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EX-32.2 - CERTIFICATION - iGambit, Inc.exhibit322.htm
EX-32.1 - CERTIFICATION - iGambit, Inc.exhibit321.htm
EX-31.2 - CERTIFICATION - iGambit, Inc.exhibit312.htm
EX-31.1 - CERTIFICATION - iGambit, 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

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  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

1

Consolidated Statements of Income

3

Consolidated Statements of Cash Flows

4

Notes to Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

Part II — Other Information

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults upon Senior Securities

28

Item 4.

Removed and Reserved

28

Item 5.

Other Information

28

Item 6.

Exhibits

28

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

6,705,157

Deposits

1,720

1,720

Total other assets

6,706,877

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

156,566

1



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

2,339,251

Note payable - related party

469,699

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

39,684

Additional paid-in capital

4,320,022

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.

2



IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

THREE MONTHS

NINE MONTHS

ENDED

ENDED

SEPTEMBER 30,

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

share:

Continuing operations

$

.01

$

(.00)

$

(.00)

$

(.01)

Discontinued operations

$

.00

$

.00

$

.00

$

.00

Net loss per common share

$

.01

$

(.00)

$

(.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.

3



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.

4



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:

5



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

1,500

Total assets

$

53,389

$

262,765

6



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.

7



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

8



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

9



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.

10



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.

11



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

$

139,006

Computer hardware

92,138

90,943

Computer software

77,700

77,700

Development equipment

35,318

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,

September 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

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.

12



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

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

13



Options outstanding at September 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.

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.

14



Warrants outstanding at September 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

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.

15



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 %

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.

16



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.

17



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.

18



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.

19



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

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

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

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

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

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

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

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

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

reported  under  general  and  administrative  expenses  in  the  accompanying  consolidated

statements of operations.

Options

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

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

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

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

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

20



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

Stock option activity during the nine months ended September 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

4.51

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

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

21



$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

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

Stock Transactions

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.

22



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. Management has determined that

the   Company   has   no   significant   uncertain   tax   positions   requiring   recognition   and

measurement under ASC 740-10.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

INTRODUCTION

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

subsidiary, 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  September  30,  2016,  we  had  $7,495,555  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 September 30, 2016, our total liabilities were $6,052,495 compared

to  $6,076,680  at  December  31,  2015.  Our  current  liabilities  at  September  30,  2016

consisted of accounts payable and accrued expenses of $745,725, accrued interest on notes

payable  of   $494,207     amounts   due  to   related   parties   of   $82,923,   notes   payable   of

$1,022,649,  liabilities  from  discontinued  operations  of  $15,557  and  deferred  revenue

current  portion  of  $385,396,  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 September 30, 2016 consisted of Notes payable of

23



$2,808,950 and deferred  revenue non-current  portion of $497,088, 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   $1,443,060   at

September 30, 2016 from $1,561,316 at December 31, 2015.  This decrease was a result of

a net loss of $(118,256) for the nine months ended September 30, 2016.

THREE  MONTHS  ENDED  SEPTEMBER  30,  2016  AS  COMPARED  TO  THREE

MONTHS ENDED SEPTEMBER 30, 2015

Revenues   and   Net   Loss.     We   had   $797,817   of   revenue   from   our   ArcMail

subsidiary and net income of $216,666 during the three months ended September 30, 2016,

compared to revenue of $0 and net  loss of $74,849 for the three months  ended September

30,  2015.   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 $550 compared to income from

discontinued  operations  of  $47,619  for  the  three  months  ended  September  30,  2016  and

September 30, 2015, respectively.

General  and  Administrative  Expenses.  General  and  Administrative  Expenses

increased  to $458,686  for  the  three  months  ended  September 30,  2016  from $121,833  for

the  three  months  ended  September  30,  2015.  For  the  three  months  ended  September  30,

2016  our  General  and  Administrative  Expenses  consisted  of  corporate  administrative

expenses  of  $66,705,  legal  and  accounting  fees  of  $22,307,  health  insurance  expenses  of

$18,992,  general  business  insurance  expense  of  $8,142,  payroll  expenses  of  $288,457,

marketing  expense  of  $45,079,  computer  and  internet  expense  of  $6,748,  and  exchange

filing  fees  of  $2,256.   For  the  three  months  ended  September  30,  2015  our  General  and

Administrative Expenses consisted of corporate administrative expenses of $29,778, legal

and  accounting  fees  of  $16,222,  finder’s  fees  and  commissions  of  $17,500,  marketing

expense  of  $33,333,  and  investor  relations  expenses  of  $25,000.  The  increases  from  the

three  months  ended  September  30,  2015  to  the  three  months  ended  September  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 $115,348 for the

three  months  ended  September  30,  2016  compared  to  $635  for  the  three  months  ended

September 30, 2015.

24



Nine   Months   Ended   September   30,   2016   as   Compared   to   Six   Months   Ended

September 30, 2015

Revenues and Net Loss.   We  had $1,791,518 of revenue  and net  loss of $118,256

during the nine months ended September 30, 2016, compared to revenue of $0 and net loss

of $271,392  for the  nine  months  ended September  30, 2015. 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  $3,868  and  $79,584  for  the  nine  months  ended  September  30,  2016  and

September 30, 2015, respectively.

