Clinigence Holdings, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - CERTIFICATION - Clinigence Holdings, Inc.	exhibit322.htm
EX-32.1 - CERTIFICATION - Clinigence Holdings, Inc.	exhibit321.htm
EX-31.2 - CERTIFICATION - Clinigence Holdings, Inc.	exhibit312.htm
EX-31.1 - CERTIFICATION - Clinigence Holdings, Inc.	exhibit311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly period ended September 30, 2016



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

For the transition period from

Commission file number 000-53862

iGambit Inc.

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

Delaware

11-3363609

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1050 W. Jericho Turnpike, Suite A

Smithtown, New York 11787

(Address of Principal Executive Offices)(Zip Code)

(631) 670-6777

(Issuer’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or

15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period

that the registrant was required to file such reports), and (2) has been subject to such filing requirements for

the past 90 days. Yes x No 

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

site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of

Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that

the registrant was required to submit and post such files). Yes x No 

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

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

“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer Accelerated filer

Non-accelerated filer 

Smaller reporting company



(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes  No x

The Registrant had 39,683,990 shares of its common stock outstanding as of November 21, 2016.

iGambit Inc.

Form 10-Q

Part I — Financial Information

Item 1.

Financial Statements:

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Part II — Other Information

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults upon Senior Securities

Item 4.

Removed and Reserved

Item 5.

Other Information

Item 6.

Exhibits

EX-31.1

EX-31.2

EX-32.1

EX-32.2

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

IGAMBIT INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER

30,

2016

DECEMBER 31,

(Unaudited)

2015

ASSETS

Current assets

Cash

21,829

131,987

Accounts receivable, net

545,873

230,182

Inventories

1,160

21,160

Prepaid expenses

141,995

244,592

Assets from discontinued operations, net

53,389

262,765

Total current assets

764,246

890,686

Property and equipment, net

24,432

40,433

Other assets

Goodwill

6,705,157

Deposits

1,720

Total other assets

6,706,877

7,495,555

7,637,996

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable and accrued expenses

745,725

636,633

Accrued interest on notes payable

454,854

291,107

Accrued interest on notes payable - related party

39,353

11,171

Amounts due to related parties

82,923

74,871

Deferred revenue, current portion

385,396

811,227

Notes payable, current portion

786,624

779,750

Note payable - related party, current portion

156,566

Notes payable - other

79,459

Liabilities from discontinued operations

15,557

127,353

Total current liabilities

2,746,457

2,888,678

Long-term liabilities

Deferred revenue, net of current portion

497,088

379,052

Notes payable

2,339,251

Note payable - related party

469,699

Total long-term liabilities

3,306,038

3,188,002

Total liabilities

6,052,495

6,076,680

Stockholders' equity

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

shares;

issued and outstanding - 0 shares in 2016 and 2015,

respectively

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

shares;

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

2015, respectively

39,684

Additional paid-in capital

4,320,022

Accumulated deficit

(2,916,646)

(2,798,390)

Total stockholders' equity

1,443,060

1,561,316

7,495,555

7,637,996

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

THREE MONTHS

NINE MONTHS

ENDED

SEPTEMBER 30,

2016

2015

2016

2015

Sales:

Hardware and software

200,506

442,800

Support and maintenance

597,311

1,348,718

Total sales

797,817

1,791,518

Cost of sales

7,667

36,121

Gross profit

790,150

1,755,397

Operating expenses

General and administrative expenses

458,686

121,833

1,598,461

348,840

Income (loss) from operations

331,464

(121,833)

156,936

(348,840)

Other income (expenses)

Interest expense

(115,348)

(635)

(279,060)

(2,136)

Total other income (expenses)

(115,348)

(635)

(279,060)

(2,136)

Income (loss) from continuing operations

216,116

(122,468)

(122,124)

(350,976)

Income from discontinued operations

550

47,619

3,868

79,584

Net income (loss)

216,666

(74,849)

(118,256)

(271,392)

Basic and fully diluted loss per common

Continuing operations

.01

(.00)

(.01)

Discontinued operations

.00

Net loss per common share

.01

(.00)

(.01)

Weighted average common shares

outstanding - basic

39,683,990

27,825,294

39,683,990

27,099,008

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30,

(UNAUDITED)

