Nutex Health, Inc. - Annual Report: 2016 (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, 2016
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large
Accelerated
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
As of June 30, 2016, the aggregate market value of shares held by non-affiliates of the
registrant (based upon the closing sale prices of such shares on the OTCQB Market on
June 30, 2016) was approximately $370.773. For purposes of calculating the aggregate
market value of shares held by non-affiliates, we have assumed that all outstanding shares
are held by non-affiliates, except for shares held by each of our executive officers,
directors and 5% or greater stockholders. In the case of 5% or greater stockholders, we
have not deemed such stockholders to be affiliates unless there are facts and
circumstances which would indicate that such stockholders exercise any control over our
company, or unless they hold 10% or more of our outstanding common stock. These
assumptions should not be deemed to constitute an admission that all executive officers,
directors and 5% or greater stockholders are, in fact, affiliates of our company, or that
there are not other persons who may be deemed to be affiliates of our company. Further
information concerning shareholdings of our officers, directors and principal stockholders
is included or incorporated by reference in Part III, Item 12 of this Annual Report on
Form 10-K.
As of April 17, 2017 there were 116,868,990 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, 2016
TABLE OF CONTENTS
Page No.
PART I
Business
1
Risk Factors
5
Unresolved Staff Comments
5
Properties
5
Legal Proceedings
6
(Removed and Reserved)
6
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
6
Selected Financial Data
7
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
7
Quantitative and Qualitative Disclosure About Market Risk
14
Financial Statements and Supplementary Data
14
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
14
Controls and Procedures
15
Other Information
15
PART III
Directors, Executive Officers and Corporate Governance
16
Executive Compensation
19
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
21
Certain Relationships, Related Transactions and Director
Independence
22
Principal Accountant Fees and Services
23
PART IV
Exhibits and Financial Statement Schedules
24
i
This annual report on Form 10-K is for the year ended December 31, 2016. 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”).
On November 4, 2015, we consummated the acquisition of Wala, Inc. doing
business as ArcMail Technology (ArcMail) in accordance with a Stock Purchase
Agreement (the “ArcMail Purchase Agreement”) by and among Wala, Inc. doing
business as ArcMail Technologies (“ArcMail”), Rory T. Welch (the “Seller”) and the
Company. Pursuant to the Stock Purchase, the total consideration to be paid for the outstanding
capital stock of ArcMail is 11,500,000 shares of the Company’s Common stock. 10,500,000
shares of iGambit’s Common stock to the Seller, and/or Seller’s designees at Closing and
the Holdback Amount of 1,000,000 shares of the iGambit’s Common stock to be held in
Escrow and paid to the Seller on later of (i) the first (1st) anniversary of completion of the
first audit of Purchaser after the Closing, or (ii) that date which is twelve (12) months
from the Closing, provided that in the event iGambit or the Purchaser has any claims for
indemnification against the Seller under the Purchase Agreement, Purchaser shall
continue to withhold the portion of the Holdback Amount subject to such claims until the
parties fully and finally resolve such claims.
The ArcMail Purchase Agreement was disclosed on the Company’s current report
on Form 8-K filed on November 10, 2015.
On November 5, 2015, through our wholly owned subsidiary Gotham Innovation
Lab, Inc. (“Gotham”), we completed the sale of certain assets of Gotham to VHT Inc.
(“VHT”) in accordance with an Asset Purchase Agreement (the “VHT Purchase
Agreement”) by and between Gotham and VHT. Pursuant to the Purchase Agreement
the Company received $600,000 in consideration, $400,000 of the consideration was
received at closing and the remaining $200,000 portion of the consideration is subject to
twelve (12) equal monthly payments beginning January 2016. The sale included certain
of the assets of the Gotham, including the Elliman customer agreement, all customer
accounts, all vendor agreements and all the intellectual property.
The VHT Purchase Agreement was disclosed on the Company’s current report on
Form 8-K filed on November 11, 2015.
On February 14, 2017, we consummated the acquisition of HubCentrix, Inc.
(HubCentrix) in accordance with a Stock Exchange Agreement (the “Exchange
Agreement”) by and among HubCentrix, Jerry Robinson, Mary-Jo Robinson, Kathleen
Shepherd, Edwin Shepherd, Nora Minor,,and Sandra Gacio (the “Hub Shareholders”) and
the Company. Pursuant to the Exchange Agreement, the total consideration to be paid for
the outstanding capital stock of HubCentrix is 15,000,000 shares of the Company’s
Common stock. 13,500,00 shares of iGambit’s Common stock to the Hub Shareholders at
Closing and the Holdback Amount of 1,500,000 shares of the iGambit’s Common stock
to be held restricted and paid to the Seller on later of (i) the first (1st) anniversary of
completion of the first audit of Purchaser after the Closing, or (ii) that date which is
twelve (12) months from the Closing, provided that in the event the Company has any
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claims for indemnification against the HubCentrix under the Exchange Agreement, the
Company shall continue to withhold the portion of the Holdback Amount subject to such
claims until the parties fully and finally resolve such claims.
The HubCentrix Exchange Agreement was disclosed on the Company’s current
report on Form 8-K filed on February 15, 2017.
On March 27, 2017 we changed the name of HubCentrix, Inc. to HealthDatix, Inc.
On April 5, 2017, the Company, through its wholly owned subsidiary
HealthDatix, Inc. (“HealthDatix”) consummated the acquisition of certain assets of the
CyberCare Health Network Division from EncounterCare Solutions Inc. (ECSL) in
accordance with an Asset Purchase Agreement (the “Agreement”) by and among,
HealthDatix, ECSL and the Company. Pursuant to the Agreement, ECSL will sell,
convey, transfer and assign to HealthDatix certain assets (the “Assets”), and HealthDatix
will purchase and accept from the ECSL all right, title and interest in and to the Assets in
exchange for sixty million 60,000,000 shares of restricted common stock of iGambit.
The ECSL Agreement was disclosed on the Company’s current report on Form 8-
K filed on April 6, 2017.
OUR COMPANY
Introduction
Previously we were a company focused on the technology markets. We have
tailored our strategy to focus on pursuing specific medical technology strategies and
objectives.
Presently we have one operating subsidiary, Wala, Inc. doing business as ArcMail
Technology (ArcMail) which was purchased on November 4, 2015. ArcMail is in the
business of providing simple, secure and cost-effective email and enterprise archiving
and management solutions to businesses of all sizes across a wide range of vertical
markets. On March 7, 2017 we entered into a Letter of Intent (LOI) to sell substantially
all the assets of ArcMail. The LOI has certain binding and non-binding obligations,
including the acquisition consideration which is subject to adjustment and the transaction
is subject to various conditions to closing, including satisfactory completion of due
diligence, approval of the Company’s shareholders, if required, and definitive
documentation. There can be no assurance that the transactions contemplated by the LOI
will be consummated.
As a result of the entry into the LOI, the generally accepted
accounting principles require us to present the ArcMail financial information as
discontinued operations. See financial disclosures below.
Our primary focus is the expansion of our newly acquired medical technology
business HealthDatix Inc.
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HealthDatix
Products and Services
HealthDatix is an end to end Software-as-a-Service solution that manages,
reports, and analyzes critical data, enabling healthcare organizations to deliver positive
patient outcomes. We offer a fully-hosted cloud service for healthcare providers to
conduct the Medicare Annual Wellness Visit (AWV) program to their Medicare patients
providing the patient with a 5-10 year Personalized Preventive Plan and physician reports
that meet all Medicare audit requirements. The AWV is a program that allows a
physician to identify those patients that have 2+ chronic conditions that require additional
screening and management.
Competitive Comparison
HealthDatix AWV solution is built on a simple and flexible design that gives
customers ownership and control over their data and offers a single comprehensive
solution for Medicare compliance and data retention. HealthDatix primary competitors
include AWV360 and AWVTotal Solutions. Their primary focus is on just the primary
care physicians and not operating through a downstream channel program
HealthDatix competes effectively against its primary competitors by providing a
simple and scalable application and world-class customer support. HealthDatix’s primary
competitive differentiation includes:
§ Simple User Interface
§ Efficient Reporting
Proprietary algorithm to generate Medicare required patient and practice
reporting
§ HIPAA complaint
§ Fully automated and easy user data capture
§ Channel Program
§ First Class Customer Service
Support is provided at our U.S. headquarters by an experienced technical
team
Future Products and Services
HeathDatix’s product strategy is to provide additional products that will support
the patients that have been identified through the program to require additional chronic
care management with a medical wearable that will allow ease of use for the patient and
effective tracking and management by the physician through our developed chronic care
management solution.
