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EX-32.2 - CERTIFICATION CFO - iGambit, Inc.exhibit322.htm
EX-32.1 - CERTIFICATION CEO - iGambit, Inc.exhibit321.htm
EX-31.2 - CERTIFICATION CFO - iGambit, Inc.exhibit312.htm
EX-31.1 - CERTIFICATION CEO - iGambit, Inc.exhibit311.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 June 30, 2016.

      

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE

ACT

For the transition period from

to

Commission file number 000-53862

iGambit Inc.

(Exact name of small business issuer as specified in its charter)

Delaware

11-3363609

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1050 W. Jericho Turnpike, Suite A

Smithtown, New York 11787

(Address of Principal Executive Offices) (Zip Code)

(631) 670-6777

(Issuer’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed

by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding

12 months (or for such shorter period that the registrant was required to file such reports),

and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No

Indicate by check mark whether the registrant has submitted electronically and posted on

its corporate Web site, if any, every Interactive Data File required to be submitted and

posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the

preceding 12 months (or for such shorter period that the registrant was required to submit

and post such files). Yes þ     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated

filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large

accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of

the Exchange Act. (Check one):

Large accelerated      Accelerated

Non-accelerated filer

Smaller reporting

filer

filer

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     No þ

The  Registrant  had  39,683,990  shares  of  its  common  stock  outstanding  as  of  August  22,

2016.




iGambit Inc.

Form 10-Q

Part I — Financial Information

Item 1.

Financial Statements:

1

Consolidated Balance Sheets

1

Consolidated Statements of Income

3

Consolidated Statements of Cash Flows

5

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

Part II — Other Information

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults upon Senior Securities

31

Item 4.

Removed and Reserved

31

Item 5.

Other Information

31

Item 6.

Exhibits

31

EX-31.1

EX-31.2

EX-32.1

EX-32.2




PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

IGAMBIT INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30,

DECEMBER

2016

31,

(Unaudited)

2015

ASSETS

Current assets

Cash

$

33,370

$

131,987

Accounts receivable, net

441,427

230,182

Inventories

1,160

21,160

Employee advances

800

--

Prepaid expenses

145,924

244,592

Assets from discontinued operations, net

120,434

262,765

Total current assets

743,115

890,686

Property and equipment, net

29,080

40,433

Other assets

Goodwill

6,705,157

6,705,157

Deposits

1,720

1,720

Total other assets

6,706,877

6,706,877

$

7,479,072

$

7,637,996

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable and accrued expenses

$

665,834

$

636,633

Accrued interest on notes payable

400,272

291,107

Accrued interest on notes payable - related party

29,958

11,171

Amounts due to related parties

91,173

74,871

1



Deferred revenue, current portion

734,634

811,227

Notes payable, current portion

825,374

779,750

Note payable - related party, current portion

156,566

156,566

Notes payable - other

67,206

--

Liabilities from discontinued operations

18,888

127,353

Total current liabilities

2,989,905

2,888,678

Long-term liabilities

Deferred revenue, net of current portion

453,823

379,052

Notes payable

2,339,251

2,339,251

Note payable - related party

469,699

469,699

Total long-term liabilities

3,262,773

3,188,002

Total liabilities

6,252,678

6,076,680

Stockholders' equity

Preferred stock, $.001 par value; authorized - 100,000,000

shares;

issued and outstanding - 0 shares in 2016 and 2015,

respectively

--

--

Common stock, $.001 par value; authorized - 200,000,000

shares;

issued and outstanding - 39,683,990 shares in 2016 and

2015, respectively

39,684

39,684

Additional paid-in capital

4,320,022

4,320,022

Accumulated deficit

(3,133,312)

(2,798,390)

Total stockholders' equity

1,226,394

1,561,316

$

7,479,072

$

7,637,996

See accompanying notes to the condensed consolidated financial statements.

2



IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

THREE MONTHS

SIX MONTHS

ENDED

ENDED

JUNE 30,

JUNE 30,

2016

2015

2016

2015

Sales:

Hardware and

software

$

169,488

$

--

$

242,294

$

--

Support and

maintenance

420,463

--

751,407

--

Total sales

589,951

--

993,701

--

Cost of sales

25,263

--

28,454

--

Gross profit

564,688

--

965,247

--

Operating expenses

General and

administrative expenses

581,122

86,796

1,139,775

227,007

Income (loss) from

operations

(16,434)

(86,796)

(174,528)

(227,007)

Other income (expenses)

Interest expense

(79,378)

(1,447

(163,712)

(1,501)

Total other income

(expenses)

(79,378)

(1,447)

(163,712)

(1,501)

Loss from continuing

operations

(95,812)

(88,243)

(338,240)

(228,508)

Income (loss) from

discontinued operations

(240)

36,597

3,318

31,965

Net loss

$

(96,052)

$

(51,646)

$

(334,922)

$

(196,543)

Basic and fully diluted

loss per common share:

3



Continuing operations

$

(.00)

$

(.00)

$

(.01)

$

(.01)

Discontinued

operations

$

.00

$

.00

$

.00

$

.00

Net loss per common

share

$

(.00)

$

(.00)

$

(.01)

$

(.01)

Weighted average

common shares

outstanding - basic

39,683,990

26,874,100

39,683,990

26,729,846

See accompanying notes to the condensed consolidated financial statements.

4



IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30,

(UNAUDITED)

2016

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$    (334,922)

$    (196,543)

Adjustments to reconcile net loss to net

cash used in operating activities

Income from discontinued operations

(3,318)

(31,965)

Depreciation

12,623

331

Stock-based compensation expense

--

131,998

Increase (Decrease) in cash flows as a result of

changes in asset and liability account balances:

Accounts receivable

(211,245)

--

Inventories

20,000

--

Employee advances

(800)

--

Prepaid expenses

98,668

(63,889)

Accounts payable and accrued expenses

29,201

14,065

Accrued interest on notes payable

127,952

--

Deferred revenue

(1,822)

--

Net cash used in continuing operating activities

(263,663)

(146,003)

Net cash provided by discontinued operating activities

42,683

26,133

NET CASH USED IN OPERATING ACTIVITIES

(220,980)

(119,870)

NET CASH USED IN INVESTING ACTIVITIES:

Purchases of property and equipment

(1,269)

--

Net cash used in continuing investing activities

(1,269)

--

Net cash used in discontinued investing activities

--

(5,026)

NET CASH USED IN INVESTING ACTIVITIES

(1,269)

(5,026)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from stockholders' loans

--

15,500

Repayments of stockholders' loans

--

(6,500)

Proceeds from notes payable

112,830

--

5



Increase in amounts due to related parties

16,302

--

Net cash provided by continuing financing activities

129,132

9,000

Net cash used in discontinued financing activities

(5,500)

23,436

NET CASH PROVIDED BY FINANCING ACTIVITIES

123,632

32,436

NET DECREASE IN CASH

(98,617)

(92,460)

CASH - BEGINNING OF PERIOD

131,987

133,436

CASH - END OF PERIOD

$

33,370

$

40,976

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:

Interest

$

13,427

$

4,844

See accompanying notes to the condensed consolidated financial statements.

6



IGAMBIT INC.