General  and  Administrative  Expenses.  General  and  Administrative  Expenses

increased to $1,598,461 for the nine months ended September 30, 2016 from $348,840 for

the nine months ended September 30, 2015. For the nine months ended September 30, 2016

our  General  and  Administrative  Expenses  consisted  of  corporate  administrative  expenses

of  $198,233  legal  and  accounting fees  of  $83,562,  health  insurance  expenses  of  $56,438,

directors and officers insurance expense of $10,053, general business insurance expense of

$19,797   payroll   expenses   of   $953,386,   finders   fees   and   commissions   of   $26,250,

marketing expense  of $208,662,  computer and  internet  expense  of $31,246  and  exchange

filing  fees  of  $10,834.   For  the  nine  months  ended  September  30,  2015  our  General  and

Administrative Expenses consisted of corporate administrative expenses of $69,185, legal

and  accounting  fees  of  $80,870,  director’s  and  officers’  insurance  expense  of  $27,249,

general business insurance expense of $4,496, consulting fees of $14,498, finder’s fees and

commissions  of  $35,000,  marketing  expense  of  $33,333,  investor  relations  expenses  of

$34,649,  filing fees  of  $10,993,  and  payroll  expenses  of  $38,567.  The  increases  from  the

nine  months  ended  September  30,  2015  to  the  nine  months  ended  September  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 $279,060 for the

nine  months  ended  September  30,  2016  compared  to  $2,136  for  the  nine  months  ended

September 30, 2015.

LIQUIDITY AND CAPITAL RESOURCES

As  reflected  in the  accompanying  consolidated  financial  statements,  at  September

30, 2016, we had $21,829 of cash and stockholders’ equity of $1,443,060  as compared to

$131,987 and $1,561,316, respectively at December 31, 2015. At September 30, 2016 we

had $7,495,555 in total assets, compared to $7,637,996 at December 31, 2015.

25



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 $304,796 for the nine months

ended  September  30,  2016,  compared  to  $171,912  for  the  nine  months  ended  September

30, 2015. Our primary source of operating cash flows from continuing operating activities

for  the  nine  months  ended  September  30,  2016  was  from  our  ArcMail  subsidiary’s

revenues  of  $1,791,518.    Additional  contributing  factors  to  the  change  were  from  an

increase  in  accounts  receivable  of  $315,691,  a  decrease  in  inventories  of  $20,000,  a

decrease  in  prepaid  expenses  of  $102,597,  an  increase  in  accounts  payable  and  accrued

expenses  of  $109,092,  an  increase  in  accrued  interest  of  $191,929,  and  a  decrease  in

deferred revenue of $307,795.  Net cash provided by discontinued operating activities was

$106,947 for the nine months ended September 30, 2016 and $23,920 for the nine months

ended September 30, 2015. Cash provided by discontinued operations for the nine months

ended September 30, 2016 and September 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  $1,194  for  the  nine  months  ended

September  30,  2016  and  cash  used  in  discontinued  investing  activities  of  $5,026  for  the

nine months ended September 30, 2015 was from the purchase of property and equipment

Cash  provided  by  financing  activities  was   $88,885  for  the  nine   months  ended

September 30, 2016 compared to $38,336 for the nine months ended September 30, 2015.

The  cash  provided  by  financing  activities  for  the  nine  months  ended  September  30,  2016

consisted of a  net  increase in notes payable of $86,333 and amounts due to related parties

of  $8,052  whereas  the  cash  provided  by  financing  activities  for  the  nine  months  ended

September 30, 2015 consisted of proceeds from loans from shareholders of $38,336.

26



Supplemental Cash Flow Activity

In the nine months ended September 30, 2016 the company paid interest of $13,427

compared to interest of $7,147 in the nine months ended September 30, 2015.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Required.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our  management,  with  the  participation  of  our  chief  executive  officer  and  chief

financial  officer,  evaluated  the  effectiveness  of  our  disclosure  controls  and  procedures

pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange

Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based  on  this  evaluation,  our  chief  executive  officer  and  chief  financial  officer

concluded  that,  as  of  September    30,  2016,  our  disclosure  controls  and  procedures  are

designed at a reasonable assurance level and are effective to provide reasonable assurance

that  information  we  are  required  to  disclose  in  reports  that  we  file  or  submit  under  the

Exchange  Act  is  recorded,  processed,  summarized,  and  reported  within  the  time  periods

specified  in  the  SEC’s  rules  and  forms,  and  that  such  information  is  accumulated  and

communicated to our management, including our chief executive officer and chief financial

officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred

during   the   quarter   ended   September   30,   2016   that   have   materially   affected,   or   are

reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In  designing  and  evaluating  the  disclosure  controls  and  procedures,  management

recognizes  that  any  controls  and  procedures,  no  matter  how  well  designed  and  operated,

can  provide  only  reasonable  assurance  of  achieving  the  desired  control  objectives.  In

addition,  the  design  of  disclosure  controls  and  procedures  must  reflect  the  fact  that  there

are   resource   constraints   and   that   management   is   required   to   apply   its   judgment   in

evaluating the benefits of possible controls and procedures relative to their costs.

27



PART II — OTHER INFORMATION

Item 1.   Legal Proceedings.

From  time-to-time,  the  Company is  involved  in  various  civil  actions  as  part  of its  normal

course of business. The Company is not a party to any litigation that is material to ongoing

operations as defined in Item 103 of Regulation S-K as of the period ended September 30,

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.

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.)

28



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

November 21, 2016.

iGambit Inc.

/s/ John Salerno

John Salerno

Chief Executive Officer

/s/ Elisa Luqman

Elisa Luqman

Chief Financial Officer

29



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.)

30