Nutex Health, Inc. - Annual Report: 2013 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-53862
IGAMBIT INC.
(Exact name of registrant 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)
(631) 670-6777
(Registrant’s telephone number)
(Registrant’s former telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class: NONE
Name of Each Exchange on Which
Registered:
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Date File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of the chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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
Non-accelerated filer o
Smaller
accelerated
filer o
reporting
filer o
company þ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-
2 of the act): Yes o No þ
There is not currently a market for the Registrant’s common stock.
As of March 31, 2014 there were 25,044,056 shares of the Registrant’s $0.001 par value
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
iGambit Inc.
FORM 10-K — FOR THE YEAR ENDED DECEMBER 31, 2013
TABLE OF CONTENTS
Page No.
PART I
Business
1
Risk Factors
9
Unresolved Staff Comments
9
Properties
9
Legal Proceedings
10
(Removed and Reserved)
12
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
13
Selected Financial Data
14
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
15
Quantitative and Qualitative Disclosure About Market Risk
21
Financial Statements and Supplementary Data
21
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
21
Controls and Procedures
22
Other Information
23
PART III
Directors, Executive Officers and Corporate Governance
23
Executive Compensation
28
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
30
Certain Relationships, Related Transactions and Director
Independence
30
Principal Accountant Fees and Services
31
PART IV
Exhibits and Financial Statement Schedules
32
EX-31.1
EX-31.2
EX-32.1
EX-32.2
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This annual report on Form 10-K is for the year ended December 31, 2013. The
Securities and Exchange Commission (“SEC”) allows us to “incorporate by reference”
information that we file with the SEC, which means that we can disclose important
information to you by referring you directly to those documents. Information
incorporated by reference is considered to be part of this annual report. In addition,
information that we file with the SEC in the future will automatically update and
supersede information contained in this annual report. In this annual report, “Company,”
“we,” “us” and “our” refer to iGambit Inc. and its subsidiaries.
ii
PART I
This Annual Report on Form 10-K 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. The Company has based these forward-
looking statements on the Company’s current expectations and projections about future
events. These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions about us and the Company’s subsidiaries that may cause
the Company’s actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In many cases,
you can identify forward-looking statements by terminology such as “anticipate,”
“estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,”
“predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,”
“guidance,” “outlook,” “effort,” “target” and other similar words. However, the
absence of these words does not mean that the statements are not forward-looking.
Factors that might cause or contribute to a material difference include, but are not
limited to, those discussed elsewhere in this Annual Report, including the section entitled
“Risk Factors” and the risks discussed in the Company’s other Securities and Exchange
Commission filings. The following discussion should be read in conjunction with the
Company’s audited Consolidated Financial Statements and related Notes thereto
included elsewhere in this report.
ITEM 1. BUSINESS
HISTORY
We were incorporated in the State of Delaware under the name BigVault.com Inc.
on April 13, 2000. On April 18, 2000, we merged with BigVault.com, Inc., a New York
corporation with which we were affiliated. We survived the merger, and on December 19,
2000 changed our name to bigVAULT Storage Technologies, Inc. At that time we were
in the business of providing remote, internet-based storage vaulting services and related
ancillary services to end users and resellers (the “Vault Business”).
On February 28, 2006 we sold all of our assets to Digi-Data Corporation
(“DDC”), an unrelated third party, pursuant to the terms of an Asset Purchase Agreement
dated December 21, 2005 (the “APA”), a copy of which is filed herewith as an exhibit.
As consideration for our transfer of assets under the APA, DDC paid certain of our
liabilities and agreed to make certain quarterly and annual revenue sharing payments to
us, as is further described below. Mr. Salerno and Ms. Luqman accepted employment
with DDC in senior management positions post closing, and continued to work for DDC
until February 2009. As of March 1, 2009 Mr. Salerno and Ms. Luqman returned to their
full time management roles with the Company.
On April 5, 2006, we changed our name to iGambit Inc.
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On October 1, 2009, we acquired the assets of Jekyll Island Ventures, Inc., a New
York corporation doing business as Gotham Photo Company (“Jekyll”) through our
wholly owned subsidiary Gotham Innovation Lab, Inc., a New York corporation
(“Gotham”). Pursuant to the terms of the Asset Purchase Agreement and Plan of
Reorganization (“APAPR”), we (i) issued 500,000 shares of our common stock to Jekyll
at closing; (ii) assumed $10,410.59 of Jekyll accounts payable relating to office rent and
health insurance premiums; and (iii) issued Jekyll warrants to purchase 1,500,000 shares
of our common stock, at $0.01 per share, subject to a 3 year vesting schedule and the
attainment by Gotham of certain revenue targets during said 3 year period. The 3 year
period has ended and Gotham did not attain the revenue targets.
On December 28, 2012, we entered into an Asset and Stock Purchase Agreement
(the “Purchase Agreement”) to acquire substantially all of the assets of IGX Global Inc. a
Connecticut corporation (“IGXUS”), and all of the issued and outstanding shares of IGX
Global UK Limited a UK Private Limited company (“IGXUK”) through our wholly
owned subsidiary IGXGLOBAL CORP., a Delaware corporation (“IGXGLOBAL”), and
thereby acquired the business operated by IGSUS and IGSUK (the “Acquired Business”).
Thomas Duffy is the sole shareholder of both IGXUK and IGXUS (the “Shareholder”).
The Purchase Agreement was disclosed on the Company’s current report on Form 8-K
filed on January 7, 2013.
Pursuant to the terms of the Purchase Agreement Thomas Duffy was to receive
(i) $1,500,000 payable $ 500,000 in cash and a Promissory Note in the principal sum of
$1,000,000 and (ii) Thomas Duffy was to receive 3.75 million iGambit Inc. Common
voting shares over a three-year period starting on the first through third anniversary of
signing of this agreement, based upon certain criteria. In addition, iGambit was to pay
approximately $2,500,000 of the Acquired Business’s liabilities (the “Assumed
Liabilities”).
The cash portion and certain debt assumed of the Purchase Price was financed
through asset based funding issued by Keltic Financial Partners II LLP for a $6 million
revolving credit line.
On April 8, 2013, iGambit Inc. (“iGambit”) and its wholly owned subsidiary,
IGXGLOBAL, CORP. (“IGXGLOBAL”, and collectively, the "Company"), entered
into, and became obligated under, a transaction to rescind the Company’s Purchase
Agreement dated December 28, 2012 with IGX Global Inc. (“IGXUS”), IGX Global
UK Limited (“IGXUK”, and collectively, “IGXNJ”) and Tomas Duffy (“Duffy”) the sole
shareholder of both IGXUK and IGXUS (the “Shareholder”). The Rescission Agreement
was disclosed on the Company’s current report on Form 8-K filed on April 12, 2013.
Under the terms of the Rescission Agreement, the Company, IGXNJ and
Shareholder (collectively “IGX”), agreed to unwind the Purchase Agreement in its
entirety and to fully restore each to the positions they were respectively in prior to
entering the Purchase Agreement, in every respect other than as otherwise expressly
contemplated by the Rescission Agreement; and key terms as follows:
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(i) IGX to payback or arrange acceptable payoff of the Keltic Financing;
(ii) Cancellation of any future consideration to IGX;
(iii) IGX to pay to iGambit $625,000 in consideration for its expenses and
inconvenience; and
(v) IGX to assume and pay certain expenses related to the contemplated
Purchase Agreement.
On April 25, 2013 the conditions to closing the Rescission Agreement were
completed.
OUR COMPANY
Introduction
We are a company focused on the technology markets. Presently we have one
operating subsidiary, Gotham Innovation Lab Inc. (“Gotham”). Gotham is in the business
of providing media technology services to the real estate industry. Revenues consist
mostly of revenues from the operation of our Gotham subsidiary ($1,461,183 during year
ended December 31, 2013). . In addition to Gotham’s operations, we earned other income
of $755,000 and income from discontinued operations of $317,625.
Our primary focus is the acquisition of additional technology companies. We
believe that the background of our management and of our Board of Directors in the
technology markets is a valuable resource that makes us a desirable business partner to
the companies that we are seeking to acquire. When we acquire a company, we work to
assume an active role in the development and growth of the company, providing both
strategic guidance and operational support. We provide strategic guidance to our partner
companies relating to, among other things, market positioning, business model and
product development, strategic capital expenditures, mergers and acquisitions and exit
opportunities. Additionally, we provide operational support to help our partner companies
manage day-to-day business and operational issues and implement best practices in the
areas of finance, sales and marketing, business development, human resources and legal
services. Once a company joins our partner company network, our collective expertise is
leveraged to help position that company to produce high-margin, recurring and
predictable earnings and generate long-term value for our stockholders.
Our current intention is to fund the purchase price of acquisitions through a
combination of the issuance of our common stock at closing and the issuance of common
stock purchase or common-stock warrants that would become exercisable only in the
event certain earn-out conditions are satisfied by the acquired company. In addition to
acquiring entire companies, we would also consider entering into joint ventures and
acquiring less than 100 percent of a target company.
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Our Strategy to Grow the Company
General
We have an overall corporate business plan as a holding company to seek out and
acquire operating companies. Phase one of our strategy is complete. We established new
corporate headquarters and a website, expanded our board to include 3 outside
independent directors, set up periodic board meetings, engaged a sophisticated full
service law firm, engaged a new PCAOB registered auditing firm, engaged an investment
banking firm as advisors to assist in the analysis of target acquisitions, and become an
SEC reporting company. In addition, we have identified and acquired our first target
company, Jekyll Island Ventures Inc. We are working on a daily basis towards phase two
of our strategy, identifying further acquisitions that will expand and or complement our
existing subsidiary.
Sources of Target Businesses
We anticipate that target business candidates will be brought to our attention from
various sources, including our management team, investment bankers, venture capital
funds, private equity funds, leveraged buyout funds, management buyout funds,
consulting firms and other members of the financial community who will become aware
that we are seeking business partners via public relations and marketing efforts, direct
contact by management or other similar efforts, who may present solicited or unsolicited
proposals. Any finder or broker would only be paid a fee upon the completion of a
business combination. While we do not presently anticipate engaging the services of
professional firms that specialize in acquisitions on any formal basis, we may decide to
engage such firms in the future or we may be approached on an unsolicited basis. Our
officers and directors, as well as their affiliates, may also bring to our attention target
business candidates that they become aware of through their business contacts. While our
officers and directors make no commitment as to the amount of time they will spend
trying to identify or investigate potential target businesses, they believe that the various
relationships they have developed over their careers together with their direct inquiry,
will generate a number of potential target businesses that will warrant further
investigation. In no event will we pay any of our existing officers, directors, special
advisors or stockholders or any entity with which they are affiliated any finder’s fee or
other compensation for services rendered to us prior to or in connection with the
completion of a business combination. In addition, none of our officers, directors, special
advisors or existing stockholders will receive any finder’s fee, consulting fees or any
similar fees from any person or entity in connection with any business combination
involving us other than any compensation or fees that may be received for any services
provided following such business combination.
Selecting Acquisition Targets
Our management has virtually unrestricted flexibility in identifying prospective
target business and diligently reviews all of the proposals we receive.
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The criteria we look for in a potential acquisition include, but are not limited to,
the following:
Company Characteristics
§ Established Company with proven track record
o Company with history of strong operating and financial performance, or
o Company undergoing a turnaround that demonstrates strong prospects for
future growth
§ Strong Cash Flow Characteristics.
o Cash flow neutral or positive,
o Predictable recurring revenue stream,
o High gross margins and
o Low working capital and capital expenditure needs
§ Strong Competitive Industry Position
o Leading or niche market position, and/or
o Strong channel relationships that promote barriers to entry
§ Strong Management Team
o Experienced, proven track record in delivering revenue and ability to
execute, or
o A management team that can be complemented with our contacts and
team
§ Diversified Customer and Supplier base
§ Proprietary products or marketing position
Industry Characteristics
§ Non-cyclical
§ Services Consumer or niche market
§ Fragmented with potential for consolidation or growth
§ Emerging markets
Industries of Interest
§ Real Estate Services
§ Managed Security Services Providers (MSSP)
§ IT Solutions Providers specializing in security and network technology
products, services, and support
§ Internet
o Cloud Computing
o Security focused applications
Investment Criteria
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§ Sales Volumes: $500 thousand to $30 million
§ Cash Flow: Neutral or positive
§ Structure: Controlled ownership. Closely held private company
§ Geography: North America Investment size: $1 million to $5 Million
§ Involvement: Board oversight
§ Controlling Interest: Acquire 100% of controlling interest in target
§ Marketing:
o Target captures a particular segment of the market
o Target has a focused strategic marketing plan.