Notes to Condensed Consolidated Financial Statements

Six Months Ended June 30, 2016 and 2015

Note 1 - Organization and Basis of Presentation

The  consolidated  financial  statements  presented  are  those  of  iGambit  Inc.,  (the  “Company”)  and

its wholly-owned subsidiaries, Wala, Inc. doing business as Arcmail Technology (“ArcMail”) and

Gotham  Innovation  Lab  Inc.  (“Gotham”).  The  Company  was  incorporated  under  the  laws  of  the

State of Delaware on April 13, 2000. The Company was originally incorporated as Compusations

Inc. under the laws of the State of New York on October 2, 1996.  The Company changed its name

to  BigVault.com  Inc.  upon  changing  its  state  of  domicile  on  April  13,  2000.    The  Company

changed  its  name  again  to  bigVault  Storage  Technologies  Inc.  on  December  21,  2000  before

changing to iGambit Inc. on April  5, 2006.   Gotham was incorporated under the laws of the state

of  New  York  on  September  23,  2009.    The  Company  is  a  holding  company  which  seeks  out

acquisitions  of  operating  companies  in  technology  markets.    ArcMail  provides  email  archive

solutions  to  domestic  and  international  businesses  through  hardware  and  software  sales,  support,

and maintenance.  Gotham is in the business of providing media technology services to real estate

agents and brokers in the New York metropolitan area.

Interim Financial Statements

The following (a) condensed consolidated balance sheet as of December 31, 2015, which has been

derived  from  audited  financial  statements,  and  (b)  the  unaudited  condensed  consolidated  interim

financial  statements  of  the  Company  have  been  prepared  in  accordance  with  the  instructions  to

Form  10-Q  and  Rule  8-03  of  Regulation  S-X.  Accordingly,  they  do  not  include  all  of  the

information and footnotes required by GAAP for complete financial statements. In the opinion of

management, all adjustments (consisting of normal recurring accruals) considered necessary for a

fair presentation have been included. Operating results for the six months ended June 30, 2016 are

not necessarily indicative of results that may be expected for the year ending December 31, 2016.

These condensed consolidated financial statements should be read in conjunction with the audited

consolidated financial statements and notes thereto for the year ended December 31, 2015 included

in   the   Company’s   Annual   Report   on   Form   10-K,   filed   with   the   Securities   and   Exchange

Commission (“SEC”) on April 14, 2016.

Business Acquisition

On November 4, 2015, the Company acquired  Wala, Inc. doing business as ArcMail  Technology

in  accordance  with  a  stock  purchase  agreement.   Pursuant  to  the  stock  purchase  agreement,  the

total consideration paid for the outstanding capital stock of Wala was 11,500,000 shares of iGambit

common stock, valued at $.10 per share.    The following table presents the allocation of the value

of  the  common  shares  issued  for  ArcMail  to  the  acquired  identifiable  assets,  liabilities  assumed

and goodwill:

Common shares issued, valued at $.10 per share                    $     1,150,000

 

Cash

  $

10,198

7



Accounts receivable, net

205,208

Inventories

21,160

Prepaid expenses

276

Fixed assets

41,235

Total identifiable assets

278,077

Accounts payable and accrued expenses

(442,300)

Accrued interest

(254,718)

Deferred revenue

(1,254,865)

Note payable

(3,881,351)

Total liabilities assumed

(5,833,234)

Excess of liabilities assumed over identifiable assets

5,555,157

Total goodwill

$     6,705,157

 

Note 2 – Discontinued Operations

Sale of Business

On November 5, 2015, pursuant to an asset purchase agreement Gotham sold assets consisting of

fixed  assets,  client  and  supplier  lists,  trade  names,  software,  social  media  accounts  and  websites,

and domain names to VHT, Inc., a Delaware corporation for a purchase price of $600,000.  Gotham

received  $400,000  and  commencing  on  January  29,  2016,  VHT,  Inc.  shall  pay  twelve  equal

monthly  installments  of  $16,667  on  the  last  business  day  of  each  month  (the  “Installment

Payments”  and  each,  an  “Installment  Payment”),  each  Installment  Payment  to  consist  of  (1)  an

earn-out  payment  of  $10,000  (the  “Earn-Out  Payments”  and  each,  an  “Earn-Out  Payment”),  and

(2)  an  additional  payment  of  $6,667  (the  “Additional  Payments”  and  each,  an   “Additional

Payment”); provided that VHT, Inc. shall only be required to make the Earn-Out Payments for as

long as it maintains its relationship with Gotham’s major client, unless it is dissatisfied with VHT,

Inc.

8



The assets and liabilities of the discontinued operations are presented in the consolidated balance

sheets   under   the   captions   “Assets   from   discontinued   operations”   and   “Liabilities   from

discontinued  operations”,  respectively.   The  underlying  assets  and  liabilities  of  the  discontinued

operations as of June 30, 2016 and December 31, 2015 are presented as follows:

2016

2015

Assets:

Cash

$

--

$

13,893

Accounts receivable, net

118,934

247,372

Prepaid expenses

1,500

1,500

Total assets

$

120,434

$

262,765

Liabilities:

Accounts payable and accrued expenses

14,452

117,417

Note payable - related party

4,436

9,936

$

18,888

$

127,353

Note 3 – Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned

subsidiaries,   Wala,   Inc.   and   Gotham   Innovation   Lab,   Inc.  All   intercompany   accounts   and

transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The   preparation   of   financial   statements   in   conformity   with   generally   accepted   accounting

principles  requires  management  to  make  estimates  and  assumptions  that  affect  the  reported

amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the

consolidated  financial  statements  and  the  reported  amounts  of  revenues  and  expenses  during  the

period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

For  certain  of  the  Company’s  financial  instruments,  including cash,  accounts  receivable,  prepaid

expenses, accounts payable, accrued interest, deferred revenue, and amounts due to related parties,

the carrying amounts approximate fair value due to their short  maturities.   Additionally, there are

no assets or liabilities for which fair value is remeasured on a recurring basis.

Revenue Recognition

The Company recognizes revenue from product sales when the following four revenue recognition

criteria are met: persuasive evidence of an arrangement exists, an equipment order has been placed

9



with the vendor, the selling price is fixed or determinable, and collectability is reasonably assured.

Revenues from maintenance contracts  covering multiple future periods are recognized during the

current  periods  and  deferred  revenue  is  recorded  for  future  periods  and  classified  as  current  or

noncurrent, depending on the terms of the contracts.

Gotham’s revenues were derived primarily from the sale of products and services rendered to real

estate  brokers.    Gotham  recognized  revenues  when  the  services  or  products  have  been  provided

or delivered, the fees charged are fixed or determinable, Gotham and its customers understood the

specific  nature  and  terms  of  the  agreed  upon  transactions,  and  collectability  was  reasonably

assured.

Advertising Costs

The Company expenses advertising costs as incurred.  Advertising costs for the six months ended

June 30, 2016 and 2015 were $130,249 and $2,037, respectively.

Cash and Cash Equivalents

For  purposes  of  reporting  cash  flows,  cash  and  cash  equivalents  include  checking  and  money

market accounts and any highly liquid debt instruments purchased with a maturity of three months

or less.

Accounts Receivable

The Company analyzes the collectability of accounts receivable  from continuing operations  each

accounting  period  and  adjusts  its  allowance  for  doubtful  accounts  accordingly.   A  considerable

amount of judgment is required in assessing the realization of accounts receivables, including the

creditworthiness  of  each  customer,  current  and  historical  collection  history  and  the  related  aging

of  past  due  balances.   The  Company  evaluates  specific  accounts  when  it  becomes  aware  of

information  indicating  that  a  customer  may  not  be  able  to  meet  its  financial  obligations  due  to

deterioration  of  its  financial  condition,  lower credit  ratings,  bankruptcy or  other  factors  affecting

the ability to render payment.  Allowance for doubtful accounts was $8,345 at  June 30, 2016 and

December  31,  2015,  respectively.   There  was  no  bad  debt  expense  charged  to  operations  for  the

six months ended June 30, 2016 and 2015, respectively.

Inventories

Inventories  consisting  of  finished  products  are  stated  at  the  lower  of  cost  or  market.    Cost  is

determined on an average cost basis.