Customers
HealthDatix operates by bringing on Channel Partners to sell the service to
primary care Physicians, ACOs and Managed Care Practices. We currently have 5
Channel Partners with extensive sales arms through established healthcare technology
companies.
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Expansion Summary
HealthDatix objective is to be a market leader in providing a world class AWV
software application as well as expand our offering to current and new channel partners
with our new chronic care management and medical wearable technology acquired
pursuant to the recent ECSL transaction.
Employees
We presently have 7 total employees all of which are full-time for operations and
11 full time employees from discontinued operations.
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.healthdatix.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 $1,660. The lease is for a term of two (2) years commencing on March 1,
2017 and ending on February 28, 2019. The lease contains annual escalations of 2% of
the annual rent.
Our HealthDatix operations are located in St. Petersbug, Florida where we lease
where office suites with furniture and equipment in the TecGarage shared coworking
incubator office building. Monthly lease payments are $695 paid on a month to month
basis.
Our ArcMail discontinued operations are located in Shreveport, Louisiana, where
we lease approximately 2,989 rentable square feet to be used as office space and 178
rentable square feet to be used as storage space, for a total of 3,167 rentable square feet.
space. The lease is for a term of forty five (35) months beginning February 1, 2015 and
ending October 31, 2018 payable monthly in the following manner:
02-01-15 through 04-30-15
$ 0.00/mth.
05-01-15 through 04-30-16
$ 3,404.19/mth. ($13.25/s.f/yr.-office; $7.00/s.f.Iyr.-storage)
05-01-16 through 04-30-17
$ 3,528.73/mth. ($13.75/s.f/yr.--office; $7.00/s.f./yr.-storage)
05-01-17 through 10-31-18
$ 3,653.27/mth. ($14.25/s.f/yr.--office; $7.00/s.f./yr.-storage)
5
Our leased 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
From time-to-time, the Company is involved in various civil actions as part of its normal
course of business. The Company is not a party to any litigation that is material to
ongoing operations as defined in Item 103 of Regulation S-K as of the period ended
December 31, 2017.
ITEM 4. (REMOVED AND RESERVED)
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 April 17, 2017, there are 116,868,990 shares of our common stock
outstanding, held of record by approximately 181 persons. There are 27,867,133 shares
held in reserve. We have 400,000 common stock warrants outstanding and 1,034,900
common stock options outstanding.
As of April 17, 2016, approximately 39,683,990 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
6
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 do not have an equity compensation plan. In 2006, we adopted the
2006 Long-Term Incentive Plan (the "2006 Plan"). The Plan expired on December 31,
2009. 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.
In addition to the 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.
RECENT SALES OF UNREGISTERED SECURITIES
During 2016 we sold securities in transactions not registered under the Securities
Act of 1933, as amended (the “Securities Act”).
ITEM 6. SELECTED FINANCIAL DATA
Not Required
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
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
7
assumptions on financial condition or operating performance is material, except as
described below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries Wala, Inc. and Gotham Innovation Lab, Inc. All
intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
Long-Lived Assets
We assess the valuation of components of its property and equipment and other
long-lived assets whenever events or circumstances dictate that the carrying value might
not be recoverable. We base our evaluation on indicators such as the nature of the assets,
the future economic benefit of the assets, any historical or future profitability
measurements and other external market conditions or factors that may be present. If such
factors indicate that the carrying amount of an asset or asset group may not be
recoverable, we determine whether an impairment has occurred by analyzing an estimate
of undiscounted future cash flows at the lowest level for which identifiable cash flows
exist. If the estimate of undiscounted cash flows during the estimated useful life of the
asset is less than the carrying value of the asset, we recognize a loss for the difference
between the carrying value of the asset and its estimated fair value, generally measured
by the present value of the estimated cash flows.
Revenue Recognition
We recognize revenue from product sales when the following four revenue
recognition criteria are met: persuasive evidence of an arrangement exists, an equipment
order has been placed with the vendor, the selling price is fixed or determinable, and
collectability is reasonably assured. Revenues from maintenance contracts covering
multiple future periods are recognized during the current periods and deferred revenue is
recorded for future periods and classified as current or noncurrent, depending on the
terms of the contracts.
Deferred Revenue
Deposits from customers are not recognized as revenues, but as liabilities, until
the following conditions are met: revenues are realized when cash or claims to cash
(receivable) are received in exchange for goods or services or when assets received in
such exchange are readily convertible to cash or claim to cash or when such
8
goods/services are transferred. When such income item is earned, the related revenue
item is recognized, and the deferred revenue is reduced. To the extent revenues are
generated from our support and maintenance services, we recognize such revenues when
services are completed and billed. We have received deposits from various customers that
have been recorded as deferred revenue in the amount of $1,092,388 and $1,190,270 as
of the years ended December 31, 2016 and 2015, respectively.
Accounts Receivable
We analyze the collectability of accounts receivable from continuing operations
each accounting period and adjust our allowance for doubtful accounts accordingly. A
considerable amount of judgment is required in assessing the realization of accounts
receivables, including the creditworthiness of each customer, current and historical
collection history and the related aging of past due balances. We evaluate specific
accounts when we become aware of information indicating that a customer may not be
able to meet its financial obligations due to deterioration of its financial condition, lower
credit ratings, bankruptcy or other factors affecting the ability to render payment.
Allowance for doubtful accounts was $8,345 at December 31, 2016 and 2015,
respectively. Bad debt expense of $0 and $5,971 was charged to operations for the years
ended December 31, 2016 and 2015, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of liabilities assumed over assets acquired of
ArcMail and the fair market value of the common shares we issued for the acquisition of
ArcMail. In accordance with ASC Topic No. 350 “Intangibles – Goodwill and Other”),
the goodwill is not being amortized, but instead will be subject to an annual assessment
of impairment by applying a fair-value based test, and will be reviewed more frequently
if current events and circumstances indicate a possible impairment. An impairment loss is
charged to expense in the period identified. If indicators of impairment are present and
future cash flows are not expected to be sufficient to recover the asset’s carrying amount,
an impairment loss is charged to expense in the period identified. A lack of projected
future operating results from ArcMail’s operations may cause impairment. During the
year ended December 31, 2016, goodwill was reallocated to intangible assets acquired as
follows:
Workforce
$
138,783
Non-compete
145,315
Customer relations
3,357,756
3,641,854
Goodwill
3,063,303
$ 6,705,157
In connection with management’s decision to sell Arcmail, we recorded an
impairment charge to discontinued operations of $6,263,320, and amortization of
$441,837 was charged to discontinued operations during the year ended December 31,
2016.
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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 pricing model to estimate the
fair value of our stock options and warrants. The Black-Scholes option pricing model
requires the input of highly subjective assumptions including the expected stock price
volatility of the Company’s common stock, the risk free interest rate at the date of grant,
the expected vesting term of the grant, expected dividends, and an assumption related to
forfeitures of such grants. Changes in these subjective input assumptions can materially
affect the fair value estimate of the Company’s stock options and warrants.
Options
In 2006, we adopted the 2006 Long-Term Incentive Plan (the "2006 Plan").
Awards granted under the 2006 Plan have a ten-year term and may be incentive stock
options, non-qualified stock options or warrants. The awards are granted at an exercise
price equal to the fair market value on the date of grant and generally vest over a three or
four year period. The Plan expired on December 31, 2009, therefore as of December 31,
2015, 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.
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.
Convertible Debenture
10
During the year ended December 31, 2016, we issued convertible debentures to
two individuals. The debentures are convertible into 50,000 shares of common stock for
up to 5 years, at the holders’ option, at an exercise price of $.50 and $.25, respectively.
The debentures mature on the earlier of the closing of a subsequent financing event by
the Company resulting in gross proceeds of at least $10,000,000 or three years from the
date of issuance. The debentures bear interest at a rate of 10% and is deferred until 2017.
A beneficial conversion feature was not recorded as the fair market value of the
Company’s common stock was less than the exercise prices at the dates of issuance and
through the end of the year.
Income Taxes
We follow 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
iGambit is a company focused on the medical technology markets. Our primary
focus is the expansion of our newly acquired medical technology business HealthDatix
Inc.
Year Ended December 31, 2016 as Compared to Year Ended December 31, 2015
Assets. At December 31, 2016, we had $507,932 in current assets and $510,835
in total assets, compared to $7,634,620 in current assets and $7,637,996 in total assets as
of December 31, 2015. The decrease in total assets was primarily due to a decrease in
assets from discontinued operations as a result of impairment of goodwill and intangible
assets.