These criteria are not intended to be exhaustive. Any evaluation relating to the
merits of a particular business combination will be based, to the extent relevant, on the
above factors as well as other considerations deemed relevant by our management in
effecting a business combination consistent with our business objective.
Diligence Process
Upon receipt of a business plan, the procedure is for management to review the
business plan and determine if it satisfies the Company’s acquisition criteria, and whether
the business plan should be rejected or pursued further. If the plan satisfies the
requirements, then Management meets with the target’s management to determine if there
is a synergy that can work and to explore the business plan in greater detail. Generally
this occurs over several meetings and can take some time. Depending on the nature of the
business, management may enlist certain technical or industry consultants to meet with
the target and provide feedback and analysis. Management will also review the target’s
financials. If the analysis suggests the target should be explored further Management will
present the opportunity to the BOD for approval to pursue the opportunity further. One or
two outside directors may meet with the target to make an independent assessment. If the
opportunity is approved for further exploration management will discuss potential
purchase structure with target’s management to be sure that a meeting of the minds exists
for a potential deal. At this point management will request that our investment banking
advisors give their opinion of the industry, the market and potential financing options of
the deal. Often, the investment bankers will meet with target’s management. The
investment banker’s feedback is presented to the board and, if positive, the Board
analyzes the proposed financing structure, discusses effects of a transaction on the
Company as they relate to taxes, capitalization, stock value etc., engaging the necessary
outside consultants. If all appears positive a letter of intent is negotiated and executed,
additional diligence is conducted, and definitive transaction documents are negotiated
and executed.
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Evaluation of the Target’s Management
We would condition any acquisition on the commitment of management of the
target business to remain in place post closing. Following a business combination, we
may seek to recruit additional managers to supplement the incumbent management of the
target business. We cannot assure you that we will have the ability to recruit additional
managers, or that any such additional managers will have the requisite skills, knowledge
or experience necessary to enhance the incumbent management. Although we intend to
closely scrutinize the management of a prospective target business when evaluating the
desirability of effecting a business combination, we cannot assure you that our
assessment of the target business’s management will prove to be correct.
Competition
In identifying, evaluating and selecting a target business, we may encounter
intense competition from other entities having a business objective similar to ours. Many
of these entities are well established and have extensive experience identifying and
effecting business combinations directly or through affiliates. Many of these competitors
possess greater technical, human and other resources than us and our financial resources
will be relatively limited when contrasted with those of many of these competitors, which
may limit our ability to compete in acquiring certain target businesses. This inherent
competitive limitation gives others an advantage in pursuing the acquisition of a target
business.
Companies Currently Under Review
We are constantly in the process of reviewing potential target companies.
Currently, we are not under contract to acquire any companies.
Our Partner Company
Gotham Innovation Lab Inc.
Products and Services
Gotham’s business is directed at providing media technology services to the real
estate community. The range of media services includes Real Estate Sales location
Photography,
the exclusive Gotham EXPO Full Screen Experience; Floorplan
Measurements, and Redraws and E-Brochures, Virtual Staging, Headshots, and HD
Video.
In 2012, Gotham launched its new offering ScreenPLAY. Gotham's ScreenPLAY
is a low cost tool that gets real estate agents listings on YouTube, Wellcomemat, and
other popular video platforms with enhanced visibility on Google quickly. Gotham has
also seen success in its Headshot events for real estate agents, Headshot events offer
professional headshots photo sessions on an individual or company wide basis. Gotham
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also provides website development services, sales office technology and data interchange
services for many of the real estate firms in New York City.
When it comes to selling real estate every broker or seller listing has to have
pictures. Utilizing the latest technology Gotham’s service offerings provide a full listing
experience for real estate agents’ clients. Gotham service offerings allow brokers and
sellers to present their listings in the best possible light while giving the viewer control of
the show. Gotham’s services integrate images, photos, floor plans, video, virtual staging,
agent and key listing details in an engaging format that immerses the viewer.
All systems are built on accessible web platforms that integrate quickly and
seamlessly into the agent’s workflow.
In addition to natural expansion into the areas surrounding NYC, Gotham is
actively working to expand other geographic locations on the East Coast. Gotham has
already established a presence in Florida, covering the Miami to West Palm Beach area.
Competitive Comparison
Gotham competes with others in the industry by focusing on user interaction,
technology and delivery. Gotham maintains strict standards of photography and a roster
of accomplished photographers who we engage in between their premium assignments
such as fashion shoots, architectural projects, etc.
In addition to superior media, in the opinion of management, Gotham’s
technology tools set us apart from our competition. For example, our expo product
offering utilizes the pre-generation of a multitude of media sets to deliver images sized
perfectly for the users screen, wasting no bandwidth or file size, thereby enabling us to
maintain the speed and efficiency of the product at an optimal level. In the opinion of
management, a majority of our competitors either don’t seem to employ similar measures
in their full screen product offerings or do so, on a more limited basis.
Future Products and Services
Future offerings will include enhanced products that focus on social media
interaction, mobile applications and tools for realtors, as well as multi touch augmented
reality technologies for presentations, etc. Gotham will continue to expand its media
offerings, integrating with and adopting technologies as they become available.
Customers
Gotham currently has approximately 400 client accounts, including accounts
ranging from single agent accounts to large “master accounts” with large firms such as
Douglas Elliman and Halstead. Taking these and other master accounts into
consideration, Gotham does business with over 3,000 New York City real estate agents.
The following five customers constituted approximately 81% of the Company’s sales in
2013: EGR International, Inc. – approximately 24% of sales; Cambridge Who’s Who –
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approximately 6% of sales; Douglas Elliman Real Estate, LLC – approximately 45% of
sales; Halstead Property Development Marketing LLC – approximately 3% of sales; and
Richard Caplan Photography – approximately 2% of sales. The loss of any of the
foregoing client accounts could have a material adverse affect on the Company’s
financial condition.
Expansion Summary
Gotham’s objective is to be a market leader in offering EXPO, Virtual Tours, and
Video, type services to the real estate industry. Gotham is currently providing services to
a number of realtors and brokers in the New York Metropolitan area including, but not
limited to, Douglas Elliman (“DE”), Corcoran, Trump among others. In addition to
natural expansion into the areas surrounding NYC such as Long Island, Gotham has
recently expanded into Florida, and is actively working to expand by further providing
services to large accounts that exist in both Manhattan and targeted secondary markets,
and through the selective hiring of one-off service providers who are currently operating
in other markets
Employees
We presently have 9 total employees all of which are full-time.
OUR CORPORATE INFORMATION
Our principal offices are located at 1050 W. Jericho Turnpike, Suite A,
Smithtown, New York, 11787. Our telephone number is (631) 670-6777 and our fax
number is (631) 670-6780. We currently operate two corporate websites that can be
found at www.igambit.com, and www.gothamphotocompany.com (the information on
the foregoing websites does not form a part of this report).
ITEM 1A. RISK FACTORS
Not Required.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate executive office is located in Smithtown, New York, where we
lease approximately 1000 square feet of office space. Monthly lease payments are
approximately $1,560. The lease is for a term of five (5) years commencing on March 1,
2012 and ending on February 28, 2017. The lease contains annual escalations of 2% of
the annual rent.
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Our Gotham operations are located in New York, New York, where we license
office suites with furniture and equipment in a shared global office building. Monthly
license payments are approximately $4,025 and the fees are paid on a month to month
basis.
Our leased and licensed properties are suitable for their respective uses and are, in
general, adequate for our present needs. Our properties are subject to various federal,
state, and local statutes and ordinances regulating their operations. Management does not
believe that compliance with such statutes and ordinances will materially affect our
business, financial condition, or results of operations.
ITEM 3. LEGAL PROCEEDINGS
Digi-Data Corporation
On October 1, 2012, we filed a lawsuit in the United States District Court for the
District of Maryland, Baltimore Division, asserting claims against DigiData Corp.
("Defendant") for monetary damages arising from the Defendant's breach of contract
regarding that certain Asset Purchase Agreement dated February 26, 2006 among the
parties, and to enforce payment of outstanding contingency payments due to the
Company pursuant to said agreement.
On or about December 3, 2012, Digi-Data filed its Answer, Affirmative Defenses
and Counterclaim against iGambit. The Counterclaim seeks damages against iGambit for
breach of the Agreement for the alleged failure to indemnify Digi-Data for expenses
related to pending litigation between Verizon Communications, Inc. (one of Digi-Data's
customers) an unrelated third party, Titanide Ventures, LLC, concerning alleged patent
violations (hereinafter "Verizon Patent Litigation").
Upon information and belief, the Verizon Patent Litigation is a "patent troll"
whereby Titanide seeks to extract settlement funds from alleged patent infringers without
seeking actual adjudication of its purported patent rights. iGambit has advised Digi-Data
of what iGambit believes is "prior art" related to the subject intellectual properly that is
at-issue in the Verizon Patent Litigation, a possible defense to the claims by Titanide.
A pre-trial order was issued by the Court with detailed deadlines. E.g., discovery
cut-off and status report (4/29/13) and dispositive motions (5/28/13). iGambit
propounded its initial discovery upon Digi-Data, responses to which were due on or about
March 8, 2013.
On April 4, 2013, Digi-Data provided discovery to iGambit.
On April 4, 2013 an Order of Dismissal in the Verizon Patent Litigation was
filed. The Dismissal is with prejudice with each party to bear its own costs and fees.
On May 24, 2013 we filed a Motion for Summary Judgment with the Court
asking the Court to move in our favor against DDC for the entire outstanding balance due
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along with attorney’s fees and post and pre-judgment interest as applicable under
Maryland Law.
On December 13, 2013 the Court Granted Summary Judgment in iGambit’s favor
against Digi-Data in the amount of $570,590, plus interest at the Maryland legal rate of
6% per annum from August 31, 2012, and post judgment interest at the Federal statutory
Rate. Furthermore, Digi-Data’s Counterclaim was dismissed.
On February 24, 2014 we entered into a Forbearance Agreement with Digi-Data
pursuant to which Digi-Data shall pay to iGambit Six Hundred Forty-Six Thousand, Six
Hundred Sixty-Eight Dollars and Sixty-Seven Cents ($646,668.67) (the “Settlement
Amount”) in full satisfaction of the Judgment based upon the following terms:
Initial Payment: Digi-Data shall pay the Settlement Amount by delivering
Twenty-Five Thousand Dollars and No Cents ($25,000.00) to iGambit upon the
execution of this Agreement (“Initial Payment”), and delivering the remaining Six
Hundred Twenty-One Thousand, Six Hundred Sixty-Eight Dollars and Sixty-Seven Cents
($621,668.67), plus interest at a rate of 6% per annum (calculated at Actual/360) (the
“Remaining Balance”) to iGambit.
Monthly Payments: Commencing thirty (30) calendar days after the Effective
Date, and continuing for the three following months, Digi-Data shall make monthly
payments of Twelve Thousand, Five Hundred Dollars and No Cents ($12,500.00) to
iGambit (each, an “Initial Monthly Payment”). Thirty (30) calendar days after the fourth
Initial Monthly Payment is made, Digi-Data shall commence making a monthly payment
of Twenty-Five Thousand Dollars and No Cents ($25,000.00) to iGambit until the
Remaining Balance is paid in full (each, a “Subsequent Monthly Payment”). Such Initial
Monthly Payments and Subsequent Monthly Payments shall be credited to payment of
the Settlement Amount and Remaining Balance, with payment being first applied to
accrued and/or outstanding interests, then to principal.