Property and equipment and depreciation

Property and equipment  are stated at cost.   Maintenance and repairs are charged to expense when

incurred.   When property and equipment are retired or otherwise disposed of, the related cost and

accumulated depreciation are removed from the respective accounts and any gain or loss is credited

10



or  charged  to  income.    Depreciation  for  both  financial  reporting  and  income  tax  purposes  is

computed using combinations of the straight line and accelerated methods over the estimated lives

of the respective assets as follows:

Office equipment and fixtures

5 - 7 years

Computer hardware

5 years

Computer software

3 years

Development equipment

5 years

Goodwill

Goodwill represents the excess of liabilities assumed over assets acquired of ArcMail and the fair

market  value  of  the  common  shares  issued  by  the  Company  for  the  acquisition  of  ArcMail.   In

accordance  with  ASC  Topic  No.  350  “Intangibles    Goodwill  and  Other”),  the  goodwill  is  not

being amortized, but instead will be subject to an annual assessment of impairment by applying a

fair-value  based  test,  and  will  be  reviewed  more  frequently  if  current  events  and  circumstances

indicate a possible impairment. An impairment loss is charged to expense in the period identified.

If  indicators  of  impairment  are  present  and  future  cash  flows  are  not  expected  to  be  sufficient  to

recover  the  asset’s  carrying  amount,  an  impairment  loss  is  charged  to  expense  in  the  period

identified.  A  lack  of  projected  future  operating  results  from  ArcMail’s  operations  may  cause

impairment.   As  the  acquisition  of  ArcMail  occurred  on  November  4,  2015,  it  is  too  early  for

management to evaluate whether goodwill has been impaired.  No impairment was recorded during

the six months ended June 30, 2016.

Long-Lived Assets

The Company assesses the valuation of components of its property and equipment and other long-

lived  assets  whenever  events  or  circumstances  dictate  that  the  carrying  value  might  not  be

recoverable. The  Company bases  its  evaluation  on  indicators  such  as  the  nature  of the  assets, the

future economic benefit of the assets, any historical or future profitability measurements and other

external market conditions or factors that may be present. If such factors indicate that the carrying

amount  of  an  asset  or  asset  group  may  not  be  recoverable,  the  Company  determines  whether  an

impairment has occurred by analyzing an estimate of undiscounted future cash flows at the lowest

level for which identifiable cash flows exist. If the estimate of undiscounted cash flows during the

estimated  useful  life  of  the  asset  is  less  than  the  carrying  value  of  the  asset,  the  Company

recognizes  a  loss  for  the  difference  between  the  carrying  value  of  the  asset  and  its  estimated  fair

value, generally measured by the present value of the estimated cash flows.

Deferred Revenue

Deposits  from  customers  are  not  recognized  as  revenues,  but  as  liabilities,  until  the  following

conditions are met: revenues are realized when cash or claims to cash (receivable) are received in

exchange  for  goods  or  services  or  when  assets  received  in  such  exchange  are  readily convertible

to  cash  or  claim  to  cash  or  when  such  goods/services  are  transferred.  When  such  income  item  is

earned, the related revenue item is recognized, and the deferred revenue is reduced. To the  extent

revenues  are  generated  from  the  Company’s  support  and  maintenance  services,  the  Company

recognizes  such  revenues  when  services  are  completed  and  billed.  The  Company  has  received

deposits from its various customers that have been recorded as deferred revenue in the amount of

11



$1,188,457 and $1,190,279 as of June 30, 2016 and December 31, 2015, respectively.

Stock-Based Compensation

The Company accounts for its stock-based awards  granted under its employee compensation plan

in  accordance  with  ASC  Topic  No.  718-20,  Awards  Classified  as  Equity,  which  requires  the

measurement  of  compensation  expense  for  all  share-based  compensation  granted  to  employees

and  non-employee  directors  at  fair  value  on  the  date  of  grant  and  recognition  of  compensation

expense over the related service period for awards expected to vest.  The Company uses the Black-

Scholes  option  pricing  model  to  estimate  the  fair  value  of  its  stock  options  and  warrants.  The

Black-Scholes option pricing model requires the input of highly subjective assumptions including

the  expected  stock  price  volatility of  the  Company’s  common  stock,  the  risk  free  interest  rate  at

the  date  of  grant,  the  expected  vesting  term  of  the  grant,  expected  dividends,  and  an  assumption

related to forfeitures of such grants.  Changes in these subjective input assumptions can materially

affect the fair value estimate of the Company’s stock options and warrants.

Income Taxes

The  Company accounts  for income  taxes  using the  asset  and  liability method  in  accordance  with

ASC  Topic  No.  740,  Income  Taxes.  Under  this  method,  deferred  tax  assets  and  liabilities  are

determined based on differences between financial reporting and tax bases of assets and liabilities,

and  are  measured  using  the  enacted  tax  rates  and  laws  that  are  expected  to  be  in  effect  when  the

differences are expected to reverse.

The Company applies the provisions of ASC Topic No. 740 for the financial statement recognition,

measurement  and  disclosure  of  uncertain  tax  positions  recognized  in  the  Company’s  financial

statements.  In  accordance  with  this  provision,  tax  positions  must  meet  a  more-likely-than-not

recognition  threshold  and  measurement  attribute  for  the  financial  statement  recognition  and

measurement of a tax position.

Recent Accounting Pronouncements

FASB ASC 606 ASU 2014-09 - Revenue from contracts with customers:

In  May 2014,  the  FASB  issued  amended  guidance  on  contracts  with  customers  to  transfer  goods

or services or contracts for the transfer of nonfinancial assets, unless those contracts are within the

scope  of  other  standards  (e.g.,  insurance  contracts  or  lease  contracts).  The  guidance  requires  an

entity to  recognize  revenue  on  contracts  with  customers  to  depict  the  transfer  of  promised  goods

or services to customers in an amount that reflects the consideration to which the entity expects to

be entitled in exchange for those goods or services. The guidance requires that an entity depict the

consideration by applying the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

12



The amendments in this ASU are effective for annual reporting periods beginning after December

15, 2016, including interim periods within that reporting period. Early application is not permitted.

This amendment is to be either retrospectively adopted to each prior reporting period presented or

retrospectively with the cumulative effect of initially applying this ASU recognized at the date of

initial  application.  Adoption  of  this  guidance  is  not  expected  to  have  a  material  impact  on  the

Company's consolidated financial statements.

FASB ASC 718 ASU 2014-12 – Compensation – Stock Compensation:

In  June 2014, the  FASB  issued ASU No. 2014-12, "Compensation  - Stock Compensation  (Topic

718):  Accounting  for  Share-Based  Payments  When  the  Terms  of  an  Award  Provide  that  a

Performance  Target  Could  be  Achieved  after  the  Requisite  Service  Period,"  ("ASU   2014-12").

The  amendments  in  ASU  2014-12  require  that  a  performance  target  that  affects  vesting  and  that

could  be  achieved  after  the  requisite  service  period  be  treated  as  a  performance  condition.   A

reporting entity  should apply  existing  guidance in ASC Topic No. 718,  "Compensation  - Stock

Compensation"  as it relates to awards with  performance  conditions that affect  vesting to account

for  such  awards.   The  amendments  in  ASU  2014-12  are  effective  for  annual  periods  and  interim

periods  within  those  annual  periods  beginning  after  December  15,  2015.    Early  adoption  is

permitted.   Entities  may  apply  the  amendments  in  ASU  2014-12  either:  (a)  prospectively  to  all

awards  granted  or  modified  after  the  effective  date;  or  (b)  retrospectively  to  all  awards  with

performance targets that are outstanding as of the beginning of the earliest annual period presented

in  the  financial  statements  and  to  all  new  or  modified  awards  thereafter.  The  Company  does  not

anticipate  that  the  adoption  of  ASU  2014-12  will  have  a  material  impact  on  its  consolidated

financial statements.