Liabilities. At December 31, 2016, we had total liabilities of $6,380,260
compared to $6,076,680 at December 31, 2015. Our total liabilities at December 31, 2016
consisted of current liabilities including accounts payable and accrued expenses of
$356,005, amounts due to related parties of $508, convertible debentures of $50,000 and
labilities from discontinued operations of $5,905,666, whereas our total liabilities at
December 31, 2015 consisted of current liabilities including accounts payable of
$168,971, amounts due to related parties of $2,043, and liabilities from discontinued
operations of $5,905,666. We had no long term liabilities for the year ended December
11
31, 2016. The increase in liabilities was primarily due to an increase in accounts payable
and accrued interest
Stockholders’ Equity (Deficiency). Our Stockholders’ Deficiency was
$(5,869,425) at December 31, 2016 compared to Stockholders’ Equity of $1,561,316 at
December 31, 2015 This decrease was due to an increase in accumulated deficit from
$(2,798,390) at December 31, 2015 to $(10,230,631) at December 31, 2016 resulting
from net loss from continuing operations of $(451,060) and a net loss from discontinued
operations of $(6,981,181) primarily due to impairment of goodwill and intangible assets.
Net Income (Loss). We had a loss from continuing operations of $(451,060) and
$(536,130) for the years ended December 31, 2016 and December 31, 2015, respectively,
and a loss from discontinued operations of $(6,981,181) compared to income from
discontinued operations of $619,939 for the year ended December 31, 2016 and
December 31, 2015, respectively.
General and Administrative Expenses. General and Administrative Expenses
decreased to $448,595 for the year ended December 31, 2016 from $532,988 for the year
ended December 31, 2015. For the year ended December 31, 2016 our General and
Administrative Expenses consisted of corporate administrative expenses of $90,617, legal
and accounting fees of $115,660, payroll expenses of $91,155, Directors and Officers
Insurance of $10,053 employee benefits expenses of $24,217 (medical and life insurance)
filing fees of $11,779, financing expense of $10,000, and $95,114 in marketing and
finder’s fees. For the year ended December 31, 2015 our General and Administrative
Expenses consisted of corporate administrative expenses of $98,085, legal and
accounting fees of $124,555, payroll expenses of $111,838, Directors and Officers
Insurance of $42,206, employee benefits expenses of $20,790 (medical and life
insurance), filing fees of $12,489, and $123,025 in in marketing and finder’s fees.
Therefore the decreases from the year ended December 31, 2015 to the year ended
December 31, 2016 relate primarily to a decrease in payroll, legal and professional fees
and in marketing and finder’s fees. In 2017 we anticipate an increase in General
Administrative Expenses associated with the HealthDatix acquisition.
LIQUIDITY AND CAPITAL RESOURCES
General
As reflected in the accompanying consolidated financial statements, at December
31, 2016, we had $10,522 of cash and stockholders’ deficiiency of $(5,869,425). At
December 31, 2015, we had $122,291 of cash and stockholders’ equity of $1,561,316.
Our primary capital requirements in 2017 are likely to arise from the expansion of
our HealthDatix operations, It is not possible to quantify those costs at this point in time,
in that they depend on HealthDatix’s business opportunities and the state of the overall
economy. 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
12
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 HealthDatix’s sales
volume, 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 in operating activities was $274,223, for the year ended December
31, 2016, compared to net cash provided by operating activities of $44,907 for the year
ended December 31, 2015. Net cash used in continuing operating activities was
$142,092 for the year ended December 31, 2016, compared to $313,932 for the year
ended December 31, 2015. Our primary use of operating cash flows from continuing
operating activities was from net losses of $451,060 and $536,130 for the years ended
December 31, 2016 and 2015, respectively. Additional contributing factors to the change
were from a decrease in prepaid expenses of $119,961, and an increase in accounts
payable and accrued expenses of $187,034. Net cash used in discontinued operating
activities was $132,131 for the year ended December 31, 2016 and net cash provided by
discontinued operations was $358,839 for the year ended December 31, 2015. Cash used
in discontinued operations for the year ended December 31, 2016 consisted of $1,990,490
in revenue from our ArcMail subsidiary and $180,849 in cash payments received from
VHT Inc. pursuant to the VHT Purchase Agreement. Cash provided by discontinued
operations for the year ended December 31, 2015 consisted of $495,930 in cash payments
received from VHT Inc. pursuant to the VHT Purchase Agreement.
Cash used in investing activities was $9,990 for the year ended December 31, 2016
and cash provided by investing activities was $1,828 for the year ended December 31,
2015. For the year ended December 31, 2016 the primary source of cash from investing
activities was from an increase in note receivable of $15,000. For the year ended
December 31, 2015 the primary source of cash from investing activities was from a
decrease in deposits of $10,413.
Cash provided by financing activities was $172,444 for the year ended December
31, 2016 compared to cash used in financing activities of $(51,277) for the year ended
December 31, 2015. The cash flows provided by financing activities for the year ended
December 31, 2016 was primarily from proceeds from convertible debentures. The cash
flows used in financing activities for the year ended December 31, 2015 was primarily
from repayment of stockholders loans and a note payable from discontinued operations..
Plan of Operation and Funding
We expect that working capital requirements will continue to be funded through a
combination of our existing funds and further issuances of securities. Our working capital
13
requirements are expected to increase in line with the growth of our business. Existing
working capital, further advances and debt instruments, and anticipated cash flow are
expected to be adequate to fund our operations over the next twelve months. We have no
lines of credit or other bank financing arrangements. Generally, we have financed
operations to date through the proceeds of the private placement of equity and debt
instruments. In connection with our business plan, management anticipates additional
increases in operating expenses and capital expenditures relating to: (i) developmental
expenses associated with a start-up business and (ii) marketing expenses. We intend to
finance these expenses with further issuances of securities, and debt issuances.
Thereafter, we expect we will need to raise additional capital and generate revenues to
meet long-term operating requirements. Additional issuances of equity or convertible
debt securities will result in dilution to our current shareholders. Further, such securities
might have rights, preferences or privileges senior to our common stock. Additional
financing may not be available upon acceptable terms, or at all. If adequate funds are not
available or are not available on acceptable terms, we may not be able to take advantage
of prospective new business endeavors or opportunities, which could significantly and
materially restrict our business operations.
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, 2016 and 2015
F-2
Consolidated Statement of Income for the years ended December 31, 2016 and
F-3
2015
Consolidated Statement of Changes in Stockholder’s Equity for the years ended
F-4
December 31, 2016 and 2015
Consolidated Statement of Cash Flows for the years ended December 31, 2016
F-5
and 2015
Notes to Financial Statements
F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
14
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by
this Annual Report on Form 10-K.
Based on this evaluation, our chief executive officer and chief financial officer
concluded that, as of December 31, 2016, our disclosure controls and procedures are
designed at a reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2016 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our
management conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework). Based on this evaluation, management concluded that our internal
control over financial reporting was effective as of December 31, 2016.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives. In
addition, the design of disclosure controls and procedures must reflect the fact that there
are resource constraints and that management is required to apply its judgment in
evaluating the benefits of possible controls and procedures relative to their costs.
ITEM 9B. OTHER INFORMATION
None.
15
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
78 Chief Executive Officer, President, March 2009
Chairman of the Board, and
(appointed Chairman
Director
and Director in
April 2000)
Elisa Luqman
52 Chief Financial Officer, Executive March 2009
Vice President, General Counsel,
(appointed Director
and Director
in August 2009)
George G. Dempster
77 Director
January 2001
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
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
16
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.
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.
17
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.
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 consisted of Messrs. Charles, Keefe and Dempster, with
Mr. Charles serving as chairman. On September 14, 2016 Mr. Charles resigned from the
Board, as disclosed on the Company’s current report on Form 8-K filed on September 19,
2016. Our Board is actively seeking a suitable replacement that 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.
Compensation Committee
The Compensation Committee consisted of Messrs. Charles, Keefe and Dempster,
with Mr. Keefe serving as chairman. On September 14, 2016 Mr. Keefe resigned from
the Board, as disclosed on the Company’s current report on Form 8-K filed on September
19, 2016. Our Board is actively seeking a suitable replacement. The Compensation
Committee is responsible for reviewing and recommending to the Board the
compensation and over-all benefits of our executive officers. 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(e) under the Exchange Act during its most recent fiscal
18
year and Forms 5 and amendments thereto furnished to the Company with respect to its
most recent fiscal year, and any written representation to the Company from the reporting
person that no Form 5 is required, no person who, at any time during the fiscal year, was
a director, officer, beneficial owner of more than ten percent of the Company’s Common
Stock, or any other person known to the Company to be subject to section 16 of the
Exchange Act with respect to the Company, failed to file on a timely basis, as disclosed
in the above Forms, reports required by section 16(a) of the Exchange Act during the
most recent fiscal year or prior fiscal years.
