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EX-31.1 - EXHIBIT311.HTM - GENERATED BY SEC PUBLISHER FOR SEC FILING - iGambit, Inc.exhibit311.htm
EX-31.2 - EXHIBIT312.HTM - GENERATED BY SEC PUBLISHER FOR SEC FILING - iGambit, Inc.exhibit312.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 September 30, 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) 780-7057
(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 November 14, 2011.

 

 

 


 

 

 iGambit, Inc.
Form 10-Q

 

 

 

 

 

Part I — Financial Information

 

3

 

 

 

 

 

Item 1.

 

 

3

 

 

 

3

 

 

 

4

 

 

 

5

 

 

 

6

 

 

 

 

 

Item 2.

 

 

16

 

 

 

 

 

Item 3.

 

 

22

 

 

 

 

 

Item 4.

 

 

22

 

 

 

 

 

Part II — Other Information

 

23

 

 

 

 

 

Item 1.

 

 

23

 

 

 

 

 

Item 1A.

 

 

23

 

 

 

 

 

Item 2.

 

 

23

 

 

 

 

 

Item 3.

 

 

23

 

 

 

 

 

Item 4.

 

 

23

 

 

 

 

 

Item 5.

 

 

23

 

 

 

 

 

Item 6.

 

 

23

 EX-31.1

 EX-31.2

 EX-32.1

 EX-32.2

 

 

2


 

 

PART I — FINANCIAL INFORMATION

 

IGAMBIT INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30,

DECEMBER 31,

2011

2010

ASSETS

Current assets

    Cash

$

303,507

$

465,549

    Accounts receivable

256,333

124,651

    Prepaid expenses

175,436

326,245

    Notes receivable

436,512

472,000

    Notes receivable - stockholders

17,000

17,000

Assets from discontinued operations

689,828

812,730

Total current assets

1,878,616

2,218,175

Property and equipment, net

20,042

5,087

Other assets

    Goodwill

111,026

111,026

    Deposits

2,500

2,500

Total other assets

113,526

113,526

$

2,012,184

$

2,336,788

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

    Accounts payable

$

230,996

$

326,227

    Note payable - related party

25,390

25,390

Total current liabilities

256,386

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

2,403,090

2,402,275

    Accumulated deficit

(671,246)

(441,058)

Total stockholders' equity

1,755,798

1,985,171

$

2,012,184

$

2,336,788

 

 

 

3


 

 

IGAMBIT INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS

NINE MONTHS

ENDED

ENDED

SEPTEMBER 30,

SEPTEMBER 30,

2011

2010

2011

2010

Restated

Restated

Sales

$

410,258

$

232,343

$

1,299,602

$

646,002

Cost of sales

191,056

99,387

542,869

243,712

Gross profit

219,202

132,956

756,733

402,290

Operating expenses

    General and administrative expenses

458,574

448,881

1,361,635

1,307,621

Loss from operations

(239,372)

(315,925)

(604,902)

(905,331)

Other income

    Interest income

8,110

1,853

22,280

2,771

Loss from continuing operations before income tax benefit

(231,262)

(314,072)

(582,622)

(902,560)

Income tax expense (benefit)

(77,789)

(116,984)

(192,649)

(346,049)

Loss from continuing operations

(153,473)

(197,088)

(389,973)

(556,511)

Discontinued operations

    Income from discontinued operations

--

330,199

242,099

1,537,486

    Provision for income taxes

--

120,467

82,314

607,307

Income from discontinued operations, net of taxes

--

209,732

159,785

930,179

Net income (loss)

$

(153,473)

$

12,644

$

(230,188)

$

373,668

Basic and fully diluted earnings (loss) per common share:

  Continuing operations

$

(.00)

$

(.01)

$

(.02)

$

(.03)

  Discontinued operations, net of tax

$

.00

$

.01

$

.01

$

.04

Net earnings per common share

$

.00

$

.00

$

(.01)

$

.01

Weighted average common shares outstanding

23,954,056

23,954,056

23,954,056

23,954,056

4


 

 

IGAMBIT INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30,

2011

2010

Restated

CASH FLOWS FROM OPERATING ACTIVITIES:

    Net income (loss)

$

(230,188)

$

373,668

    Adjustments to reconcile net income (loss) to net

         cash used by operating activities

         Income from discontinued operations

(159,785)

(930,179)

         Depreciation

4,436

894

         Stock-based compensation

815

5,832

         Increase (Decrease) in cash flows as a result of

         changes in asset and liability account balances:

            Accounts receivable

(131,682)

(69,446)

            Prepaid expenses

150,809

(321,284)

            Accounts payable

(95,231)

292,708

    Net cash used by continuing operating activities

(460,826)

(647,807)

    Net cash used by discontinued operating activities

(82,312)

(605,466)

              NET CASH USED BY OPERATING ACTIVITIES

(543,138)

(1,253,273)

CASH FLOWS FROM INVESTING ACTIVITIES:

    Purchases of property and equipment

(19,392)

(4,158)

    Increase in notes receivable

--

(200,000)

    Proceeds from repayments of notes receivable

35,488

--

    Net cash provided (used) by continuing investing activities

16,096

(204,158)

    Net cash provided by discontinued investing activities

365,000

1,500,422

              NET CASH PROVIDED BY INVESTING ACTIVITIES

381,096

1,296,264

CASH FLOWS FROM FINANCING ACTIVITIES:

    Increase in loans payable to related party

--

26,886

NET INCREASE (DECREASE) IN CASH

(162,042)

69,877

CASH - BEGINNING OF PERIOD

465,549

857,074

CASH - END OF PERIOD

$

303,507

$

926,951

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    Cash paid during the period for:

      Interest

$

1,826

$

851

      Income taxes

13,940

390,634

    Non-cash investing and financing activities:

      Stock-based compensation expense

$

815

$

5,832

 

5


 

IGAMBIT INC.

Notes to Consolidated Financial Statements

Nine Months Ended September 30, 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 operations.

 

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 consist of accounts receivable of $689,828 and $812,730 as of September 30, 2011 and December 31, 2010, respectively.

 

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 nine months ended September 30, 2011.

 

6


 

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, consists 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

 

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 nine months ended September 30, 2011 and 2010, respectively.

7


 

 

Prepaid Expenses

 

Prepaid expenses consist of the following:

                                                                                       September 30,    December 31,

                                                                                                2011                2010

 

Prepaid federal income taxes                                            $ 118,416         $ 249,558

Prepaid state income taxes                                                     23,677              72,264

Prepaid insurance                                                                   33,343                4,423

 

                                                                                          $ 175,436         $ 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 nine months ended September 30, 2011, the Company purchased computer equipment totaling $19,392. 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 $4,436 and $894 was charged to operations for the nine months ended September 30, 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 nine months ended September 30, 2011.  Based on the Company’s evaluation of goodwill, no impairment was recorded during the nine months ended September 30, 2011.

8


 

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.

 

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.

9


 

 

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

 

Previously

Restated as

Reported as of

of

Sept. 30,

Effect of

Sept. 30,

2010

Restatement

2010

Changes to Consolidated Balance Sheet

Additional paid-in capital

$

  2,531,513

$

   (129,238)

$

2,402,275

Accumulated deficit

$

   (354,765)

$

     129,238

$

    (225,527)

Changes to Consolidated Statement of Income

General and administrative expenses

$

  1,384,889

$

     (77,268)

$

    1,307,621

Net income

$

     296,400

$

       77,268

$

       373,668

Changes to Consolidated Statement of Cash Flows

Net cash used by discontinued operating activities

$

   (186,208)

$

       (419,258)

$

    (605,466)

Net cash provided by discontinued investing activities

$

  1,081,164

$

         419,258

$

    1,500,422

 

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 $436,512 at September 30, 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. As of September 30, 2011, $93,516 of the notes became past due.  On October 26, 2011, the Company sent demand notices to Allied demanding payment of the past due balance plus applicable accrued interest. 

 

Accrued interest on the notes was $26,965 for the nine months ended September 30, 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.  

