAL RESOURCES
General
 
As reflected in the accompanying consolidated financial statements, at March 31, 2011, we had $356,930of cash and stockholders’ equity of $2,030,691. At March 31, 2011 we had $2,296,089 in total assets, compared to $2,336,788 at December 31, 2010.

Our primary capital requirements in 2011 are likely to arise from the expansion of our Gotham 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 Gotham’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 Gotham’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 used in operating activities was $255,377 for the three months March 31, 2011, compared to net cash used in operating activities of $519,489 for the three months ending March 31, 2010. Our primary source of operating cash flow for the three months ending March 31, 2011 was from net income of $45,520, compared to net income of $156,186 for the three months ending March 31, 2010.  The primary source of net income is income from discontinued operations totaling $159,785 for the three months ending March 31, 2011 (net of taxes of $82,314) compared to income from discontinued operations of $344,993 for the three months ending March 31, 2010 (net of taxes of $220,164).  Income from discontinued operations is comprised solely of income from DDC contingency payments, which is classified as cash provided by discontinued investing activities. We receive Quarterly Revenue Share Payments and Annual Increase Payments from Digi-Data Corporation, which are payable pursuant to the terms of an agreement under which we sold certain assets to DDC in 2006.  Revenue earned from DDC under the agreement totaled $242,099 during the three months ended March 31, 2011, and $565,157 during the three months ending March 31, 2010.     Of the $242,099 revenue earned from DDC in the three months ending March 31, 2011 we received $150,000 in cash payments from DDC all of which was for the second quarter 2010 Contingency Payment.  Additionally $92,099 was offset by an increase in the accounts receivable included in Assets from Discontinued Operations.     Of the $565,157 revenue earned from DDC in the three months ending March 31, 2010 we received $414,851 in cash payments from DDC all of which was for the fourth quarter 2009 Contingency Payment.  Additionally $150,306 was offset by an increase in the accounts receivable included in Assets from Discontinued Operations.   The agreement with DDC ended on February 28, 2011.   Also included in discontinued investing activities is cash used by DDC contingency payment escrow of $233for the three months ending March 31, 2010, resulting in net cash provided by discontinued investing activities of $150,000 and $414,618 for the three months ending March 31, 2011 and 2010, respectively.

In addition to the DCC Contingency Payments, we receive revenue from the operation of our Gotham subsidiary, which operates the business we acquired from Jekyll Island Ventures, Inc. in 2009. We anticipate that Gotham’s business and revenues will continue to grow throughout 2011. Gotham generated revenues of $411,903and earned net income of $92,989 in 2011 and generated revenues of $164,932 and incurred a net loss of $(98,655) for the three months ended March 31, 2010.

Cash provided by investing activities was $146,758for the three months ending March 31, 2011 and $414,618 for the three months ending March 31, 2010.   The entire source of cash provided by investing activities is the DDC contingency payments classified as cash flows from discontinued investing activities. 

Cash provided from financing activities was $0 for the three months ending March 31, 2011 compared to cash provided by financing activities of $37,079 for the three months ending March 31, 2010.   The cash flow from financing activities in the first three months of 2010 was an increase in a loan payable to a related party from our subsidiary Gotham.
Supplemental Cash Flow Activity

          In the three months ending March 31, 2011 the company paid income taxes of $13,940 compared to $202,101 for the three months ending March 31, 2010. The decrease in taxes was due to tax overpayments in 2010.The Company also paid interest of $848during the first three months of 2011.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Required.
Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
 
We carried out an evaluation, as required by paragraph (b) of Rule 13a-15 and 15d-15 of the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2010. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011.
 
Change in Internal Controls

There were no changes in our internal controls over financial reporting during the first fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
     
Item 1.
 
Legal Proceedings.
From time-to-time, the Company is involved in various civil actions as part of its normal course of business. The Company is not a party to any litigation that is material to ongoing operations as defined in Item 103 of Regulation S-K as of the period ended March 31, 2011.
     
Item 1A.
 
Risk Factors.
Not required
 
10

 
     
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds.
None
     
Item 3.
 
Defaults upon Senior Securities.
None
     
Item 4.
 
Removed and Reserved.
     
Item 5.
 
Other Information.
None
     
Item 6.
 
Exhibits
         
Exhibit No.
 
Description
         
 
31.1
   
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
         
 
31.2
   
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
         
 
32.1
   
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
         
 
32.2
   
Certification of the Interim Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
 


 
11

 

SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 16, 2011.
         
 
iGambit, Inc.
 
 
 
/s/ John Salerno  
 
 
John Salerno 
 
 
Chief Executive Officer 
 
 
         
     
 
/s/ Elisa Luqman  
 
 
Elisa Luqman 
 
 
Chief Financial Officer and Principal Accounting Officer
 
         

 
12

 

Exhibit Index
         
Exhibit No.
 
Description
         
 
31.1
   
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
         
 
31.2
   
Certification of the Interim Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
         
 
32.1
   
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)
         
 
32.2
   
Certification of the Interim Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)