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.
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, 2016.
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
2016
37,846
0
0
0
0
0
27,454 (1)
65,300
CEO,
President 2015
46,635
0
0
0
0
0
20,790 (2)
67,425
Chairman
&
2014 131,250
0
0
0
0
0
13,206(3)
144,456
Director
Elisa
Luqman
2016
60,459
0
0
0
0
0
0
60,459
CFO,
EVP, GC 2015
60,577
0
0
0
0
0
0
60,577
and
Director
2014 143,746
0
0
0
0
0
36,514(4)
180,260
(1) Includes $3,237 in health insurance premiums and $24,217 in life insurance premiums.
(2) Includes $5,220 in health insurance premiums and $15,670 in life insurance premiums.
(3) Includes $6,264 in health insurance premiums and $6,942 in life insurance premiums.
(4) Includes $36,514 in health and dental insurance premiums.
19
Employment Arrangements with Named Executive Officers
Effective November 4, 2015, along with the acquisition ArcMail, we entered into an
employment agreement with Rory T. Welch (the Welch Employment Agreement). Under the
five-year agreement, Mr. Welch is entitled to (a) a base salary of $180,000 per year, (b) an annual
bonus of $45,000, and (c) participation in all benefit programs generally made available to
ArcMail employees. The Welch Employment Agreement also contains provisions designed to
protect the confidentiality of the Company’s confidential information and restricting Mr. Welch
from engaging in certain competitive activities for the greater of 60 months from the date of the
agreement or two years following the termination of his employment.
Mr. Welch has diverse management experience in growing international businesses
across multiple industries, Rory Welch is ushering ArcMail into the next phase of the Company’s
lifecycle with emphasis on expanding global sales, marketing and distribution strategies. A senior
executive with more than 20 years of experience in strategy, supply chain, sourcing, distribution,
logistics, marketing and sales management, he has success in expanding profits through both
revenue growth and cost savings.
Prior to joining ArcMail, he managed his own consulting firm, and then before that held
leadership positions at Movado Group, Inc., including COO for the boutique division and Senior
Vice President of wholesale operations. Earlier in his career, Welch served as VP of strategic
planning and analysis at Arrow Electronics, where he was responsible for building performance
models across all aspects of the organization. While at Arrow, Welch also held positions as VP of
product management for Asia-Pacific, with responsibility for overseeing all aspects of product
management for the $1 billion division; as well as general manager of aerospace/military program
accounts; product manager; and asset and logistics manager.
A graduate of Indiana University’s Kelley School of Business with a master’s degree in
business administration, Welch holds a bachelor’s degree in economics from Furman University.
We do not currently have any other employment agreements with our executive officers.
Compensation of the Board of Directors
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS
STOCK AWARDS
Equity
Market Equity
Equity
Incentive
Number Value Incentive Incentive
Plan
of
of
Plan
Plan
Awards:
Shares Shares Awards: Awards:
Number of
Number of
Number of
or Units
or
Number Market or
Securities
Securities
Securities
of Stock Units
of
Payout
Underlying Underlying
Underlying
That
of
Unearned Value of
Unexercised Unexercised Unexercised Option
Have
Stock
Shares, Unearned
Options
Options
Unearned Exercise
Option
Not
That
Units or
Shares,
(#)
(#)
Options
Price
Expiration
Vested Have
Other
Units or
Exercisable Unexercisable
(#)
($)
Date
(#)
Not
Rights
Other
Name (a)
(b)
(c)
(d)
(e)
(f)
(g)
Vested
That
Rights
20
($)
Have Not
That
(h)
Vested Have Not
(#)
Vested
(i)
(#)
(j)
James Charles
59,000
0
0
$0.03
06/09/2024
0
0
0
0
James Charles
100,000
0
0
$0.03
06/09/2024
0
0
0
0
George
Dempster
113,000
0
0
$0.03
06/09/2024
0
0
0
0
George
Dempster
100,000
0
0
$0.03
06/09/2024
0
0
0
0
John Keefe
600,000
0
0
$0.03
06/09/2024
0
0
0
0
The following table sets forth the compensation received by our directors, for their
service as directors, during the year ended December 31, 2016.
Nonqualified
Fees
Non-equity
deferred
earned or
Stock
Option
incentive plan
compensation
All other
paid in
awards
awards
compensation
earnings
compensation
Total
Name
cash ($)
($)
($)
($)
($)
($)
($)
John Salerno (1)
-
-
-
-
-
-
0
Elisa Luqman (1)
-
-
-
-
-
-
0
George G. Dempster
$4,000
-
-
-
-
$4,000
(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.
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 April 17, 2017,
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
21
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 April 17, 2017.
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
5,000,000
%
Elisa Luqman, C.F.O., Executive Vice
President, General Counsel and Director
5,685,000,(1)
%
%
George G. Dempster, Director
605,000(2)
%
Rory T. Welch, CEO & President ArcMail
10,000,000
HealthDatix Management
11,250,000
Executive Officers and Directors as Group:
32,540,000 (3)
%
1 Includes 685,000 shares of common stock held by Muhammad Luqman, Ms. Luqman’s husband.
2. Includes options to purchase 213,000 shares of the common stock at $0.03 per share.
3. Includes the disclosures in footnotes 1 through 4 above.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
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. Dempster is
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.
22
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows what Paritz and Company P.A. and Michael F.
Albanese, CPA billed for the audit and other services for the year ended December 31,
2016 and December 31, 2015 respectively.
Year Ended Year Ended
12/31/ 2016 12/31/2015
Audit Fees
$
47,500 $
38,500
Audit-Related Fees
---
---
All Tax Fees
---
—
Other Fees
---
—
Total
$
47,500 $
38,500
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.”
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
23
(a) Financial Statements
Report of Independent Registered Public Accounting Firm
F-1
Consolidated Balance Sheet as of December 31, 2016 and 2015
F-2
Consolidated Statement of Income for the years ended December 31, 2016 and
F-3
2015
Consolidated Statement of Changes in Stockholder’s Equity for the years
F-4
ended December 31, 2016 and 2015
Consolidated Statement of Cash Flows for the years ended December 31, 2016
F-5
and 2015
Notes to Financial Statements
F-7
(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)
3.1(vii)
Certificate of Amendment Increasing Authorized Common Stock to300
Million shares of Common Stock and to create a new class of stock entitled
“Preferred Stock, filed with the Delaware Secretary of State on November
24, 2014.
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 (2)
10.3
Employment Agreement between Digi-Data Corporation and Mrs. Luqman
(2)
14
Code of Ethics (5)
21
Subsidiaries (1)
31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer Pursuant to Section 906 of the
24
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.)
32.2
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.
25
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
April 17, 2017.
iGambit Inc.
April 17, 2017
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 17, 2017
John Salerno
/s/ Elisa Luqman
Chief Financial Officer, Executive
April 17, 2017
Vice President, General Counsel,
Elisa Luqman
Principal Accounting Officer and
Director
26
15 Warren Street, Suite 25
P
Hackensack, New Jersey 07601
(201) 342-7753
aritz
Fax: (201) 342-7598
& Company, P.A
E-Mail: PARITZ@paritz.com
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders’
iGambit, Inc.
We have audited the accompanying consolidated balance sheets of iGambit, Inc. as of December 31, 2016
and 2015 and the related consolidated statements of operations, changes in stockholders’ equity
(deficiency) and cash flows for the years ended December 31, 2016 and 2015. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these
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 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 audit 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 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 audit provides 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 iGambit, Inc.as of December 31, 2016 and 2015, and the results of its
operations and cash flows for the years ended December 31, 2016 and 2015 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As
discussed in Note 4, the Company is in the process of disposing of its operating subsidiary and has a
stockholders' deficiency of $5,869,425 at December 31, 2016. These factors, among others, raise substantial
doubt about the ability of the Company to continue as a going concern. Management plans are also
discussed in Note 4.The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/S/Paritz & Company, P.A.