2016

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

(118,256)

(271,392)

Adjustments to reconcile net loss to net

cash used in operating activities

Income from discontinued operations

(3,868)

(79,584)

Depreciation

17,196

496

Stock-based compensation expense

331,998

Increase (Decrease) in cash flows as a result of

changes in asset and liability account balances:

Accounts receivable

(315,691)

Inventories

20,000

Prepaid expenses

102,597

(187,434)

Accounts payable and accrued expenses

109,092

34,004

Accrued interest on notes payable

191,929

Deferred revenue

(307,795)

Net cash used in continuing operating activities

(304,796)

(171,912)

Net cash provided by discontinued operating activities

106,947

23,920

NET CASH USED IN OPERATING ACTIVITIES

(197,849)

(147,992)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

(1,194)

Net cash used in continuing investing activities

(1,194)

Net cash used in discontinued investing activities

(5,026)

NET CASH USED IN INVESTING ACTIVITIES

(1,194)

(5,026)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from stockholders' loans

28,700

Repayments of stockholders' loans

(7,300)

Proceeds from notes payable

125,083

Repayments of notes payable

(38,750)

Increase in amounts due to related parties

8,052

Net cash provided by continuing financing activities

94,385

21,400

Net cash provided by (used in) discontinued financing activities

(5,500)

16,936

NET CASH PROVIDED BY FINANCING ACTIVITIES

88,885

38,336

NET DECREASE IN CASH

(110,158)

(114,682)

CASH - BEGINNING OF PERIOD

131,987

133,436

CASH - END OF PERIOD

21,829

18,754

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:

Interest

13,427

7,147

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2016 and 2015

Note 1 - Organization and Basis of Presentation

The consolidated financial statements presented are those of iGambit Inc., (the

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

Technology (“ArcMail”) and Gotham Innovation Lab Inc. (“Gotham”). The Company was

incorporated under the laws of the State of Delaware on April 13, 2000. The Company was

originally incorporated as Compusations Inc. under the laws of the State of New York on

October 2, 1996. The Company changed its name to BigVault.com Inc. upon changing its

state of domicile on April 13, 2000. The Company changed its name again to bigVault

Storage Technologies Inc. on December 21, 2000 before changing to iGambit Inc. on April

5, 2006. Gotham was incorporated under the laws of the state of New York on September

23, 2009. The Company is a holding company which seeks out acquisitions of operating

companies in technology markets. ArcMail provides email archive solutions to domestic

and international businesses through hardware and software sales, support, and

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

estate agents and brokers in the New York metropolitan area.

Interim Financial Statements

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

has been derived from audited financial statements, and (b) the unaudited condensed

consolidated interim financial statements of the Company have been prepared in

accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.

Accordingly, they do not include all of the information and footnotes required by GAAP

for complete financial statements. In the opinion of management, all adjustments

(consisting of normal recurring accruals) considered necessary for a fair presentation have

been included. Operating results for the nine months ended September 30, 2016 are not

necessarily indicative of results that may be expected for the year ending December 31,

2016. These condensed consolidated financial statements should be read in conjunction

with the audited consolidated financial statements and notes thereto for the year ended

December 31, 2015 included in the Company’s Annual Report on Form 10-K, filed with

the Securities and Exchange Commission (“SEC”) on April 14, 2016.

Business Acquisition

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

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

agreement, the total consideration paid for the outstanding capital stock of Wala was

11,500,000 shares of iGambit common stock, valued at $.10 per share. The following

table presents the allocation of the value of the common shares issued for ArcMail to the

acquired identifiable assets, liabilities assumed and goodwill:

Common shares issued, valued at $.10 per share

$ 1,150,000

Cash

10,198

Accounts receivable, net

205,208

Inventories

21,160

Prepaid expenses

276

Fixed assets

41,235

Total identifiable assets

278,077

Accounts payable and accrued expenses

(442,300)

Accrued interest

(254,718)

Deferred revenue

(1,254,865)

Note payable

(3,881,351)

Total liabilities assumed

(5,833,234)