Line of Credit Payments: In the event that Digi-Data obtains a new line of credit
subsequent to the Effective Date under terms acceptable to Digi-Data in the amount of
Three Million Dollars and No Cents ($3,000,000.00) or greater it shall, within fifteen
(15) calendar days upon obtaining such funding, pay the full Remaining Balance to
iGambit (the “LOC Payment”). In the event that Digi-Data obtains a new line of credit
subsequent to the Effective Date under terms acceptable to Digi-Data for any amount less
than Three Million Dollars and No Cents ($3,000,000.00) that is secured by its
receivables it shall, within fifteen (15) calendar days of obtaining such funding, pay
Twenty-Five Thousand Dollars and No Cents ($25,000.00) to iGambit (the “Receivables
Payment”). Such Receivables Payment shall be credited to payment of the Settlement
Amount and Remaining Balance, with payment being first applied to accrued and/or
outstanding interests, then to principal.
Digi-Data Sale: In the event of a Digi-Data Sale, iGambit shall be paid the
Remaining Balance at closing of any such Digi-Data Sale as provided in paragraph 2,
11
below. iGambit acknowledges that, if the Digi-Data Sale is a sale or sales of the Digi-
Data Assets, there may be insufficient proceeds to pay the Remaining Balance in full. If
the Digi-Data Sale is a sale or sales of the stock of Digi-Data and there are insufficient
proceeds at closing to pay the Remaining Balance in full, iGambit shall continue to
receive the Subsequent Monthly Payment until the full Remaining Balance is paid.
Allied Airbus, Inc.
On November 1, 2011, we commenced collection proceedings against Allied Airbus, Inc.
(“Allied”) for nonpayment of various promissory notes totaling $434,512 at December
31, 2011 in connection with a letter of intent the Company entered into to acquire the
assets and business of Allied, to which a definitive agreement could not be reached. The
claim against Allied included accrued interest at the rate of 6% per annum.
As a result of a settlement reached on June 12, 2012, we received payment of the total
balance, accrued interest and legal fees on June 27, 2012.
Financial Advisor Contract
Brooks, Houghton & Company, Inc. (BHC)
We entered into a contract with BHC in which BHC would provide financial advisory
services in connection with the Company’s proposed business combinations and related
fund raising transactions. As part of that agreement BHC would be entitled to a “Business
Combination Fee” equal to three percent of the amount of the company’s total proceeds
and other consideration paid or to be paid for the assets acquired, inclusive of equity or
any debt issued; however the fee was to be no less than $300,000. As a result of the IGX
transaction, BHC initially felt entitled to $300,000. We have taken a position that since
the transaction has been rescinded, that the fee is has not been earned and thus not to be
paid. While the ultimate outcome of this matter is not presently determinable, it is the
opinion of management that the resolution of any outstanding claim will not have a
material adverse effect on the financial position or results of operations of the Company.
ITEM 4. (REMOVED AND RESERVED)
12
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
MARKET INFORMATION
Effective March 19, 2011 the Company’s common stock is quoted on the Over
the Counter Bulletin Board, a service maintained by the Financial Industry Regulatory
Authority, under the ticker symbol “IGMB”.
HOLDERS
As of March 31, 2014, there are 25,044,056 shares of our common stock
outstanding, held of record by 158 persons. We have 275,000 common stock warrants
outstanding and 1,268,900 common stock options outstanding.
As of March 31, 2014, approximately 21,737,018 shares of our common stock are
eligible to be sold under Rule 144.
DIVIDENDS
We have never declared or paid any dividends on our common stock. Any
determination to pay dividends in the future will be at the discretion of our Board of
Directors and will be dependent upon our results of operations, financial condition,
capital requirements, contractual restrictions and other factors deemed relevant by the
Board of Directors. The Board of Directors is not expected to declare dividends or make
any other distributions in the foreseeable future, but instead intends to retain earnings, if
any, for use in business operations.
EQUITY COMPENSATION PLAN INFORMATION
We currently have one equity compensation plan outstanding which is our 2006
Long Term Incentive Plan. The Plan was adopted by our directors and approved by our
stockholders on March 26, 2006. The Plan permits the award of incentive stock options,
non-qualified stock options, stock appreciation rights, and stock grants. We have reserved
10 million shares for issuance under the Plan, plus an annual increase equal to 10% of the
number of outstanding shares of our common stock on the first day of each year, but in
no event more than 15 million shares of common stock in the aggregate. As of December
31, 2009 the Company no longer has the ability to issue shares under the Plan. As of
December 31, 2009, there were 0 shares available for issuance under the Plan.
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
13
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.
The following table describes our equity compensation plans as of December 31,
2013:
Number of Securities
Remaining Available
for Future Issuance
Number of
Securities
under Equity
to be Issued Upon Weighted Average Compensation Plans
Exercise of
Exercise Price of
(excluding securities
Outstanding
Options,
Outstanding Options,
referenced in
Warrants and
Rights
Warrants and Rights
column (a))
Plan Category
(a)
(b)
(c)
Equity
compensation
plans approved by
our stockholders
(1)
296,900 $
0.08
0
Equity
compensation
plans not approved
by our
stockholders
372,000 $
0.08
0
(1) Equity compensation plans approved by our stockholders consist of our 2006
Long Term Incentive Plan.
RECENT SALES OF UNREGISTERED SECURITIES
During 2013 we not sell securities in transactions not registered under the
Securities Act of 1933, as amended (the “Securities Act”).
ITEM 6. SELECTED FINANCIAL DATA
Not Required
14
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING ESTIMATES
Our management’s discussion and analysis of our financial condition and results
of operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of financial statements may require us to make estimates and
assumptions that may affect the reported amounts of assets and liabilities and the related
disclosures at the date of the financial statements. We do not currently have any estimates
or assumptions where the nature of the estimates or assumptions is material due to the
levels of subjectivity and judgment necessary to account for highly uncertain matters or
the susceptibility of such matters to change or the impact of the estimates and
assumptions on financial condition or operating performance is material, except as
described below.
Fair Value of Financial Instruments
For certain of our financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and amounts due to/from 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
Our revenues from continuing operations consist of revenues derived primarily
from sales of products and services rendered to real estate brokers. We recognize
revenues when the services or products have been provided or delivered, the fees we
charge are fixed or determinable, we and our customers understand the specific nature
and terms of the agreed upon transactions, and collectability is reasonably assured.
Contingency payment income was recognized quarterly from a percentage of
Digi-Data’s vaulting service revenue, and is included in discontinued operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking
and money market accounts and any highly liquid debt instruments purchased with a
maturity of three months or less.
Accounts Receivable
We analyze the collectability of accounts receivable from continuing operations
each accounting period and adjust our allowance for doubtful accounts accordingly. A
considerable amount of judgment is required in assessing the realization of accounts
receivables, including the creditworthiness of each customer, current and historical
15
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. No
reserve for bad debts was charged to operations for the year ended December 31, 2013.
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation for both financial
reporting and income tax purposes is computed using combinations of the straight line
and accelerated methods over the estimated lives of the respective assets. Computer
equipment is depreciated over 5 years and furniture and fixtures are depreciated over 7
years. Maintenance and repairs are charged to expense when incurred. When property
and equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is credited or
charged to income.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value
of the net assets acquired in a business combination, specifically the acquisition of Jekyll
by the Company’s subsidiary, Gotham. In accordance with ASC Topic No. 350
“Intangibles – Goodwill and Other”), the goodwill is not amortized, but instead is subject
to an annual assessment of impairment by applying a fair-value based test, and is
reviewed more frequently if current events and circumstances indicate a possible
impairment. If indicators of impairment are present and future cash flows are not
expected to be sufficient to recover the asset’s carrying amount, an impairment loss is
charged to expense in the period identified. A lack of projected future operating results
from Gotham’s operations may cause impairment. At December 31, 2012, we performed
an annual impairment study and determined that present and future cash flows are not
expected to be sufficient to recover the carrying amount of goodwill. Based on our
evaluation of goodwill, an impairment of $111,026 was charged to operations during the
year ended December 31, 2012.
Stock-Based Compensation
We account for our stock-based awards granted under our employee
compensation plan in accordance with ASC Topic No. 718-20, Awards Classified as
Equity, which requires the measurement of compensation expense for all share-based
compensation granted to employees and non-employee directors at fair value on the date
of grant and recognition of compensation expense over the related service period for
awards expected to vest. We use the Black-Scholes option valuation model to estimate
the fair value of our stock options and warrants. The Black-Scholes option valuation
model requires the input of highly subjective assumptions including the expected stock
price volatility of the Company’s common stock. Changes in these subjective input
assumptions can materially affect the fair value estimate of our stock options and
warrants.
16
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.
Convertible Note
On September 16, 2013, the Company issued an 8% convertible note in the aggregate
principal amount of $103,500, convertible into shares of the Company’s common stock.
The Note, including accrued interest is due June 18, 2014 and is convertible any time
after 180 days at the option of the holder into shares of the Company’s common stock at
55% of the average stock price of the lowest 3 closing bid prices during the 10 trading
day period ending on the latest complete trading day prior to the conversion date. Interest
expense on the convertible note of $2,405 was recorded for the year ended December 31,
2013.
Initially the Company had anticipated repaying the obligation prior to the effective date
of the holder electing to convert. Since the effective date of the election to convert has
passed the Company recorded a debt discount related to identified embedded derivatives
relating to conversion features and a reset provisions (see Note 7) based fair values as of
the inception date of the Note. The calculated debt discount equaled the face of the note
and is being amortized over the term of the note. During the year ended December 31,
2013, the Company amortized $40,250 of debt discount.
Derivative Liability
During the year ended December 31, 2013, the Company issued a convertible note.
The note is convertible into common stock, at the holders’ option, at a discount to the
market price of the Company’s common stock. The Company has identified embedded
derivatives included in these notes as a result of certain anti-dilutive (reset) provisions,
related to certain conversion features. The accounting treatment of derivative financial
instruments requires that the Company record the fair value of the derivatives as of the
inception date of the convertible note and debt discount amortization to fair value as of
each subsequent reporting date. This resulted in a fair value of derivative liability of
$152,076 in which to the extent of the face value of convertible note was treated as debt
discount with the remainder treated as interest expense.
17
The fair value of the embedded derivatives at December 31, 2013, in the amount of
$152,076, was determined using the Binomial Option Pricing Model based on the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of 243.00%, (3)
weighted average risk-free interest rate of 0.09%, (4) expected lives of 0.72 to 0.75 years,
and (5) estimated fair value of the Company’s common stock of $0.51 per share. The
Company recorded interest expense from the excess of the derivative liability over the
convertible note of $48,576 during the year ended December 31, 2013.
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted
a sequencing approach regarding the application of ASC 815-40 to its outstanding
convertible note. Pursuant to the sequencing approach, the Company evaluates its
contracts based upon earliest issuance date.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
iGambit is a company focused on the technology markets. Our sole operating
subsidiary, Gotham Innovation Lab, Inc., is in the business of providing media
technology services to the real estate industry. During the years ended December 31,
2013 and December 31, 2012 Gotham produced approximately $1,460,923 and
$1,528,822 of revenue, respectively. We are focused on expanding the operations of
Gotham by marketing the company to existing and potential new clients. In addition to
Gotham’s operations, we earned $260 and $65,064 in technical consulting fees, other
income of $755,000 from the IGX Rescission and $30,000, and income from
discontinued operations of $317,625 and $0 for the years ended December 31, 2013 and
December 31, 2012, respectively.
Year Ended December 31, 2013 as Compared to Year Ended December 31, 2012
Assets. At December 31, 2013, we had $1,050,746 in current assets and
$1,071,342 in total assets, compared to $716,829 in current assets and $745,919 in total
assets as of December 31, 2012. The increase in total assets was primarily due to an
increase in assets from discontinued operations as a result of reversing the bad debt
allowance for the DDC Judgment and the receivable due from the IGX Rescission
Agreement.