Hackensack, New Jersey
April 17, 2017
F-1
IGAMBIT INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2016
2015
ASSETS
Current assets
Cash
$
10,522
$
122,291
Prepaid expenses and other current assets
108,941
228,902
Note receivable
15,000
--
Assets from discontinued operations, net
373,469
7,283,427
Total current assets
507,932
7,634,620
Property and equipment, net
1,183
1,656
Other assets
Deposits
1,720
1,720
$
510,835
$
7,637,996
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued expenses
$
356,005
$
168,971
Amounts due to related parties
508
2,043
Convertible debentures
50,000
--
Liabilities from discontinued operations
5,973,747
5,905,666
Total current liabilities
6,380,260
6,076,680
Stockholders' equity (deficiency)
Preferred stock, $.001 par value; authorized - 100,000,000 shares;
issued and outstanding - 0 shares in 2016 and 2015, respectively
--
--
Common stock, $.001 par value; authorized - 200,000,000 shares;
issued and outstanding - 39,708,990 shares in 2016 and
39,683,990 shares in 2015, respectively
39,709
39,684
Additional paid-in capital
4,321,497
4,320,022
Accumulated deficit
(10,230,631)
(2,798,390)
Total stockholders' equity (deficiency)
(5,869,425)
1,561,316
$
510,835
$
7,637,996
See accompanying notes to the consolidated financial statements.
F-2
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2016
2015
Sales
$
-- $
--
Cost of sales
--
--
Gross profit
--
--
Operating expenses
General and administrative expenses
448,595
532,988
Operating loss from continuing operations
(448,595)
(532,988)
Other income (expenses)
Interest expense
(2,579)
(3,146)
Interest income
114
4
Total other income (expenses)
(2,465)
(3,142)
Loss from continuing operations
(451,060)
(536,130)
Income (loss) from discontinued operations
(6,981,181)
619,939
Net income (loss)
$ (7,432,241) $
83,809
Basic and fully diluted earnings (loss) per common share:
Continuing operations
$
(.01) $
(.02)
Discontinued operations
$
(.18) $
.02
Net income (loss) per common share
$
(.19) $
.00
Weighted average common shares outstanding - basic and fully diluted
39,687,747 29,168,374
See accompanying notes to the consolidated financial statements.
F-3
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2016 AND 2015
Additional
Common stock
Paid-in
Accumulated
Shares
Amount
Capital
Deficit
Totals
Balances, December 31, 2014
26,583,990 $ 26,584 $ 2,851,124 $ (2,882,199) $
(4,491)
Compensation for vested stock options
--
--
11,998
--
11,998
Common stock issued for services
1,600,000
1,600
318,400
--
320,000
Common stock issued in business acquisition
11,500,000
11,500
1,138,500
--
1,150,000
Net income
83,809
83,809
Balances, December 31, 2015
39,683,990
39,684
4,320,022
(2,798,390)
1,561,316
Common stock issued for services
25,000
25
1,475
--
1,500
Net loss
(7,432,241) (7,432,241)
Balances, December 31, 2016
39,708,990 $ 39,709 $ 4,321,497 $ (10,230,631) $ (5,869,425)
See accompanying notes to the consolidated financial statements.
F-4
IGAMBIT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$ (7,432,241) $ 83,809
(Income) loss from discontinued operations
6,981,181 (619,939)
Net earnings from continuing operations
(451,060) (536,130)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Sale of discontinued property and equipment
--
6,118
Depreciation
473
662
Stock-based compensation expense
1,500
331,998
Increase (Decrease) in cash flows as a result of
changes in asset and liability account balances:
Prepaid expenses and other current assets
119,961 (194,374)
Accounts payable and accrued expenses
187,034
77,794
Net cash used in continuing operating activities
(142,092) (313,932)
Net cash provided by (used in) discontinued operating activities
(132,131)
358,839
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (274,223)
44,907
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of note receivable
(15,000)
--
Decrease in deposits
--
10,413
Net cash provided by (used in) continuing investing activities
(15,000)
10,413
Net cash provided by (used in) discontinued investing activities
5,010
(8,585)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(9,990)
1,828
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholders' loans
--
2,043
Repayments of stockholders' loans
(1,535)
--
Proceeds from convertible debentures
50,000
--
Net cash provided by continuing financing activities
48,465
2,043
Net cash provided by (used in) discontinued financing activities
123,979 (53,320)
F-5
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
172,444 (51,277)
NET DECREASE IN CASH
(111,769)
(4,542)
CASH - BEGINNING OF YEAR
122,291
126,833
CASH - END OF YEAR
$
10,522 $ 122,291
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
$
2,579 $
3,146
Non-cash investing and financing activities:
Common stock issued in business acquisition
$
-- $ 1,150,000
See accompanying notes to the consolidated financial statements.
F-6
IGAMBIT INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2016 and 2015
Note 1 - Organization and Basis of Presentation
The consolidated financial statements presented are those of iGambit Inc., (the
“Company”) and its wholly-owned subsidiaries, Wala, Inc. doing business as Arcmail
Technology (“ArcMail”) and Gotham Innovation Lab Inc. (“Gotham”). The Company
was incorporated under the laws of the State of Delaware on April 13, 2000. The
Company was originally incorporated as Compusations Inc. under the laws of the State of
New York on October 2, 1996. The Company changed its name to BigVault.com Inc.
upon changing its state of domicile on April 13, 2000. The Company changed its name
again to bigVault Storage Technologies Inc. on December 21, 2000 before changing to
iGambit Inc. on April 5, 2006. Gotham was incorporated under the laws of the state of
New York on September 23, 2009. The Company is a holding company which seeks out
acquisitions of operating companies in technology markets. ArcMail provides email
archive solutions to domestic and international businesses through hardware and software
sales, support, and maintenance. Gotham is in the business of providing media
technology services to real estate agents and brokers in the New York metropolitan area.
Business Acquisition
On November 4, 2015, the Company acquired Wala, Inc. doing business as ArcMail
Technology in accordance with a stock purchase agreement. Pursuant to the stock
purchase agreement, the total consideration paid for the outstanding capital stock of Wala
was 11,500,000 shares of iGambit common stock, valued at $.10 per share.
The
following table presents the allocation of the value of the common shares issued for
ArcMail to the acquired identifiable assets, liabilities assumed and goodwill:
Fair Value
Cash
$
10,198
Accounts receivable, net
205,208
Inventories
21,160
Prepaid expenses
276
Fixed assets
41,235
Accounts payable and accrued expenses
(442,300)
Accrued interest
(254,718)
Deferred revenue
(1,254,865)
Notes payable
(3,881,351)
Workforce
138,783
Non-compete
145,315
Customer relations
3,357,756
Goodwill
3,063,303
Purchase price
$
1,150,000
F-7
The results of operations of ArcMail have been included in the consolidated statements of
operations as discontinued operations from the acquisition date. The following table presents pro forma results of operations of the Company and ArcMail as if the companies had been combined as of January 1, 2015. The pro forma condensed combined financial information is presented
for informational purposes only. The unaudited pro forma results of operations are not
necessarily indicative of results that would have occurred had the acquisition taken place
at the beginning of the earliest period presented, or of future results.
December 31,
2015
Pro forma revenue
$
2,165,646
Pro forma gross profit
$
2,080,851
Pro forma loss from operations
$
(414,366)
Pro forma net loss
$
(207,014)
Note 2 – Discontinued Operations
Sale of Business
Effective October 1, 2016, management decided to dispose of its subsidiary Arcmail and
entered into a letter of intent on March 1, 2017 to sell Arcmail in a stock exchange to the
CEO of Arcmail.
On November 5, 2015, pursuant to an asset purchase agreement Gotham sold assets
consisting of fixed assets, client and supplier lists, trade names, software, social media
accounts and websites, and domain names to VHT, Inc., a Delaware corporation for a
purchase price of $600,000. Gotham received $400,000 and commencing on January 29,
2016, VHT, Inc. shall pay twelve equal monthly installments of $16,667 on the last
business day of each month (the “Installment Payments” and each, an “Installment
Payment”), each Installment Payment to consist of (1) an earn-out payment of $10,000
(the “Earn-Out Payments” and each, an “Earn-Out Payment”), and (2) an additional
payment of $6,667 (the “Additional Payments” and each, an “Additional Payment”);
provided that VHT, Inc. shall only be required to make the Earn-Out Payments for as
long as it maintains its relationship with Gotham’s major client, unless it is dissatisfied
with VHT, Inc. The terms of the installment payments were fulfilled as of December 31,
2016.