10


 

 

 

 

 

 

 

       Nine Months Ended

         September 30,

 

 

 

 

 

 

 

 

 

2011

 

 

2010

 

StocS Stock options

 

 

 

 

 

 

 

 

 

 

2,768,900

 

 

 

2,468,900

 

Aver  Common stock warrants

 

 

 

 

 

 

 

 

 

 

3,085,000

 

 

 

3,085,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Total shares excluded from calculation

 

 

 

 

 

 

 

 

 

 

5,853,900

 

 

 

5,553,900

 

 

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 operations.

 

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 September 30, 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 10,000,000 shares of common stock.  8,822,000 options have been issued or exercised to date.  There are 8,617,520 options outstanding under the 2006 Plan.

 

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 September 30, 2011

3,085,000

$

0.83

$

0.10

1.72

Warrant activity during the nine months ended September 30, 2011 follows:

 

11


 

Stock Option Plan activity during the nine months ended September 30, 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

Granted during 2011

 

300,000

 

 

0.10

0.10

Options outstanding at  September 30, 2011

2,768,900

$

0.04

$

0.10

7.11

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.

 

 

                                                                       Nine months ended September 30,

 

__2011__

__2010__

Weighted average risk-free rate

0.64%

4.87%

Average expected life in years

5.0

5.0

Expected dividends

None

None

Volatility

44%

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.

 

12


 

Note 9 - Income Taxes

 

The tax provision at September 30 consists of the following:

 

 

                                                                                    2011                2010

From operations:

Continuing operations:

Current tax expense (benefit):                                          

    Federal                                                              $(192,649)        $ (275,153)

    State and local                                                                 --             (73,198)

                                                                                (192,649)          (348,351)

Deferred tax expense (benefit)                                          --                        --

    Total from continuing operations                       (192,649)          (348,351)

Discontinued operations:

Current tax expense (benefit)                                                                   

    Federal                                                                   82,314             479,696

    State and local                                                               --              127,611

                                                                                   82,314             607,307

 

Deferred tax expense (benefit):

    Federal                                                                          --                       --

    State and local                                                               --                        --

                                                                                           --                       --

   

    Total from discontinued operations                      82,314             607,307

 

    Total                                                                 $ (110,335)         $258,956

 

A reconciliation of the statutory federal income tax rate and the effective tax rate follows:

 

                                                                                    Nine Months Ended

                                                                                         September 30,

                                                                                    2011                2010

 

Statutory tax rate                                                        34.0%              34.0%

  Effect of:

State income taxes, net of

federal income tax benefit                                            0.0%                5.5%

Tax effect of expenses that are not

  deductible for income tax purposes                          (0.9)%              (4.2)%

Effective tax rate                                                        33.1%              35.3%

 

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.

13


 

 

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 September 30, 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 nine months ended September 30, 2011 and 2010 were $9,284 and $10,242, respectively.

 

Note 11 – Significant Customers

 

Sales of Gotham to two customers amounted to approximately 58% of Gotham’s total sales for the nine months ended September 30, 2011 at 32%, and 26%, 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 September 30, 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 $763 for the nine months ended September 30, 2011 and 2010, respectively.

14


 

Note Payable – Related Party

 

Gotham was provided loans from an entity that is controlled by the officers of Gotham totaling $25,390 at September 30, 2011 and December 31, 2010.  The note bears interest at a rate of 5.5% and is due on December 31, 2011.

 

Interest expense of $531 and $516 was charged to operations for the nine months ended September 30, 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, 2011.  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 $72,112 and $67,400 was charged to operations for the nine months ended September 30, 2011 and 2010, respectively.

 

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.

15


 

 

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.

 

 

 

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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.

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 nine months ended September 30, 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 nine months ended September 30, 2011, the Company purchased computer equipment totaling $ 19,392. 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 $4,436 and $894 was charged to operations for the nine months ended September 30, 2011 and 2010, respectively.

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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 nine months ended September 30, 2011.  Based on the Company’s evaluation of goodwill, no impairment was recorded during the nine months ended September 30, 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.