FASB ASC 740 ASU 2015-17 - Balance Sheet Classification of Deferred Taxes:

In  November  2015,  the  FASB  issued  ASU  No.  2015-17,  “Income  Taxes  (Topic  740):  Balance

Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The  FASB issued this ASU as part of

its  ongoing  Simplification  Initiative,  with  the  objective  of  reducing  complexity  in  accounting

standards. The amendments in ASU 2015-17 require entities that present a classified balance sheet

to  classify  all  deferred  tax  liabilities  and  assets  as  a  noncurrent  amount.  This  guidance  does  not

change  the  offsetting  requirements  for  deferred  tax  liabilities  and  assets,  which  results  in  the

presentation of one amount on the balance sheet. Additionally, the amendments in this ASU align

the deferred income tax presentation with the requirements in International Accounting Standards

(IAS) 1, Presentation of Financial Statements.  The amendments in ASU 2015-17 are effective for

financial  statements  issued  for  annual  periods  beginning  after  December  15,  2016,  and  interim

periods  within  those  annual  periods.  The  Company  does  not  anticipate  that  the  adoption  of  this

standard will have a material impact on its consolidated financial statements.

FASB ASC 842 ASU 2016-02 – Leases:

In  February 2016,  the  FASB  issued  ASU  No.  2016-02, “Leases  (Topic  842)”  (“ASU  2016-02”).

ASU  2016-02  requires  an  entity  to  recognize  assets  and  liabilities  arising  from  a  lease  for  both

financing  and  operating  leases.  The  ASU  will  also  require  new  qualitative  and  quantitative

disclosures  to  help  investors  and  other  financial  statement  users  better  understand  the  amount,

13



timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years

beginning  after  December  15,  2018,  with  early  adoption  permitted.  The  Company  is  currently

evaluating ASU 2016-02 and its impact on its consolidated financial statements.

Note 4 – Property and Equipment

Property  and  equipment  are  carried  at  cost  and  consist  of  the  following  at  June  30,  2016  and

December 31, 2015:

2016

2015

Office equipment and fixtures

$

139,006

$

139,006

Computer hardware

92,212

90,943

Computer software

77,700

77,700

Development equipment

35,318

35,318

344,236

342,967

Less: Accumulated depreciation

315,156

302,534

$

29,080

$

40,433

Depreciation expense of $12,623 and $2,611 was  charged  to operations  for  the six  months ended

June 30, 2016 and 2015, respectively.

Note 5 - Earnings (Loss) Per Common Share

The  Company  calculates  net  earnings  (loss)  per  common  share  in  accordance  with  ASC  260

Earnings Per Share” (“ASC 260”). Basic and diluted net earnings (loss) per common share was

determined  by  dividing  net  earnings  (loss)  applicable  to  common  stockholders  by  the  weighted

average  number  of  common  shares  outstanding  during  the  period.  The  Company’s  potentially

dilutive  shares,  which  include  outstanding  common  stock  options  and  common  stock  warrants,

have  not  been  included  in  the  computation  of  diluted  net  earnings  (loss)  per  share  for  all  periods

as the result would be anti-dilutive.

Three Months Ended

Six Months Ended

June 30,

June 30,

2016

2015

2016

2015

Stock options

1,422,000

1,718,900

1,422,000

1,718,900

Stock warrants

275,000

275,000

275,000

275,000

Total shares excluded from calculation

1,697,000

1,993,900

1,697,000

1,993,900

14



Note 6 – Stock Based Compensation

Stock-based compensation expense for all stock-based award programs, including grants of stock

options  and  warrants,  is  recorded  in  accordance  with  "Compensation—Stock  Compensation",

Topic  718  of  the  FASB  ASC.  Stock-based  compensation  expense,  which  is  calculated  net  of

estimated forfeitures, is computed using the grant date fair-value and amortized over the requisite

service  period  for  all  stock  awards  that  are  expected  to  vest.  The  grant  date  fair  value  for  stock

options and warrants is calculated using the Black-Scholes option pricing model. Determining the

fair  value  of  options  at  the  grant  date  requires  judgment,  including  estimating  the  expected  term

that stock options will be outstanding prior to exercise, the associated volatility of the Company’s

common  stock,  expected  dividends,  and  a  risk-free  interest  rate.  Stock-based  compensation

expense is reported under general and administrative expenses in the accompanying consolidated

statements of operations.

Options

In  2006,  the  Company  adopted  the  2006  Long-Term  Incentive  Plan  (the  "2006  Plan").    Awards

granted under the 2006 Plan have a ten-year term and may be incentive stock options, non-qualified

stock  options  or  warrants.  The  awards  are  granted  at  an  exercise  price  equal  to  the  fair  market

value on the date of grant and generally vest over a three or four year period. The Plan expired on

December 31, 2009, therefore as of June 30, 2016, there was no unrecognized compensation cost

related to non-vested share-based compensation arrangements granted under the 2006 plan.

The 2006 Plan provided for the granting of options to purchase up to 10,000,000 shares of common

stock.  8,146,900 options were issued under the plan of which 7,157,038 have been exercised and

989,862  expired.  There  were  296,900  options  outstanding  under  the  2006  Plan  on  its  expiration

date of December 31, 2009 that expired on May 1, 2016.

All  options  issued  subsequent  to  this  date  were  not  issued  pursuant  to  any  plan  and  vested  upon

issuance.

Stock option activity during the six months ended June 30, 2016 and 2015 follows:

15



Weighted

Average

Weighted

Remaining

Weighted

Average

Average

Contractual

Options

Grant-Date

Life

Outstanding

Exercise Price

Fair Value

(Years)

Options outstanding at

December 31, 2014

1,518,900

$

0.03

$

0.10

4.76

Options granted

200,000

0.01

0.40

4.74

Options outstanding at

June 30, 2015

1,718,900

$

0.03

0.13

4.32

Options outstanding at

December 31, 2015

1,718,900

$

0.03

0.13

3.82

Options expired

(296,900)

0.01

--

Options outstanding at

June 30, 2016

1,422,000

$

0.03

$

0.13

6.10

Options outstanding at June 30, 2016 consist of:

Date

Number

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

June 9, 2014

213,000

213,000

$0.03

June 9, 2024

June 9, 2014

159,000

159,000

$0.03

June 9, 2024

June 9, 2014

600,000

600,000

$0.03

June 9, 2024

June 6, 2014

250,000

250,000

$0.05

June 6, 2019

March 24, 2015

200,000

200,000

$0.01

March 24, 2020

Total

1,422,000

1,422,000

Warrants

In addition to our 2006 Long Term Incentive Plan, we have issued and outstanding compensatory

warrants  to  two  consultants  entitling  the  holders  to  purchase  a  total  of  275,000  shares  of  our

common stock at an average exercise price of $0.94 per share. Warrants to purchase 25,000 shares

of common stock vest upon 6 months after the Company engages in an IPO, have an exercise price

of $3.00 per share, and expire 2 years after the Company engages in an IPO. Warrants to purchase

250,000  shares  of  common  stock  vest  100,000  shares  on  issuance  (June 1,  2009),  and  50,000

shares  on  each  of  the  following  three  anniversaries  of  the  date  of  issuance,  have  exercise  prices

ranging from $0.50  per share  to  $1.15 per share, and  expire  on June 1,  2019.  The  issuance  of the

compensatory warrants was not submitted to our shareholders for their approval.

