Nutex Health, Inc. - Quarter Report: 2016 June (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the Quarterly period ended June 30, 2016.



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

ACT

For the transition period from

Commission file number 000-53862

iGambit Inc.

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

Delaware

11-3363609

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1050 W. Jericho Turnpike, Suite A

Smithtown, New York 11787

(Address of Principal Executive Offices) (Zip Code)

(631) 670-6777

(Issuer’s Telephone Number, Including Area Code)

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

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

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

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

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

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

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

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

and post such files). Yes þ No 

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

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

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

the Exchange Act. (Check one):

Large accelerated Accelerated

Non-accelerated filer 

Smaller reporting

filer 

company þ

(Do not check if a smaller reporting company)

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

2 of the Exchange Act). Yes  No þ

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

2016.

iGambit Inc.

Form 10-Q

Part I — Financial Information

Item 1.

Financial Statements:

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Part II — Other Information

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults upon Senior Securities

Item 4.

Removed and Reserved

Item 5.

Other Information

Item 6.

Exhibits

EX-31.1

EX-31.2

EX-32.1

EX-32.2

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

IGAMBIT INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30,

DECEMBER

2016

31,

(Unaudited)

2015

ASSETS

Current assets

Cash

33,370

131,987

Accounts receivable, net

441,427

230,182

Inventories

1,160

21,160

Employee advances

800

Prepaid expenses

145,924

244,592

Assets from discontinued operations, net

120,434

262,765

Total current assets

743,115

890,686

Property and equipment, net

29,080

40,433

Other assets

Goodwill

6,705,157

Deposits

1,720

Total other assets

6,706,877

7,479,072

7,637,996

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable and accrued expenses

665,834

636,633

Accrued interest on notes payable

400,272

291,107

Accrued interest on notes payable - related party

29,958

11,171

Amounts due to related parties

91,173

74,871

Deferred revenue, current portion

734,634

811,227

Notes payable, current portion

825,374

779,750

Note payable - related party, current portion

156,566

Notes payable - other

67,206

Liabilities from discontinued operations

18,888

127,353

Total current liabilities

2,989,905

2,888,678

Long-term liabilities

Deferred revenue, net of current portion

453,823

379,052

Notes payable

2,339,251

Note payable - related party

469,699

Total long-term liabilities

3,262,773

3,188,002

Total liabilities

6,252,678

6,076,680

Stockholders' equity

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

shares;

issued and outstanding - 0 shares in 2016 and 2015,

respectively

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

shares;

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

2015, respectively

39,684

Additional paid-in capital

4,320,022

Accumulated deficit

(3,133,312)

(2,798,390)

Total stockholders' equity

1,226,394

1,561,316

7,479,072

7,637,996

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

THREE MONTHS

SIX MONTHS

ENDED

JUNE 30,

2016

2015

2016

2015

Sales:

Hardware and

software

169,488

242,294

Support and

maintenance

420,463

751,407

Total sales

589,951

993,701

Cost of sales

25,263

28,454

Gross profit

564,688

965,247

Operating expenses

General and

administrative expenses

581,122

86,796

1,139,775

227,007

Income (loss) from

operations

(16,434)

(86,796)

(174,528)

(227,007)

Other income (expenses)

Interest expense

(79,378)

(1,447

(163,712)

(1,501)

Total other income

(expenses)

(79,378)

(1,447)

(163,712)

(1,501)

Loss from continuing

operations

(95,812)

(88,243)

(338,240)

(228,508)

Income (loss) from

discontinued operations

(240)

36,597

3,318

31,965

Net loss

(96,052)

(51,646)

(334,922)

(196,543)

Basic and fully diluted

loss per common share:

Continuing operations

(.00)

(.01)

Discontinued

operations

.00

Net loss per common

(.00)

(.01)

Weighted average

common shares

outstanding - basic

39,683,990

26,874,100

39,683,990

26,729,846

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30,

(UNAUDITED)

2016

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$ (334,922)

$ (196,543)

Adjustments to reconcile net loss to net

cash used in operating activities

Income from discontinued operations

(3,318)

(31,965)

Depreciation

12,623

331

Stock-based compensation expense

131,998

Increase (Decrease) in cash flows as a result of

changes in asset and liability account balances:

Accounts receivable

(211,245)

Inventories

20,000

Employee advances

(800)

Prepaid expenses

98,668

(63,889)

Accounts payable and accrued expenses

29,201

14,065

Accrued interest on notes payable

127,952

Deferred revenue

(1,822)

Net cash used in continuing operating activities

(263,663)

(146,003)

Net cash provided by discontinued operating activities

42,683

26,133

NET CASH USED IN OPERATING ACTIVITIES

(220,980)

(119,870)

NET CASH USED IN INVESTING ACTIVITIES:

Purchases of property and equipment

(1,269)

Net cash used in continuing investing activities

(1,269)

Net cash used in discontinued investing activities

(5,026)

NET CASH USED IN INVESTING ACTIVITIES

(1,269)

(5,026)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from stockholders' loans

15,500

Repayments of stockholders' loans

(6,500)

Proceeds from notes payable

112,830

Increase in amounts due to related parties

16,302

Net cash provided by continuing financing activities

129,132

9,000

Net cash used in discontinued financing activities

(5,500)

23,436

NET CASH PROVIDED BY FINANCING ACTIVITIES

123,632

32,436

NET DECREASE IN CASH

(98,617)

(92,460)

CASH - BEGINNING OF PERIOD

131,987

133,436

CASH - END OF PERIOD

33,370

40,976

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:

Interest

13,427

4,844

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

Notes to Condensed Consolidated Financial Statements

Six Months Ended June 30, 2016 and 2015

Note 1 - Organization and Basis of Presentation

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

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

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

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

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

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

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

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

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

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

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

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

agents and brokers in the New York metropolitan area.