Liabilities. At December 31, 2013, we had total liabilities of $515,155 compared
to $440,221 at December 31, 2012. Our total liabilities at December 31, 2013 consisted
of accounts payable of $316,566, a convertible note payable of $40.250, a derivative
liability for certain provisions of the convertible note of $152,076 and a note to a related
party of $6,263, whereas our total liabilities as of December 31, 2012 consisted of
accounts payable of $433,958, and a note to a related party of $6,263. The increase in
liabilities was primarily due to a derivative liability recorded for the issuance of a
convertible note payable to an unrelated party. We do not have any long term liabilities.
18
Stockholders’ Equity. Our Stockholders’ Equity increased to $556,187 at
December 31, 2013 from $305,698 at December 31, 2012. This increase was due to a
decrease in accumulated deficit from $(2,448,346) at December 31, 2012 to $(2,197,857)
at December 31, 2013 resulting from net income of $250,489 for the year ended
December 31, 2013 compared to net losses of $(1,623,895) for the year ended December
31, 2012.
Revenue and Net Income. We had revenue of $1,461,183 for the year ended
December 31, 2013, compared to revenue of $1,593,886 for the year ended December 31,
2012. The decrease in revenue was due primarily to a decrease in revenue generated by
our Gotham subsidiary as result of transitioning out our customer technical services
division and focusing more on the real estate photography division. In addition to
Gotham’s operations, we earned $260 and $65,064 in technical consulting fees, other
income of $755,000 and $30,000 , and income from discontinued operations of $317,625
and $0 for the years ended December 31, 2013 and December 31, 2012, respectively.
Our net income was $250,489 for the year ended December 31, 2013, compared to a net
loss of $(1,623,895) for the year ended December 31, 2012. Therefore net income
resulted from a decrease in our cost of goods sold for the year ended December 31, 2013
due to a decrease in the cost of the outsourced photography vendors utilized by Gotham,
other income from the IGX Rescission Agreement and income from discontinued
operations as a result of the DDC Judgment Award.
General and Administrative Expenses. General and Administrative Expenses
decreased to $1,692,556 for the year ended December 31, 2013 from $2,383,568 for the
year ended December 31, 2012. For the year ended December 31, 2013 our General and
Administrative Expenses consisted of corporate administrative expenses of $269,596,
legal and accounting fees of $153,113, payroll expenses of $1,082,212, Directors and
Officers Insurance of $40,381, employee benefits expenses of $117,079 (medical, dental,
retirement plan, and life insurance), and business advisory fees, commissions and
expenses primarily associated with the IGX purchase and rescission transaction, of
$30,175. For the year ended December 31, 2012 our General and Administrative
Expenses consisted of corporate administrative expenses of $456,097, legal and
accounting fees of $184,848 consulting fees of $45,660, payroll expenses of $1,161,861,
Directors and Officers Insurance of $37,076, goodwill impairment expense of $111,026
and business advisory fees, commissions and expenses associated with the IGX purchase
and rescission transaction, of $387,000. Therefore the decreases from the year ended
December 31, 2012 to the year ended December 31, 2013 relate primarily to a decrease in
payroll and corporate administrative expenses. In the event the company effectuates an
acquisition in 2014 we anticipate additional professional fees associated with the
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
General
As reflected in the accompanying consolidated financial statements, at December
31, 2013, we had $26,870 of cash and stockholders’ equity of $556,187. At December
31, 2012, we had $104,721 of cash and stockholders’ equity of $305,698.
19
Our primary capital requirements in 2014 are likely to arise from the expansion of
our Gotham operations, and, in the event we effectuate an acquisition, from: (i) the
amount of the purchase price payable in cash at closing, if any; (ii) professional fees
associated with the negotiation, structuring, and closing of the transaction; and (iii) post
closing costs. It is not possible to quantify those costs at this point in time, in that they
depend on Gotham’s business opportunities, the state of the overall economy, the relative
size of any target company we identify and the complexity of the related acquisition
transaction(s). We anticipate raising capital in the private markets to cover any such
costs, though there can be no guaranty we will be able to do so on terms we deem to be
acceptable. We do not have any plans at this point in time to obtain a line of credit or
other loan facility from a commercial bank.
While we believe in the viability of our strategy to improve Gotham’s sales
volume and to acquire companies, and in our ability to raise additional funds, there can
be no assurances that we will be able to fully effectuate our business plan.
We believe we will continue to increase our cash position and liquidity for the
foreseeable future. We believe we have enough capital to fund our present operations.
Cash Flow Activity
Net cash used by operating activities was $183,151 for the year ended December
31, 2013, compared to net cash used by operating activities of $518,687 for the year
ended December 31, 2012. Our primary source of operating cash flows from continuing
operating activities for the year ended December 31, 2013 was from our Gotham
subsidiary’s revenues of $1,461,183, and $1,528,822 for the year ending December 31,
2012. Additional contributing factors to the change were from a decrease in accounts
receivable of $23,149, a decrease in prepaid expenses of $122,487 and a decrease in
accounts payable of $117,392. Net cash provided by discontinued operating activities
was $0 for the year ended December 31, 2013 and cash provided by discontinued
operating activities was $250,000 for the ended December 31, 2012. For the year ended
December 31, 2012 we received $250,000 in cash payments from DDC which was offset
by a decrease in accounts receivable included in the Assets from Discontinued
Operations.
Cash provided by continuing investing activities was $1,800 and $417,735
respectively, for the years ended December 31, 2013 and December 31, 2012. For the
year ended December 31, 2013 the entire source of cash provided by investing activities
was a decrease in deposits. For the year ended December 31, 2012 the primary source of
cash provided by investing activities was from the repayment of notes receivable due
from Allied Airbus Inc.
Cash provided by financing activities was $103,500 for the year ended December
31, 2013 compared to cash used by financing activities of $19,127 for the year ended
December 31, 2012. The cash flows provided by financing activities for the year ended
December 31, 2013 was from the issuance of a Convertible note payable to at an
20
unrelated party.
The cash flows used by financing activities for the year ended
December 31, 2012 was from a repayment of loans payable to a related party.
Supplemental Cash Flow Activity
In the year ended December 31, 2013 the company paid interest of $3,524
compared to interest of $1,884 in the year ended December 31, 2012.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance-sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not Required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this Item 8 are included in this Report beginning
on page F-1, as follows:
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheet as of December 31, 2013 and 2012
F-2
Consolidated Statement of Income for the years ended December 31, 2013 and
F-3
2012
Consolidated Statement of Changes in Stockholder’s Equity for the years ended F-4
December 31, 2013 and 2012
Consolidated Statement of Cash Flows for the years ended December 31, 2013
F-5
and 2012
Notes to Financial Statements
F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, as required by paragraph (b) of Rule 13a-15 and
15d-15 of the Exchange Act under the supervision and with the participation of our
21
management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act as of December 31, 2013. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of December 31, 2013.
Management’s Annual Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rule 13a-
15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by,
or under the supervision of, our Chief Executive Officer (our principal executive officer)
and Chief Financial Officer (our principal accounting and financial officer), and effected
by our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those policies and
procedures that:
§ Pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets;
§ Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
our directors; and
§ Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Our internal control system was designed to provide reasonable assurance to our
management and board of directors regarding the preparation and fair presentation of
published financial statements. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2013. In making this assessment,
management used the criteria set forth in the Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on management’s assessment, we concluded that, as of December 31,
2013, our internal control over financial reporting was effective.
22
Change in Internal Controls
During the quarter ended December 31, 2013, there were no changes in our
internal control over financial reporting that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors manages our business and affairs. Under our Articles of
Incorporation and Bylaws, the Board will consist of not less than one, nor more than
seven directors. Currently, our Board consists of five directors.
The names, ages, positions and dates appointed of our current directors and
executive officers are set forth below.
Name
Age
Position
Appointed
John Salerno
75 Chief Executive Officer, President, March 2009
Chairman of the Board, and
(appointed Chairman
Director
and Director in
April 2000)
Elisa Luqman
49 Chief Financial Officer, Executive March 2009
Vice President, General Counsel,
(appointed Director
and Director
in August 2009)
James J. Charles
71 Director
March 2006
George G. Dempster
74 Director
January 2001
John Keefe
71 Director
July 2013
John Salerno, Chief Executive Officer, President, Chairman of the Board,
and Director. Mr. Salerno is a seasoned hands-on executive with over 40 years of
experience with public and private computer software and service companies.
Mr. Salerno built a multi-million dollar business from a start up, servicing the real estate
industry. The business was sold in 1984 and Mr. Salerno provided consulting services to
a wide range of clients through 1995. In 1996, along with his daughter and a small group
of private accredited investors, he co-founded the Company. Mr. Salerno was President
and CEO of the Company from April 1, 2000 until February 28, 2006. After signing
contracts with Verizon and Cablevision, the Company sold its assets in 2006 to Digi-Data
Corporation. From March 1, 2006 thru February 2009 Mr. Salerno served as President of
23
the Vault Services Division of Digi-Data Corporation. Upon the expiration of his 3 year
contract the Vault Services Division was at a revenue run rate of $12 million annually. As
of March 1, 2009, Mr. Salerno returned to his full time management roll at the Company.
Mr. Salerno is an ex — US Marine Corps, Crypto/ Communications Officer and has a BS
in Mathematics from Fordham University. Mr. Salerno is Elisa Luqman’s father.
Mr. Salerno was nominated as a Director because if his intimate knowledge of the
Company and its history as a founder. Additionally, Mr. Salerno’s mathematical and
technical background as a data center manager early in his professional career and later as
a software developer offers the board hand’s on technical experience in both operations
and software analysis. Mr. Salerno utilized his experience and contacts to secure the
major customers driving the sales that generate the Company’s payment stream from
DDC. Moreover, Mr. Salerno adds value to Gotham through his 40 plus years serving
the New York Real Estate industry. He is thoroughly familiar with the unique workings
of the New York real estate industry and has many contacts within that community that
are a benefit to Gotham.
Elisa Luqman, Chief Financial Officer, Executive Vice President, General
Counsel, and Director. Ms. Luqman is a computer literate attorney with over 18 years
experience with intellectual property and computer software. Prior to co-founding the
Company, Ms. Luqman was president of University Software Corp., a software
development company focused on a wide range of student educational and intellectual
applications. Ms. Luqman was Chief Operating Officer of the Company, from April 1,
2000 until February 28, 2006. From March 1, 2006 through February 28, 2009
Ms. Luqman was employed as Chief Operating Officer of the Vault Services Division of
Digi-Data Corporation, the company that acquired the Company’s assets in 2006, and
subsequently during her tenure with Digi-Data Corporation she became the in-house
general counsel for the entire corporation. In that capacity she was responsible for
acquisitions, mergers, patents, and employee contracts, and worked very closely with
Digi-Data’s outside counsel firms, DLA-Piper, the Law Offices of Sandra T. Carr and the
patent firm of Jordan and Hamburg. As of March 1, 2009, Ms. Luqman rejoined the
Company in her current capacities. Ms Luqman received a BA degree in Marketing, a JD
in Law, and a MBA Degree in Finance from Hofstra University. Ms. Luqman is a
member of the bar in New York and New Jersey. Ms. Luqman is John Salerno’s
daughter.
Ms. Luqman was nominated as a Director because of her intimate knowledge of
the Company and its history as a founder. Additionally, as an attorney, Ms. Luqman’s
legal background enables her to provide counsel to the Company. Her experience as
general counsel to the Company provides her with a unique insight into the Company’s
contracts with customers and vendors, intellectual property assets and issues, financing
transactions and shareholder transactions. Moreover, having been through the merger
and acquisition process on both sides of the table, Ms. Luqman offers the Company in-
house guidance throughout the acquisition process. That combined with Ms. Luqman’s
MBA in Finance aids in providing the Board with more efficient analysis of input from
outside auditors and legal advisors.