16



Warrant activity during the six months ended June 30, 2016 and 2015 follows:

Weighted

(1)Weighted

Weighted

Average Grant-

Average

Date

Remaining

Average

Warrants

Exercise Pric

Contractual

Outstanding

e

Fair Value

Life (Years)

Warrants outstanding

at December 31, 2014

275,000

$

0.94

$

0.10

4.42

No warrant activity

--

--

--

Warrants outstanding

at June 30, 2015

275,000

$

0.94

$

0.10

3.92

Warrants outstanding

at December 31, 2015

275,000

$

0.94

$

0.10

3.42

No warrant activity

--

--

--

Warrants outstanding

at June 30, 2016

275,000

$

0.94

$

0.10

2.92

Warrants outstanding at June 30, 2016 consist of:

Date

Number

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

April 1, 2000

25,000

25,000

$3.00

2 years after IPO

June 1, 2009

100,000

100,000

$0.50

June 1, 2019

June 1, 2009

50,000

50,000

$0.65

June 1, 2019

June 1, 2009

50,000

50,000

$0.85

June 1, 2019

June 1, 2009

50,000

50,000

$1.15

June 1, 2019

Total

275,000

275,000

(1)  Exclusive of 25,000 warrants expiring 2 years after initial IPO.

Note 7 – Deferred Revenue

Deferred  revenue  represents  sales  of  maintenance  contracts  that  extend  to  and will  be  realized  in

future  periods.   Deferred  revenue  at  June  30,  2016  will  be  realized  in  the  following  years  ended

December 31,

2016

$

734,634

2017

357,882

2018

43,720

2019

43,720

2020

6,801

2021

1,700

$     1,188,457

17



Note 8 – Notes Payable

Notes  payable at  March  31,  2016  consist  of various  notes  payable in  annual  installments  totaling

$779,750 through September 2019.  The notes include interest at 7% and are secured by the assets

of ArcMail.

Principal amounts due on notes payable for the years ended December 31, are as follows:

2016

$

825,374

2017

779,750

2018

779,750

2019

779,751

$     3,164,625

During the six months ended June 30, 2016, Arcmail entered into merchant financing agreements

with  two  lenders  for  proceeds  totaling  $210,000  payable  in  daily  amounts  based  on  various

percentages of future collections of accounts receivable, which were assigned to the lenders.  The

obligations  will  be  satisfied  upon  total  payments  of  $287,400  and  will  mature  in  January  2017.

The outstanding balance of notes payable - other was $67,206 at June 30, 2016.

Note 9 – Stock Transactions

Common Stock Issued

In  connection  with  the  acquisition  of  ArcMail  the  Company  issued  11,500,000  common  shares

valued at $.10 per share to the president and CEO of Wala, Inc. on November 4, 2015.

The Company issued 1,000,000 and 600,000 common shares for services, valued at $.20 per share

on August 3, 2015 and May 18, 2015, respectively.

Note 10 - Income Taxes

Quarter Ended June 30,

2016

2015

Effective tax rate

0.0 %

0.0 %

A  full  valuation  allowance  was  recorded  against  the  Company’s  net  deferred  tax  assets.  A

valuation  allowance  must  be  established  if  it  is  more  likely  than  not  that  the  deferred  tax  assets

will not be realized. This assessment is based upon consideration of available positive and negative

evidence,  which  includes,  among  other  things,  the  Company’s  most  recent  results  of  operations

and expected future profitability. Based on the Company’s cumulative losses in recent years, a full

valuation   allowance   against   the   Company’s   deferred   tax   assets   has   been   established   as

Management believes that the Company will not realize the benefit of those deferred tax assets.

18



Note 11 - Retirement Plan

ArcMail has a defined contribution 401(k) plan, which covers substantially all employees. Under

the  terms  of  the  Plan,  Arcmail  is  currently  not  required  to  match  employee  contributions.   The

Company did not  make any employer contributions to the Plan during the six months ended June

30, 2016.

Note 12 – Concentrations and Credit Risk

Sales and Accounts Receivable

No  customer  accounted  for  more  than  10%  of  sales  for  the  six  months  ended  June  30,  2016  and

2015, respectively.

Cash

Cash is maintained at a major financial institution. Accounts held at U.S. financial institutions are

insured  by  the  FDIC  up  to  $250,000.  Cash  balances  could  exceed  insured  amounts  at  any  given

time, however, the Company has not experienced any such losses.  The Company did not have any

interest-bearing accounts at June 30, 2016 and December 31, 2015, respectively.

Note 13 - Related Party Transactions

Note Payable – Related Party

ArcMail issued a promissory note to the president of ArcMail on June 30, 2015 for funds advanced.

The note is payable in annual installments of $155,566 through December 2019.  The notes include

interest at 6% and are subordinated to the notes payable (see Note 8).

Principal amounts due on notes payable for the years ended December 31, are as follows:

2016

$

156,566

2017

156,566

2018

156,566

2019

156,567

$

626,265

Note 14 – Commitments and Contingencies

Lease Commitment

The Company is obligated under two operating leases for its premises that expire at various times

through October 31, 2018.

19



Total  future  minimum annual  lease  payments  under  the  leases  for  the  years  ending December  31

are as follows:

2016

$  29,979

2017

46,581

2018

36,533

$113,093

Rent expense of $31,297 and $34,118 was charged to operations for the six months ended June 30,

2016 and 2015, respectively.

Contingencies

The Company provides accruals for costs associated with the estimated resolution of contingencies

at the earliest date at which it is deemed probable that a liability has been incurred and the amount

of such liability can be reasonably estimated.

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.

20



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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-

owned subsidiaries, Wala, Inc. and Gotham Innovation  Lab,  Inc.  All intercompany accounts and

transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting

principles  requires  management  to  make  estimates  and  assumptions  that  affect  the  reported

amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the

consolidated  financial  statements  and  the  reported  amounts  of  revenues  and  expenses  during  the

period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

For  certain  of  our  financial  instruments,  including  cash,  accounts  receivable,  prepaid

expenses, accounts payable, accrued interest, deferred revenue, and amounts due to related parties,

the carrying amounts approximate fair value due to their short  maturities.   Additionally, there are

no assets or liabilities for which fair value is remeasured on a recurring basis.

Long-Lived Assets

We assess the valuation of components of its property and equipment and other long-lived

assets whenever events or circumstances dictate that the carrying value might not be recoverable.

We base our evaluation on indicators such as the nature of the assets, the future economic benefit

of  the  assets,  any  historical  or  future  profitability  measurements  and  other  external  market

conditions  or  factors  that  may  be  present.  If  such  factors  indicate  that  the  carrying  amount  of  an

asset or asset group may not be recoverable, we determine whether an impairment has occurred by

analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable

cash flows exist. If the estimate of undiscounted cash flows during the estimated useful life of the

21



asset is less than the carrying value of the asset, we recognize a loss for the difference between the

carrying value of the asset and its estimated fair value, generally measured by the present value of

the estimated cash flows.

Revenue Recognition

We  recognize  revenue  from  product  sales  when  the  following  four  revenue  recognition

criteria are met: persuasive evidence of an arrangement exists, an equipment order has been placed

with the vendor, the selling price is fixed or determinable, and collectability is reasonably assured.

Revenues from maintenance contracts  covering multiple future periods are recognized during the

current  periods  and  deferred  revenue  is  recorded  for  future  periods  and  classified  as  current  or

noncurrent, depending on the terms of the contracts.

Gotham’s revenues were derived primarily from the sale of products and services rendered to real

estate  brokers.    Gotham  recognized  revenues  when  the  services  or  products  have  been  provided

or delivered, the fees charged are fixed or determinable, Gotham and its customers understood the

specific  nature  and  terms  of  the  agreed  upon  transactions,  and  collectability  was  reasonably

assured.