Excess of liabilities assumed over identifiable assets

5,555,157

Total goodwill

$ 6,705,157

Note 2 – Discontinued Operations

Sale of Business

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

consisting of fixed assets, client and supplier lists, trade names, software, social media

accounts and websites, and domain names to VHT, Inc., a Delaware corporation for a

purchase price of $600,000. Gotham received $400,000 and commencing on January 29,

2016, VHT, Inc. shall pay twelve equal monthly installments of $16,667 on the last

business day of each month (the “Installment Payments” and each, an “Installment

Payment”), each Installment Payment to consist of (1) an earn-out payment of $10,000 (the

“Earn-Out Payments” and each, an “Earn-Out Payment”), and (2) an additional payment

of $6,667 (the “Additional Payments” and each, an “Additional Payment”); provided that

VHT, Inc. shall only be required to make the Earn-Out Payments for as long as it maintains

its relationship with Gotham’s major client, unless it is dissatisfied with VHT, Inc.

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

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

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

discontinued operations as of September 30, 2016 and December 31, 2015 are presented

as follows:

2016

2015

Assets:

Cash

13,893

Accounts receivable, net

51,889

247,372

Prepaid expenses

1,500

Total assets

53,389

262,765

Liabilities:

Accounts payable and accrued expenses

11,121

117,417

Note payable - related party

4,436

9,936

15,557

127,353

Note 3 – Summary of Significant Accounting Policies

Principles of Consolidation

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

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

accounts and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting

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

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

date of the consolidated financial statements and the reported amounts of revenues and

expenses during the period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

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

prepaid expenses, accounts payable, accrued interest, deferred revenue, and amounts due

to related parties, the carrying amounts approximate fair value due to their short maturities.

Additionally, there are no assets or liabilities for which fair value is remeasured on a

recurring basis.

Revenue Recognition

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

recognition criteria are met: persuasive evidence of an arrangement exists, an equipment

order has been placed with the vendor, the selling price is fixed or determinable, and

collectability is reasonably assured. Revenues from maintenance contracts covering

multiple future periods are recognized during the current periods and deferred revenue is

recorded for future periods and classified as current or noncurrent, depending on the terms

of the contracts.

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

to real estate brokers. Gotham recognized revenues when the services or products have

been provided or delivered, the fees charged are fixed or determinable, Gotham and its

customers understood the specific nature and terms of the agreed upon transactions, and

collectability was reasonably assured.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs for the nine

months ended September 30, 2016 and 2015 were $208,662 and $3,352, respectively.

Advertising costs for the three months ended September 30, 2016 and 2015 were $45,079

and $33,333, respectively.

Accounts Receivable

The Company analyzes the collectability of accounts receivable from continuing

operations each accounting period and adjusts its allowance for doubtful accounts

accordingly. A considerable amount of judgment is required in assessing the realization of

accounts receivables, including the creditworthiness of each customer, current and

historical collection history and the related aging of past due balances. The Company

evaluates specific accounts when it becomes aware of information indicating that a

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

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

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

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

for the nine months ended September 30, 2016 and 2015, respectively.

Inventories

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

is determined on an average cost basis.

Property and equipment and depreciation

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

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

related cost and accumulated depreciation are removed from the respective accounts and

any gain or loss is credited or charged to income. Depreciation for both financial reporting

and income tax purposes is computed using combinations of the straight line and

accelerated methods over the estimated lives of the respective assets as follows:

Office equipment and fixtures

5 - 7 years

Computer hardware

5 years

Computer software

3 years

Development equipment

5 years

Goodwill

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

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

ArcMail. In accordance with ASC Topic No. 350 “Intangibles – Goodwill and Other”),

the goodwill is not being amortized, but instead will be subject to an annual assessment of

impairment by applying a fair-value based test, and will be reviewed more frequently if

current events and circumstances indicate a possible impairment. An impairment loss is

charged to expense in the period identified. If indicators of impairment are present and

future cash flows are not expected to be sufficient to recover the asset’s carrying amount,

an impairment loss is charged to expense in the period identified. A lack of projected future

operating results from ArcMail’s operations may cause impairment. As the acquisition of

ArcMail occurred on November 4, 2015, it is too early for management to evaluate whether

goodwill has been impaired. No impairment was recorded during the nine months ended

September 30, 2016.