 

18


 

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, 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 nine months ended September 30, 2011 Gotham produced approximately $850,222 and $ 1,234,412 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 were receiving Quarterly Revenue Share Payments and Annual Increase Payments from Digi-Data Corporation, which were 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 nine months ended September 30, 2011, respectively.  The agreement with DDC ended on February 28, 2011. We expect the balance of the amounts due to be paid during 2011.   We are also focused on acquiring or partnering with additional technology companies.

 

     Assets. At September 30, 2011, we had $2,012,184 in total assets, compared to $2,336,788 at December 31, 2010.    The decrease in total assets was primarily due to the decrease in cash used to fund the loss.

 

     Liabilities. At September 30, 20110, our total liabilities were $256,386 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 total liabilities was primarily due to the decrease in the income tax provision.

 

     Stockholders’ Equity (Deficit). Our stockholders’ equity decreased to $1,755,798 at September 30, 2011 from $1,985,171 at December 31, 2010. This decrease was primarily due to an increase in accumulated deficit from $(441,058) at December 31, 2010 to $(671,246) at September 30, 2011 resulting from the end of the contingency payments from Digi-Data Corp.

 

Three Months Ended September 30, 2011 as Compared to Three Months Ended September 30, 2010

 

     Revenues and Net Income. We had $410,258 of revenue during the three months ended September 30, 2011, as compared to $232,343 revenue during the three months ended September 30, 2010.  The increase in revenue was due to revenue generated by our acquired subsidiary Gotham.  In addition, we had no income from discontinued operations for the three months ended September 30, 2011, compared to $330,199 for the three months ended September 30, 2010 and net loss of $(153,473) for the three months ended September 30, 2011, compared to net income of $12,644 for the three months ended September 30, 2010.  Our decrease in income from discontinued operations was due to the Digi-Data agreement ending on February 28, 2011.

 

19


 

     General and Administrative Expenses. General and Administrative Expenses increased to $458,574 for the three months ended September 30, 2011 from $448,881 for the three months ended September 30, 2010. For the three months ended September 30, 2011 our General and Administrative expenses consisted of corporate administrative expenses of $128,682, legal and accounting fees of $21,760, and payroll expenses of $307,317 and compensation for vested options of $815.  For the three months ended September 30, 2010 our General and Administrative Expenses consisted of corporate administrative expenses of $149,381, legal and accounting fees of $38,208, payroll expenses of $255,460 and compensation for vested warrants expense of $5,832. The increases from the three months ended September 30, 2010 to the three months ended September 30, 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 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, we anticipated an increase in legal and accounting fees in 2011 as a result of having become a reporting company under the Securities Exchange Act of 1934.

 

Nine months ended September 30, 2011 as Compared to Nine months ended September 30, 2011

 

     Revenues and Net Income. We had $1,299,602 of revenue during the nine months ended September 30, 2011, as compared to revenue of $646,002 during the nine months ended September 30, 2010.  The increase in revenue was due to revenue generated by our acquired subsidiary Gotham.  In addition, we had income from discontinued operations of $242,099 for the nine months ended September 30, 2011, compared to $1,537,486 for the nine months ended September 30, 2010, and net loss of $(230,188) for the nine months ended September 30, 2011, compared to net income of $373,668 for the nine months ended September 30, 2010. Our decrease in revenue was due to the Digi-Data agreement ending on February 28, 2011.

 

     General and Administrative Expenses. General and Administrative Expenses increased to $1,361,635 for the nine months ended September 30, 2011 from $1,307,621 for the nine months ended September 30, 2010. For the nine months ended September 30, 2011 our General and Administrative Expenses consisted of corporate administrative expenses of $375,122, legal and accounting fees of $114,411 and payroll expenses of $871,287 and compensation for vested options expense of $815. For the nine months ended September 30, 2010 our General and Administrative Expenses consisted of corporate administrative expenses of $377,262, legal and accounting fees of $112,938, initial public offering expenses of $58,276, payroll expenses of $753,313 and compensation for vested warrants expense of $5,832.   The increases from the nine months ended September 30, 2010 to the nine months ended September 30, 2011 relate primarily to: (i) salaries for the addition of the Gotham subsidiary officers and staff; (ii) professional costs associated with the preparation and filing of a registration statement with the SEC; and (iii) 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 we anticipate an increase in legal and accounting as we engage in other acquisitions, and we anticipate an increase in legal and accounting fees in 2011 as a result of having become a reporting company under the Securities Exchange Act of 1934.