Deferred Revenue

Deposits  from  customers  are  not  recognized  as  revenues,  but  as  liabilities,  until  the

following conditions  are  met:  revenues  are  realized  when  cash  or  claims  to  cash  (receivable)  are

received  in  exchange  for  goods  or  services  or  when  assets  received  in  such  exchange  are  readily

convertible  to  cash  or  claim  to  cash  or  when  such  goods/services  are  transferred.  When  such

income item is earned, the related revenue item is recognized, and the deferred revenue is reduced.

To  the  extent  revenues  are  generated  from  our  support  and  maintenance  services,  we  recognize

such  revenues  when  services  are  completed  and  billed.  We  received  deposits  from  our  various

customers   that   have   been   recorded   as   deferred   revenue   in   the   amount   of   $1,188,457   and

$1,190,279 as of June 30, 2016 and December 31, 2015, respectively.

Cash and Cash Equivalents

For  purposes  of  reporting  cash  flows,  cash  and  cash  equivalents  include  checking  and

money market accounts and any highly liquid debt instruments purchased with a maturity of three

months or less.

Accounts Receivable

We  analyze  the  collectability  of  accounts  receivable  from  continuing  operations  each

accounting  period  and  adjust  our  allowance  for  doubtful  accounts  accordingly.  A  considerable

amount of judgment is required in assessing the realization of accounts receivables, including the

credit worthiness of each customer, current and historical  collection history and the related aging

of  past  due  balances.  We  evaluate  specific  accounts  when  we  become  aware  of  information

indicating that a customer may not be able to meet its financial obligations due to deterioration of

its  financial  condition,  lower  credit  ratings,  bankruptcy  or  other  factors  affecting  the  ability  to

render payment. Allowance for doubtful accounts was $8,345 at June 30, 2016 and December 31,

22



2015, respectively.  There was no bad debt expense charged to operations for the six months ended

June 30, 2016 and 2015, respectively.

Property and equipment and depreciation

Property and equipment are stated at cost.  Maintenance and repairs are charged to expense

when incurred.  When property and equipment are retired or otherwise disposed of, the related cost

and  accumulated  depreciation  are  removed  from  the  respective  accounts  and  any  gain  or  loss  is

credited or charged to income.  Depreciation for both financial reporting and income tax purposes

is  computed  using  combinations  of  the  straight  line  and  accelerated  methods  over  the  estimated

lives of the respective assets as follows:

Office equipment and fixtures

5 - 7 years

Computer hardware

5 years

Computer software

3 years

Development equipment

5 years

Depreciation expense of $12,623 and $2,611 was charged to operations for the six months

ended June 30, 2016 and 2015, respectively.

Goodwill

Goodwill represents the excess of liabilities assumed over assets acquired of ArcMail and

the fair market value of the common shares issued by the Company for the acquisition of ArcMail.

In accordance with ASC Topic No. 350 “Intangibles – Goodwill and Other”), the  goodwill  is not

being amortized, but instead will be subject to an annual assessment of impairment by applying a

fair-value  based  test,  and  will  be  reviewed  more  frequently  if  current  events  and  circumstances

indicate a possible impairment. An impairment loss is charged to expense in the period identified.

If  indicators  of  impairment  are  present  and  future  cash  flows  are  not  expected  to  be  sufficient  to

recover  the  asset’s  carrying  amount,  an  impairment  loss  is  charged  to  expense  in  the  period

identified.  A  lack  of  projected  future  operating  results  from  ArcMail’s  operations  may  cause

impairment.   As  the  acquisition  of  ArcMail  occurred  on  November  4,  2015,  it  is  too  early  for

management to evaluate whether goodwill has been impaired.  No impairment was recorded during

the six months ended June 30, 2016.

Stock-Based Compensation

Stock-based  compensation  expense  for  all  stock-based  award  programs,  including  grants

of   stock   options   and   warrants,   is   recorded   in   accordance   with   "Compensation—Stock

Compensation",  Topic  718  of  the  FASB  ASC.  Stock-based  compensation  expense,  which  is

calculated  net  of  estimated  forfeitures,  is  computed  using the  grant  date fair-value  and  amortized

over the requisite service period for all stock awards that are  expected to vest. The grant date fair

value  for  stock  options  and  warrants  is  calculated  using the  Black-Scholes  option  pricing  model.

Determining the fair value of options at the grant date requires judgment, including estimating the

expected  term that  stock options  will  be  outstanding prior to exercise, the  associated  volatility of

the  Company’s  common  stock,  expected  dividends,  and  a  risk-free  interest  rate.  Stock-based

23



compensation expense is reported under general and administrative expenses in the accompanying

consolidated statements of operations.

Options

In  2006,  we  adopted  the  2006  Long-Term  Incentive  Plan  (the  "2006  Plan").    Awards

granted under the 2006 Plan have a ten-year term and may be incentive stock options, non-qualified

stock  options  or  warrants.  The  awards  are  granted  at  an  exercise  price  equal  to  the  fair  market

value on the date of grant and generally vest over a three or four year period. The Plan expired on

December 31, 2009, therefore as of June 30, 2016, there was no unrecognized compensation cost

related to non-vested share-based compensation arrangements granted under the 2006 plan.

The 2006 Plan provided for the granting of options to purchase up to 10,000,000 shares of

common  stock.  8,146,900  options  have  been  issued  under  the  plan  to  date  of  which  7,157,038

have  been  exercised  and  692,962  have  expired  to  date.  There  were  296,900  options  outstanding

under the 2006 Plan on its expiration date of December 31, 2009.

All options issued subsequent to this date were not issued pursuant to any plan.

Stock option activity during the six months ended June 30, 2016 and 2015 follows:

Weighted

Average

Weighted

Remaining

Weighted

Average

Average

Contractual

Options

Grant-Date

Life

Outstanding

Exercise Price

Fair Value

(Years)

Options outstanding at

December 31, 2014

1,518,900

$

0.03

$

0.10

4.76

Options granted

200,000

0.01

0.40

4.98

Options outstanding at

June 30, 2015

1,718,900

$

0.03

0.13

4.57

Options outstanding at

December 31, 2015

1,718,900

$

0.03

0.13

3.82

Options expired

(296,900)

0.01

--

Options outstanding at

June 30, 2016

1,718,900

$

0.03

$

0.13

6.10

Options outstanding at June 30, 2016 consist of:

Date

Number

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

June 9, 2014

213,000

213,000

$0.03

June 9, 2024

24



June 9, 2014

159,000

159,000

$0.03

June 9, 2024

June 9, 2014

600,000

600,000

$0.03

June 9, 2024

June 6, 2014

250,000

250,000

$0.05

June 6, 2019

March 24, 2015

200,000

200,000

$0.01

March 24, 2020

Total

1,422,000

1,422,000

Warrants

In addition to our 2006 Long Term Incentive Plan, we have issued and outstanding compensatory

warrants  to  two  consultants  entitling  the  holders  to  purchase  a  total  of  275,000  shares  of  our

common stock at an average exercise price of $0.94 per share. Warrants to purchase 25,000 shares

of common stock vest upon 6 months after the Company engages in an IPO, have an exercise price

of $3.00 per share, and expire 2 years after the Company engages in an IPO. Warrants to purchase

250,000  shares  of  common  stock  vest  100,000  shares  on  issuance  (June 1,  2009),  and  50,000

shares  on  each  of  the  following  three  anniversaries  of  the  date  of  issuance,  have  exercise  prices

ranging from $0.50  per share  to  $1.15 per share, and  expire  on June 1,  2019.  The  issuance  of the

compensatory warrants was not submitted to our shareholders for their approval.