The assets and liabilities of the discontinued operations are presented in the consolidated
balance sheets under the captions “Assets from discontinued operations” and “Liabilities
from discontinued operations”, respectively. The underlying assets and liabilities of the
discontinued operations as of December 31, 2016 and 2015 are presented as follows:
2016
2015
Assets:
Cash
$
17,323
$
23,590
F-8
Accounts receivable, net
321,033
477,554
Inventory
1,160
21,160
Prepaid expenses
15,300
17,189
Property and equipment
18,653
38,777
Workforce
--
138,783
Non-compete
--
145,315
Customer relations
--
3,357,756
Goodwill
--
3,063,303
Total assets
$
373,469
$ 7,283,427
Liabilities:
Accounts payable and accrued expenses
359,996
585,079
Accrued interest on notes payable
558,183
302,278
Amounts due to related party
64,509
72,827
Deferred revenue
1,092,388
1,190,279
Notes payable
3,119,001
3,119,001
Notes payable - other
153,404
--
Note payable - related party
626,266
636,202
$ 5,973,747
$ 5,905,666
The components of income (loss) from discontinued operations presented in the
consolidated statements of operations for the years ended December 31, 2016 and 2015
are presented as follows:
2016
2015
Sales
$ 1,990,490
$ 1,549,564
Cost of sales
(179,312)
(524,249)
General and administrative expenses
(1,626,355)
(941,987)
Depreciation and amortization
(463,217)
(6,164)
Gain on sale of assets
--
590,764
Interest expense
(439,467)
(47,989)
Impairment expense
(6,263,320)
--
Income (loss) from discontinued operations
$ (6,981,181)
$
619,939
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Wala, Inc. and Gotham Innovation Lab, Inc., which are
F-9
presented as discontinued operations (See Note 2). All intercompany accounts and
transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash, accounts receivable,
prepaid expenses, accounts payable, 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
iGambit is a holding company and has no sources of revenue.
Arcmail recognizes revenue from product sales when the following four revenue
recognition criteria are met: persuasive evidence of an arrangement exists, an equipment
order has been placed with the vendor, the selling price is fixed or determinable, and
collectability is reasonably assured. Revenues from maintenance contracts covering
multiple future periods are recognized during the current periods and deferred revenue is
recorded for future periods and classified as current or noncurrent, depending on the
terms of the contracts.
Gotham’s revenues were derived primarily from the sale of products and services
rendered to real estate brokers. Gotham recognized revenues when the services or
products have been provided or delivered, the fees charged are fixed or determinable,
Gotham and its customers understood the specific nature and terms of the agreed upon
transactions, and collectability was reasonably assured.
Advertising Costs
The Company expenses advertising costs as incurred. There were no advertising costs
for the years ended December 31, 2016 and 2015, respectively.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include checking and
money market accounts and any highly liquid debt instruments purchased with a maturity
of three months or less.
F-10
Accounts Receivable
The Company analyzes the collectability of accounts receivable from continuing
operations each accounting period and adjusts its allowance for doubtful accounts
accordingly. A considerable amount of judgment is required in assessing the realization
of accounts receivables, including the creditworthiness of each customer, current and
historical collection history and the related aging of past due balances. The Company
evaluates specific accounts when it becomes aware of information indicating that a
customer may not be able to meet its financial obligations due to deterioration of its
financial condition, lower credit ratings, bankruptcy or other factors affecting the ability
to render payment. Allowance for doubtful accounts was $8,345 at December 31, 2016
and 2015, respectively. Bad debt expense of $0 and $5,971 was charged to discontinued
operations for the years ended December 31, 2016 and 2015, respectively.
Inventories
Inventories consisting of finished products are stated at the lower of cost or market and
are presented in assets from discontinued operations. Cost is determined on an average
cost basis.
Property and equipment and depreciation
Property and equipment are stated at cost. Maintenance and repairs are charged to
expense when incurred. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the respective
accounts and any gain or loss is credited or charged to income. Depreciation for both
financial reporting and income tax purposes is computed using combinations of the
straight line and accelerated methods over the estimated lives of the respective assets as
follows:
Office equipment and fixtures
5 - 7 years
Computer hardware
5 years
Computer software
3 years
Development equipment
5 years
Amortization
Intangible assets are amortized using the straight line method over the estimated lives of
the respective assets as follows:
Non-compete
5 years
Workforce
10 years
Customer relations
10 years
Goodwill and Intangible Assets
Goodwill represents the excess of liabilities assumed over assets acquired of ArcMail and
F-11
the fair market value of the common shares issued by the Company for the acquisition of
ArcMail. In accordance with ASC Topic No. 350 “Intangibles – Goodwill and Other”),
the goodwill is not being amortized, but instead will be subject to an annual assessment
of impairment by applying a fair-value based test, and will be reviewed more frequently
if current events and circumstances indicate a possible impairment. An impairment loss is
charged to expense in the period identified. If indicators of impairment are present and
future cash flows are not expected to be sufficient to recover the asset’s carrying amount,
an impairment loss is charged to expense in the period identified. A lack of projected
future operating results from ArcMail’s operations may cause impairment. During the
year ended December 31, 2016, goodwill was reallocated to intangible assets acquired as
follows:
Workforce
$
138,783
Non-compete
145,315
Customer relations
3,357,756
3,641,854
Goodwill
3,063,303
$ 6,705,157
In connection with management’s decision to sell Arcmail, the Company recorded an
impairment charge to discontinued operations of $6,263,320, and amortization of
$441,837 was charged to discontinued operations during the year ended December 31,
2016.
Long-Lived Assets
The Company assesses the valuation of components of its property and equipment and
other long-lived assets whenever events or circumstances dictate that the carrying value
might not be recoverable. The Company bases its evaluation on indicators such as the
nature of the assets, the future economic benefit of the assets, any historical or future
profitability measurements and other external market conditions or factors that may be
present. If such factors indicate that the carrying amount of an asset or asset group may
not be recoverable, the Company determines whether an impairment has occurred by
analyzing an estimate of undiscounted future cash flows at the lowest level for which
identifiable cash flows exist. If the estimate of undiscounted cash flows during the
estimated useful life of the asset is less than the carrying value of the asset, the Company
recognizes a loss for the difference between the carrying value of the asset and its
estimated fair value, generally measured by the present value of the estimated cash flows.
Deferred Revenue
Deposits from customers are not recognized as revenues, but as liabilities, until the
following conditions are met: revenues are realized when cash or claims to cash
(receivable) are received in exchange for goods or services or when assets received in
such exchange are readily convertible to cash or claim to cash or when such
goods/services are transferred. When such income item is earned, the related revenue
item is recognized, and the deferred revenue is reduced. To the extent revenues are
generated from the Company’s support and maintenance services, the Company
F-12
recognizes such revenues when services are completed and billed. The Company has
received deposits from its various customers that have been recorded as deferred revenue
and presented as discontinued liabilities in the amount of $1,092,388 and $1,190,279 as
of the years ended December 31, 2016 and 2015, respectively.
Stock-Based Compensation
The Company accounts for its stock-based awards granted under its employee
compensation plan in accordance with ASC Topic No. 718-20, Awards Classified as
Equity, which requires the measurement of compensation expense for all share-based
compensation granted to employees and non-employee directors at fair value on the date
of grant and recognition of compensation expense over the related service period for
awards expected to vest. The Company uses the Black-Scholes option pricing model to
estimate the fair value of its stock options and warrants. The Black-Scholes option
pricing model requires the input of highly subjective assumptions including the expected
stock price volatility of the Company’s common stock, the risk free interest rate at the
date of grant, the expected vesting term of the grant, expected dividends, and an
assumption related to forfeitures of such grants. Changes in these subjective input
assumptions can materially affect the fair value estimate of the Company’s stock options
and warrants.
Income Taxes
The Company accounts for income taxes using the asset and liability method in
accordance with ASC Topic No. 740, Income Taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
The Company applies the provisions of ASC Topic No. 740 for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in the
Company’s financial statements. In accordance with this provision, tax positions must
meet a more-likely-than-not recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position.
Recent Accounting Pronouncements
FASB ASC 606 ASU 2014-09 - Revenue from contracts with customers:
In May 2014, the FASB issued amended guidance on contracts with customers to transfer
goods or services or contracts for the transfer of nonfinancial assets, unless those
contracts are within the scope of other standards (e.g., insurance contracts or lease
contracts). The guidance requires an entity to recognize revenue on contracts with
customers to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. The guidance requires that an entity depict the consideration by
applying the following steps:
F-13
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The amendments in this ASU are effective for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. Early
application is not permitted. This amendment is to be either retrospectively adopted to
each prior reporting period presented or retrospectively with the cumulative effect of
initially applying this ASU recognized at the date of initial application. Adoption of this
guidance is not expected to have a material impact on the Company's consolidated
financial statements.