Long-Lived Assets

The Company assesses the valuation of components of its property and equipment and

other long-lived assets whenever events or circumstances dictate that the carrying value

might not be recoverable. The Company bases its evaluation on indicators such as the

nature of the assets, the future economic benefit of the assets, any historical or future

profitability measurements and other external market conditions or factors that may be

present. If such factors indicate that the carrying amount of an asset or asset group may not

be recoverable, the Company determines whether an impairment has occurred by analyzing

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

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

of the asset is less than the carrying value of the asset, the Company recognizes a loss for

the difference between the carrying value of the asset and its estimated fair value, generally

measured by the present value of the estimated cash flows.

Deferred Revenue

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

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

(receivable) are received in exchange for goods or services or when assets received in such

exchange are readily convertible to cash or claim to cash or when such goods/services are

transferred. When such income item is earned, the related revenue item is recognized, and

the deferred revenue is reduced. To the extent revenues are generated from the Company’s

support and maintenance services, the Company recognizes such revenues when services

are completed and billed. The Company has received deposits from its various customers

that have been recorded as deferred revenue in the amount of $882,484 and $1,190,279 as

of September 30, 2016 and December 31, 2015, respectively.

Stock-Based Compensation

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

compensation plan in accordance with ASC Topic No. 718-20, Awards Classified as

Equity, which requires the measurement of compensation expense for all share-based

compensation granted to employees and non-employee directors at fair value on the date

of grant and recognition of compensation expense over the related service period for

awards expected to vest. The Company uses the Black-Scholes option pricing model to

estimate the fair value of its stock options and warrants. The Black-Scholes option pricing

model requires the input of highly subjective assumptions including the expected stock

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

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

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

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

Income Taxes

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

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

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

assets and liabilities, and are measured using the enacted tax rates and laws that are

expected to be in effect when the differences are expected to reverse.

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

recognition, measurement and disclosure of uncertain tax positions recognized in the

Company’s financial statements. In accordance with this provision, tax positions must meet

a more-likely-than-not recognition threshold and measurement attribute for the financial

statement recognition and measurement of a tax position.

Recent Accounting Pronouncements

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

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

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

are within the scope of other standards (e.g., insurance contracts or lease contracts). The

guidance requires an entity to recognize revenue on contracts with customers to depict the

transfer of promised goods or services to customers in an amount that reflects the

consideration to which the entity expects to be entitled in exchange for those goods or

services. The guidance requires that an entity depict the consideration by applying the

following steps:

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

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

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

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

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

December 15, 2016, including interim periods within that reporting period. Early

application is not permitted. This amendment is to be either retrospectively adopted to each

prior reporting period presented or retrospectively with the cumulative effect of initially

applying this ASU recognized at the date of initial application. Adoption of this guidance

is not expected to have a material impact on the Company's consolidated financial

statements.

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

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

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

that a Performance Target Could be Achieved after the Requisite Service Period," ("ASU

2014-12"). The amendments in ASU 2014-12 require that a performance target that affects

vesting and that could be achieved after the requisite service period be treated as a

performance condition. A reporting entity should apply existing guidance in ASC Topic

No. 718, "Compensation - Stock Compensation" as it relates to awards with performance

conditions that affect vesting to account for such awards. The amendments in ASU 2014-

12 are effective for annual periods and interim periods within those annual periods

beginning after December 15, 2015. Early adoption is permitted. Entities may apply the

amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified

after the effective date; or (b) retrospectively to all awards with performance targets that

are outstanding as of the beginning of the earliest annual period presented in the financial

statements and to all new or modified awards thereafter. The Company does not anticipate

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

statements.

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

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

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

ASU as part of its ongoing Simplification Initiative, with the objective of reducing

complexity in accounting standards. The amendments in ASU 2015-17 require entities that

present a classified balance sheet to classify all deferred tax liabilities and assets as a

noncurrent amount. This guidance does not change the offsetting requirements for deferred

tax liabilities and assets, which results in the presentation of one amount on the balance

sheet. Additionally, the amendments in this ASU align the deferred income tax presentation

with the requirements in International Accounting Standards (IAS) 1, Presentation of

Financial Statements. The amendments in ASU 2015-17 are effective for financial

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

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

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

FASB ASC 842 ASU 2016-02 – Leases:

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

02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease

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

quantitative disclosures to help investors and other financial statement users better

understand the amount, timing, and uncertainty of cash flows arising from leases. ASU

2016-02 is effective for fiscal years beginning after December 15, 2018, with early

adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on

its consolidated financial statements.