24
James J. Charles, Director. Mr. Charles is a high profile financial executive
with a broad base of experience with firms ranging in size from $24MM to $180MM in
annual revenue. He worked closely with management and Boards of Directors on matters
ranging from mergers and acquisitions to stock restructurings and spin-offs. Mr. Charles
has been a self employed Certified Public Accountant from 1999 to present. From 1994
to 1999 Mr. Charles was the chief financial officer of Interpharm Holdings, Inc.
Interpharm Holdings, Inc., through its subsidiary, Interpharm, Inc., engaged in the
development, manufacture, and marketing of generic prescription strength and over-the-
counter pharmaceuticals in the United States. It also focused on the development of
products in the areas of female hormone, scheduled narcotic, soft gelatin capsule, oral
liquid, products coming off patent, and other products. From 1966 to 1994 Mr. Charles
was a Senior Managing Partner with Ernst & Young. Mr. Charles’ education includes
studies and management programs at Harvard University and Williams College.
Mr. Charles received his BBA in Accounting at Manhattan College.
Mr. Charles was nominated as a Director because of his financial expertise. He
has been involved in the practice of public accounting for over forty years. During his
tenure as a Senior Managing Partner at Ernst & Young he spent considerable years
analyzing potential acquisition targets for corporate clients and has particular experience
and skills on matter such as mergers and acquisitions, stock restructuring and spin-offs.
He has also been a Chief Financial Officer of a public company.
George G. Dempster, Director. Mr. Dempster was Commissioner of Commerce
for the State of New York from 1979 to 1983. He served as the Chairman of the Finance
Committee for Hofstra University for 25 years from 1976 through 2001, and is currently
Chairman Emeritus of the Board of Trustees. Mr. Dempster has been the Chairman of
Tran-Leisure Corp. since 1983, and was its CEO from 1983-2002. Tran -Leisure Corp is
a diversified holding company with interests ranging from helicopter services to
manufacturing. From 1969 to 1973 Mr. Dempster served as the CEO of Cybernetics, a
major computer software developer. Mr. Dempster served as a marketing manager for
IBM from 1961 to 1968. Mr. Dempster has a BA in business administration from Hofstra
University.
Mr. Dempster was nominated as a Director because of his strong administrative,
financial and economic background. Having served as Commissioner of Commerce for
the State of New York for 4 years and on the Board of Hofstra University for over 25
years, Mr. Dempster provides the Company with extensive experience in commerce and
administration in both the private and public sectors. Moreover, during his tenure at
Hofstra University Mr. Dempster was intimately involved in several financing
transactions to maintain the University in a solvent and profitable manner. Additionally,
having been CEO of a diversified holding company, Mr. Dempster is thoroughly familiar
with the merger and acquisition process. He offers years of experience analyzing
business, their models and economics, and identifying the appropriate financing vehicles.
John Keefe, Director. Mr. Keefe is an investment banker, venture capitalist, founder
of three businesses, and a turnaround consultant to businesses in trouble. Since 2011 to
Present, Mr. Keefe is the Founder and Chief Development Officer of Security Capital
25
Advisors LLC, located in Jersey City, NJ. Security Capital Advisors LLC is a firm
providing indirect financing to local governments in the US. From 2007 to 2011 Mr.
Keefe was Managing Director of Nachman Hays Brownstein, located in New York, NY.
Nachman Hays Brownstein is a national turnaround management firm, assisting
underperforming and troubled companies, maximizing value for owners, investors,
creditors and employees. Mr. Keefe was also a founding General Partner of a venture
capital firm, a founder and CFO of a computer software company, a Senior Vice
President of an investment banking firm, and emergency CFO and Chief Restructuring
Officer of several distressed businesses. He is a graduate of Harvard College and Harvard
Business School.
Mr. Keefe’ was nominated as a Director because of his financial expertise
combined with his strong technical background. He started his career as a computer
software engineer and designer for IBM, General Electric, and Litton Industries. He
evolved into the financial arena serving many years a corporate Chief Financial Officer.
He is now involved in the practice of venture capital and investment banking He has
particular skills acting as a turnaround consultant to businesses in trouble being a
‘Certified Turnaround Professional’ by the Turnaround Management Association. He
offers years of experience analyzing business, their revenue models, and identifying
appropriate financing vehicles.
On April 22, 2013, the Board of Directors (the “Board”) of iGambit Inc. (the
“Company”) accepted the resignation of Mr. John Waters from the Board and related
responsibilities on the Audit and Compensation Committees. Mr. Waters’ resignation is
not the result of any disagreement with the Company on any matter relating to the
Company’s operations, policies or practices. Mr. Waters was replaced by Mr. Keefe.
COMMITTEES OF THE BOARD
The Board has established an Audit Committee and a Compensation Committee.
The Board does not currently have a Nominating Committee. The work typically
conducted by a Nominating Committee is conducted by the full Board.
Audit Committee
The Audit Committee presently consists of Messrs. Charles, Keefe and
Dempster, with Mr. Charles serving as chairman. Our Board has determined that
Mr. Charles qualifies as an “audit committee financial expert” as defined under the
federal securities laws. The Audit Committee is responsible for monitoring and reviewing
our financial statements and internal controls over financial reporting. In addition, they
recommend the selection of the independent auditors and consult with management and
our independent auditors prior to the presentation of financial statements to stockholders
and the filing of our forms 10-Q and 10-K. The Audit Committee has adopted a charter
and it is posted on our web site at www.igambit.com.
26
Compensation Committee
The Compensation Committee presently consists of Messrs. Charles, Keefe and
Dempster, with Mr. Keefe serving as chairman. The Compensation Committee is
responsible for reviewing and recommending to the Board the compensation and over-all
benefits of our executive officers, including administering the Company’s 2006 Long
Term Incentive Plan. The Compensation Committee may, but is not required to, consult
with outside compensation consultants. The Compensation Committee has adopted a
charter and the charter is posted on our web site at www.igambit.com.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
to the Company under Rule 16a-3(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) the Company is not aware of any person that failed to file on a
timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a)
of the Exchange Act during the year ended December 31, 2013.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. A copy of the Code of Ethics is attached as an exhibit to
this report. A copy of the Code of Ethics is available on the Company’s website at
www.igambit.com. Any amendments to, or waivers from, the Code of Ethics will be
disclosed on the Company’s website at www.igambit.com.
27
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation received by our executive
officers, for their service, during the year ended December 31, 2013.
Current
Nonqualified
Officers
Non-equity
Deferred
Name &
Option
Incentive Plan Compensation
All Other
Principal
Salary Bonus Stock Awards Compensation
Earnings
Compensation
Total
Position
Year
($)
($)
($)
($)
($)
($)
($)
($)
John
Salerno
2013 200,000
0
0
0
0
0
10,237(1)
210,237
CEO,
President
2012 225,000
0
0
0
0
0
10,237(2)
235,237
Chairman
& Director 2011 225,000
0
0
0
0
0
10,087(3)
235,087
Elisa
Luqman
2013 200,000
0
0
0
0
0
30,125(4)
230,125
Acting
CFO,
2012 200,000
0
0
0
0
0
27,795(5)
227,795
EVP, GC
and
2011 200,000
0
0
0
0
0
26,887(6)
226,887
Director
(1) Includes $6,168 in health insurance premiums and $4,069 in life insurance
premiums.
(2) Includes $6,168 in health insurance premiums and $4,069 in life insurance
premiums.
(3) Includes $6,018 in health insurance premiums and $4,069 in life insurance
premiums.
(4) Includes $30,125 in health and dental insurance premiums..
(5) Includes $27,795 in health and dental insurance premiums.
(6) Includes $26,887 in health and dental insurance premiums.
Employment Arrangements with Named Executive Officers
The Company does not currently have any employment agreements with it executive
officers.
28
Compensation of the Board of Directors
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS
STOCK AWARDS
Equity
Equity
Incentive
Incentive
Plan
Market
Plan
Awards:
Value Awards: Market or
Equity
of
Number
Payout
Incentive
Number Shares
of
Value of
Plan
of
or
Unearned Unearned
Awards:
Shares
Units
Shares,
Shares,
Number of
Number of
Number of
or Units
of
Units or
Units or
Securities
Securities
Securities
of Stock Stock
Other
Other
Underlying
Underlying
Underlying
That
That
Rights
Rights
Unexercised Unexercised Unexercised Option
Have
Have That Have That Have
Options
Options
Unearned Exercise Option
Not
Not
Not
Not
(#)
(#)
Options
Price Expiration Vested Vested
Vested
Vested
Exercisable Unexercisable
(#)
($)
Date
(#)
($)
(#)
(#)
Name (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
James Charles
59,000
0
0
$0.10 7/21/2020
0
0
0
0
James Charles
100,000
0
0
$0.10 7/11/2021
0
0
0
0
George Dempster
113,000
0
0
$0.10 7/21/2020
0
0
0
0
George Dempster
100,000
0
0
$0.10 7/11/2021
0
0
0
0
The following table sets forth the compensation received by our directors, for their
service as directors, during the year ended December 31, 2013.
Nonqualified
Fees
Non-equity
deferred
earned or
Stock
Option
incentive plan
compensation
All other
paid in
awards
awards
compensation
earnings
compensation
Total
Name
cash ($)
($)
($)
($)
($)
($)
($)
John Salerno (1)
-
-
-
-
-
-
0
Elisa Luqman (1)
-
-
-
-
-
-
0
James J. Charles
$3,000
-
-
-
-
$3,000
George G. Dempster
$3,000
-
-
-
-
$3,000
John Waters
$3,000
-
-
-
-
$3,000
John Keefe
0
-
-
-
-
-
0
(1) These individuals serve as executive officers of the Company, and do not
receive any compensation for the services they provide as directors of the
Company.
Members of our Board receive $1,000 per quarter for their service to the Company.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information known to us, as of March 31, 2014,
relating to the beneficial ownership of shares of common stock by: (i) each person who is
known by us to be the beneficial owner of more than 5% of the Company’s outstanding
common stock; (ii) each director; (iii) each executive officer; and (iv) all executive
officers and directors as a group. Under securities laws, a person is considered to be the
beneficial owner of securities owned by him (or certain persons whose ownership is
attributed to him) or securities that can be acquired by him within 60 days, including
upon the exercise of options, warrants or convertible securities. The Company determines
a beneficial owner’s percentage ownership by assuming that options, warrants and
convertible securities that are held by the beneficial owner and which are exercisable
within 60 days, have been exercised or converted. The Company believes that all persons
named in the table have sole voting and investment power with respect to all shares of
common stock shown as being owned by them. Unless otherwise indicated, the address
of each beneficial owner in the table set forth below is care of iGambit Inc., 1050 W.
Jericho Turnpike, New York, 11787. The percentages in the following table are based
upon 25,044,056 shares outstanding as of March 31, 2014.
Amount and Nature
of Beneficial
Name of Beneficial Owner
Ownership
Percent of Class
John Salerno, C.E.O., President, Chairman
of the Board, and Director
5,616,900(1)
22.4%
Elisa Luqman, C.F.O., Executive Vice
President, General Counsel and Director
5,715,000(2)
22.8%
James J. Charles, Director
600,000(3)
2.4%
George G. Dempster, Director
605,000(4)
2.4%
Mehul Mehta
2,450,000
9.8%
Executive Officers and Directors as a
Group:
12,539,900 (4)
50%
1. Includes: options to purchase 46,900 shares of common stock at $0.01 per share held by John L.
Salerno, Mr. Salerno’s son; and options to purchase 100,000 shares of common stock at $0.01 per
share held by Dean T. Salerno, Mr. Salerno’s son.
2. Includes 245,000 shares of common stock held by Muhammad Luqman, Ms. Luqman’s husband.
3. Includes options to purchase 159,000 shares of the common stock at $0.10 per share.
4. Includes options to purchase 213,000 shares of the common stock at $0.10 per share.
5. Includes the disclosures in footnotes 1 through 4 above.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
30
RELATED PARTY TRANSACTIONS
None.