FASB ASC 718 ASU 2014-12 – Compensation – Stock Compensation:
In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation
(Topic 718): Accounting for Share-Based Payments When the Terms of an Award
Provide that a Performance Target Could be Achieved after the Requisite Service
Period," ("ASU 2014-12"). The amendments in ASU 2014-12 require that a
performance target that affects vesting and that could be achieved after the requisite
service period be treated as a performance condition. A reporting entity should apply
existing guidance in ASC Topic No. 718, "Compensation - Stock Compensation" as it
relates to awards with performance conditions that affect vesting to account for such
awards. The amendments in ASU 2014-12 are effective for annual periods and interim
periods within those annual periods beginning after December 15, 2015. Early adoption
is permitted. Entities may apply the amendments in ASU 2014-12 either: (a)
prospectively to all awards granted or modified after the effective date; or (b)
retrospectively to all awards with performance targets that are outstanding as of the
beginning of the earliest annual period presented in the financial statements and to all
new or modified awards thereafter. The Company does not anticipate that the adoption of
ASU 2014-12 will have a material impact on its consolidated financial statements.
FASB ASC 740 ASU 2015-17 - Balance Sheet Classification of Deferred Taxes:
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The FASB issued
this ASU as part of its ongoing Simplification Initiative, with the objective of reducing
complexity in accounting standards. The amendments in ASU 2015-17 require entities
that present a classified balance sheet to classify all deferred tax liabilities and assets as a
noncurrent amount. This guidance does not change the offsetting requirements for
deferred tax liabilities and assets, which results in the presentation of one amount on the
balance sheet. Additionally, the amendments in this ASU align the deferred income tax
presentation with the requirements in International Accounting Standards (IAS) 1,
Presentation of Financial Statements. The amendments in ASU 2015-17 are effective for
financial statements issued for annual periods beginning after December 15, 2016, and
F-14
interim periods within those annual periods. The Company does not anticipate that the
adoption of this standard will have a material impact on its consolidated financial
statements.
FASB ASC 842 ASU 2016-02 – Leases:
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU
2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from
a lease for both financing and operating leases. The ASU will also require new qualitative
and quantitative disclosures to help investors and other financial statement users better
understand the amount, timing, and uncertainty of cash flows arising from leases. ASU
2016-02 is effective for fiscal years beginning after December 15, 2018, with early
adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on
its consolidated financial statements.
Note 4 – Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the process of disposing
of its operating subsidiary and has a stockholders' deficiency of $5,869,425 at December 31,
2016. These factors, among others, raise substantial doubt about the ability of the
Company to continue as a going concern for a reasonable period of time. The
Company’s continuation as a going concern is dependent upon its ability to obtain
necessary equity financing and ultimately from generating revenues from its newly
acquired subsidiaries to continue operations. The Company expects that working capital
requirements will continue to be funded through a combination of its existing funds and
further issuances of securities. Working capital requirements are expected to increase in
line with the growth of the business. Existing working capital, further advances and debt
instruments, and anticipated cash flow are expected to be adequate to fund operations
over the next twelve months. The Company has no lines of credit or other bank financing
arrangements. The Company has financed operations to date through the proceeds of a
private placement of equity and debt instruments. In connection with the Company’s
business plan, management anticipates additional increases in operating expenses and
capital expenditures relating to: (i) developmental expenses associated with a start-up
business and (ii) marketing expenses. The Company intends to finance these expenses
with further issuances of securities, and debt issuances. Thereafter, the Company expects
it will need to raise additional capital and generate revenues to meet long-term operating
requirements. Additional issuances of equity or convertible debt securities will result in
dilution to current shareholders. Further, such securities might have rights, preferences or
privileges senior to common stock. Additional financing may not be available upon
acceptable terms, or at all. If adequate funds are not available or are not available on
acceptable terms, the Company may not be able to take advantage of prospective new
business endeavors or opportunities, which could significantly and materially restrict
business operations
F-15
The consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be unable to
continue as a going concern.
Note 5 – Property and Equipment
Property and equipment are carried at cost and consist of the following at December 31,
2016 and 2015:
Continuing operations:
2016
2015
Office equipment and fixtures
$
7,164
$
7,164
Less: Accumulated depreciation
5,981
5,508
$
1,183
$
1,656
Discontinued operations:
2016
2015
Office equipment and fixtures
$
131,842
$
131,842
Computer hardware
92,200
90,943
Computer software
77,700
77,700
Development equipment
35,318
35,318
337,060
335,803
Less: Accumulated depreciation
318,407
297,026
$
18,653
$
38,777
Depreciation expense of $473 and $662 was charged to continuing operations for the
years ended December 31, 2016 and 2015, respectively.
Depreciation expense of $21,381 and $6,164 was charged to discontinued operations for
the years ended December 31, 2016 and 2015, respectively.
Note 6 - Income (Loss) Per Common Share
The Company calculates net income (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 loss per share for the year ended December 31, 2016 as the result would be
anti-dilutive.
F-16
Years Ended
December 31,
2016
2015
Stock options
1,422,000
1,718,900
Stock warrants
275,000
275,000
Total shares excluded from calculation
1,697,000
1,993,900
Note 7 – Stock Based Compensation
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,
2016, there was no unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the 2006 plan.
The 2006 Plan provided for the granting of options to purchase up to 10,000,000 shares
of common stock. 8,146,900 options have been issued under the plan to date of which
7,157,038 have been exercised and 692,962 have expired to date. There were 296,900
options outstanding under the 2006 Plan on its expiration date of December 31, 2009. All
options issued subsequent to this date were not issued pursuant to any plan.
Stock option activity during the years ended December 31, 2016 and 2015 follows:
Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Options
Grant-Date
Life
Outstanding
Exercise Price
Fair Value
(Years)
Options outstanding at
December 31, 2014
1,518,900
$
0.03
$
0.10
4.76
Options granted
200,000
0.01
0.10
Options outstanding at
December 31, 2015
1,718,900
0.03
0.13
3.82
Options expired
(296,900)
0.01
--
Options outstanding at
December 31, 2016
1,422,000
$
0.03
$
0.13
5.60
F-17
Options outstanding at December 31, 2016 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
June 9, 2014
213,000
213,000
$0.03
June 9, 2024
June 9, 2014
159,000
159,000
$0.03
June 9, 2024
June 9, 2014
600,000
600,000
$0.03
June 9, 2024
June 6, 2014
250,000
250,000
$0.05
June 6, 2019
March 24, 2015
200,000
200,000
$0.01
March 24, 2020
Total
1,4228,000
1,422,000
Warrants
In addition to our 2006 Long Term Incentive Plan, we have issued and outstanding
compensatory warrants to two consultants entitling the holders to purchase a total of
275,000 shares of our common stock at an average exercise price of $0.94 per share.
Warrants to purchase 25,000 shares of common stock vest upon 6 months after the
Company engages in an IPO, have an exercise price of $3.00 per share, and expire 2
years after the Company engages in an IPO. Warrants to purchase 250,000 shares of
common stock vest 100,000 shares on issuance (June 1, 2009), and 50,000 shares on each
of the following three anniversaries of the date of issuance, have exercise prices ranging
from $0.50 per share to $1.15 per share, and expire on June 1, 2019. The issuance of the
compensatory warrants was not submitted to our shareholders for their approval.
Weighted
(1)Weighted
Weighted
Average Grant-
Average
Date
Remaining
Warrants
Average
Contractual
Outstanding
Exercise Price
Fair Value
Life (Years)
Warrants outstanding
at December 31, 2014
275,000
$
0.94
$
0.10
4.42
No warrant activity
--
--
--
Warrants outstanding
at December 31, 2015
275,000
$
0.94
$
0.10
3.42
No warrant activity
--
--
--
Warrants outstanding
at December 31, 2016
275,000
$
0.94
$
0.10
2.42
Warrant activity during the years ended December 31, 2016 and 2015 follows:
(1) Exclusive of 25,000 warrants expiring 2 years after initial IPO.
F-18
Warrants outstanding at December 31, 2016 consist of:
Date
Number
Number
Exercise
Expiration
Issued
Outstanding
Exercisable
Price
Date
April 1, 2000
25,000
25,000
$3.00
2 years after IPO
June 1, 2009
100,000
100,000
$0.50
June 1, 2019
June 1, 2009
50,000
50,000
$0.65
June 1, 2019
June 1, 2009
50,000
50,000
$0.85
June 1, 2019
June 1, 2009
50,000
50,000
$1.15
June 1, 2019
Total
275,000
275,000
Note 8 – Deferred Revenue
Deferred revenue included in liabilities from discontinued operations represents sales of
maintenance contracts that extend to and will be realized in future periods. Deferred
revenue at December 31, 2016 will be realized in the following years ended
December 31,
2017
$
717,553
2018
270,715
2019
85,465
2020
15,075
2021
3,580
$ 1,092,388
Note 9 – Convertible Debentures
During the year ended December 31, 2016, the Company issued convertible debentures to
two individuals.