Warrant activity during the six months ended June 30, 2016 and 2015 follows:

Weighted

(1)Weighted

Weighted

Average Grant-

Average

Date

Remaining

Warrants

Average

Contractual

Outstanding

Exercise Price

Fair Value

Life (Years)

Warrants outstanding

at December 31, 2014

275,000

$

0.94

$

0.10

4.42

No warrant activity

--

--

--

Warrants outstanding

at June 30, 2015

275,000

$

0.94

$

0.10

4.17

Warrants outstanding

at December 31, 2015

275,000

$

0.94

$

0.10

3.42

No warrant activity

--

--

--

Warrants outstanding

at June 30, 2016

275,000

$

0.94

$

0.10

3.17

(1)  Exclusive of 25,000 warrants expiring 2 years after initial IPO.

Warrants outstanding at June 30, 2016 consist of:

Date

Number

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

April 1, 2000

25,000

25,000

$3.00

2 years after IPO

June 1, 2009

100,000

100,000

$0.50

June 1, 2019

June 1, 2009

50,000

50,000

$0.65

June 1, 2019

25



June 1, 2009

50,000

50,000

$0.85

June 1, 2019

June 1, 2009

50,000

50,000

$1.15

June 1, 2019

Total

275,000

275,000

Stock Transactions

On   September   25,   2014,   the   Board   unanimously   approved   an   amendment   to   the

Company’s  Articles  of  Incorporation  to  increase  the  number  of  shares  of  Common  Stock  which

the  Company  is  authorized  to  issue  from  seventy  five  million  (75,000,000)  to  Three  Hundred

Million  (300,000,000) shares  of Common  Stock,  $0.001  par  value  per share,  and  to  create  a  new

class   of   stock   entitled   “preferred   stock”   (together,   the   “Capitalization   Amendments”).   The

Capitalization  Amendments  create provisions  in  the  Company’s  Articles  of Incorporation,  which

allows  the  voting  powers,  designations,  preferences  and  other  special  rights,  and  qualifications,

limitations and restrictions of each series of preferred stock to be established from time to time by

the  Board  without  approval  of  the  stockholders.  No  dividend,  voting,  conversion,  liquidation  or

redemptions  rights  as  well  as  redemption  or  sinking  fund  provisions  are  yet  established  with

respect  to  the  Company’s  preferred  stock.    On  October  3,  2014,  the  Majority  Stockholders

executed   and   delivered   to   the   Company   a   written   consent   approving   the   Capitalization

Amendments.

Common Stock Issued

In  connection  with  the  acquisition  of  Wala,  Inc.  we  issued  11,500,000  common  shares

valued at $.10 per share to the president and CEO of Wala, Inc. on November 4, 2015.

We issued 1,000,000 and 600,000 common shares for services, valued at $.20 per share on

August 3, 2015 and May 18, 2015, respectively.

Income Taxes

We account for income taxes using the asset and liability method in accordance with ASC

Topic No. 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined

based  on  differences  between  financial  reporting  and  tax  bases  of  assets  and  liabilities,  and  are

measured using the enacted tax rates and laws that are expected to be in effect when the differences

are expected to reverse.

We  apply  the  provisions  of  ASC  Topic  No.  740  for  the  financial  statement  recognition,

measurement  and  disclosure  of  uncertain  tax  positions  recognized  in  the  Company’s  financial

statements.  In  accordance  with  this  provision,  tax  positions  must  meet  a  more-likely-than-not

recognition  threshold  and  measurement  attribute  for  the  financial  statement  recognition  and

measurement of a tax position.

26



INTRODUCTION

iGambit  is  a  company focused  on  the  technology  markets.  Our  sole  operating subsidiary,

Wala, Inc. doing business as ArcMail Technology (ArcMail) is in the business of providing simple,

secure and cost-effective enterprise information and email archiving solutions for businesses of all

sizes  across  a  range  of vertical  markets.  We  are  focused  on  expanding the  operations  of ArcMail

by marketing the company to existing and potential new clients.

Assets.  At  June  30,  2016,  we  had  $7,479,072  in  total  assets,  compared  to  $7,637,996  at

December  31,  2015.  The  decrease  in  total  assets  was  primarily  due  to  the  decrease  in  cash,  the

decrease in prepaid expenses, and the decrease in assets from discontinued operations.

Liabilities. At June 30, 2016, our total liabilities were $6,252,678 compared to $6,076,680

at  December  31,  2015.  Our current  liabilities  at  June  30,  2016  consisted  of accounts  payable  and

accrued  expenses  of  $665,834,  accrued  interest  on  notes  payable  of  $430,230,   amounts  due  to

related parties of $91,173, notes payable of $1,049,146, liabilities from discontinued operations of

$18,888  and  deferred  revenue  current  portion  of  $734,634,  whereas  our  current   liabilities  as  of

December 31,  2015  consisted  of   accounts  payable  and  accrued  expenses  of  $636,633,  accrued

interest  on  notes  payable  of  $302,278, notes  payable  of  $936,316,  amounts  due  to  related  parties

of  $74,871,  liabilities  from  discontinued  operations  of  $127,353  and  deferred  revenue  current

portion  of  $811,227.  Our  long  term  liabilities  at  June  30,  2016  consisted  of  Notes  payable  of

$2,808,950   and   deferred   revenue   non-current   portion   of   $453,823,   whereas   our   long   term

liabilities as of December 31, 2015 consisted of Notes payable of $2,808,950 and deferred revenue

non-current portion of $379,052.

Stockholders’ Equity.  Our stockholders’ equity decreased to $1,226,394 at  June 30, 2016

from  $1,561,316  at  December  31,  2015.    This  decrease  was  primarily  due  to  an  increase  in

accumulated  deficit  from  $(2,798,390)  at  December  31,  2015  to  $(3,133,312)  at  June  30,  2016,

resulting from a net loss of $(334,922) for the six months ended June 30, 2016.

THREE  MONTHS  ENDED  JUNE  30,  2016  AS  COMPARED  TO  THREE  MONTHS

ENDED JUNE 30, 2015

Revenues  and  Net  Loss.   We  had  $589,951  of  revenue  and  a  net  loss  of  $96,052  during

the three months ended June 30, 2016 from our ArcMail subsidiary.  The increase in revenue was

due primarily to an increase in revenue generated by our ArcMail subsidiary acquired in November

2015.  In  addition  to  ArcMail’s  operations,  we  had  a  loss  from  discontinued  operations  of  $240

compared to income from discontinued operations of $36,587 for the three months ended June 30,

2016 and June 30, 2015, respectively.

General and Administrative Expenses. General and Administrative Expenses increased to

$581,122 for the three months ended June 30, 2016 from $86,796 for the three months ended June

30,  2015.  For  the  three  months  ended  June  30,  2016  our  General  and  Administrative  Expenses

consisted of corporate  administrative  expenses of $73,892, legal  and accounting fees of $21,637,

health insurance expenses of $23,249, payroll expenses of $323,450, finders fees and commissions

of $8,750, marketing expense of $119,592, computer and internet expense of $9,474, and exchange

27



filing fees  of  $1,078.   For  the  three  months  ended  June  30, 2015  our  General  and  Administrative

Expenses consisted of corporate administrative expenses of $25,145, legal and accounting fees of

$24,569, finders fees and commissions of $17,500, and investor relations expenses of $9,649. The

increases  from  the  three  months  ended  June  30,  2015  to  the  three  months  ended  June  30,  2016

relate primarily to: (i) an increase in payroll expenses; (ii) an increase in consulting expenses; (iii)

an  increase  in  exchange  filing  fees;  and  (iv)  an  increase  in  general  and  administrative  costs

associated  with  the  operation  of  our  ArcMail  subsidiary  acquired  in  November  2015.  Costs

associated  with  our  officers’  salaries  and  the  operation  of  our  ArcMail  subsidiary  should  remain

level  going forward, subject to a  material expansion in the business operations of ArcMail  which

would likely increase our corporate administrative expenses.