Note 4 – Property and Equipment

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

2016 and December 31, 2015:

2016

2015

Office equipment and fixtures

139,006

Computer hardware

92,138

90,943

Computer software

77,700

Development equipment

35,318

344,162

342,967

Less: Accumulated depreciation

319,730

302,534

24,432

40,433

Depreciation expense of $17,196 and $496 was charged to operations for the nine months

ended September 30, 2016 and 2015, respectively.

Note 5 - Earnings (Loss) Per Common Share

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

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

share was determined by dividing net earnings (loss) applicable to common stockholders

by the weighted average number of common shares outstanding during the period. The

Company’s potentially dilutive shares, which include outstanding common stock options

and common stock warrants, have not been included in the computation of diluted net

earnings (loss) per share for all periods as the result would be anti-dilutive.

Three Months Ended

Nine Months Ended

September 30,

2016

2015

2016

2015

Stock options

1,422,000

1,718,900

1,422,000

1,718,900

Stock warrants

275,000

Total shares excluded from calculation

1,697,000

1,993,900

1,697,000

1,993,900

Note 6 – Stock Based Compensation

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

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

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

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

amortized over the requisite service period for all stock awards that are expected to vest.

The grant date fair value for stock options and warrants is calculated using the Black-

Scholes option pricing model. Determining the fair value of options at the grant date

requires judgment, including estimating the expected term that stock options will be

outstanding prior to exercise, the associated volatility of the Company’s common stock,

expected dividends, and a risk-free interest rate. Stock-based compensation expense is

reported under general and administrative expenses in the accompanying consolidated

statements of operations.

Options

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

Plan"). Awards granted under the 2006 Plan have a ten-year term and may be incentive

stock options, non-qualified stock options or warrants. The awards are granted at an

exercise price equal to the fair market value on the date of grant and generally vest over a

three or four year period. The Plan expired on December 31, 2009, therefore as of

September 30, 2016, there was no unrecognized compensation cost related to non-vested

share-based compensation arrangements granted under the 2006 plan.

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

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

7,157,038 have been exercised and 692,962 have expired to date. There were 296,900

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

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

upon issuance.

Stock option activity during the nine months ended September 30, 2016 and 2015 follows:

Weighted

Average

Weighted

Remaining

Weighted

Average

Contractual

Options

Grant-Date

Outstanding

Exercise Price

Fair Value

Life (Years)

Options outstanding at

December 31, 2014

1,518,900

0.03

0.10

4.51

Options granted

200,000

0.01

0.40

4.48

Options outstanding at

September 30, 2015

1,718,900

0.03

0.13

4.07

Options outstanding at

December 31, 2015

1,718,900

0.03

0.13

3.82

Options expired

(296,900)

0.01

Options outstanding at

September 30, 2016

1,422,000

0.03

0.13

5.85

Options outstanding at September 30, 2016 consist of:

Date

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

June 9, 2014

213,000

$0.03

June 9, 2024

June 9, 2014

159,000

$0.03

June 9, 2024

June 9, 2014

600,000

$0.03

June 9, 2024

June 6, 2014

250,000

$0.05

June 6, 2019

March 24, 2015

200,000

$0.01

March 24, 2020

Total

1,422,000

Warrants

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

compensatory warrants to two consultants entitling the holders to purchase a total of

275,000 shares of our common stock at an average exercise price of $0.94 per share.