The debentures are convertible into 50,000 shares of common stock for up to 5 years, at
the holders’ option, at an exercise price of $.50 and $.25, respectively. The debentures
mature on the earlier of the closing of a subsequent financing event by the Company
resulting in gross proceeds of at least $10,000,000 or three years from the date of
issuance. The debentures bear interest at a rate of 10% and is deferred until 2017. A
beneficial conversion feature was not recorded as the fair market value of the Company’s
common stock was less than the exercise prices at the dates of issuance and through the
end of the year.
Note 10 – Notes Payable
Notes payable at December 31, 2016 are presented in liabilities from discontinued
operations and consist of various notes payable in annual installments totaling $779,750
through September 2019. The notes bear interest at 7% and are secured by the assets of
ArcMail.
F-19
Principal amounts due on notes payable for the years ended December 31, are as follows:
2017
$
779,750
2018
779,750
2019
779,750
2020
779,751
$ 3,119,001
During the year ended December 31, 2016, Arcmail entered into merchant financing
agreements with various lenders for proceeds totaling $395,583 payable in daily amounts
based on various percentages of future collections of accounts receivable, which were
assigned to the lenders. The obligations will be satisfied upon total payments of
$504,591 and will mature in March 2017. The outstanding balance of notes payable -
other was $153,404 and presented in liabilities from discontinued operations at December
31, 2016.
Note 11 – Stock Transactions
Common Stock Issued
The Company issued 25,000 common shares for services, valued at $.06 per share on
November 7, 2016.
In connection with the acquisition of ArcMail the Company issued 11,500,000 common
shares valued at $.10 per share to the president and CEO of Wala, Inc. on November 4,
2015.
The Company issued 1,000,000 and 600,000 common shares for services, valued at $.20
per share on August 3, 2015 and May 18, 2015, respectively.
Note 12 - 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 difference between income tax expense computed by applying the federal statutory
corporate tax rate and actual income tax expense (benefit) is as follows:
F-20
Years Ended
December 31,
2016
2015
Statutory U.S. federal income tax rate
(34.0)%
34.0%
State income taxes, net of
federal income tax benefit
(4.7)%
4.7%
Tax effect of expenses that are not
deductible for income tax purposes
30.8%
(11.2)%
Change in Valuation Allowance
7.9%
(27.5)%
Effective tax rate
(0.0)%
(0.0)%
At December 31, the significant components of the deferred tax assets (liabilities) are
summarized below:
2016
2015
Deferred Tax Assets:
Net Operating Losses
$1,313,180
$412,750
Other
185,670
184,646
Total deferred tax assets
1,498,850
597,397
Deferred Tax Liabilities:
--
--
Total deferred tax liabilities
--
--
Valuation Allowance
(1,498,850)
(597,397)
Net deferred tax assets
$
--
$
--
As of December 31, 2016, the Company had federal and state net operating loss
carryforwards of approximately $2.7 million and $3.3 million, respectively, which expire
at various dates from 2024 through 2037. 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. The net operating losses may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% change in ownership as determined under the regulations.
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, 2016 and 2015
has been established as Management believes that the Company will not realize the
benefit of those deferred tax assets. Therefore, no tax provision has been recorded for the
years ended December 31, 2016 and 2015.
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
F-21
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.
Note 13 - Retirement Plan
ArcMail has a defined contribution 401(k) plan, which covers substantially all
employees. Under the terms of the Plan, Wala is currently not required to match
employee contributions. The Company did not make any employer contributions to the
Plan in 2016.
Note 14 – Concentrations and Credit Risk
Sales and Accounts Receivable
No customer accounted for more than 10% of sales included in discontinued operations
for the years ended December 31, 2016 and 2015, respectively.
Cash
Cash is maintained at a major financial institution. Accounts held at U.S. financial
institutions are insured by the FDIC up to $250,000. Cash balances could exceed insured
amounts at any given time, however, the Company has not experienced any such losses.
The Company did not have any interest-bearing accounts at December 31, 2016 and
2015, respectively.
Note 15 - Related Party Transactions
Note Payable – Related Party
ArcMail issued a promissory note to the president of ArcMail on June 30, 2015 for funds
advanced. The note is payable in annual installments of $155,566 through December
F-22
2019 and is presented in liabilities from discontinued operations. The notes include
interest at 6% and are subordinated to the notes payable (see Note 10).
Principal amounts due on notes payable for the years ended December 31, are as follows:
2017
$
155,566
2018
155,566
2019
155,567
2020
155,567
$
626,266
Amounts Due to Related Parties
Amounts due to related parties with balances of $508 and $2,043 at December 31, 2016
and 2015, respectively, consist of cash advances from an officer/stockholder. These
advances do not bear interest and are payable on demand.
Amounts due to related parties with balances of $64,509 and $72,827 at December 31,
2016 and 2015, respectively, consist of cash advances from the president of Arcmail, and
is presented in liabilities from discontinued operations. These advances do not bear
interest and are payable on demand.
Note 16 – Commitments and Contingencies
Lease Commitment
The Company is obligated under two operating leases for its premises that expire at
various times through February 28, 2019.
Total future minimum annual lease payments under the leases for the years ending
December 31 are as follows:
2017
$ 63,131
2018
56,743
2019
3,380
$123,254
Rent expense of $19,380 and $19,020 was charged to continuing operations for the years ended
December 31, 2016 and 2015, respectively.
Rent expense of $43,790 and $48,711 was charged to discontinued operations for the
years ended December 31, 2016 and 2015, respectively.
F-23
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.
Note 17 – Subsequent Events
Business Acquisitions
On February 14, 2017, the Company acquired 100% of the stock of HubCentrix, Inc. in
exchange for 15,000,000 shares of restricted common stock of the Company.
HubCentrix, Inc., which subsequently changed its name to HealthDatix, Inc. is engaged
in the business of streamlining the process of managing information in the document-
intensive medical field for customers throughout the United States. Prior to the
acquisition, the Company issued a promissory note to HealthDatix, Inc. on November 15,
2016 for $15,000. The note bears interest at a rate of 6% and is due on November 15,
2017.
On April 5, 2017, the Company, through its wholly-owned subsidiary HealthDatix, Inc.
consummated the acquisition of certain assets of the CyberCare Health Network Division
from EncounterCare Solutions Inc. (“ECSL”) in accordance with an Asset Purchase
Agreement by and among, HealthDatix, Inc., ECSL and the Company. Pursuant to the
Agreement, ECSL will sell, convey, transfer and assign to HealthDatix, Inc. certain
assets, and HealthDatix, Inc. will purchase and accept from ECSL all rights, title and
interest in and to the Assets in exchange for 60,000,000 shares of restricted common
stock of the Company.
Equity Financing Transactions
On January 27, 2017, the Company entered into a common stock subscription agreement
with an accredited investor relating to the issuance and sale of the Company’s common
stock in a private placement. Pursuant to the stock subscription agreement, the Company
sold a total of 2,000,000 shares of restricted common stock to the investor at $.05 per
share, for aggregate consideration of $100,000.
On March 30, 2017, the Company entered into a securities purchase agreement with an
accredited investor pursuant to an exemption under section 4(a)(2) of the securities act of
1933, pursuant to which the Company agreed to sell, and the investor agreed to purchase,
convertible debentures in the aggregate principal amount of $75,000. The convertible
debentures are due 9 months after issuance and bear interest at a rate of 8%. The debentures are convertible into shares of common stock of the Company 180 days following the date of funding and thereafter. The conversion price shall be subject to a discount of 35%. The conversion price shall be determined on the basis of the three (3) lowest closing bids for the Common Stock during the prior ten (10) trading day period. The Investor will be limited to convert no more than 4.99% of the issued and outstanding Common Stock at the time of conversion at any one time. At any time during the period beginning on the date of the Note and ending on the date which is 180 days thereafter, the Company may repay the Note by paying an amount equal to the then outstanding amount multiplied by 120%.
On April 3, 2017, the Company entered into a Convertible Promissory Note with an
accredited investor pursuant to an exemption under section 4(a)(2) of the securities act of
1933, pursuant to which the investor agreed to lend and the Company agreed to repay the
investors the aggregate principal amount of $125,000. The convertible note is due 12
months after issuance and bears interest at a rate of 12%.The Note is convertible into shares of common stock of the Company 180 days following the date of funding and thereafter. The conversion price shall be subject to a discount of 50%. The conversion price shall be determined on the basis of the lowest VWAP (Volume Weighted Average Price) of the Common Stock during the prior twenty (20) trading day period. The Investor will be limited to convert no more than 4.99% of the issued and outstanding Common Stock at the time of conversion at any one time. At any time during the period beginning on the date of the Note and ending on the date which is 180 days thereafter, the Company may repay the Note by paying an amount equal to the then outstanding amount multiplied by 135%.
F-24