Other  Income  (Expense)  and  Taxes.  We  had  interest  expense  of  $79,378  for  the  three

months ended June 30, 2016 compared to $1,447 for the three months ended June 30, 2015.

Six Months Ended June 30, 2016 as Compared to Six Months Ended June 30, 2015

Revenues and Net Loss.  We had $993,701 of revenue and net loss of $334,922 during the

six  months  ended  June  30,  2016.  The  increase  in  revenue  was  due  primarily  to  an  increase  in

revenue   generated   by   our   ArcMail   subsidiary   acquired   in   November   2015.   In   addition   to

ArcMail’s operations, we had income from discontinued operations of $3,318 and $31,965 for the

six months ended June 30, 2016 and June 30, 2015, respectively.

General and Administrative Expenses. General and Administrative Expenses increased to

$1,139,775 for the six months ended June 30, 2016 from $227,007 for the six months ended June

30,  2015.  For  the  six  months  ended  June  30,  2016  our  General  and  Administrative  Expenses

consisted of corporate administrative expenses of $142,073 legal and accounting fees of $61,255,

health insurance expenses of $37,969, directors and officers insurance expense of $10,640, payroll

expenses of $664,928, finders fees and commissions of $26,250, marketing expense of $163,583,

computer and internet expense of $24,499 and exchange filing fees of $8,578.  For the six months

ended   June   30,   2015   our   General   and   Administrative   Expenses   consisted   of   corporate

administrative  expenses  of $51,508, legal  and  accounting fees of $64,649,  directors  and officers’

insurance  expense  of  $20,533,  consulting  fees  of  $14,498,  finders  fees  and  commissions  of

$17,500,  investor  relations  expenses  of  $9,649,  filing  fees  of  $10,105,  and  payroll  expenses  of

$38,565. The increases from the three months ended June 30, 2015 to the three months ended June

30,  2016  relate  primarily  to:  (i) an  increase  in  payroll  expenses;  (ii) an  increase  in  consulting

expenses;   (iii)   an   increase   in   exchange   filing   fees;   and   (iv)   an   increase   in   general   and

administrative costs associated with the operation of our ArcMail subsidiary acquired in November

2915.  Costs  associated  with  our  officers’  salaries  and  the  operation  of  our  ArcMail  subsidiary

should  remain  level  going  forward,  subject  to  a  material  expansion  in  the  business  operations  of

ArcMail which would likely increase our corporate administrative expenses.

Other  Income  (Expense)  and  Taxes.  We  had  interest  expense  of  $163,712  for  the  six

months ended June 30, 2016 compared to $1,501 for the six months ended June 30, 2015.

28



LIQUIDITY AND CAPITAL RESOURCES

As  reflected  in the  accompanying consolidated  financial  statements, at  June  30,  2016, we

had  $33,370  of  cash  and  stockholders’  equity  of  $1,226,394  as  compared  to  $131,987  and

$1,561,316 at December 31, 2015. At June 30, 2016 we had $7,479,072 in total assets, compared

to $7,637,996 at December 31, 2015.

Our  primary  capital  requirements  in  2016  are  likely  to  arise  from  the  expansion  of  our

Arcmail  operations,  and,  in  the  event  we  effectuate  an  acquisition,  from:  (i) the  amount  of  the

purchase  price  payable  in  cash  at  closing,  if  any;  (ii) professional  fees  associated  with  the

negotiation, structuring, and closing of the transaction; and (iii) post closing costs. It is not possible

to   quantify   those   costs   at   this   point   in   time,   in   that   they   depend   on   Arcmail’s   business

opportunities, the state of the overall economy, the relative size of any target company we identify

and  the  complexity  of  the  related  acquisition  transaction(s).  We  anticipate  raising  capital  in  the

private markets to cover any such costs, though there can be no guaranty we will be able to do so

on terms we deem to be acceptable. We do not have any plans at this point in time to obtain a line

of credit or other loan facility from a commercial bank.

While we believe in the viability of our strategy to improve Arcmail’s sales volume and to

acquire companies, and in our ability to raise additional funds, there can be no assurances that we

will be able to fully effectuate our business plan.

Cash Flow Activity

Net  cash  used  in  continuing  operating  activities  was  $263,663  for  the  six  months  ended

June 30, 2016, compared to $146,003 for the six months ended June 30, 2015. Our primary source

of  operating  cash  flows  from  continuing  operating  activities  for  the  six  months  ended  June  30,

2016 was from our ArcMail subsidiary’s revenues of $993,701.  Additional contributing factors to

the change were from an increase in accounts receivable of $221,245, a decrease in inventories of

$20,000,  an  increase  in  employee  advances  of  $800,  a  decrease  in  prepaid  expenses  of  $98,668,

an  increase  in  accounts  payable and  accrued  expenses  of $29,201, an  increase  in  accrued  interest

of  $127,952,  and  a  decrease  in  deferred  revenue  of  $1,822.   Net  cash  provided  by  discontinued

operating activities was $42,683 for the six months ended June 30, 2016 and $0 for the six months

ended June 30, 2015. The $42,683 and $26,133 cash provided by discontinued operations for the

six  months  ended  June  30,  2016  and  June  30,  2015,  respectively,  represents  cash  payments

received from VHT which was offset by a decrease in accounts receivable included in the Assets

from Discontinued Operations.

Cash  used  in  continuing  investing  activities  was  $1,269  for  the  six  months  ended  June  30,

2016  and  Cash  used  in  discontinued  investing activities  of  $5,026  for  the  six  months  ended  June

30, 2015 was from the purchase of property and equipment

Cash provided by financing activities was $123,632 for the six months ended June 30, 2016

compared  to  $32,436  for  the  six  months  ended  June  30,  2015.  The  cash  provided  by  financing

activities  for  the  six  months  ended  June  30,  2016  consisted  of  an  increase  in  notes  payable  of

$112,830  and  amounts  due  to  related  parties  of  $16,302  whereas  the  cash  provided  by  financing

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activities  for  the  three  months  ended  June  30,  2015  consisted  of  proceeds  from  loans  from

shareholders of $32,436.

Supplemental Cash Flow Activity

In the six  months  ended June 30, 2016 the company paid interest  of $13,427 compared to

interest of $4,844 in the six months ended June 30, 2015.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Required.

Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We  carried  out  an  evaluation,  as  required  by paragraph  (b) of  Rule 13a-15  and  15d-15  of

the Exchange Act under the supervision and with the participation of our management, including

our  Chief  Executive  Officer  and  Chief  Financial  Officer,  of  the  effectiveness  of  our  disclosure

controls  and  procedures,  as defined in Rules 13a-15(e)  and 15d-15(e) under the  Exchange  Act  as

of  June  30,  2012.  Based  upon  that  evaluation,  our  Chief  Executive  Officer  and  Chief  Financial

Officer concluded that our disclosure controls and procedures were effective as of June 30, 2016.

Change in Internal Controls

During the six months ended June 30, 2016, there were no changes  in our internal  control

over  financial  reporting that  materially affected,  or  are  reasonably likely to  materially affect,  our

internal control over financial reporting.

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 June 30, 2016.

Item 1A.   Risk Factors.

Not required

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

On  May  18,  2015,  the  Company  issued  600,000  common  shares  for  services,  valued  at  $.20  per

share.

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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.)

31



SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be

signed on its behalf by the undersigned, thereunto duly authorized, on August 22, 2016.

iGambit Inc.

/s/ Rory T. Welch

Rory T. Welch

Chief Executive Officer

/s/ Elisa Luqman

Elisa Luqman

Chief Financial Officer

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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.)

33