Warrants to purchase 25,000 shares of common stock vest upon 6 months after the

Company engages in an IPO, have an exercise price of $3.00 per share, and expire 2 years

after the Company engages in an IPO. Warrants to purchase 250,000 shares of common

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

following three anniversaries of the date of issuance, have exercise prices ranging from

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

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

Warrant activity during the nine months ended September 30, 2016 and 2015 follows:

Weighted

(1)Weighted

Weighted

Average Grant-

Average

Date

Remaining

Warrants

Average

Contractual

Outstanding

Exercise Price

Fair Value

Life (Years)

Warrants outstanding

at December 31, 2014

275,000

0.94

0.10

4.17

No warrant activity

Warrants outstanding

at September 30, 2015

275,000

0.94

0.10

3.67

Warrants outstanding

at December 31, 2015

275,000

0.94

0.10

3.42

No warrant activity

Warrants outstanding

at September 30, 2016

275,000

0.94

0.10

2.67

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

Warrants outstanding at September 30, 2016 consist of:

Date

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

April 1, 2000

25,000

$3.00

2 years after IPO

June 1, 2009

100,000

$0.50

June 1, 2019

June 1, 2009

50,000

$0.65

June 1, 2019

June 1, 2009

50,000

$0.85

June 1, 2019

June 1, 2009

50,000

$1.15

June 1, 2019

Total

275,000

Note 7 – Deferred Revenue

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

realized in future periods. Deferred revenue at September 30, 2016 will be realized in the

following years ended December 31,

2016

385,396

2017

243,139

2018

119,890

2019

111,956

2020

20,403

2021

1,700

882,484

Note 8 – Notes Payable

Notes payable at September 30, 2016 consist of various notes payable in annual

installments totaling $779,750 through September 2019. The notes include interest at 7%

and are secured by the assets of ArcMail.

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

2016

786,624

2017

779,750

2018

779,750

2019

779,751

$ 3,125,875

During the nine months ended September 30, 2016, Arcmail entered into merchant

financing agreements with two lenders for proceeds totaling $281,000 payable in daily

amounts based on various percentages of future collections of accounts receivable, which

were assigned to the lenders. The obligations will be satisfied upon total payments of

$358,400 and will mature in January 2017. The outstanding balance of notes payable -

other was $79,459 at September 30, 2016.

Note 9 – Stock Transactions

Common Stock Issued

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

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

2015.

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

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

Note 10 - Income Taxes

Quarter Ended September 30,

2016

2015

Effective tax rate

0.0 %

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

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

assets will not be realized. This assessment is based upon consideration of available

positive and negative evidence, which includes, among other things, the Company’s most

recent results of operations and expected future profitability. Based on the Company’s

cumulative losses in recent years, a full valuation allowance against the Company’s

deferred tax assets has been established as Management believes that the Company will

not realize the benefit of those deferred tax assets.

Note 11 - Retirement Plan

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

Under the terms of the Plan, Arcmail is currently not required to match employee

contributions. The Company did not make any employer contributions to the Plan during

the nine months ended September 30, 2016.

Note 12 – Concentrations and Credit Risk

Sales and Accounts Receivable

No customer accounted for more than 10% of sales or accounts receivable for the nine

months ended September 30, 2016 and 2015, respectively.

Cash

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

institutions are insured by the FDIC up to $250,000. Cash balances could exceed insured

amounts at any given time, however, the Company has not experienced any such losses.

The Company did not have any interest-bearing accounts at September 30, 2016 and

December 31, 2015, respectively.

Note 13 - Related Party Transactions

Note Payable – Related Party

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

advanced. The note is payable in annual installments of $156,566 through December 2019.

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

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

2016

156,566

2017

156,566

2018

156,566

2019

156,567

626,265

Amounts Due to Related Parties

Amounts due to related parties with balances of $82,923 and $74,871 at September 30,

2016 and December 31, 2015, respectively, consist of cash advances from two

stockholders/officers. These advances do not bear interest and are payable on demand.

Note 14 – Commitments and Contingencies

Lease Commitment

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

times through October 31, 2018.

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

December 31 are as follows:

2016

$ 15,446

2017

46,581

2018

36,533

$ 98,560

Rent expense of $47,559 and $50,963 was charged to operations for the nine months ended

September 30, 2016 and 2015, respectively.

Contingencies

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

contingencies at the earliest date at which it is deemed probable that a liability has been

incurred and the amount of such liability can be reasonably estimated.

