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

Converted by EDGARwiz

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 March 31, 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  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  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 filer

Non-accelerated filer 

Smaller reporting

filer 



company 

(Do not check if a smaller reporting company)

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

Act). Yes  No 

The Registrant had 39,683,990 shares of its common stock outstanding as of May 23, 2016.

iGambit Inc.

Form 10-Q

Page

No.

Part I — Financial Information

Item 1.

Financial Statements:

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Income

Condensed Consolidated Statements of Cash Flows

Notes to Condensed 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

Removed and Reserved

Other Information

Exhibits

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

IGAMBIT INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31,

2016

DECEMBER 31,

(Unaudited)

2015

ASSETS

Current assets

Cash

24,375

131,987

Accounts receivable, net

329,682

230,182

Inventories

21,160

Employee advances

1,600

Prepaid expenses

194,180

244,592

Assets from discontinued operations, net

154,075

262,765

Total current assets

725,072

890,686

Property and equipment, net

34,143

40,433

Other assets

Goodwill

6,705,157

Deposits

1,720

Total other assets

6,706,877

7,466,092

7,637,996

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Accounts payable and accrued expenses

634,161

636,633

Accrued interest on notes payable

345,690

291,107

Accrued interest on notes payable - related party

20,565

11,171

Amounts due to related parties

82,648

74,871

Deferred revenue, current portion

736,604

811,227

Notes payable, current portion

784,849

779,750

Note payable - related party, current portion

156,566

Notes payable - other

164,781

Liabilities from discontinued operations

23,769

127,353

Total current liabilities

2,949,633

2,888,678

Long-term liabilities

Deferred revenue, net of current portion

385,063

379,052

Notes payable

2,339,251

Note payable - related party

469,699

Total long-term liabilities

3,194,013

3,188,002

Total liabilities

6,143,646

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

(3,037,260)

(2,798,390)

Total stockholders' equity

1,322,446

1,561,316

7,466,092

7,637,996

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31,

(UNAUDITED)

2016

2015

Sales:

Hardware and software

72,806

300,347

Support and maintenance

330,944

Total sales

403,750

300,347

Cost of sales

3,191

135,622

Gross profit

400,559

164,725

Operating expenses

General and administrative expenses

558,653

307,919

Loss from operations

(158,094)

(143,194)

Other income (expenses)

Interest expense

(84,334)

(1,703)

Loss from continuing operations

(242,428)

(144,897)

Income from discontinued operations

3,558

Net loss

$ (238,870)

$ (144,897)

Basic and fully diluted earnings (loss) per common share:

Continuing operations

(.01)

Discontinued operations

.00

Net earnings per common share

(.01)

Weighted average common shares outstanding - basic

39,683,990

26,583,900

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31,

(UNAUDITED)

2016

2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

(238,870)

(144,897)

Adjustments to reconcile net loss to net

cash used in operating activities

Income from discontinued operations

(3,558)

Depreciation

6,290

1,306

Stock-based compensation expense

11,998

Increase (Decrease) in cash flows as a result of

changes in asset and liability account balances:

Accounts receivable

(99,500)

(29,858)

Employee advances

(1,600)

Prepaid expenses

50,412

25,675

Accounts payable and accrued expenses

(2,472)

15,920

Accrued interest on notes payable

63,977

Deferred revenue

(68,612)

Net cash used in continuing operating activities

(293,933)

(119,856)

Net cash provided by discontinued operating activities

8,664

NET CASH USED IN OPERATING ACTIVITIES

(285,269)

(119,856)

NET CASH USED IN INVESTING ACTIVITIES:

Purchases of property and equipment

(5,026)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from stockholders' loans

30,180

Proceeds from notes payable

169,880

Increase in amounts due to related parties

7,777

NET CASH PROVIDED BY FINANCING ACTIVITIES

177,657

30,180

NET DECREASE IN CASH

(107,612)

(94,702)

CASH - BEGINNING OF PERIOD

131,987

133,436

CASH - END OF PERIOD

24,375

38,734

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:

Interest

2,927

1,703

See accompanying notes to the condensed consolidated financial statements.