20


 

 

 

Liquidity and Capital Resources

 

As reflected in the accompanying consolidated financial statements, at September 30, 2011, we had $303,507 of cash and stockholders’ equity of $1,755,798. At September 30, 2011 we had $2,012,184 in total assets, compared to $2,336,788 at December 31, 2010.

 

Our primary capital requirements in 2010 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

 

            Cash used in operating activities was $543,138 for the nine months ending September 30, 2011, compared to cash used in operating activities of $1,253,273 for the nine months ending September 30, 2010. Our primary source of operating cash flow for the nine months ending September 30, 2011 was from prepaid expenses of $150,809, compared to net income of $373,668 for the nine months ending September 30, 2010.  The primary source of net income (loss) is income from discontinued operations totaling $159,785 for the nine months ending September 30, 2011 (net of taxes of $82,314) compared to income from discontinued operations of $930,179 for the nine months ended September 30, 2010 (net of taxes of $607,307).  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 was $242,099 for the nine months ended September 30, 2011.  We received $365,000 in cash payments from DDC which was offset by a decrease in accounts receivable included in Assets from Discontinued Operations.  Of the $1,537,486 revenue earned from DDC during the nine months ended September 30, 2010, $1,348,680 was for the first three quarters Contingency Payments and $188,806 was accrued revenue for the 5% year to year Contingency Payment for the months January 2010 to September 2010. $472,384 for the first quarter Contingency Payment was paid in May 2010 and the second quarter Contingency Payment was paid the first and second a quarter of 2011. $35,000 was received in the third quarter of 2011 and applied against the outstanding Digi-Data accounts receivable. The Digi-Data agreement ended on February 28, 2011

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In addition to the DDC Contingency Payments, we receive revenue from the operation of our Gotham subsidiary, which operates the business we acquired from Jekyll Island Ventures, Inc. in fourth quarter 2009. We anticipate that Gotham’s business and revenues will continue to grow throughout 2011. Gotham generated revenues of $639,642 and incurred a net loss of $(250,503) for the nine months ended September 30, 2010 and revenues of $1,234,412 and net income of $78,182 for the nine months ended September 30, 2011.

 

Cash provided by continuing and discontinuing investing activities was $16,096 and $365,000 respectively, for the first nine months ended September 30, 2011 and cash used by continuing investing activities was $(204,158) and cash provided by discontinuing investing activities was $1,500,422 for the nine months ended September 30, 2010.   The entire source of cash provided by discontinued investing activities is the DDC contingency payments and the cash provided by continuing investing activities is cash flows from our Gotham subsidiary.

 

Cash provided from financing activities was $0 for the nine months ended September 30, 2011 compared to $26,886 for the nine months ended September 30, 2010.   The cash flow from financing activities in the first nine months of fiscal 2010 was an increase in a loan payable to a related party from our subsidiary Gotham.

 

Supplemental Cash Flow Activity

 

In the nine months ended September 30, 2011 the company paid income taxes of $13,940 compared to $390,634 for the nine months ended September 30, 2010. The decrease in taxes was due to tax overpayments in 2010. The Company also paid interest of $1,826 during the first nine months of fiscal year 2011 compared to $851 during the first nine months of fiscal year 2010.  

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Required.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2010. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.

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Changes in internal controls. There were no changes in our internal controls over financial reporting during the third 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 September 30, 2011.

 

 

 

Item 1A.

 

Risk Factors.

Not required

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

None

 

 

 

Item 3.

 

Defaults upon Senior Securities.

None

 

 

 

Item 4.

 

Removed and Reserved.

 

 

 

Item 5.

 

Other Information.

None

 

 

 

Item 6.

 

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.)

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Exhibit Index

 

 

 

 

 

 

Exhibit No.

 

Description

 

 

 

 

 

 

31.1

 

 

 

 

 

 

 

 

31.2

 

 

 

 

 

 

 

 

32.1

 

 

 

 

 

 

 

 

32.2

 

 

 

 

25