Interim Financial Statements

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

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

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

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

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

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

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

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

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

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

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

Commission (“SEC”) on April 14, 2016.

Business Acquisition

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

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

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

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

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

and goodwill:

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

Cash

10,198

Accounts receivable, net

205,208

Inventories

21,160

Prepaid expenses

276

Fixed assets

41,235

Total identifiable assets

278,077

Accounts payable and accrued expenses

(442,300)

Accrued interest

(254,718)

Deferred revenue

(1,254,865)

Note payable

(3,881,351)

Total liabilities assumed

(5,833,234)

Excess of liabilities assumed over identifiable assets

5,555,157

Total goodwill

$ 6,705,157

Note 2 – Discontinued Operations

Sale of Business

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

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

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

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

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

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

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

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

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

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

Inc.

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

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

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

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

2016

2015

Assets:

Cash

13,893

Accounts receivable, net

118,934

247,372

Prepaid expenses

1,500

Total assets

120,434

262,765

Liabilities:

Accounts payable and accrued expenses

14,452

117,417

Note payable - related party

4,436

9,936

18,888

127,353

Note 3 – Summary of Significant Accounting Policies

Principles of Consolidation

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

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

transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting

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

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

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

period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

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

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

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

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

Revenue Recognition

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

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

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

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

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

noncurrent, depending on the terms of the contracts.

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

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

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

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

assured.

Advertising Costs

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

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

Cash and Cash Equivalents

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

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

or less.

Accounts Receivable

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

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

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

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

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

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

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

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

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

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

Inventories

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

determined on an average cost basis.

Property and equipment and depreciation

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

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

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

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

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

of the respective assets as follows:

Office equipment and fixtures

5 - 7 years

Computer hardware

5 years

Computer software

3 years

Development equipment

5 years

Goodwill

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

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

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

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

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

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

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

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

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

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

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

the six months ended June 30, 2016.

Long-Lived Assets

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

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

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

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

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

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

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

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

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

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

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

Deferred Revenue

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

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

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

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

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

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

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

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

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

Stock-Based Compensation

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

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

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

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

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

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

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

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

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

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

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

Income Taxes

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

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

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

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

differences are expected to reverse.

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

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

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

recognition threshold and measurement attribute for the financial statement recognition and

measurement of a tax position.

Recent Accounting Pronouncements

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

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

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

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

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

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

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

consideration by applying the following steps:

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

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

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

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

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

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

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

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

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

Company's consolidated financial statements.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

financial statements.

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

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

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

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

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

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

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

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

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

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

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

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

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

FASB ASC 842 ASU 2016-02 – Leases:

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

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

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

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

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

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

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

Note 4 – Property and Equipment

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

December 31, 2015:

2016

2015

Office equipment and fixtures

139,006

Computer hardware

92,212

90,943

Computer software

77,700

Development equipment

35,318

344,236

342,967

Less: Accumulated depreciation

315,156

302,534

29,080

40,433

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

June 30, 2016 and 2015, respectively.

Note 5 - Earnings (Loss) Per Common Share

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

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

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

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

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

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

as the result would be anti-dilutive.

Three Months Ended

Six Months Ended

June 30,

2016

2015

2016

2015

Stock options

1,422,000

1,718,900

1,422,000

1,718,900

Stock warrants

275,000

Total shares excluded from calculation

1,697,000

1,993,900

1,697,000

1,993,900

Note 6 – Stock Based Compensation

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

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

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

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

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

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

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

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

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

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

statements of operations.

Options

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

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

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

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

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

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

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

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

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

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

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

issuance.

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

Weighted

Average

Weighted

Remaining

Weighted

Average

Contractual

Options

Grant-Date

Life

Outstanding

Exercise Price

Fair Value

(Years)

Options outstanding at

December 31, 2014

1,518,900

0.03

0.10

4.76

Options granted

200,000

0.01

0.40

4.74

Options outstanding at

June 30, 2015

1,718,900

0.03

0.13

4.32

Options outstanding at

December 31, 2015

1,718,900

0.03

0.13

3.82

Options expired

(296,900)

0.01

Options outstanding at

June 30, 2016

1,422,000

0.03

0.13

6.10

Options outstanding at June 30, 2016 consist of:

Date

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

June 9, 2014

213,000

$0.03

June 9, 2024

June 9, 2014

159,000

$0.03

June 9, 2024

June 9, 2014

600,000

$0.03

June 9, 2024

June 6, 2014

250,000

$0.05

June 6, 2019

March 24, 2015

200,000

$0.01

March 24, 2020

Total

1,422,000

Warrants

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

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

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

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

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

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

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

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

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

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

Weighted

(1)Weighted

Weighted

Average Grant-

Average

Date

Remaining

Average

Warrants

Exercise Pric

Contractual

Outstanding

Fair Value

Life (Years)

Warrants outstanding

at December 31, 2014

275,000

0.94

0.10

4.42

No warrant activity

Warrants outstanding

at June 30, 2015

275,000

0.94

0.10

3.92

Warrants outstanding

at December 31, 2015

275,000

0.94

0.10

3.42

No warrant activity

Warrants outstanding

at June 30, 2016

275,000

0.94

0.10

2.92

Warrants outstanding at June 30, 2016 consist of:

Date

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

April 1, 2000

25,000

$3.00

2 years after IPO

June 1, 2009

100,000

$0.50

June 1, 2019

June 1, 2009

50,000

$0.65

June 1, 2019

June 1, 2009

50,000

$0.85

June 1, 2019

June 1, 2009

50,000

$1.15

June 1, 2019

Total

275,000

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

Note 7 – Deferred Revenue

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

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

December 31,

2016

734,634

2017

357,882

2018

43,720

2019

43,720

2020

6,801

2021

1,700

$ 1,188,457

Note 8 – Notes Payable

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

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

of ArcMail.

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

2016

825,374

2017

779,750

2018

779,750

2019

779,751

$ 3,164,625

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

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

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

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

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

Note 9 – Stock Transactions

Common Stock Issued

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

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

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

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

Note 10 - Income Taxes

Quarter Ended June 30,

2016

2015

Effective tax rate

0.0 %

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

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

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

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

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

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

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

Note 11 - Retirement Plan

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

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

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

30, 2016.

Note 12 – Concentrations and Credit Risk

Sales and Accounts Receivable

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

2015, respectively.

Cash

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

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

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

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

Note 13 - Related Party Transactions

Note Payable – Related Party

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

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

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

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

2016

156,566

2017

156,566

2018

156,566

2019

156,567

626,265

Note 14 – Commitments and Contingencies

Lease Commitment

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

through October 31, 2018.

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

are as follows:

2016

$ 29,979

2017

46,581

2018

36,533

$113,093

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

2016 and 2015, respectively.

Contingencies

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

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

of such liability can be reasonably estimated.

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

Operations

FORWARD LOOKING STATEMENTS

This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A

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

1934, as amended. All statements, other than statements of historical facts, included or

incorporated by reference in this Form 10-Q which address activities, events or developments that

the Company expects or anticipates will or may occur in the future, including such things as future

capital expenditures (including the amount and nature thereof), finding suitable merger or

acquisition candidates, expansion and growth of the Company’s business and operations, and other

such matters are forward-looking statements. These statements are based on certain assumptions

and analyses made by the Company in light of its experience and its perception of historical trends,

current conditions and expected future developments as well as other factors it believes are

appropriate in the circumstances.

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

future performance and involve significant risks and uncertainties, and that actual results may

differ materially from those projected in the forward-looking statements. Factors that could

adversely affect actual results and performance include, among others, potential fluctuations in

quarterly operating results and expenses, government regulation, technology change and

competition. Consequently, all of the forward-looking statements made in this Form 10-Q are

qualified by these cautionary statements and there can be no assurance that the actual results or

developments anticipated by the Company will be realized or, even if substantially realized, that

they will have the expected consequence to or effects on the Company or its business or operations.

The Company assumes no obligations to update any such forward-looking statements.

CRITICAL ACCOUNTING ESTIMATES

Our management’s discussion and analysis of our financial condition and results of

operations are based on our financial statements, which have been prepared in accordance with

accounting principles generally accepted in the United States of America. The preparation of

financial statements may require us to make estimates and assumptions that may affect the reported

amounts of assets and liabilities and the related disclosures at the date of the financial statements.

We do not currently have any estimates or assumptions where the nature of the estimates or

assumptions is material due to the levels of subjectivity and judgment necessary to account for

highly uncertain matters or the susceptibility of such matters to change or the impact of the

estimates and assumptions on financial condition or operating performance is material, except as

described below.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Principles of Consolidation

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

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

transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting

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

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

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

period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

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

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

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

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

Long-Lived Assets

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

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

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

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

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

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

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

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

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

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

the estimated cash flows.

Revenue Recognition

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

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

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

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

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

noncurrent, depending on the terms of the contracts.

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

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

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

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

assured.

Deferred Revenue

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

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

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

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

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

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

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

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

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

Cash and Cash Equivalents

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

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

months or less.

Accounts Receivable

We analyze the collectability of accounts receivable from continuing operations each

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

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

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

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

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

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

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

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

June 30, 2016 and 2015, respectively.

Property and equipment and depreciation

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

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

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

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

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

lives of the respective assets as follows:

Office equipment and fixtures

5 - 7 years

Computer hardware

5 years

Computer software

3 years

Development equipment

5 years

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

ended June 30, 2016 and 2015, respectively.

Goodwill

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

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

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