IGAMBIT INC.

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 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.

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 three months ended March 31, 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

6278,077

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

The results of operations of ArcMail have been included in the consolidated statements of

operations for the three months ended March 31, 2016. 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, 2014. 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

2014

Pro forma revenue

1,876,313

3,423,954

Pro forma gross profit

1,791,518

2,579,661

Pro forma loss from operations

(703,699)

(1,381,581)

Pro forma net loss

(496,347)

(1,828,332)

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 March 31, 2016 and December 31, 2015 are presented as

follows:

2016

2015

Assets:

Cash

13,893

Accounts receivable, net

152,519

247,372

Prepaid expenses

1,500

Total assets

154,075

262,765

Liabilities:

Accounts payable and accrued expenses

19,333

117,417

Note payable - related party

4,436

9,936

23,769

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 three

months ended March 31, 2016 and 2015 were $27,323 and $1,325, 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 March 31, 2016 and

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

for the three months ended March 31, 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

three months ended March 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

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 $1,121,667 and $1,190,279 as of March 31, 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 March 31, 2016

and December 31, 2015:

2016

2015

Office equipment and fixtures

139,006

Computer hardware

90,943

Computer software

77,700

Development equipment

35,318

342,967

Less: Accumulated depreciation

308,824

302,534

34,143

40,433

Depreciation expense of $6,290 and $1,306 was charged to operations for the three

months ended March 31, 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

March 31,

2016

2015

Stock options

1,718,900

Stock warrants

275,000

Total shares excluded from calculation

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 March 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 three months ended March 31, 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

4.98

Options outstanding at

March 31, 2015

1,718,900

0.03

0.13

4.57

Options outstanding at

December 31, 2015

1,718,900

0.03

0.13

3.82

No option activity

Options outstanding at

March 31, 2016

1,718,900

0.03

0.13

3.57

Options outstanding at March 31, 2016 consist of:

Date

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

May 1, 2006

100,000

$0.01

May 1, 2016

May 1, 2006

100,000

$0.01

May 1, 2016

May 1, 2006

50,000

$0.01

May 1, 2016

May 1, 2006

46.900

46,900

$0.01

May 1, 2016

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

1,718,900

Warrants

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

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

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

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

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

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

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

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

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

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

Warrant activity during the three months ended March 31, 2016 and 2015 follows:

Weighted

(1)Weighted

Weighted

Average Grant-

Average

Date

Remaining

Warrants

Average

Contractual

Outstanding

Exercise Price

Fair Value

Life (Years)

Warrants outstanding

at December 31, 2014

275,000

0.94

0.10

4.42

No warrant activity

Warrants outstanding

at March 31, 2015

275,000

0.94

0.10

4.17

Warrants outstanding

at December 31, 2015

275,000

0.94

0.10

3.42

No warrant activity

Warrants outstanding

at March 31, 2016

275,000

0.94

0.10

3.17

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

Warrants outstanding at March 31, 2016 consist of:

Date

Number

Exercise

Expiration

Issued

Outstanding

Exercisable

Price

Date

April 1, 2000

25,000

$3.00

2 years after IPO

June 1, 2009

100,000

$0.50

June 1, 2019

June 1, 2009

50,000

$0.65

June 1, 2019

June 1, 2009

50,000

$0.85

June 1, 2019

June 1, 2009

50,000

$1.15

June 1, 2019

Total

275,000

Note 7 – Deferred Revenue

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

realized in future periods. Deferred revenue at March 31, 2016 will be realized in the

following years ended December 31,

2016

$ 1,022,688

2017

33,405

2018

29,399

2019

29,400

2020

5,807

2021

968

$ 1,121,667

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

784,849

2017

779,750

2018

779,750

2019

779,751

$ 3,124,100

During the three months ended March 31, 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 $164,781 at March 31,

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 March 31,

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 three months ended March 31, 2016.