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results

of Operations

FORWARD LOOKING STATEMENTS

This Form 10-Q includes “forward-looking statements” within the meaning of

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities

Exchange Act of 1934, as amended. All statements, other than statements of historical

facts, included or incorporated by reference in this Form 10-Q which address activities,

events or developments that the Company expects or anticipates will or may occur in the

future, including such things as future capital expenditures (including the amount and

nature thereof), finding suitable merger or acquisition candidates, expansion and growth of

the Company’s business and operations, and other such matters are forward-looking

statements. These statements are based on certain assumptions and analyses made by the

Company in light of its experience and its perception of historical trends, current conditions

and expected future developments as well as other factors it believes are appropriate in the

circumstances.

Investors are cautioned that any such forward-looking statements are not

guarantees of future performance and involve significant risks and uncertainties, and that

actual results may differ materially from those projected in the forward-looking statements.

Factors that could adversely affect actual results and performance include, among others,

potential fluctuations in quarterly operating results and expenses, government regulation,

technology change and competition. Consequently, all of the forward-looking statements

made in this Form 10-Q are qualified by these cautionary statements and there can be no

assurance that the actual results or developments anticipated by the Company will be

realized or, even if substantially realized, that they will have the expected consequence to

or effects on the Company or its business or operations. The Company assumes no

obligations to update any such forward-looking statements.

Revenue Recognition

We recognize revenue from product sales when the following four revenue

recognition criteria are met: persuasive evidence of an arrangement exists, an equipment

order has been placed with the vendor, the selling price is fixed or determinable, and

collectability is reasonably assured. Revenues from maintenance contracts covering

multiple future periods are recognized during the current periods and deferred revenue is

recorded for future periods and classified as current or noncurrent, depending on the terms

of the contracts.

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

to real estate brokers. Gotham recognized revenues when the services or products have

been provided or delivered, the fees charged are fixed or determinable, Gotham and its

customers understood the specific nature and terms of the agreed upon transactions, and

collectability was reasonably assured.

Deferred Revenue

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

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

(receivable) are received in exchange for goods or services or when assets received in such

exchange are readily convertible to cash or claim to cash or when such goods/services are

transferred. When such income item is earned, the related revenue item is recognized, and

the deferred revenue is reduced. To the extent revenues are generated from our support and

maintenance services, we recognize such revenues when services are completed and billed.

We received deposits from our various customers that have been recorded as deferred

revenue in the amount of $882,484 and $1,190,279 as of September 30, 2016 and

December 31, 2015, respectively

Accounts Receivable

We analyze the collectability of accounts receivable from continuing operations

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

considerable amount of judgment is required in assessing the realization of accounts

receivables, including the creditworthiness of each customer, current and historical

collection history and the related aging of past due balances. We evaluate specific accounts

when we become aware of information indicating that a customer may not be able to meet

its financial obligations due to deterioration of its financial condition, lower credit ratings,

bankruptcy or other factors affecting the ability to render payment. Allowance for doubtful

accounts was $8,345 at September 30, 2016 and December 31, 2015, respectively. There

was no bad debt expense charged to operations for the nine months ended September 30,

2016 and 2015, respectively.

Property and Equipment

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

expense when incurred. When property and equipment are retired or otherwise disposed

of, the related cost and accumulated depreciation are removed from the respective accounts

and any gain or loss is credited or charged to income. Depreciation for both financial

reporting and income tax purposes is computed using combinations of the straight line and

accelerated methods over the estimated lives of the respective assets as follows:

Office equipment and fixtures

5 - 7 years

Computer hardware

5 years

Computer software

3 years

Development equipment

5 years

Depreciation expense of $17,196 and $496 was charged to operations for the nine

months ended September 30, 2016 and 2015, respectively.

Goodwill

Goodwill represents the excess of liabilities assumed over assets acquired of

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

acquisition of ArcMail. In accordance with ASC Topic No. 350 “Intangibles – Goodwill

and Other”), the goodwill is not being amortized, but instead will be subject to an annual

assessment of impairment by applying a fair-value based test, and will be reviewed more

frequently if current events and circumstances indicate a possible impairment. An

impairment loss is charged to expense in the period identified. If indicators of impairment

are present and future cash flows are not expected to be sufficient to recover the asset’s

carrying amount, an impairment loss is charged to expense in the period identified. A lack

of projected future operating results from ArcMail’s operations may cause impairment. As

the acquisition of ArcMail occurred on November 4, 2015, it is too early for management

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

nine months ended September 30, 2016.

Stock-Based Compensation

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

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