BOARD INDEPENDENCE
The Company has elected to use the independence standards of the NYSE AMEX
Equities Exchange in its determination of whether the members of its Board are
independent. Based on the foregoing, the Company has concluded that Mr. Charles and
Mr. Dempster are independent. The Board has established an Audit Committee and a
Compensation Committee. The Board does not currently have a Nominating Committee.
The work typically conducted by a Nominating Committee is conducted by the full
Board.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows what Fiondella, Milone & LaSaracina, LLP billed for
the audit and other services for the year ended December 31, 2013 and December 31,
2012 respectively.
Year Ended Year Ended
12/31/ 2013 12/31/2012
Audit Fees
$
45,000 $
45,000
Audit-Related Fees
-
---
All Tax Fees
---
—
Other Fees
---
—
Total
$
45,000 $
45,000
Audit Fees — This category includes the audit of the Company’s annual financial
statements, review of financial statements included in the Company’s Form 10-Q
Quarterly Reports and services that are normally provided by the independent auditors in
connection with engagements for those years.
Audit-Related Fees — This category includes assurance and related services by
the independent auditor that are reasonably related to the performance of the audit or
review of the Company’s financial statements and that are not reported under the caption
“Audit Fees.”
Tax Fees — This category includes services rendered by the independent auditor
for tax compliance, tax advice, and tax planning.
All Other Fees — This category includes products and services provided by the
independent auditor other than the services reported under the captions “Audit Fees,”
“Audit-Related Fees,” and “Tax Fees.”
31
Overview — The Company’s Audit Committee, reviews, and in its sole
discretion pre-approves, our independent auditors’ annual engagement letter including
proposed fees and all audit and non-audit services provided by the independent auditors.
Accordingly, all services described under “Audit Fees,” “Audit-Related Fees,” “Tax
Fees,” and “All Other Fees” were pre-approved by our Company’s Audit Committee. The
Audit Committee may not engage the independent auditors to perform the non-audit
services proscribed by law or regulation. The Company’s Audit Committee may delegate
pre-approval authority to a member of the Board of Directors, and authority delegated in
such manner must be reported at the next scheduled meeting of the Board of Directors.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheet as of December 31, 2013 and 2012
F-3
Consolidated Statement of Income for the years ended December 31, 2013 and
F-4
2012
Consolidated Statement of Changes in Stockholder’s Equity for the years
F-5
ended December 31, 2013 and 2012
Consolidated Statement of Cash Flows for the years ended December 31, 2013
F-6
and 2012
Notes to Financial Statements
F-8
(b) Exhibits
Exhibit No. Description
3.1(i) Certificate of Incorporation, filed with the Delaware Secretary of State on
April 13, 2000 (1)
3.1(ii)
Certificate of Merger, filed with the Delaware Secretary of State on
April 18, 2000 (1)
3.1(iii)
Certificate of Amendment Changing Name, filed with the Delaware
Secretary of State on December 19, 2000 (1)
3.1(iv)
Certificate of Merger filed with the Delaware Secretary of State on
February 17, 2006 (1)
3.1(v) Certificate of Amendment Changing Name filed with the Delaware
Secretary of State on April 5, 2006 (1)
3.1(vi)
Certificate of Amendment Increasing Authorized Common Stock to 75
Million Shares, filed with the Delaware Secretary of State on December 2,
2009 (1)
3.2
Bylaws (1)
4.1
Form of Stock Certificate (2)
4.2
Common Stock Purchase Warrant issued to Roetzel & Andress (3)
10.1
iGambit Inc. 2006 Long Term Incentive Plan, Amended 12/31/2006 (1)
10.2
Employment Agreement between Digi-Data Corporation and Mr. Salerno
32
(2)
10.3
Employment Agreement between Digi-Data Corporation and Mrs. Luqman
(2)
14
Code of Ethics (5)
21
Subsidiaries (1)
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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 incorporated by reference into any other filing
under the Security Act of 1933, as amended, or by the Security Exchange
Act of 1934, as amended.)
Certification of the 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 incorporated by reference into any other filing
under the Security Act of 1933, as amended, or by the Security Exchange
Act of 1934, as amended.)
(1) Incorporated by reference to Form 10 filed on December 31, 2009.
(2) Incorporated by reference to Amendment No. 1 to Form 10 filed on June 11, 2010.
(3) Filed with initial Form 10-K on June 15, 2010.
(4) We hereby agree to furnish the SEC with any omitted schedule or exhibit upon
request.
(5) Filed with Form 10-K/A (Amendment No. 1) on September 13, 2010.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Hauppauge, New York, on
March 31, 2014.
iGambit Inc.
April 1, 2014
By: /s/ John Salerno
John Salerno, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this
Annual Report on Form 10-K has been signed by the following persons in the capacities
indicated:
Signature
Title
Date
/s/ John Salerno
Chief Executive Officer and
Director
April 1, 2014
John Salerno
/s/ Elisa Luqman
Chief Financial Officer, Executive
April 1, 2014
Vice President, General Counsel,
Elisa Luqman
Principal Accounting Officer and
Director
/s/ James J. Charles
Director
April 1, 2014
James J. Charles
/s/ George G. Dempster
Director
April 1, 2014
George G. Dempster
/s/ John Keefe
Director
April 1, 2014
John Keefe
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
iGambit, Inc.
Smithtown, New York
We have audited the accompanying consolidated balance sheets of iGambit, Inc. (the
Company) as of December 31, 2013 and 2012, and the related consolidated statements
of operations, changes in stockholders’ equity, and cash flows for each of the years in
the two-year period ended December 31, 2013. The Company’s management is
responsible for these consolidated financial statements. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31, 2013
and 2012, and the results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2013 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Fiondella, Milone & LaSaracina LLP
Glastonbury, Connecticut
March 31, 2014
F-1
IGAMBIT INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2013
2012
ASSETS
Current assets
Cash
$
26,870
$
104,721
Accounts receivable, net
135,292
158,441
Prepaid expenses
10,590
133,077
Due from rescission agreement
239,779
--
Assets from discontinued operations, net
638,215
320,590
Total current assets
1,050,746
716,829
Property and equipment, net
11,176
17,870
Other assets
Deposits
9,420
11,220
$
1,071,342
$
745,919
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
316,566
$
433,958
Convertible note payable, net
40,250
--
Derivative liability
152,076
--
Note payable - related party
6,263
6,263
Total current liabilities
515,155
440,221
Stockholders' equity
Common stock, $.001 par value; authorized - 75,000,000 shares;
issued and outstanding - 25,044,056 shares in 2013 and 2012,
respectively
25,044
25,044
Additional paid-in capital
2,729,000
2,729,000
Accumulated deficit
(2,197,857)
(2,448,346)
Total stockholders' equity
556,187
305,698
F-2
$
1,071,342
$
745,919
F-3
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2013
2012
Sales
$ 1,461,183
$
1,593,886
Cost of sales
496,008
783,505
Gross profit
965,175
810,381
Operating expenses
General and administrative expenses
1,692,556
2,383,568
Loss from operations
(727,381)
(1,573,187)
Other income
Interest income
--
13,235
Interest expense
(54,505)
--
Amortization of debt discount
(40,250)
--
Income from rescission agreement
755,000
--
Miscellaneous income
--
30,000
Total other income
660,245
43,235
Loss from continuing operations before income tax
expense
(67,136)
(1,529,952)
Income tax expense
--
93,943
Loss from continuing operations
(67,136)
(1,623,895)
Income from discontinued operations
317,625
--
Net income (loss)
$
250,489
$ (1,623,895)
Basic and fully diluted earnings (loss) per common
share:
Continuing operations
$
.00
$
(.07)
Discontinued operations
$
.01
$
.00
Net earnings per common share
$
.01
$
(.07)
F-4
Weighted average common shares outstanding - basic
25,044,056
23,957,034
Weighted average common shares outstanding - fully
diluted
25,987,956
23,957,034
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2013 AND 2012
Additional
Common stock
Paid-in
Accumulated
Shares
Amount
Capital
Deficit
Totals
Balances, December 31, 2011
23,954,056 $
23,954 $
2,403,090 $
(824,451) $
1,602,593
Common stock issued for
services
1,090,000
1,090
325,910
--
327,000
Net loss
(1,623,895)
(1,623,895)
Balances, December 31, 2012
25,044,056
25,044
2,729,000
(2,448,346)
305,698
Net income
250,489
250,489
Balances, December 31, 2013
25,044,056 $
25,044 $
2,729,000 $
(2,197,857) $
556,187
F-5
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
250,489
$ (1,623,895)
Adjustments to reconcile net income (loss) to net
cash used by operating activities
Income from discontinued operations
(317,625)
--
Depreciation
6,694
8,750
Debt discount interest expense
48,576
--
Debt discount amortization
40,250
--
Stock-based compensation expense
--
327,000
Goodwill impairment
--
111,026
Satisfaction of notes receivable from stockholder for services
--
17,000
Deferred income taxes
--
184,185
Increase (Decrease) in cash flows as a result of
changes in asset and liability account balances:
Accounts receivable
23,149
110,912
Prepaid expenses
122,487
(74,428)
Due from rescission agreement
(239,779)
--
Accounts payable
(117,392)
170,763
Net cash provided(used) by continuing operating activities
134,474
(768,687)
Net cash provided (used) by discontinued operating activities
(317,625)
250,000
NET CASH USED BY OPERATING ACTIVITIES
(183,151)
(518,687)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
--
(8,057)
Decrease (Increase)in deposits
1,800
(8,720)
Repayments of notes receivable
--
434,512
NET CASH PROVIDED BY INVESTING ACTIVITIES
1,800
417,735
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible note payable
103,500
--
Repayment of loans payable to related party
--
(19,127)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
103,500
(19,127)
F-6
NET DECREASE IN CASH
(77,851)
(120,079)
CASH - BEGINNING OF YEAR
104,721
224,800
CASH - END OF YEAR
$
26,870
$
104,721
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
$
3,524
$
1,884
Non-cash investing and financing activities:
Debt discount
$
103,500
$
--
F-7
IGAMBIT INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2013 and 2012
Note 1 - Organization and Basis of Presentation
The consolidated financial statements presented are those of iGambit Inc., (the
“Company”) and its wholly-owned subsidiary, Gotham Innovation Lab Inc. (“Gotham”).
The Company was incorporated under the laws of the State of Delaware on April 13,
2000. The Company was originally incorporated as Compusations Inc. under the laws of
the State of New York on October 2, 1996. The Company changed its name to
BigVault.com Inc. upon changing its state of domicile on April 13, 2000. The Company
changed its name again to bigVault Storage Technologies Inc. on December 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.
Gotham is in the business of providing media technology services to real estate agents
and brokers in the New York metropolitan area.
Note 2 –Discontinued Operations
Sale of Business
On February 28, 2006, the Company entered into an asset purchase agreement with Digi-
Data Corporation (“Digi-Data”), whereby Digi-Data acquired the Company’s assets and
its online digital vaulting business operations in exchange for $1,500,000, which was
deposited into an escrow account for payment of the Company’s outstanding liabilities.
In addition, as part of the sales agreement, the Company received payments from Digi-
Data based on 10% of the net vaulting revenue payable quarterly over five years. The
Company was also entitled to an additional 5% of the increase in net vaulting revenue
over the prior year’s revenue. These adjustments to the sales price were included in the
discontinued operations line of the statements of operations for the year ended December
31, 2011, the last year of payments.
The assets of the discontinued operations are presented in the balance sheets under the
captions “Assets from discontinued operations”. The underlying assets of the
discontinued operations consist of accounts receivable of $570,590 and $320,590 as of
December 31, 2013 and December 31, 2012, respectively, and of accrued interest
receivable of $67,625 as of December 31, 2013.
Accounts Receivable
Assets from discontinued operations, net includes accounts receivable which represents
50% of contingency payments earned for the previous quarters. The reserve for bad debts
of $250,000 charged to operations in 2010 was reversed in connection with the Summary
Judgment and Forbearance Agreement described in Note 11. Also included is accrued
interest receivable of $67,625 recorded for interest granted on the balance due from Digi-
data through December 31, 2013.