Note 12 – Concentrations and Credit Risk

Sales and Accounts Receivable

No customer accounted for more than 10% of sales for the three months ended March 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 March 31, 2016 and

December 31, 2015, respectively.

Note 13 - Fair Value Measurement

The Company adopted the provisions of Accounting Standards Codification subtopic

825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines

fair value as the price that would be received from selling an asset or paid to transfer a

liability in an orderly transaction between market participants at the measurement date.

When determining the fair value measurements for assets and liabilities required or

permitted to be recorded at fair value, the Company considers the principal or most

advantageous market in which it would transact and considers assumptions that market

participants would use when pricing the asset or liability, such as inherent risk, transfer

restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy

that requires an entity to maximize the use of observable inputs and minimize the use of

unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of

inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar

assets or liabilities; quoted prices in markets with insufficient volume or infrequent

transactions (less active markets); or model-derived valuations in which all significant

inputs are observable or can be derived principally from or corroborated by observable

market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs to the valuation methodology that are significant to the

measurement of fair value of assets or liabilities.

All items required to be recorded or measured on a recurring basis consist of derivative

liabilities and are based upon level 3 inputs.

To the extent that valuation is based on models or inputs that are less observable or

unobservable in the market, the determination of fair value requires more judgment. In

certain cases, the inputs used to measure fair value may fall into different levels of the

fair value hierarchy. In such cases, for disclosure purposes, the level is the fair value

hierarchy within which the fair value measurement is disclosed and is determined based

on the lowest level input that is significant to the fair value measurement.

Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning

accumulated deficit and no impact on the consolidated financial statements.

As of March 31, 2016 and December 31, 2015, the Company did not have any items that

would be classified as level 1, 2 or 3 disclosures.

Fluctuations in the Company’s stock price are a primary driver for the changes in the

derivative valuations during each reporting period. As the stock price decreases for each

of the related derivative instruments, the value to the holder of the instrument generally

decreases, therefore decreasing the liability on the Company’s balance sheet.

Additionally, stock price volatility is one of the significant unobservable inputs used in

the fair value measurement of each of the Company’s derivative instruments. The

simulated fair value of these liabilities is sensitive to changes in the Company’s expected

volatility. A 10% change in pricing inputs and changes in volatilities and correlation

factors would currently not result in a material change in value for the level 3 financial

liability.

Note 14 - 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

155,566

2017

155,566

2018

155,566

2019

155,567

626,265

Note 15 – 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

$ 47,851

2017

46,581

2018

36,533

$130,965

Rent expense of $13,435 and $17,273 was charged to operations for the three months

ended March 31, 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.

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.

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 its various customers that

have been recorded as deferred revenue in the amount of $1,121,667 and $1,190,279 as

of March 31, 2016 and December 31, 2015, respectively.

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.

Cash and Cash Equivalents

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

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

maturity of three months or less.

Accounts Receivable

We analyze the collectability of accounts receivable from continuing operations

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

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

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

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 March 31, 2016 and December 31, 2015,

respectively. There was no bad debt expense charged to operations for the three months

ended March 31, 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 $6,290 and $1,306 was charged to operations for the

three months ended March 31, 2016 and 2015, respectively.

Goodwill

Goodwill represents the excess of liabilities assumed over assets acquired of

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

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

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

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

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

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

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

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

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

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

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

recorded during the three months ended March 31, 2016.

Stock-Based Compensation

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

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

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

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

value and amortized over the requisite service period for all stock awards that are

expected to vest. The grant date fair value for stock options and warrants is calculated

using the Black-Scholes option pricing model. Determining the fair value of options at

the grant date requires judgment, including estimating the expected term that stock

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

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

compensation expense is reported under general and administrative expenses in the

accompanying consolidated statements of operations.

Options

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

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

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

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

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