F-8
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Gotham Innovation Lab, Inc. All 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 and cash equivalents,
accounts receivable, accounts payable, 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’s revenues are derived primarily from the sale of products and services
rendered to real estate brokers. The Company recognizes revenues when the services or
products have been provided or delivered, the fees charged are fixed or determinable, the
Company and its customers understand the specific nature and terms of the agreed upon
transactions, and collectability is reasonably assured.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the years
ended December 31, 2013 and 2012 were $5,786 and $26,439, respectively.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking and
money market accounts and any highly liquid debt instruments purchased with a maturity
of three months or less.
Accounts Receivable
The Company analyzes the collectability of accounts receivable from continuing
operations each accounting period and adjusts its allowance for doubtful accounts
accordingly. A considerable amount of judgment is required in assessing the realization
F-9
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 $17,865 and $37,954 at
December 31, 2013 and 2012, respectively. There was no bad debt expense charged to
operations for the years ended December 31, 2013 and 2012, respectively.
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation for both financial reporting and
income tax purposes is computed using combinations of the straight line and accelerated
methods over the estimated lives of the respective assets. Computer equipment is
depreciated over 5 years and furniture and fixtures are depreciated over 7 years.
Maintenance and repairs are charged to expense when incurred. When property and
equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is credited or
charged to income.
Depreciation expense of $6,694 and$8,750was charged to operations for the years ended
December 31, 2013 and 2012, respectively.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in a business combination, specifically the acquisition of Jekyll by the
Company’s subsidiary, Gotham. In accordance with ASC Topic No. 350 “Intangibles –
Goodwill and Other”, goodwill is not amortized, but instead is subject to an annual
assessment of impairment by applying a fair-value based test, and is reviewed more
frequently if current events and circumstances indicate a possible impairment. 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. At December 31, 2012, the Company performed its
annual impairment study and determined that present and future cash flows were not
expected to be sufficient to recover the carrying amount of goodwill, and the goodwill
was written off.
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
F-10
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
The Company has reviewed recently issued, but not yet adopted, accounting standards in
order to determine their effects, if any, on its results of operations, financial position or
cash flows. Based on that review, the Company believes that none of these
pronouncements will have a significant effect on its consolidated financial statements.
Note 4 – Earnings Per Common Share
The Company calculates net earnings (loss) per common share in accordance with ASC
260 “Earnings Per Share” (“ASC 260”). Basic and diluted net earnings (loss) per
common share was determined by dividing net earnings (loss) applicable to common
stockholders by the weighted average number of common shares outstanding during the
period. The Company’s potentially dilutive shares, which include outstanding common
stock options and common stock warrants, have not been included in the computation of
diluted net earnings (loss) per share for all periods as the result would be anti-dilutive.
Years Ended
December 31,
2013
2012
Stock options
--
1,268,900
Stock warrants
--
275,000
Total shares excluded from calculation
--
1,543,900
F-11
Note 5–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 December 31,
2013, 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.
F-12
Stock option activity during the years ended December 31, 2013 and 2012 follows:
Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Options
Grant-Date
Life
Outstanding
Exercise Price
Fair Value
(Years)
Options outstanding at
December 31, 2011
2,768,900
$
0.04
$
0.10
6.85
Cancelled during 2012
(1,500,000)
0.01
0.06
Options outstanding at
December 31, 2012
1,268,900
0.08
0.10
6.16
Expired
(600,000)
0.10
0.10
Options outstanding at
December 31, 2013
668,900
$
0.06
$
0.10
4.69
Options outstanding at December 31, 2013 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
100,000
100,000
$0.01
May 1, 2016
May 1, 2006
50,000
50,000
$0.01
May 1, 2016
May 1, 2006
46.900
46,900
$0.01
May 1, 2016
July 21, 2010
113,000
113,000
$0.10
July 21, 2020
July 21, 2010
59,000
59,000
$0.10
July 21, 2020
July 11, 2011
100,000
100,000
$0.10
July 11, 2021
July 11, 2011
100,000
100,000
$0.10
July 11, 2021
Total
668,900
668,900
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.
F-13
Warrant activity during the years ended December 31, 2013 and 2012follows:
(1)Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Warrants
Grant-DateFair
Outstanding
Exercise Price
Value
Life (Years)
Warrants outstanding
at December 31, 2011
275,000
$
0.94
$
0.10
7.42
No warrant activity
--
--
--
Warrants outstanding
at December 31, 2012
275,000
$
0.94
$
0.10
6.42
No warrant activity
--
--
--
Warrants outstanding
at December 31, 2013
275,000
$
0.94
$
0.10
5.42
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
Warrants outstanding at December 31, 2013 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 6 – Convertible Note Payable
On September 16, 2013, the Company issued an 8% convertible note in the aggregate
principal amount of $103,500, convertible into shares of the Company’s common stock.
The Note, including accrued interest is due June 18, 2014 and is convertible any time
after 180 days at the option of the holder into shares of the Company’s common stock at
55% of the average stock price of the lowest 3 closing bid prices during the 10 trading
day period ending on the latest complete trading day prior to the conversion date. Interest
expense on the convertible note of $2,405 was recorded for the year ended December 31,
2013.
Initially the Company had anticipated repaying the obligation prior to the effective date
of the holder electing to convert. Since the effective date of the election to convert has
passed the Company recorded a debt discount related to identified embedded derivatives
relating to conversion features and a reset provisions (see Note 7) based fair values as of
the inception date of the Note. The calculated debt discount equaled the face of the note
F-14
and is being amortized over the term of the note. During the year ended December 31,
2013, the Company amortized $40,250 of debt discount.
Note7 - Derivative Liability
Convertible Note
During the year ended December 31, 2013, the Company issued a convertible note (see
Note 6 above).
The note is convertible into common stock, at the holders’ option, at a discount to the
market price of the Company’s common stock. The Company has identified embedded
derivatives included in these notes as a result of certain anti-dilutive (reset) provisions,
related to certain conversion features. The accounting treatment of derivative financial
instruments requires that the Company record the fair value of the derivatives as of the
inception date of the convertible note and debt discount amortization to fair value as of
each subsequent reporting date. This resulted in a fair value of derivative liability of
$152,076 in which to the extent of the face value of convertible note was treated as debt
discount with the remainder treated as interest expense.
The fair value of the embedded derivatives at December 31, 2013, in the amount of
$152,076, was determined using the Binomial Option Pricing Model based on the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of 243.00%, (3)
weighted average risk-free interest rate of 0.09%, (4) expected lives of 0.72 to 0.75 years,
and (5) estimated fair value of the Company’s common stock of $0.51 per share. The
Company recorded interest expense from the excess of the derivative liability over the
convertible note of $48,576 during the year ended December 31, 2013.
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted
a sequencing approach regarding the application of ASC 815-40 to its outstanding
convertible note. Pursuant to the sequencing approach, the Company evaluates its
contracts based upon earliest issuance date.
Note 8 - Income Taxes
The Company follows Accounting Standards Codification subtopic 740, Income Taxes
(“ASC 740”) which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the financial
statements or tax returns. Under such method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective
tax bases using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred taxes are classified as current or non-current, depending on
the classification of the assets and liabilities to which they relate.
The income tax provision (benefit) at December 31 consists of the following:
F-15
2013
2012
From Continuing Operations:
Deferred tax expense (benefit):
Federal
$
--
$184,185
State and local
--
--
Total from continued operations
--
184,185
Current tax expense (benefit):
Federal
--
(90,242)
State and local
--
--
Total from continued operations
--
(90,242)
From Discontinued Operations:
Current tax expense (benefit):
Federal
--
--
State and local
--
--
Total from discontinued operations
--
--
Total
$
--
$ 93,943
The difference between income tax expense computed by applying the federal statutory
corporate tax rate and actual income tax expense is as follows:
Years Ended
December 31,
2013
2012
Statutory U.S. federal income tax rate
34.0%
34.0%
State income taxes, net of
federal income tax benefit
1.9%
0.0%
Tax effect of expenses that are not
deductible for income tax purposes
1.3%
(0.8)%
Return to Provision Items
12.8%
0.0%
Other
0.5%
(0.2)%
Change in Valuation Allowance
(50.5)%
(39.1)%
Effective tax rate
(0.0)%
(6.1)%
At December 31, the significant components of the deferred tax assets (liabilities) are
summarized below:
2013
2012
Deferred Tax Assets:
Net Operating Losses
$612,173
$765,578
Other
3,258
3,258
Total deferred tax assets
615,431
768,836
F-16
Deferred Tax Liabilities:
--
--
Total deferred tax liabilities
--
--
Valuation Allowance
(615,431)
(768,836)
Net deferred tax assets
$
--
$
--
As of December 31, 2013, the Company had federal and state net operating loss
carryforwards of approximately $1.3 million and $3.1 million, respectively, which expire
at various dates from 2023 through 2033. These net operating loss carryforwards may be
used to offset future taxable income and thereby reduce the Company’s U.S. federal and
state income taxes.
In accordance with ASC 740, 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 as of December 31, 2012 has been
established as Management believes that the Company will not realize the benefit of
those deferred tax assets.
The Company complies with the provisions of ASC 740-10 in accounting for its
uncertain tax positions. ASC 740-10 addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial
statements. Under ASC 740-10, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely that not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the
position. Management has determined that the Company has no significant uncertain tax
positions requiring recognition under ASC 740-10.
The Company is subject to income tax in the U.S., and certain state jurisdictions. The
Company has not been audited by the U.S. Internal Revenue Service, or any states in
connection with income taxes. The Company’s tax years generally remain open to
examination for all federal and state income tax matters until its net operating loss
carryforwards are utilized and the applicable statutes of limitation have expired. The
federal and state tax authorities can generally reduce a net operating loss (but not create
taxable income) for a period outside the statute of limitations in order to determine the
correct amount of net operating loss which may be allowed as a deduction against income
for a period within the statute of limitations.
The Company recognizes interest and penalties related to unrecognized tax benefits, if
incurred, as a component of income tax expense.
F-17
Note 9 -Retirement Plan
Gotham has adopted the Gotham Innovation Lab, Inc. SIMPLE IRA Plan, which covers
substantially all employees. Participating employees may elect to contribute, on a tax-
deferred basis, a portion of their compensation in accordance with Section 408 (a) of the
Internal Revenue Code. The Company matches up to 3% of employee contributions. The
Company's contributions to the plan for the years ended December 31, 2013 and 2012
were $14,572 and$8,714, respectively.
Note 10 – Concentrations and Credit Risk
Sales and Accounts Receivable
Gotham had sales to two customers which accounted for approximately 45% and 24%,
respectively of Gotham’s total sales for the year ended December 31, 2013. One
customer accounted for approximately 53% of accounts receivable at December 31,
2013.
Gotham had sales to three customers which accounted for approximately 42%, 15% and
10%, respectively of Gotham’s total sales for the year ended December 31, 2012. Two of
the customers accounted for approximately 43% and 14%, respectively of accounts
receivable at December 31, 2012.
Cash
Cash is maintained at a major financial institution and, at times, balances may exceed
federally insured limits. The Company has never experienced any losses related to these
balances. All of the Company’s non-interest bearing cash balances were fully insured at
December 31, 2013. As of December 31, 2012, the Company had no amounts of cash or
cash equivalents in financial institutions in excess of amounts insured by agencies of the
U.S. Government, the limit of which is $250,000. The Company did not have any
interest-bearing accounts at December 31, 2013 and December 31, 2012, respectively.
Note 11 - Fair Value Measurement
The Company adopted the provisions of Accounting Standards Codification subtopic
825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines
fair value as the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of
F-18
unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of
inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.
All items required to be recorded or measured on a recurring basis consist of derivative
liabilities and are based upon level 3 inputs.
To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment. In
certain cases, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, for disclosure purposes, the level is the fair value
hierarchy within which the fair value measurement is disclosed and is determined based
on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning
retained earnings and no impact on the financial statements.
The carrying value of the Company’s cash and cash equivalents, accounts receivable,
accounts payable, short-term borrowings (including convertible note payable), and other
current assets and liabilities approximate fair value because of their short-term maturity.
As of December 31, 2013 and 2012, the Company did not have any items that would be
classified as level 1 or 2 disclosures.
The Company recognizes its derivative liabilities as level 3 and values its derivatives
using the methods discussed in Note 7. While the Company believes that its valuation
methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value at the reporting
date. The primary assumptions that would significantly affect the fair values using the
methods discussed in Note 7 are that of volatility and market price of the underlying
common stock of the Company.
As of December 31, 2013 and 2012, the Company did not have any derivative
instruments that were designated as hedges.
F-19
The derivative liability as of December 31, 2013, in the amount of $152,076 has a level 3
classification. Further, there were no changes in fair value of the Company’s level 3
financial liabilities during the year ended December 31, 2013.
Fluctuations in the Company’s stock price are a primary driver for the changes in the
derivative valuations during each reporting period. As the stock price decreases for each
of the related derivative instruments, the value to the holder of the instrument generally
decreases, therefore decreasing the liability on the Company’s balance sheet.
Additionally, stock price volatility is one of the significant unobservable inputs used in
the fair value measurement of each of the Company’s derivative instruments. The
simulated fair value of these liabilities is sensitive to changes in the Company’s expected
volatility. A 10% change in pricing inputs and changes in volatilities and correlation
factors would currently not result in a material change in value for the level 3 financial
liability.
Note 12 - Related Party Transactions
Note Payable – Related Party
Gotham was provided a loan from an entity that is controlled by the officers of Gotham,
such amounts outstanding were $6,263 at December 31, 2013 and 2012, respectively.
The note bears interest at a rate of 5.5% and is due on December 31, 2013.
Note 13 – Commitments and Contingencies
Lease Commitment
On February 1, 2012, iGambit entered into a 5 year lease for new executive office space
in Smithtown, New York commencing on March 1, 2012 at a monthly rent of $1,560
with 2% annual increases.
Gotham has a month to month license agreement for office space that commenced on
August 2, 2012 at a monthly license fee of $4,025. The license agreement may be
terminated upon 30 days notice.
Total future minimum annual lease payments under the lease for the years ending
December 31 are as follows:
2014
$ 18,720
2015
19,080
2016
19,440
2017
3,240
$60,480
Rent expense of $74,988 and $92,522 was charged to operations for the years ended
December 31, 2013 and 2012, respectively.
F-20
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.
Litigation
Digi-Data Corporation
In connection with the asset purchase agreement discussed in Note 2, the Company filed
a complaint against Digi-Data on October 1, 2012 for unpaid contingency payments
owed to the Company totaling $570,590 at December 31, 2013, exclusive of an
allowance for bad debts of $250,000. On or about December 3, 2012, Digi-Data filed its
Answer, Affirmative Defenses and Counterclaim against the Company. The
Counterclaim seeks damages against the Company for breach of the Agreement for the
alleged failure to indemnify Digi-Data for expenses related to pending litigation between
Verizon Communications, Inc. (one of Digi-Data's customers) and an unrelated third
party, Titanide Ventures, LLC, concerning alleged patent violations (hereinafter "Verizon
Patent Litigation").The Verizon Patent Litigation is a result of a "patent troll" whereby
Titanide seeks to extract settlement funds from alleged patent infringers without seeking
actual adjudication of its purported patent rights. The Company has advised Digi-Data of
what it believes is "prior act" related to the subject intellectual property that is at-issue in
the Verizon Patent Litigation, a possible defense to the claims by Titanide. A pre-trial
order was issued by the Court with detailed deadlines regarding among other items,
discovery cut-off and status report deadline date of April 29, 2013 and dispositive
motions deadline date of May 28, 2013. The Company propounded its initial discovery
upon Digi-Data, responses to which were due on or about March 8, 2013. On April 4,
2013, Digi-Data provided discovery to the On April 4, 2013, an Order of Dismissal in
the Verizon Patent Litigation was filed. The Dismissal is with prejudice with each party
to bear its own costs and fees. On May 24, 2013, the Company filed a Motion for
Summary Judgment with the Court asking the Court to move in its favor against DDC for
the entire outstanding balance due along with attorney’s fees and post and pre-judgment
interest as applicable under Maryland Law. On June 11, 2013, Digi-Data filed its
Response to the Motion for Summary Judgment and, for the first time, purported to
liquidate certain alleged damages for which Digi-Data seeks a set-off against the amounts
admittedly owed by Digi-Data to iGambit and alludes the existence of additional
although not yet quantified damages. The Response relies entirely upon the Affidavit of
a Vice President of Digi-Data for its evidentiary support. Notwithstanding, Digi-Data
failed to produce documentary support for its alleged damages and to explain why it
failed to disclose such information during the discovery period or thereafter.
On July 9, 2013, the Company filed its Reply to Digi-Data’s Response and, thereby,
advised the Court of Digi-Data’s apparent litigation-by-ambush tactic such as
withholding allegations of damages until the end of discovery and attempting to use such
previously withheld information to defeat summary judgment, and the legal inadequacy
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of same. Pursuant to the Maryland District Court’s Local Rules, Digi-Data is not
authorized to file a Surreply without Court order.
On December 13, 2013 the Court Granted Summary Judgment in iGambit’s favor
against Digi-Data in the amount of $570,590, plus interest at the Maryland legal rate of
6% per annum from August 31, 2012, and post judgment interest at the Federal statutory
Rate. Furthermore, Digi-Data’s Counterclaim was dismissed.
On February 24, 2014 the Company entered into a Forbearance Agreement with Digi-
Data pursuant to which Digi-Data shall pay to iGambit Six Hundred Forty-Six
Thousand, Six Hundred Sixty-Eight Dollars and Sixty-Seven Cents ($646,668.67) (the
“Settlement Amount”) in full satisfaction of the Judgment.
Initial Payment: Digi-Data shall pay the Settlement Amount by delivering Twenty-Five
Thousand Dollars and No Cents ($25,000.00) to iGambit upon the execution of this
Agreement (“Initial Payment”), and delivering the remaining Six Hundred Twenty-One
Thousand, Six Hundred Sixty-Eight Dollars and Sixty-Seven Cents ($621,668.67), plus
interest at a rate of 6% per annum (calculated at Actual/360) (the “Remaining Balance”)
to iGambit.
Monthly Payments: Commencing thirty (30) calendar days after the Effective Date, and
continuing for the three following months, Digi-Data shall make monthly payments of
Twelve Thousand, Five Hundred Dollars and No Cents ($12,500.00) to iGambit (each, an
“Initial Monthly Payment”). Thirty (30) calendar days after the fourth Initial Monthly
Payment is made, Digi-Data shall commence making a monthly payment of Twenty-Five
Thousand Dollars and No Cents ($25,000.00) to iGambit until the Remaining Balance is
paid in full (each, a “Subsequent Monthly Payment”). Such Initial Monthly Payments
and Subsequent Monthly Payments shall be credited to payment of the Settlement
Amount and Remaining Balance, with payment being first applied to accrued and/or
outstanding interests, then to principal.
Line of Credit Payments: In the event that Digi-Data obtains a new line of credit
subsequent to the Effective Date under terms acceptable to Digi-Data in the amount of
Three Million Dollars and No Cents ($3,000,000.00) or greater it shall, within fifteen
(15) calendar days upon obtaining such funding, pay the full Remaining Balance to
iGambit (the “LOC Payment”). In the event that Digi-Data obtains a new line of credit
subsequent to the Effective Date under terms acceptable to Digi-Data for any amount less
than Three Million Dollars and No Cents ($3,000,000.00) that is secured by its
receivables it shall, within fifteen (15) calendar days of obtaining such funding, pay
Twenty-Five Thousand Dollars and No Cents ($25,000.00) to iGambit (the “Receivables
Payment”). Such Receivables Payment shall be credited to payment of the Settlement
Amount and Remaining Balance, with payment being first applied to accrued and/or
outstanding interests, then to principal.
Digi-Data Sale: In the event of a Digi-Data Sale, iGambit shall be paid the Remaining
Balance at closing of any such Digi-Data Sale as provided in paragraph 2, below.
iGambit acknowledges that, if the Digi-Data Sale is a sale or sales of the Digi-Data
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Assets, there may be insufficient proceeds to pay the Remaining Balance in full. If the
Digi-Data Sale is a sale or sales of the stock of Digi-Data and there are insufficient
proceeds at closing to pay the Remaining Balance in full, iGambit shall continue to
receive the Subsequent Monthly Payment until the full Remaining Balance is paid.
Allied Airbus, Inc.
On November 1, 2011, the Company commenced collection proceedings against Allied
Airbus, Inc. (“Allied”) for nonpayment of various promissory notes totaling $434,512 at
December 31, 2011 in connection with a letter of intent the Company entered into to
acquire the assets and business of Allied, to which a definitive agreement could not be
reached. The claim against Allied included accrued interest at the rate of 6% per annum.
As a result of a settlement reached on June 12, 2012, the Company received payment of
the total balance, accrued interest and legal fees on June 27, 2012.
Financial Advisor Contract
Brooks, Houghton & Company, Inc. (BHC)
The Company had entered into a contract with BHC in which BHC would provide
financial advisory services in connection with the Company’s proposed business
combinations and related fund raising transactions. As part of that agreement BHC would
be entitled to a “Business Combination Fee” equal to three percent of the amount of the
company’s total proceeds and other consideration paid or to be paid for the assets
acquired, inclusive of equity or any debt issued; however the fee was to be no less than
$300,000. As a result of the IGX transaction, as described in Note 12, BHC initially felt
entitled to $300,000. The Company has taken a position that since the transaction has
been rescinded, that the fee is has not been earned and thus not to be paid. While the
ultimate outcome of this matter is not presently determinable, it is the opinion of
management that the resolution of any outstanding claim will not have a material adverse
effect on the financial position or results of operations of the Company.
Note 14 – Rescission of Purchase Agreement for Acquisition of IGX Global Inc. and
IGX Global UK Limited
On April 8, 2013, the Company and its wholly owned subsidiary, IGXGLOBAL,
CORP.entered into, and became obligated under, a transaction to rescind the Company’s
purchase agreement dated December 28, 2012 (the “Purchase Agreement”) with IGX
Global Inc.(“IGXUS”), IGX Global UK Limited (“IGXUK”) and Tomas Duffy
(“DUFFY”) the sole shareholder of both IGXUK and IGXUS.
Under the Purchase Agreement, the Company intended to purchase,as of December 31,
2012, substantially all of the assets of IGXUS and all of the issued and outstanding shares
of IGXUK and thereby the acquired business operated by IGXUS and IGXUK (the
“Acquired Business”). The original agreement called for a $500,000 payment at closing,
a $1,000,000 Promissory Note, assumption of certain liabilities of the IGXUS up to
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$2,500,000 and 3.75 million shares of iGambit stock to be earned over a three year period
based upon certain revenue and earnings targets. The Company had arranged financing at
the original effective date of the purchase to pay the $500,000 payment and payoff
certain liabilities of IGXUS.
On April 8, 2013, under the terms of a Rescission Agreement, the Company, IGXUS,
IGXUK and Duffy (IGX), agreed to unwind the Purchase Agreement in its entirety and to
fully restore each to the positions they were respectively prior to entering into the
Purchase Agreement. This included IGX obtaining financing to payoff the entire balance
of the financing the Company had obtained to fund the upfront payment and certain
liabilities at the original closing date; IGX also assumed and paid certain expenses related
to the purchase. Also as consideration for iGambit’s expenses and inconvenience, the
Company received $130,000 prior to the effective date of the rescission from IGX, and
upon the effective date of the rescission, an additional payment of $275,000, and will
receive an additional $350,000 payable in equal monthly installments over 18 months.
The consideration from IGX totaling $755,000 is reported as Other Income in the
Statements of Operations. The balance due from IGX was $239,779 at December 31,
2013.
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